Legislature(2005 - 2006)
03/01/2006 09:06 AM House W&M
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| HB418 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 1, 2006
9:06 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Paul Seaton
Representative Peggy Wilson
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Max Gruenberg
COMMITTEE CALENDAR
HOUSE BILL NO. 418
"An Act relating to a mining production tax; relating to the
mining license tax; relating to production royalties on
minerals; relating to exploration incentive credits; and
providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 418
SHORT TITLE: MINING PROD. & LICENSE TAXES/ROYALTIES
SPONSOR(S): REPRESENTATIVE(S) SEATON
02/01/06 (H) READ THE FIRST TIME - REFERRALS
02/01/06 (H) W&M, RES, FIN
02/22/06 (H) W&M AT 9:00 AM CAPITOL 106
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(W&M)
02/24/06 (H) W&M AT 9:00 AM CAPITOL 106
02/24/06 (H) Heard & Held
02/24/06 (H) MINUTE(W&M)
02/27/06 (H) W&M AT 9:00 AM CAPITOL 106
02/27/06 (H) Heard & Held
02/27/06 (H) MINUTE(W&M)
03/01/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
DAN STICKEL, Economist
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Explained the revenue side of the DOR
fiscal note for HB 418.
JOHANNA BALES, Excise Audit Manager
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Explained the expense side of the DOR
fiscal note for HB 418.
KERWIN KRAUSE, Mineral Property Manager
Division of Mining, Land and Water
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided information on the possible
impacts of HB 418.
ED FOGELS, Acting Deputy Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided comments on HB 418.
DICK MYLIUS, Director
Division of Mining, Land and Water
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Explained the effect HB 418 would have on
DNR.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:06:06 AM. Representatives
Weyhrauch, Moses, and Seaton, were present at the call to order.
Representative Wilson arrived as the meeting was in progress.
HB 418-MINING PROD. & LICENSE TAXES/ROYALTIES
9:07:25 AM
CHAIR WEYHRAUCH announced that the only order of business would
be HOUSE BILL NO. 418, "An Act relating to a mining production
tax; relating to the mining license tax; relating to production
royalties on minerals; relating to exploration incentive
credits; and providing for an effective date."
9:07:51 AM
DAN STICKEL, Economist, Tax Division, Department of Revenue
(DOR), in response to Chair Weyhrauch, said he was not aware of
DOR having any official position on the bill.
CHAIR WEYHRAUCH directed the committee's attention to the "March
1, 2006" fiscal note prepared by the DOR Tax Division and
requested Mr. Stickel explain the note.
9:09:46 AM
MR. STICKEL, relayed that he prepared the revenue side of fiscal
note and Johanna Bales, Excise Audit Manager of the Tax
Division, prepared the expenses side of the note. He explained
that the bill would eliminate the existing Mining License Tax
and replace it with a production-based tax. He then referred to
the two steps used for estimating the revenue impact of the
bill: the first being an estimation of the revenue realized
under the current tax system, and the second being an estimation
of the revenue under the [proposed] tax system, and the net
revenue impact being the difference between the two. In
[determining] the Mining License Tax, he relayed that an
internal economic model is used which is based on projections
for prices and production of metals at the major mines in
Alaska, in conjunction with the review of confidential, internal
information relating historical tax payments to mineral prices
in the production of those mines. He explained that the reason
why the note is "indeterminate" is due to the difficulty in
forecasting future prices for minerals.
MR. STICKEL informed the committee that the fiscal note includes
two, future pricing scenarios [page two of the fiscal note]: a
high-priced scenario based on the most recent data available on
the futures market on major mineral prices in Alaska and a low-
price scenario which assumes that by the time the bill takes
effect, that minerals prices will return to their historical,
10-year average. He provided an example of a high-price
scenario for fiscal year 2012 (FY 12) of $32.5 million generated
from the existing tax compared to a low-price scenario of $8.3
million forecasted for the same fiscal year. Both scenarios, he
noted, would include the addition of the Pogo and Kensington
Mine Projects. Estimates for the production tax revenues, he
explained, assume that the production at the major mines would
remain constant. He highlighted that the value used in the
fiscal note is the gross value - the net sales value of the
minerals times production - and that no adjustments were made in
the note for production and transportation expenses that would
be allowable deductions under HB 418. Therefore, he remarked,
the actual revenues for the production tax might be a little
less and is another reason why the front of the fiscal note is
indeterminate. With these factors in mind, he relayed that the
net impact of changing the tax would be a "rather significant
increase" in total taxes from the mining industry:
approximately $45 million under the FY 12 high-price scenario
and $39 million under the low-price scenario in the same fiscal
year.
9:13:32 AM
REPRESENTATIVE WILSON, [referring to the tables on page two of
the fiscal note], asked whether these revenue figures were in
place of or in addition to the amounts currently received.
MR. STICKEL explained that the top line in the tables shows the
revenues DOR would expect to receive under the existing Mining
License Tax, the next line shows the expected revenues under the
proposed tax, and the bottom line reflects the net impact of the
bill.
9:14:17 AM
REPRESENTATIVE SEATON, in noting that this year's estimate of
the gross value of the mining industry is $1.6 billion, asked
Mr. Stickel what gross value was used in preparing the FY 12
projections.
MR. STICKEL said that under the high-price scenario, the
estimated taxable value is just over $2.5 billion and under the
low-price scenario, just under $1.6 billion. He commented that
this illustrates "the big issue when addressing minerals taxes,"
which is determining what the prices are going to be. He
relayed that some of the experts predict it will be high and
others say that "it's a bubble, ... it's going to burst, and
prices are going to go back down."
REPRESENTATIVE SEATON asked whether he was correct in
understanding that the current value under the 10-year-average
scenario, in spite of the two major mines coming on line, would
generate the same amount of gross revenue to the state as it
currently receives due to the current high price of minerals.
MR. STICKEL said that the two new mines are included in the low-
price scenario.
9:17:23 AM
REPRESENTATIVE WILSON asked Mr. Stickel if he would prepare new
predictions without the inclusion of the two new mines in order
to compare the "real changes" [to the mining tax revenue].
MR. STICKEL indicated that both the low and high-price scenarios
include the two new mines [to keep revenue comparisons
constant].
REPRESENTATIVE WILSON said that she would still like to see
comparisons without inclusion of the two new mines.
9:18:19 AM
REPRESENTATIVE SEATON, in explaining that certain costs, such as
transportation, ball milling, and other preparations costs, are
allowable deductions, asked whether DOR made any projections
that reflect the percent change these costs would have on
[production taxes].
MR. STICKEL said that data was not available to make this
adjustment.
REPRESENTATIVE SEATON referred to a previous committee meeting
where it was learned that "the mining industry would appreciate
mine mouth value more than the net smelter return [(NSR)] value
because it did allow the milling and the preparation of the ore
before shipment ...." The data before the committee, he noted,
does not deduct production costs for preparing the ore for
shipment nor deducts the trans-shipment costs. He said that he
would provide DOR with these cost estimates so a more accurate
[fiscal note] could be prepared.
9:20:03 AM
CHAIR WEYHRAUCH asked whether there is any data showing at what
point the tax burden would be so great that it would serve as a
disincentives to mine development.
MR. STICKEL replied that this hasn't been studied explicitly,
however the high- and low-price scenarios do show significantly
less revenue [for the mining industry] under both types of
taxes. He opined that each mine has to decide "what its cutoff
price is and ... those vary significantly from mine to mine."
CHAIR WEYHRAUCH inquired as to whether there is any data showing
how much is deducted before the tax is paid.
MR. STICKEL suggested that this information would be on the tax
returns and he would investigate whether DOR could provide this
kind of information. In response to Chair Weyhrauch, he
summarized the scenarios he would prepare for the committee's
review: one without inclusion of the two new mines and another
showing the taxable income once the aggregate amount of
deductions is taken from gross value.
REPRESENTATIVE SEATON said he provide "information on the change
from the ... gross amount to percentage of net."
9:23:55 AM
JOHANNA BALES, Excise Audit Manager, Tax Division, Department of
Revenue (DOR), explained the portion of the fiscal note she
prepared. She clarified that there would still be significant
increases to revenues in spite of deducting production costs of
the mining industry. This increase, she said, would involve
taking a closer look at the programs because any time a change
adds more expense to businesses, then more compliance activity
is required by DOR. Based on this, she relayed that one more
auditor would be needed to audit and ensure compliance of that
program. She explained that the fiscal note includes the added
expense of this position in addition to associated costs of
travel and other expenses.
REPRESENTATIVE SEATON asked Ms. Bales whether the reduction in
the number of required tax returns, once the bill is in effect,
was taken into consideration when preparing the fiscal note. He
compared the current Mining License Tax, which requires that all
those mining in Alaska file a tax form, to the tax requirement
proposed in HB 418 which does not require anyone to file should
they extract a value less than $10,000.
MS. BAYLES informed the committee that there are currently 180
taxpayers filing the Mining License Tax return, the majority of
which are royalty owners. With the way royalties would be paid
out under the proposed Mining Production Tax, she explained,
there would still be several small tax payers filing returns
that would exceed the $10,000 threshold, especially if the tax
includes "the value of the mineral versus net income."
REPRESENTATIVE SEATON relayed that with the current tax filing
requirement, many people are not complying since the [amount
owed] is minimal. He asked if he was correct in his
understanding that this requirement is not presently enforced.
MS. BAYLES said this is accurate. Because DOR receives royalty
information from the larger companies when the royalties are
paid, lists can be compiled to determine whether a company has
had a tax liability or not. However, she explained that the
department does not spend its resources to require that someone
file a return when there is no tax liability.
9:29:50 AM
KERWIN KRAUSE, Mineral Property Manager, Division of Mining,
Land and Water, Department of Natural Resources (DNR), informed
the committee that his position is responsible for managing the
section that maintains all the mining claims and leases in
addition to managing the production royalties and rentals.
CHAIR WEYHRAUCH asked how implementation of the bill would
affect Mr. Krause's job.
MR. KRAUSE surmised that "going to a different royalty mechanism
would make the job a little bit easier simply because [DNR]
wouldn't have to conduct as many investigations and audits of
the royalty returns that are filed." In response to Chair
Weyhrauch's question regarding audits, he explained that current
auditing examines the Mining License Tax returns because it has
"all of the schedules for deductions against the gross value."
He said that audits also involve review of the required
affidavits of annual labor. These affidavits, he remarked, may
include a variety of information on mining activity, volumes of
material mined, and the amount of time spent mining. Field
inspection information, he relayed, can be used to determine
whether royalty returns are filed correctly or not.
CHAIR WEYHRAUCH asked whether the schedules for gross value and
the information in the affidavits and from the field inspections
is confidential.
MR. KRAUSE explained that the schedules for gross value "comes
off the Mining License Tax return" and DOR would know of any
applicable proprietary waiting periods. However, the affidavit
and field inspection information is not confidential, he said.
CHAIR WEYHRAUCH requested the committee be provided with copies
of all tax-related forms the mining company is required to file.
He explained that he is not requesting information from any
specific company and that his interest is general.
MR. KRAUSE agreed to do so. Returning to the question of what
possible impact the bill would have on his division's workload,
he said this has not yet been determined.
9:33:56 AM
REPRESENTATIVE SEATON said he was given information relaying
that [the royalty amounts on coal] "really haven't changed since
statehood which requires a minimum of not less than five cents a
ton ... with no adjustment for inflation ... and now [probably
valued at] a penny a ton." He asked if the state negotiates any
coal deals that are based on the minimums or does it negotiate
royalties based on percent of gross similar to that proposed [in
the bill].
MR. KRAUSE explained that current coal regulations have set the
coal royalty at five percent of gross, and that these
regulations allow the commissioner to adjust the coal royalty at
a minimum of every 10 years.
REPRESENTATIVE SEATON said this explanation is "quite different"
than what he's read in the statutory requirements.
MR. KRAUSE, in response to Chair Weyhrauch, relayed that the
statute for coal is AS 38.05.150 and has not yet been amended
since its enactment by the territorial legislature.
REPRESENTATIVE SEATON paraphrased in part subsection (d),
paragraph (1) of AS 38.05.150 which read as follows:
(d) For the privilege of mining or extracting the
coal in the land covered by the lease, the lessee
(1) shall pay to the state the royalties
specified in the lease; the royalties shall be fixed
before offering the lease, and shall be effective for
a period of not more than 20 years; the royalties
shall be not less than five cents a ton of 2,000
pounds; the royalty payment is subject to the
exploration incentive credit authorized by AS 27.30;
REPRESENTATIVE SEATON asked Mr. Krause if this portion of the
statute is no longer correct and whether the state now has
another mechanism in place that deals at five percent gross
royalty.
MR. KRAUSE said this is correct. In response to Chair
Weyhrauch, he stated his belief that the authority for this is
in AS 38.05.150, AS 38.05.020, and AS 38.05.035.
9:37:36 AM
ED FOGELS, Acting Deputy Commissioner, Department of Natural
Resources (DNR), informed the committee that DNR does not have a
position on HB 418 nor has "the expertise to fully evaluate the
implications of changing the tax structure on the mining
industry."
9:38:56 AM
DICK MYLIUS, Director, Division of Mining, Land and Water,
Department of Natural Resources (DNR), relayed that Section 5,
which addresses the collection of royalties, is the portion of
the bill that directly affects the revenues taken in by DNR.
This section, he explained, changes how the royalties are
calculated from the current "net income" method to a "gross
value at point of production" one. Therefore, he summarized
that the impact the bill would have on DNR would only be on
royalties collected for those metals mined on state land and
there currently aren't a lot of large [mining] projects on state
land. He said the Usibelli Coal Mine is the only major mineral
development on state land which, because it only mines coal,
would not be affected by [changes to royalty calculations
proposed in the bill]. Fort Knox, he highlighted, is actually
on Mental Health Trust land and so any revenues from that
project would largely go to the Mental Health Trust, not DNR.
The Pogo Mine Project, will be the first large operation to pay
a significant royalty to the state. Changes to mining taxes are
addressed primarily in Section 12 of the bill and would involve
DOR, he continued, as well as apply to all mining development
and all mineral resources, including coal and sand and gravel.
MR. MYLIUS then directed the committee's attention to the charts
prepared by DNR to show the types of significant revenue
generated from the five large mine projects in Alaska, only one
of which is on state land. He reiterated that the Usibelli Coal
Mine, on state land, would have its taxes affected by the
proposed legislation, though not its royalties. With the Red
Dog Mine Project, he explained that there would be no royalties
coming to the state since the operation is on land entirely
owned by the NANA Regional Corporation.
CHAIR WEYHRAUCH requested further information regarding the
Usibelli Coal Mine. He questioned whether totaling all the
payments shown on the chart for this mine would reflect the
"total government take."
MR. MYLIUS said it would and then in response to further
questions by Chair Weyhrauch, he deferred to DOR for an
explanation of how the income tax is calculated for the Usibelli
Coal Mine operation.
9:46:02 AM
MR. STICKEL explained that any corporation doing business in
Alaska is required to file a corporate income tax return with
the DOR Tax Division. An S Corporation, he said, is generally
exempt from filing the income tax; a C Corporation is not. The
9.4 percent listed on the chart, he continued, applies to income
above $90,000, which is the maximum tax rate of a graduated
scale beginning at 1 percent on up to the 9.4 percent. He
further clarified that when a company files its Alaska tax
return, it's based on the company's federal taxable income and a
three-piece, equally-weighted factor based on property, payroll,
and sales. In response to Chair Weyhrauch, he said the return
form can be simple or complex. In regard to providing the
actual income taxes paid by specific corporations, he said that
DOR is not allowed to release this information.
CHAIR WEYHRAUCH, referring to the charts, asked whether Usibelli
Coal Mine, Red Dog Project, Greens Creek Mining Company, Fort
Knox, and Pogo are all paying 9.4 percent.
MR. STICKEL said that this would be the maximum tax rate for
those operations registered as a C Corporation.
CHAIR WEYHRAUCH commented that the amount of income tax to the
state could "fluctuate wildly" and sought confirmation that it
could only be received on an aggregate basis.
MR. STICKEL said this is correct. He relayed that he did not
presently have available the statistics that would show the
total tax liability for the mining industry but would provide
this information to the committee.
CHAIR WEYHRAUCH asked at what point does "the tax burden become
so onerous that it is a disincentive to investment and
exploration."
MR. STICKEL said that this is information DOR does not currently
have available but would be willing to compile for the
committee.
9:49:21 AM
REPRESENTATIVE SEATON referred to page 10 of the "Legislative
Research Report," Report Number 05.253, June 28, 2005, and
directed the committee's attention to the section on mining in
Table 3 entitled, "State Revenue Collected Through Major Taxes
and Fees on the Oil and Gas, Mining, and Fishing Industries, FY
95 - FY 04." This section, he relayed, shows how "highly
variable" the corporate income taxes are, ranging from $18,000
in FY 02, $323,000 in FY 04, $285,000 in FY 01.
CHAIR WEYHRAUCH suggested Mr. Stickel compare this data to that
available from DOR.
MR. STICKEL expressed his belief that DOR has already reviewed
this, found it does match the department's internal data and, in
fact, is information that was originally provided by DOR when
the report was prepared.
REPRESENTATIVE SEATON returning to discussions on coal royalties
as specified in the aforementioned statute, AS 38.01.150, asked
for clarification on the negotiation between the state and
Usibelli Coal Mine, Inc. for the 5 percent of gross royalty on
coal and whether the 5 cents per ton is simply a minimum amount
that could have been negotiated.
9:52:09 AM
MR. KRAUSE explained that the "five cents a ton" in the statute
was the original royalty amount; however, at a later point in
time regulations were implemented to make changes to the
statutes. He clarified that one of the regulations dealt with
royalties and one with rent. By 1982, he said, the royalty was
changed from five cents a ton to "up to five percent of gross."
Additionally, he highlighted that any leases in production at
that time, were allowed to deduct transportation and
beneficiation costs. He informed the committee that there were
only three leases at that time and they all belonged to Usibelli
Coal Mine, Inc. At this same time, he said that rent was
changed to $3.00 an acre - an amount that has remained in effect
and is in regulation.
REPRESENTATIVE SEATON inquired as to whether there are any
similar regulations dealing with minerals.
MR. KRAUSE explained that the same kind of structure exists with
the initial rental amounts in statute and updated rentals in
regulations which are adjusted every 10 years according to the
Consumer Price Index change (CPI). As per Representative
Seaton's request, he said he would forward this information to
the committee.
9:54:33 AM
CHAIR WEYHRAUCH announced that HB 418 would be held over.
9:55:24 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:55 a.m.
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