Legislature(2015 - 2016)BILL RAY CENTER 208

05/04/2016 10:30 AM FINANCE


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10:38:09 AM Start
10:39:11 AM HB253
12:02:49 PM Recessed to a Call of the Chair
12:03:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 253 ELCTRNC TAX RETURN;MINING LIC. TAX & FEES TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                        May 4, 2016                                                                                             
                        10:38 a.m.                                                                                              
                                                                                                                                
10:38:09 AM                                                                                                                   
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Thompson called the House Finance Committee                                                                            
meeting to order at 10:38 a.m.                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Jerry  Burnett,  Deputy   Commissioner,  Treasury  Division,                                                                    
Department of  Revenue; Ken  Alper, Director,  Tax Division,                                                                    
Department    of   Revenue;    Representative   Sam    Kito;                                                                    
Representative Louise Stutes.                                                                                                   
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Brandon S. Spanos, Deputy Director, Tax Division,                                                                               
Department of Revenue; Ed Fogels, Deputy Commissioner,                                                                          
Department of Natural Resources.                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 253    ELCTRNC TAX RETURN;MINING LIC. TAX & FEES                                                                             
                                                                                                                                
          HB 253 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Thompson discussed the meeting agenda.                                                                                 
                                                                                                                                
HOUSE BILL NO. 253                                                                                                            
                                                                                                                                
     "An  Act  requiring  the electronic  filing  of  a  tax                                                                    
     return  or  report  with  the  Department  of  Revenue;                                                                    
     establishing   a   civil   penalty   for   failure   to                                                                    
     electronically  file a  return or  report; relating  to                                                                    
     exemptions  from the  mining license  tax; relating  to                                                                    
     the  mining  license  tax   rate;  relating  to  mining                                                                    
     license application,  renewal, and fees;  and providing                                                                    
     for an effective date."                                                                                                    
                                                                                                                                
10:39:11 AM                                                                                                                   
                                                                                                                                
Co-Chair  Neuman  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute  for  HB  253, Work  Draft  29-GH2924\I  (Nauman,                                                                    
4/28/16). There being NO OBJECTION, it was so ordered.                                                                          
                                                                                                                                
JERRY  BURNETT,  DEPUTY   COMMISSIONER,  TREASURY  DIVISION,                                                                    
DEPARTMENT  OF REVENUE,  provided a  PowerPoint presentation                                                                    
titled  "New Sustainable  Alaska Plan:  Pulling Together  to                                                                    
Build  Our Future:  Mining Tax,  HB 253"  dated May  4, 2016                                                                    
(copy on  file). Slide  2 contained  the new  bill version's                                                                    
title as follows:                                                                                                               
                                                                                                                                
     Mining License Tax Increase                                                                                                
                                                                                                                                
     "An  Act  relating  to an  exemption  from  the  mining                                                                    
     license tax;  relating to the mining  license tax rate;                                                                    
     relating  to mining  license application,  renewal, and                                                                    
     fees;  relating to  the  exploration incentive  credit;                                                                    
     establishing a  legislative working group to  study the                                                                    
     tax  structure   for  mining;  and  providing   for  an                                                                    
     effective date."                                                                                                           
                                                                                                                                
Mr.  Burnett  reminded  the committee  that  the  electronic                                                                    
filing provisions were  placed in a separate  bill. He moved                                                                    
to slide 3 and provided a history on the mining tax.                                                                            
                                                                                                                                
     Began in 1913; restructured several times                                                                                  
        · Original mining license tax was 0.5% tax on                                                                           
          mining net income over $5,000                                                                                         
        · Collected on both net income from mining                                                                              
          operations and from mining-related royalties                                                                          
                                                                                                                                
        · Primarily from businesses engaged in coal and                                                                         
          hard-rock mining                                                                                                      
                                                                                                                                
Mr. Burnett moved to slide 4:                                                                                                   
                                                                                                                                
     Mining Tax History (Continued)                                                                                             
                                                                                                                                
     •Numerous changes between 1915 and 1953 to the tax                                                                         
     rates and the tax-free net income base                                                                                     
     •In 1951, adopted 3 ½ year exemption for new mining                                                                        
     operations                                                                                                                 
     •Current tax structure since 1955:                                                                                         
                                                                                                                                
     Mining Net Income        Tax Rate                                                                                          
                                                                                                                                
     $0 - $40,000             No Tax                                                                                            
     $40,000 - $50,000        $1,200 plus 3% over $40,000                                                                       
     $50,001 - $100,000       $1,500 plus 5% over $50,000                                                                       
     Over $100,000            $4,000 plus 7% over $100,000                                                                      
                                                                                                                                
Representative Gattis wondered what  the thought process was                                                                    
for  structuring the  tax at  the  time the  mining tax  was                                                                    
originally  implemented. Mr.  Burnett answered  that he  did                                                                    
not know  the reason  or what the  economic analysis  at the                                                                    
time was.  He related  that the brackets  had been  based on                                                                    
the income  at the time  however, currently many  mines were                                                                    
in the  lower tax brackets  and few  were in the  higher tax                                                                    
brackets. Representative Gattis noted  that from zero to $40                                                                    
thousand tax  was not assessed  on net income.  She believed                                                                    
that knowing the reasons how  and why the tax was originally                                                                    
structured  helped her  determine how  to restructure  them.                                                                    
She asked  why the administration was  restructuring the tax                                                                    
in the manner chosen. Mr.  Burnett answered that a blanketed                                                                    
graduated  income tax  was very  common  and recognized  the                                                                    
fact that  small operations with  less income were  not able                                                                    
to  pay  much tax.  He  reminded  the committee  that  mines                                                                    
located on  state land  were required to  pay a  royalty and                                                                    
the taxes  applied to mines  on federal or  non-state lands.                                                                    
Representative Gattis surmised that  the tax was progressive                                                                    
and the reason was not known.                                                                                                   
                                                                                                                                
10:46:55 AM                                                                                                                   
                                                                                                                                
Vice-Chair Saddler  asked whether the Department  of Revenue                                                                    
(DOR) considered  changing the brackets instead  of the rate                                                                    
of taxation.  He noted that  the original tax  was currently                                                                    
on  net  income.  He  asked   how  onerous  the  net  income                                                                    
calculation  was  for  the   department  and  industry.  Mr.                                                                    
Burnett answered that companies  had to determine net income                                                                    
tax  for  the  federal  government;  therefore  it  was  not                                                                    
terribly onerous.  He reported that mining  taxes applied to                                                                    
500 tax filers,  many paid no taxes and many  were below the                                                                    
$40 thousand  limit and  did not  pay taxes.  The department                                                                    
had  considered the  bracket sizes,  but it  had elected  to                                                                    
leave the brackets  alone. He revealed that  the top bracket                                                                    
of earners  consisted of  between 13 to  17 tax  payers that                                                                    
earned over  $500 million  in total net  income in  a recent                                                                    
year - as the  rest of the tax payers had  net income in the                                                                    
neighborhood of $3 million. Moving  the brackets into higher                                                                    
ranges would have very little effect on the taxes.                                                                              
                                                                                                                                
Representative Kawasaki  stated that  he was  distributing a                                                                    
document to members  from DOR (copy on file)  and noted that                                                                    
the mining tax was already  based on a profits based system.                                                                    
The document contained data regarding  mining tax filers per                                                                    
bracket. He  related that  the under  $0 and  the $0  to $40                                                                    
thousand filers were comprised of  small business that lived                                                                    
off of  mining income  exclusively and  totaled 193  and 239                                                                    
tax filers respectively. The next  bracket that included tax                                                                    
payers  in  the  $50  thousand   to  $100  thousand  bracket                                                                    
averaged over  $51 thousand and  contained 25 tax  payers in                                                                    
tax year 2014. He  wondered whether the department discussed                                                                    
creating a bracket  for income over $1  million. Mr. Burnett                                                                    
answered  that the  average income  for miners  in the  over                                                                    
$100,000  was approximately  $43.9  million.  He noted  that                                                                    
very few companies  existed in the highest  tax bracket. The                                                                    
department  wanted   to  keep  the  change   as  "simple  as                                                                    
possible"  and elected  to maintain  the brackets  but raise                                                                    
taxes on companies that actually  paid taxes. He pointed out                                                                    
that very little tax was paid at the lower levels.                                                                              
                                                                                                                                
10:52:33 AM                                                                                                                   
                                                                                                                                
Representative Kawasaki stated that  he had done an analysis                                                                    
based  on the  13  highest earners  and  reported that  five                                                                    
companies made over  $1 million in profit  and the remaining                                                                    
made   substantially  less.   He  reiterated   his  question                                                                    
regarding   whether  the   issue   was   addressed  by   the                                                                    
department.  Mr. Burnett  answered that  he did  not believe                                                                    
Representative  Kawasaki's  assumption  about the  data  was                                                                    
correct.  He explained  that within  the five  mines existed                                                                    
multiple owners,  operators and  royalties paid to  the mine                                                                    
owners, which  was complex,  and resulted  in the  others in                                                                    
the top  category being part  of the five largest  mines. He                                                                    
was  not  able to  provide  details  due to  confidentiality                                                                    
laws.                                                                                                                           
                                                                                                                                
Co-Chair Neuman  asked whether the tax  information provided                                                                    
by mining  companies was  proprietary. Mr.  Burnett answered                                                                    
in the  affirmative. He  elaborated that  the 13  tax payers                                                                    
may represent  multiple mines. Co-Chair Neuman  believed Mr.                                                                    
Burnett had  stated that the department  had checked against                                                                    
federal  tax returns  to ensure  the  "checks and  balances"                                                                    
within  the tax  system. Mr.  Burnett answered  that because                                                                    
the  companies paid  federal income  tax the  department had                                                                    
the ability to  cross check between federal  taxes filed and                                                                    
information  provided to  the state.  He  remarked that  the                                                                    
larger miners were also state  corporate tax payers and paid                                                                    
between zero  and $80 million  per year in  corporate income                                                                    
taxes.  The   companies  reported  their   total  nationwide                                                                    
corporate  income  tax and  "apportion  a  portion" of  that                                                                    
amount to the state.                                                                                                            
                                                                                                                                
Co-Chair  Neuman   asked  whether   there  were   any  other                                                                    
deductions when  determining net  amounts besides  the usual                                                                    
deductions.  Mr. Burnett  answered that  the current  system                                                                    
was  like  a  typical  income tax  situation  that  included                                                                    
depreciation or depletion and  typical business expenses. He                                                                    
elaborated that oil  and gas was a cash flow  type tax where                                                                    
capital  expenditures were  deducted  in the  same year  the                                                                    
money was being spent.                                                                                                          
                                                                                                                                
Co-Chair  Thompson  noted  that  Representative  Pruitt  had                                                                    
joined the meeting.                                                                                                             
                                                                                                                                
BRANDON   S.   SPANOS,   DEPUTY  DIRECTOR,   TAX   DIVISION,                                                                    
DEPARTMENT  OF REVENUE  (via teleconference),  elaborated on                                                                    
Mr.  Burnett's  answer. He  explained  that  the costs  were                                                                    
similar to  what was allowable  on a federal tax  return and                                                                    
included  direct, indirect,  and  specific allowances.  Some                                                                    
direct  costs such  as salaries,  equipment costs,  and fuel                                                                    
were permitted  to be netted  against income.  Some examples                                                                    
of indirect  costs were  insurance, overhead,  and depletion                                                                    
allowance  as well  as  indirect costs.  He  added that  the                                                                    
education credit  and the exploration credits  were specific                                                                    
allowances and were not expenses but were specific credits.                                                                     
                                                                                                                                
Co-Chair  Neuman asked  what the  exploration credit  "carve                                                                    
out"  was for  mining.  He wondered  whether the  department                                                                    
differentiated between  types of mines. Mr.  Burnett replied                                                                    
that the tax did not depend on the mineral type.                                                                                
                                                                                                                                
Representative  Gara  asked  whether   the  mining  tax  was                                                                    
deductible against  state corporate  tax if  the corporation                                                                    
was a C corporation. He  wondered whether the taxes stacked.                                                                    
Mr.  Spanos replied  that normally  state  net income  taxes                                                                    
were  deductible  from  federal taxes.  Representative  Gara                                                                    
clarified that  he was referring  to state  corporate income                                                                    
tax being stackable.  Mr. Spanos answered that  the taxes do                                                                    
not  stack. Representative  Gara  spoke  to a  corporation's                                                                    
Alaska  operations only  and the  Alaska  corporate tax.  He                                                                    
asked whether a  company deducted its mining  taxes from the                                                                    
C Corporation  tax or paid  both on  top of each  other. Mr.                                                                    
Spanos  answered  that  the   company  was  prohibited  from                                                                    
deducting the mining tax from the C corporation tax.                                                                            
                                                                                                                                
11:02:50 AM                                                                                                                   
                                                                                                                                
Representative Munoz  stated that  Alaska had  a "relatively                                                                    
high net proceeds tax" at  7 percent compared to other metal                                                                    
mining states and "a very  high corporate income tax" at 9.4                                                                    
percent.  She  asked  whether   analysis  was  performed  to                                                                    
determine  whether a  tax increase  was appropriate  for the                                                                    
industry.  Mr. Burnett  answered that  the internal  working                                                                    
group,  which included  commissioners of  the Department  of                                                                    
Natural Resources  (DNR), Department of  Commerce, Community                                                                    
and   Economic  Development   (DCCED),  and   DOR  and   the                                                                    
economists from DOR performed  analysis and comparisons with                                                                    
other  states and  Canada. He  agreed that  the state  had a                                                                    
fairly high corporate  tax rate at the  highest bracket, but                                                                    
a  number of  companies were  organized  in a  way to  avoid                                                                    
paying any  tax. The group  engaged in discussions  with the                                                                    
mining   industry   prior   to  the   bill's   introduction.                                                                    
Representative  Munoz asked  what was  the "total  take" was                                                                    
for  the largest  mining companies  in corporate  income tax                                                                    
including mining license fees.  Mr. Burnett answered that it                                                                    
was  different  for each  mine  and  would be  significantly                                                                    
different on  a year  to year basis.  He offered  to provide                                                                    
the  answer.  Representative  Munoz  asked  what  the  state                                                                    
brought  in in  total mining  revenue. Mr.  Burnett answered                                                                    
that the  information was in  a future slide. He  added that                                                                    
nearly all of the revenue was  from the five large mines and                                                                    
several  placer mines.  Representative  Munoz asked  whether                                                                    
the  impact had  been  considered on  developing mines.  Mr.                                                                    
Burnett answered  in the affirmative. The  original bill had                                                                    
included the  removal of  the 3.5 year  tax holiday  for new                                                                    
mines.  The  industry  had  relayed  that  the  holiday  was                                                                    
important. The  Committee Substitute (CS) included  a 3 year                                                                    
tax holiday for  new mines. He acknowledged  that there were                                                                    
some  potential   new  large  mines  on   the  horizon.  The                                                                    
administration did  not believe  the rate increase  would be                                                                    
enough to negatively impact development of the new mines.                                                                       
                                                                                                                                
11:07:32 AM                                                                                                                   
                                                                                                                                
Representative  Edgmon asked  how gravel  pits fit  into the                                                                    
tax picture. Mr.  Burnett answered that a few  years ago the                                                                    
legislature exempted gravel pits from the mining tax.                                                                           
                                                                                                                                
Representative  Kawasaki  wondered  when the  3.5  year  tax                                                                    
exemption  began.  Mr.  Spanos replied  that  the  exemption                                                                    
began when  production started. The department  was the body                                                                    
that  determined  whether it  was  a  new  mine or  not  and                                                                    
whether the mining was sufficiently different or new.                                                                           
                                                                                                                                
Mr. Burnett moved  to slide 5 titled  "Large mining projects                                                                    
in Alaska" that  contained a map of the  state depicting the                                                                    
locations of the mines.                                                                                                         
                                                                                                                                
ED  FOGELS,  DEPUTY   COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES (via teleconference), addressed  slide 5 that also                                                                    
included  the   location  of  mines  in   development.  {The                                                                    
teleconference connection was lost.]                                                                                            
                                                                                                                                
Mr. Burnett turned to slide 6:                                                                                                  
                                                                                                                                
     Mines in Alaska                                                                                                            
                                                                                                                                
     •Alaska has five large hard rock mines and one coal                                                                        
     mine                                                                                                                       
                                                                                                                                
     •200 small placer mines who, combined, have an                                                                             
     economic impact that is similar to one large mine                                                                          
                                                                                                                                
Representative  Wilson pondered  the  impact of  all of  the                                                                    
licensing and permitting fees for  placer mines coupled with                                                                    
the  proposed  increase  on  the  mining  tax.  Mr.  Burnett                                                                    
answered that  almost no placer  mines would be  impacted by                                                                    
the  legislation. In  a typical  year, were  very few  mines                                                                    
netted $100 thousand and therefore  were not impacted by the                                                                    
proposal.   Representative   Wilson    asked   whether   the                                                                    
administration considered  how all  taxes combined,  such as                                                                    
municipal and state, affected a  mine like Pogo. Mr. Burnett                                                                    
affirmed  that  state  taxes   were  separate  from  borough                                                                    
taxation and  all mines pay  municipal taxes in  addition to                                                                    
state.  He returned  to  slide  5 and  asked  Mr. Fogels  to                                                                    
address the slide.                                                                                                              
                                                                                                                                
Co-Chair Thompson noted Fort Knox was located in Fairbanks.                                                                     
                                                                                                                                
Mr. Fogels addressed slide 5.  He discussed the mines on the                                                                    
map. He  highlighted that the Red  Dog Mine was an  open pit                                                                    
lead and  zinc mine  located on  Nana Corporation  land. The                                                                    
mine was one  of the largest in the world.  Red Dog employed                                                                    
610  employees, was  operated by  Tech Alaska,  and was  the                                                                    
only tax payer in the  North West Arctic Borough. He related                                                                    
that the  Fort Knox mine was  an open pit gold  mine and was                                                                    
located on private and Alaska  Mental Health Trust Authority                                                                    
(AMHTA)  lands. Fort  Knox was  operated  by Fairbanks  Gold                                                                    
Mining and employed  roughly 650 people and  was the largest                                                                    
tax  payer   in  the  Fairbanks   North  Star   Borough.  He                                                                    
identified  the  Pogo  underground gold  mine  located  near                                                                    
Delta Junction and noted the  mine was operating exclusively                                                                    
on state  land. The  mine was operated  by Kinross  Gold and                                                                    
employed  320 people.  He reported  that  the family  owned,                                                                    
Usibelli coal  mine was located  on state land  and employed                                                                    
140  people. He  indicated  that the  Kensington Mine,  near                                                                    
Juneau  was  an  underground  gold mine  operated  by  Coeur                                                                    
Alaska and  employed approximately 320 people.  The mine was                                                                    
located  on United  States (US)  Forest Service  and private                                                                    
lands.  He remarked  that  the Greens  Creek  Mine was  also                                                                    
located near Juneau  and mined lead, zinc,  silver, and gold                                                                    
and was  operating on US  Forest Service and  private lands.                                                                    
The mine was  operated by Hecla Greens  Creek Mining Company                                                                    
and employed  approximately 415 workers.  He noted  that the                                                                    
Nixon Fork mine  was in temporary cessation  and was located                                                                    
on  BLM (Bureau  of  Land Management)  lands. The  following                                                                    
three mines were currently in  permitting. The Wishbone Hill                                                                    
Mine was a  coal strip mine located near Sutton  in the Mat-                                                                    
Su valley and  was owned by Usibelli. He  mentioned that the                                                                    
Chuitna  Coal  and Donlin  Gold  mines  were midway  through                                                                    
their  environmental  impact  statements  and  the  National                                                                    
Environmental Policy  Act (NEPA)  process. He  reported that                                                                    
the  map included  the location  of pre-permitting  projects                                                                    
around  the state.  The operators  had not  yet applied  for                                                                    
permits and he could not  predict the outcomes of the sites.                                                                    
He added that  the state roughly had 570  smaller placer and                                                                    
suction  dredge operations  in 2015  and  about 34  thousand                                                                    
active state mining claims on state lands.                                                                                      
                                                                                                                                
11:17:47 AM                                                                                                                   
                                                                                                                                
Co-Chair Neuman  asked about the general  discussions in the                                                                    
mining  industry regarding  the proposed  taxes. Mr.  Fogels                                                                    
responded that he had had  discussions with many individuals                                                                    
in the industry and shared  that miners were concerned about                                                                    
additional  tax burdens  under the  current low  metal price                                                                    
climate.  However, industry  understood  the state's  fiscal                                                                    
situation.  He  acknowledged  that significant  concern  was                                                                    
expressed over the proposed elimination  of the 3.5 year tax                                                                    
holiday.  Co-Chair  Neuman  asked whether  the  Division  of                                                                    
Mining,  Land,  and  Water's mining  regulatory  costs  were                                                                    
covered  by  fees.  Mr.  Fogels replied  that  part  of  the                                                                    
division's costs  was covered. He explained  that permitting                                                                    
costs  were covered  through a  memorandum of  understanding                                                                    
(MOU)  between the  mines and  the state  whereby the  mines                                                                    
reimburse  the  state  for employee  costs  associated  with                                                                    
permitting,     oversight     monitoring,     and     permit                                                                    
administration.  The  MOU   produced  a  fairly  significant                                                                    
monetary stream coming from the  projects. He commented that                                                                    
"all   state  agencies   participated   in  permitting   and                                                                    
oversight of the projects." In  addition some of the royalty                                                                    
payments were allocated back to DNR.                                                                                            
                                                                                                                                
Co-Chair Neuman  asked for  more information  regarding what                                                                    
it took to run the division.                                                                                                    
                                                                                                                                
Representative  Wilson  wanted   to  better  understand  the                                                                    
cumulative  impact of  increased  state  taxes coupled  with                                                                    
municipal  taxes   had  on  the  mines   and  requested  any                                                                    
information  the  department  could provide.  She  requested                                                                    
information  defining  severance   tax  versus  other  state                                                                    
taxes.  She asked  how  much state  land  was available  for                                                                    
mining. She  wondered what  the state  was doing  to attract                                                                    
new development.                                                                                                                
                                                                                                                                
11:23:09 AM                                                                                                                   
                                                                                                                                
Representative Gara  asked what the mining  royalty was. Mr.                                                                    
Fogels replied that the royalty  was from mineral production                                                                    
on state  lands and was 3  percent. He added that  the state                                                                    
collected  $7 million  last year  from  the gold  production                                                                    
royalty on state  lands. He elaborated that the  bulk of the                                                                    
royalty  was  from  Pogo.   Representative  Gara  asked  for                                                                    
verification that the royalty  was profits based and whether                                                                    
it was based  off of the gross. Mr. Fogels  replied that the                                                                    
royalty  was  based on  net  proceeds  and affirmed  it  was                                                                    
profits based.  Representative Gara  asked for  a comparison                                                                    
between what  the department collected  in mining  taxes and                                                                    
royalties  and "permitting  and other  related work  through                                                                    
Department of  Environmental Conservation  (DEC), Department                                                                    
of Fish and  Game (DFG), and DNR." Mr.  Fogels answered that                                                                    
a report was recently done  by the University that performed                                                                    
a  comparison  study.  He  did   not  currently  have  exact                                                                    
figures. He  reiterated that the  state collected  more from                                                                    
the mines than the actual administration costs.                                                                                 
                                                                                                                                
Vice-Chair Saddler  asked what a profits  based royalty was.                                                                    
Mr. Fogels answered  that a profits based  royalty was based                                                                    
off the same criteria that  the mining license tax was based                                                                    
on and was set in  statute. Vice-Chair Saddler asked for the                                                                    
statute reference AS  35.05.212. Vice-Chair Saddler wondered                                                                    
how "welcoming" Alaska  was to the mineral  industry and new                                                                    
mines.                                                                                                                          
                                                                                                                                
11:27:13 AM                                                                                                                   
                                                                                                                                
Mr.  Fogels  answered  that  DOR   should  have  provided  a                                                                    
comparison between other jurisdictions.  He guessed that the                                                                    
state  was in  the "middle  of  the pack."  He believed  the                                                                    
state  was  open  to  new  explorers  and  had  a  favorable                                                                    
jurisdiction in terms  of state land. He  delineated that 90                                                                    
to 95  percent of the  100 million  acres of state  land was                                                                    
open  to mining  and carried  a  lot of  potential. The  low                                                                    
price  environment   was  acting  as  a   hindrance  to  new                                                                    
investment. Vice-Chair  Saddler asked what DNR's  "policy or                                                                    
orientation"  was.   He  inquired  whether   the  department                                                                    
focused  on incentivizing  "new exploration  and development                                                                    
of  basic  geologic  knowledge,"  help  mines  navigate  the                                                                    
permitting  process, or  maximize the  operation of  current                                                                    
mines. Mr.  Fogels responded  that "on  a number  of levels"                                                                    
DNR maintained "a strong effort"  to obtain more information                                                                    
on  state  lands. He  related  that  DNR's "charge"  was  to                                                                    
generate  more revenue  from state  land holdings.  Geologic                                                                    
information  was disseminated  in order  to incentivize  new                                                                    
exploration. The permitting process  was made more efficient                                                                    
while protecting  other state resources.  Vice-Chair Saddler                                                                    
asked where most of the  department's effort was placed. Mr.                                                                    
Fogels answered that  data collection was a  large focus. He                                                                    
added that recently DNR engaged in permitting reform.                                                                           
                                                                                                                                
Representative Munoz asked whether  any "metal activity" was                                                                    
occurring in the  other states. Mr. Fogels  answered that he                                                                    
did not have any recent  information. He deferred to DOR for                                                                    
a possible answer.                                                                                                              
                                                                                                                                
11:32:24 AM                                                                                                                   
                                                                                                                                
Representative Edgmon asked  whether Mr. Fogels participated                                                                    
in  the working  group  that developed  HB  253. Mr.  Fogels                                                                    
answered  in the  affirmative.  Representative Edgmon  asked                                                                    
for a "chronology"  of when the large  mines were developed.                                                                    
He recounted  that most major  mines in the state  opened in                                                                    
the  1980s  and  the  state was  "basically  a  placer  mine                                                                    
environment" in  prior years. Mr.  Fogels affirmed  that the                                                                    
mines on the map were  "fairly recent." He stated that there                                                                    
had not been  much activity between the 1950s  and 1980s. He                                                                    
added that  Usibelli was an  exception and was  in operation                                                                    
for roughly 70 years.                                                                                                           
                                                                                                                                
Mr. Burnett moved to slide 7:                                                                                                   
                                                                                                                                
     Mining Tax Proposal (Original)                                                                                             
                                                                                                                                
     •Increases tax rate on highest bracket (over $100,000)                                                                     
     from 7% to 9%                                                                                                              
     •Removes 3 ½ year exemption                                                                                                
     •Requires electronic filing                                                                                                
     •Provides exemption process                                                                                                
     •Adds an application and renewal fee for tax license                                                                       
     •Tax license is in lieu of business license for miners                                                                     
     •Fee is set at the business license rate                                                                                   
                                                                                                                                
Mr. Burnett turned to slide 8:                                                                                                  
                                                                                                                                
     Relative Tax Rate                                                                                                          
                                                                                                                                
     •Most other state mining taxes are based on volume,                                                                        
     not net income.                                                                                                            
     •Examples comparable to Alaska:                                                                                            
     •South Dakota: 10% on profits or royalties; $4 per                                                                         
     ounce of gold                                                                                                              
     •Wisconsin: 3% to 15% progressive tax on net mining                                                                        
     proceeds                                                                                                                   
     •Nevada: 2% to 5% of net proceed                                                                                           
                                                                                                                                
Representative  Munoz  wondered  whether Wisconsin  had  any                                                                    
metal mining. Mr. Burnett was uncertain.                                                                                        
                                                                                                                                
Co-Chair  Thompson asked  the department  to follow  up. Mr.                                                                    
Burnett agreed to provide the information.                                                                                      
                                                                                                                                
Representative  Kawasaki  asked   why  the  slide  contained                                                                    
information  from states  that used  a net  income tax.  Mr.                                                                    
Burnett  replied  that  the  department  wanted  to  compare                                                                    
states  that  used  net  income  tax  because  it  was  very                                                                    
difficult  to  compare tax  rates  based  on tonnage  versus                                                                    
rates  based on  profit  in  a presentation.  Representative                                                                    
Kawasaki   asked  whether   the  three   states  also   paid                                                                    
royalties. Mr. Burnett responded  that he would be surprised                                                                    
if the mining was done on  state lands in most other states.                                                                    
He  indicated  that  most other  states  had  a  significant                                                                    
amount of private  land. Alaska was unique in  its amount of                                                                    
state land.                                                                                                                     
                                                                                                                                
Mr. Burnett moved to slide 9:                                                                                                   
                                                                                                                                
     Impacts of Tax Proposal                                                                                                    
                                                                                                                                
     •Raises the effective  tax rate of the  top tax bracket                                                                    
     from 7% to 9%                                                                                                              
     •Only  affects large  and profitable  mining operations                                                                    
     since most of their income falls above $100,000                                                                            
     •In 2015, 13 companies paid at this level                                                                                  
     •For small mining operations:                                                                                              
     •Little or no effect from tax rate change                                                                                  
     •However, removing  3 ½ year  exemption may  deter some                                                                    
     future mines                                                                                                               
                                                                                                                                
Mr. Burnett advanced to slide 10:                                                                                               
                                                                                                                                
     Revenue Impact                                                                                                             
                                                                                                                                
     •Dept.  of Revenue  estimated that  increasing the  top                                                                    
     mining  tax rate  to 9%  would raise  an additional  $6                                                                    
     million per year starting in FY 2018                                                                                       
     Dept. of Revenue estimates license  fee and renewal fee                                                                    
     of $50  per year will  raise an additional  $25,000 per                                                                    
     year                                                                                                                       
     •Does not account for any changes in mining activity                                                                       
Mr. Burnett explained slide 11:                                                                                                 
      Implementation Costs                                                                                                      
                                                                                                                                
     •Dept. of Revenue must update:                                                                                             
     •Tax Revenue Management System (TRMS)                                                                                      
     •Revenue Online (ROL) which allows a taxpayer to file                                                                      
     a return online                                                                                                            
     •Tax return forms                                                                                                          
                                                                                                                                
     •One-time implementation cost of $50,000 to recreate                                                                       
     tax forms and reprogram and test the tax system to                                                                         
     accommodate the rate changes                                                                                               
    •No additional costs to administer the tax program                                                                          
                                                                                                                                
11:39:15 AM                                                                                                                   
                                                                                                                                
Mr. Burnett highlighted slide 12:                                                                                               
                                                                                                                                
     Mining Tax-Changes made in                                                                                                 
     Committee Substitute                                                                                                       
                                                                                                                                
     •Highest bracket moves to 8% instead of 9%                                                                                 
     •3 ½ year exemption is not removed, but reduced to 3                                                                       
     years                                                                                                                      
     •Does not require electronic filing                                                                                        
     •This is done in a separate bill                                                                                           
     •Revenue impact is $3.5 million in FY 2018                                                                                 
     •Revenue impact of original proposal is $7 million                                                                         
     (new estimate)                                                                                                             
                                                                                                                                
11:40:07 AM                                                                                                                   
                                                                                                                                
Representative Gara asked  whether the pre-development costs                                                                    
were deductible  from the mining  tax. Mr.  Spanos explained                                                                    
that  the  exploration credit  as  part  of the  exploration                                                                    
phase  of  a  project  was  viable for  15  years  and  once                                                                    
development  of the  mine began  the development  costs were                                                                    
typically capitalized  and could  be depleted over  the life                                                                    
of the mine.  The cost basis was able to  be expensed in the                                                                    
fourth year. Representative Gara  asked why a mining company                                                                    
received a  3.5 year  tax holiday since  the pre-development                                                                    
costs were  deductible. Mr. Spanos  speculated that  the tax                                                                    
holiday    was   offered    to   incentivize    new   mines.                                                                    
Representative  Gara  reiterated  his question.  Mr.  Spanos                                                                    
understood  that the  mines incurred  heavy expenses  in the                                                                    
early years.  Representative Gara stated that  his point was                                                                    
if expenses were  so high in the early years  of a mine that                                                                    
a profit was not realized, no  tax was paid. He wondered why                                                                    
a mine  was granted  a tax  holiday if  all of  the expenses                                                                    
were deducted and  a profit was gained.  Mr. Spanos answered                                                                    
that the administration wanted to  eliminate the tax holiday                                                                    
in the original bill.                                                                                                           
Co-Chair Thompson added that the  decision was a policy call                                                                    
by the administration.                                                                                                          
                                                                                                                                
Representative  Gara  asked   for  clarification  about  the                                                                    
credits that were  received for exploration and  how much it                                                                    
was.  Mr.  Spanos  stated  that   DNR  had  a  good  written                                                                    
explanation  and  would  provide  it to  the  committee.  He                                                                    
delineated that the  exploration credit included exploration                                                                    
costs allowance  as a  credit for  up to  15 years  that was                                                                    
calculated at  half of  the gross or  net taxable  income on                                                                    
corporate  tax, mining  tax, and  royalty. He  was not  sure                                                                    
whether it was based on net or gross income.                                                                                    
                                                                                                                                
11:45:14 AM                                                                                                                   
                                                                                                                                
Representative Gara  reiterated that a mining  company could                                                                    
receive  the  credit  for  15   years.  He  asked  what  the                                                                    
percentage of  the credit was.  Mr. Spanos was  not familiar                                                                    
with  the calculations.  Representative  Gara requested  the                                                                    
information.                                                                                                                    
                                                                                                                                
Mr. Burnett briefly addressed slide 13 and slide 14:                                                                            
                                                                                                                                
     Closing the Budget Gap                                                                                                     
                                                                                                                                
     FY16 Budget $5.2 (Millions)                                                                                                
     AK Permanent Fund Protection Act (annual draw) $3.2                                                                        
     million                                                                                                                    
     Revenue from existing taxes and fees $850 million                                                                          
     Earnings on Savings $135 million                                                                                         
     Total               $4,185 million                                                                                         
                                                                                                                                
     Spending Reductions (estimated amounts)                                                                                    
     Continue Cuts (through FY19) $200 million                                                                                  
     Reform O&G Tax Credits    $400 million                                                                                     
     Net Priority Investments ($ 44)                                                                                          
                              $ 556 million                                                                                     
                                                                                                                                
     (Continued)                                                                                                                
     New Revenue Components (estimated amounts) (Millions)                                                                      
     Mining (starting in FY 2018)                 $ 6                                                                           
     Fishing                                      $ 18                                                                          
     Tourism                                      $ 15                                                                          
     Motor Fuel                                   $ 49                                                                          
     Alcohol                                      $ 40                                                                          
     Tobacco                                      $ 29                                                                          
    Oil and Gas                                  $ 100                                                                          
    Individual Alaskans (Income Tax)             $ 200                                                                          
    Total                                        $ 457                                                                          
     Total Budget, Spend Rdctns, and New Rev      $ 5,198                                                                       
                                                                                                                                
Mr. Burnett  addressed the sectional  analysis on  slides 15                                                                    
and 16:                                                                                                                         
                                                                                                                                
     Sectional Analysis (Committee Substitute)                                                                                  
                                                                                                                                
     Sec. 1. Changes  the 3 ½-year exemption  for new mining                                                                    
     operations to a to a 3-year exemption.                                                                                     
     Sec. 2.  Increases the highest  tax rate from 7%  to 8%                                                                    
     for  net  taxable income  in  excess  of $100,000.  The                                                                    
     other tax  rates remain the  same. For net  income over                                                                    
     $100,000 the  tax is  $4,000 plus 8%  of the  amount in                                                                    
     excess of $100,000.                                                                                                        
     Sec. 3.  Establishes a  mining license  fee of  $50 per                                                                    
     year,  a  license renewal  fee  of  $50 per  year,  and                                                                    
     changes  the due  date  for  applications and  renewals                                                                    
     from May 1 to January 1.                                                                                                   
     Sec.  4. Applicability  language  to  clarify that  the                                                                    
     change in Sec.  3 applies to all  new mining operations                                                                    
     in  which   production  has  begun  on   or  after  the                                                                    
     effective date.                                                                                                            
     Sec.    5.   Transitional    language   allowing    for                                                                    
     regulations.                                                                                                               
     Sec. 6. Section 5above takes effect immediately.                                                                           
     Sec. 7.  Effective date of  7/1/16 for the rest  of the                                                                    
     bill including the tax rate change.                                                                                        
                                                                                                                                
Representative  Kawasaki did  not realize  a mining  royalty                                                                    
was  also   related  to  profitability.  He   had  questions                                                                    
regarding  the entire  structure  for mining  and asked  for                                                                    
more  information.   Mr.  Burnett  agreed  to   provide  the                                                                    
information.  He expounded  that  royalties on  oil and  gas                                                                    
also existed in state statute and was not unique to mining.                                                                     
                                                                                                                                
Representative Gara  referred to a  report from the  DOR tax                                                                    
division (page  14) that described the  minerals exploration                                                                    
incentive  as  a  full  100 percent  credit  capped  at  $20                                                                    
million per  mine. Mr.  Spanos replied  that the  amount was                                                                    
100 percent  of the cost  but was  limited to 50  percent of                                                                    
the mining  license tax or  the corporate income tax  in the                                                                    
year  the credit  was used,  which  was the  reason the  tax                                                                    
lasted for up  to 15 years. He answered  a previous question                                                                    
regarding what  activities expenses  were allowed  under the                                                                    
credit.  He   reported  that  geochemical   and  geophysical                                                                    
surveys,  exploration   drilling,  underground  exploration,                                                                    
surface trenching  and bulk sampling, and  other exploration                                                                    
work including  aerial photos, geographical  and geophysical                                                                    
logging,   sample   analysis,    and   metallurgical   work.                                                                    
Representative Gara referenced the  tax report regarding the                                                                    
minerals exploration incentive and read:                                                                                        
                                                                                                                                
     "…the credits may not exceed $20 million."                                                                                 
                                                                                                                                
Representative  Gara wondered  whether  the information  was                                                                    
accurate, and  whether the $20  million applied per  year or                                                                    
total and if  the credit was valid for  multiple owners. Mr.                                                                    
Spanos affirmed  that the credit was  a total of all  of the                                                                    
expenses up  to $20 million  over 15 years. He  replied that                                                                    
the $20 million was spread between multiple owners.                                                                             
                                                                                                                                
Vice-Chair  Saddler  asked  about  the  orientation  of  DNR                                                                    
regarding  the  mineral  industry.   He  asked  whether  the                                                                    
increased mining tax advanced the  "policy goal" of DNR. Mr.                                                                    
Burnett answered that it would  be difficult to say that the                                                                    
bill  advanced  the goal  but  deemed  that the  affect  was                                                                    
neutral  because the  tax was  not  large enough  to have  a                                                                    
significant  impact  on   mines.  Vice-Chair  Saddler  asked                                                                    
whether  the  administration   had  analysis  regarding  the                                                                    
appropriate  level of  taxation to  achieve DNR's  goal. Mr.                                                                    
Burnett replied that an internal  analysis was done "largely                                                                    
on  judgement and  economics." He  determined that  the rate                                                                    
was different  for each of  the companies and for  each year                                                                    
due to widely  divergent variables. He thought  that the tax                                                                    
rate  in Alaska  had  an  effect, but  it  was difficult  to                                                                    
estimate.                                                                                                                       
                                                                                                                                
11:54:25 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Saddler asked  about the  difference between  an                                                                    
internal analysis  and a "swag."  Mr. Burnett  answered that                                                                    
the  tax was  "a little  bit more  than a  swag." Vice-Chair                                                                    
Saddler   asked  for   further  information   regarding  the                                                                    
analysis performed by DOR. Mr.  Burnett answered that he had                                                                    
been peripherally involved and could not respond further.                                                                       
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
voiced  that mining  was an  "incredibly volatile"  industry                                                                    
tied  to  commodity  prices.  The  state's  mining  industry                                                                    
corporate income  tax ranged  from $15  to $80  million over                                                                    
the  last 5  years. He  indicated that  it was  difficult to                                                                    
determine what  an increase might  do in any given  year. He                                                                    
reported that the mining tax  was designed as an incremental                                                                    
increase that  would not "break  anyone's bank" and  also as                                                                    
"part of a larger fiscal plan to balance the budget."                                                                           
                                                                                                                                
Vice-Chair  Saddler asked  whether  there  was any  analysis                                                                    
about the number that had  been selected. Mr. Alper answered                                                                    
that  DOR picked  a series  of numbers,  performed modeling,                                                                    
and talked to industry.  The administration then presented a                                                                    
proposal  in  the  bill  before  the  committee.  Vice-Chair                                                                    
Saddler asked  DOR to  share the  modeling results  with the                                                                    
committee. Mr.  Alper replied  that to  the extent  that the                                                                    
information  could be  shared the  department would  provide                                                                    
it.                                                                                                                             
                                                                                                                                
Representative  Wilson  asked  whether  the  department  had                                                                    
analyzed the  effects between cutting  $6 million  more from                                                                    
the  budget versus  increasing industry  taxes  by the  same                                                                    
amount.  Mr. Burnett  answered that  all of  the items  were                                                                    
considered at a policy level.  He felt that the question was                                                                    
more appropriate for the governor,  Office of Management and                                                                    
Budget  (OMB),  and  the  committee.  Representative  Wilson                                                                    
thought  that  cutting  $6 million  from  the  budget  might                                                                    
produce "less  negative impact on  the economy"  than taxing                                                                    
industry. She  believed that the  issue "was not  just about                                                                    
revenue, but about making government the right size."                                                                           
                                                                                                                                
11:58:01 AM                                                                                                                   
                                                                                                                                
Representative Gara  asked for an  estimate of what  it cost                                                                    
the  state  to  grant  a  3.5  year  mining  exemption  from                                                                    
taxation.  Mr. Burnett  responded that  it was  difficult to                                                                    
calculate  because  it  depended   on  the  year  and  other                                                                    
variables. He reported  that the total take  from the mining                                                                    
tax was $30  million to $50 million. He  delineated that one                                                                    
large mine would  pay one-third to one-quarter  of the total                                                                    
take. He surmised that the impact  could be from zero to $30                                                                    
million.                                                                                                                        
Mr.   Alper   elaborated   on   an   earlier   question   by                                                                    
Representative Gara.  He stated that the  exploration credit                                                                    
was not a  100 percent credit against taxes.  The credit was                                                                    
a deduction  from income  that would  be taxed.  He detailed                                                                    
that  a  company  could  offset  up to  50  percent  of  its                                                                    
earnings in  a given year  until the  credit was used  up or                                                                    
within 15 years.                                                                                                                
                                                                                                                                
Mr. Spanos agreed with the statements.                                                                                          
                                                                                                                                
Representative  Gara asked  for  verification  that the  3.5                                                                    
year  exemption could  cost the  state between  zero to  $30                                                                    
million per year.  Mr. Burnett answered in  the negative. He                                                                    
clarified that  the figure was  a possible total  over three                                                                    
years at the high end for one mine.                                                                                             
                                                                                                                                
Mr.  Alper clarified  that  the fiscal  note  impact of  the                                                                    
specific  provision  had been  zero  because  there were  no                                                                    
mines expected to open in the  six year period of the fiscal                                                                    
note out years.                                                                                                                 
                                                                                                                                
HB  253  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  Thompson recessed  the meeting  to a  call of  the                                                                    
chair [Note: the meeting never reconvened].                                                                                     
                                                                                                                                
^RECESSED TO A CALL OF THE CHAIR                                                                                                
                                                                                                                                
12:02:49 PM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
12:03:00 PM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 12:04 p.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB 253 CS WORKDRAFT FIN v.I.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Supporting Documents - DOR Tax presentation MINING 1-29-16.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Supporting Documents - DOR Tax electronic filing statistics 2-20-16.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Supporting Documents - DOR Response to House Resources Committee - 2.15.16 (Part 1 of 2) signed JB.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Supporting Documents - DOR response to House Resources - 2.29.16 (Part 2 of 2 - Part 1 sent 2.15.16).pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Supporting Documents - DOR 2015 Tax Annual Report.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Supporting Documents - canadian-mining-taxation-2009.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB253 Sponsor Statement - Governor's Transmittal Letter.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 TAX-PRES.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 Industry Doc Tax comparison (2).pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 Fiscal Effects of Mining Industry docx (3).pdf HFIN 5/4/2016 10:30:00 AM
HB253 mining tax questions for the Administration (3).pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response 2015 MLT Return.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response 2015 Shared Tax Report.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response CIT Sector Report FY 2015.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response DNR Explaination of the Exploration Incentive Credit.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response DOR Response to House Finance Committee - 5.3-4.16.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response ISER Report Chapter 4.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response LandStatus_reducedx4b.pdf HFIN 5/4/2016 10:30:00 AM
HB 253
HB 253 DOR Response LandStatus_reducedx4b.pdf HFIN 5/4/2016 10:30:00 AM
HB 253