Legislature(2007 - 2008)
03/16/2007 08:35 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB156 | |
| 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 16, 2007
8:35 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
Representative Anna Fairclough, Vice Chair
OTHER LEGISLATORS PRESENT
Representative Andrea Doll
Representative Mike Kelly
COMMITTEE CALENDAR
HOUSE BILL NO. 156
"An Act relating to mining licenses, to the mining license tax,
and to production royalties on minerals and rents for property
involved in mining; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 156
SHORT TITLE: MINING PROD. & LICENSE TAXES/ROYALTIES
SPONSOR(s): REPRESENTATIVE(s) SEATON
02/26/07 (H) READ THE FIRST TIME - REFERRALS
02/26/07 (H) W&M, RES, FIN
03/16/07 (H) W&M AT 8:30 AM HOUSE FINANCE 519
WITNESS REGISTER
REPRESENTATIVE PAUL SEATON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 156.
NEIL MACKINNON, Owner
Hyak Mining Company
Juneau, Alaska
POSITION STATEMENT: Expressed concerns with HB 156 and answered
questions
CHARLIE BODDY, Vice President
Governmental Relations
Usibelli Coal Mine, Inc.
Fairbanks, Alaska
POSITION STATEMENT: Expressed concerns with HB 156 and answered
questions.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 8:35:37 AM. Present at the call to
order were Representatives Hawker, Wilson, Gruenberg, and Roses.
Representative Fairclough was excused. Also present were
Representatives Doll and Kelly.
HB 156-MINING PROD. & LICENSE TAXES/ROYALTIES
8:36:59 AM
CHAIR HAWKER announced that the only order of business would be
HOUSE BILL NO. 156, "An Act relating to mining licenses, to the
mining license tax, and to production royalties on minerals and
rents for property involved in mining; and providing for an
effective date."
REPRESENTATIVE SEATON, sponsor of HB 156, said that now was an
opportune time to consider changes to the state's mining tax
regime. He referenced a poll by Hellenthal and Associates,
dated February 12th to 20th, 2007, ("Hellenthal poll"), a copy
of which was provided to the committee which indicated the
public does not consider the current mining tax regime to be too
high. Furthermore, he noted that legislative action is an
appropriate way to approach taxes. He reminded the committee
that recently proposed legislation to impose a head tax on the
cruise industry stalled in the legislature, but was then part of
a successful initiative that included a head tax, an ocean
ranger program, a corporate tax, a tax on gambling, and imposed
additional permitting requirements on the cruise industry. In
comparison, HB 156 is very precise and proposes reasonable
adjustments to the industry tax structure without undue harm to
the mining industry. He said that the mining tax has not been
significantly amended in over 50 years. In 1989, in response to
a United States Supreme Court decision, the legislature made
changes to the mining tax regime and imposed both rents and
royalties on the state's mining industry. He explained that,
under current law, when 20-year mining leases between the state
and mining operators are renewed, the rental fees charged are
adjusted by the Consumer Price Index (CPI) in Anchorage.
8:43:54 AM
REPRESENTATIVE SEATON referenced the Annual Survey of Mining
Companies 2005/2006, published by The Fraser Institute ("Fraser
report"), and explained that it is an annual survey of metal
mining and exploration companies worldwide. The survey sets
forth its results in an index which assesses how an area's
mineral potential and taxation regime affect that region's
attractiveness for mine development. The March 2006 Fraser
report ranks Alaska as 7th out of 64 regions worldwide in the
factors of attractive mining policy and mineral potential.
Alaska ranks as the 2nd most favorable for its mining taxation
regime out of the same 64 regions. He opined that Alaska's tax
regime may be favorable to the mining companies, but perhaps not
so favorable to policy makers charged with obtaining a
reasonable revenue return for the state's resources.
8:46:31 AM
REPRESENTATIVE ROSES asked how much mining activity occurred in
Alaska compared to some other areas studied by the Fraser
Institute.
REPRESENTATIVE SEATON indicated he can supply a report that
covers the aforementioned area and noted that the Fraser report
is very detailed.
REPRESENTATIVE ROSES noted that under the Hellenthal poll
approximately 28 percent of persons polled consider mining
activities anywhere from unimportant to very unimportant to the
state. He wondered how many of those who indicated a lack of
interest in mining also indicated a desire to increase mining
taxes. He opined that a person who does not care about an
industry's existence would not be concerned with taxing that
industry out of existence.
8:48:49 AM
REPRESENTATIVE SEATON predicted that if a vote on this issue was
presented by initiative, people may vote in favor of increased
taxation for various reasons.
REPRESENTATIVE ROSES noted that sometimes public opinion changes
during an initiative campaign and asked whether there was
additional information about the Hellenthal poll.
REPRESENTATIVE SEATON explained that he became aware of the
Hellenthal poll in a different committee, and that there may be
some additional information not yet made public.
8:50:11 AM
REPRESENTATIVE SEATON referred to a committee hand out titled
"Non-renewable Resource Tax Comparison Chart," ("comparison
chart") that compares the current mining tax structure with the
proposed mining tax changes in HB 156 and with the 2006 changes
to the state's oil production profits tax (PPT). He noted that
non-renewable resources are taxed somewhat differently than
renewable resources.
8:51:45 AM
REPRESENTATIVE WILSON asked how the changes proposed in the bill
would affect Alaska's ranking on the Fraser report.
REPRESENTATIVE SEATON replied that in last year's discussion of
the PPT, he recalled testimony from oil companies that they
wanted a tax restructuring for their industry because the tax
had not been changed for quite some time. The industry favored
changes that they felt would remain for quite some time so as to
add stability to the taxing regime, he opined. He reminded the
committee that the mining license tax had not been changed for
55 years, and that investors may feel uneasy if they believe a
taxing regime is going to change. He said that he thinks that a
reasonable change to the mining tax structure may be looked at
favorably by the mining industry as it could provide stability
in the area of taxation. He responded to a question by stating
that research sources which compare various tax regimes include
known factors, including the variety and rates of taxes, within
a jurisdiction.
8:53:37 AM
REPRESENTATIVE SEATON referred to the comparison chart and
explained that current mining tax rates are based on four levels
of mining net income, with taxation rates that vary from 0 to 7
percent. Under current law, there is no tax for mines with a
net income of less than $40,000, although the taxpayer must file
a return. The proposed changes would not eliminate the
exemption from taxation for mines with less than $40,000 in
income, but would eliminate the requirement that these mines
file a return. He explained that the state has many small,
recreational mines that do not earn more than $40,000 in income
and that filing a tax return engenders a lot of paperwork when
no tax liability is due. He went on to say that the bill
proposes to increase tax rates for income categories more than
$40,000 by 2 percent and it adds a category for mines with
income of more than $500,000. These mines would be taxed at 11
percent of net income. He explained that the bill does not
propose an escalator factor, unlike the PPT where the tax rates
increase as the price of oil increases. He noted that in PPT
there is a 4 percent minimum tax percentage based on the gross
value of production if oil is less than $25 a barrel. He
pointed out that in PPT, there are 18 different categories of
expenses that the producers are disallowed from deducting from
gross income to arrive at net income. He said that net income
for purposes of the mining license tax is much different than
net income under PPT.
8:58:40 AM
REPRESENTATIVE SEATON explained that current mining tax law
exempts a mine from taxation for its first three and one-half
years of operation. The proposed changes would grant a three
and one-half year tax deferral for new mines, which would be
payable over a period of 10 years. He said this change would
likely not have any adverse affect on revenues because mines do
not usually make any money in their first years of operation;
therefore, there is no tax to defer because there is no net
income to tax. The decision to allow new mines to defer, but
not forgive, taxes for the first three years and one-half years
is a policy call that recognizes some mining operations have the
potential for revenue even in the early years of operation.
9:01:01 AM
REPRESENTATIVE ROSES asked about the effect of the bill on
current operators who have the benefit of the three and one-half
year tax exemption.
REPRESENTATIVE SEATON replied that current operators would be
covered by current law, and reminded the committee that the
Department of Revenue (DOR) does not recall any mining operation
actually invoking the tax exemption for the first three and one-
half years of mining operations.
9:01:48 AM
REPRESENTATIVE SEATON went on to say that the bill's provisions
allow a deduction for cost depletion only. Current law allows a
taxpayer to choose between cost depletion and percentage
depletion. He noted that percentage depletion can allow the
taxpayer to use percentage depletion once all cost depletion is
exhausted, which can result in a tax deduction of three to four
times the actual capital costs.
9:02:51 AM
REPRESENTATIVE GRUENBERG asked whether there has been research
as to whether Alaska's current mining tax regime encourages,
discourages, or has no effect on development of the state's
mineral resources.
REPRESENTATIVE SEATON indicated that there is a fair amount of
exploration for potential new mines in the state. He said that
the Fraser Institute surveys mining executives worldwide and
rates jurisdictions on various aspects, such as governmental
policies, taxation regimes, and resource potential. He opined
that it is a policy choice of the state to determine how it
wants to structure its taxes, and that the state could decide to
have a very favorable mining tax regime in an effort to attract
mining jobs. He went on to say another aspect to consider in
setting tax policy could be consideration of state revenues and
constitutional obligations.
9:05:44 AM
REPRESENTATIVE GRUENBERG said he believes it is difficult to
compare Alaska with other regimes because there are significant
political and geographical differences. He went on to say his
concern is perhaps within the purview of DOR and it is how the
state is doing with regard to mining activities compared to
where it ought to be in the ideal world.
9:07:32 AM
REPRESENTATIVE SEATON opined that Canada may be a good
comparison to Alaska, and noted that British Columbia's policy
and mineral potential is ranked 11th most favorable, while
Alaska is ranked 6th in this same category. He opined that the
Fraser index tries to summarize where mining companies are most
likely to invest. He said that it is difficult to structure
taxes for industries based on non-renewable resources.
9:10:28 AM
REPRESENTATIVE CISSNA asked whether there is information on the
relative costs of mining in other jurisdictions.
REPRESENTATIVE SEATON stated that the rating system relies on
knowledgeable mining executives who are familiar with the
factors of resource potential, costs, and taxation. The Fraser
Institute reports how mining executives view various
jurisdictions in various categories, and opined that this is a
difficult policy decision for the state to decide how to
structure its mining taxation system. He said he researched and
considered the issue of mining taxes for three years. During
that time he considered taxes based on gross income, point of
production, or mine-mouth value, to determine ways to increase
revenues received from mining operations. His research included
much discussion with the mining industry. He noted that in the
past 10 years, Alaska has not received much revenue from mining
taxes. He went on to opine that the bill is the best compromise
to assure a reasonable return, yet impose a taxing regime that
will not damage Alaska's attractiveness to industry investment.
He also noted that Alaska's mining tax scheme is over 50 years
old, and a change would provide some comfort to mining
executives that the taxes would not change again soon.
9:15:16 AM
REPRESENTATIVE SEATON explained that the under prior law, the
state corporate income net tax was being deducted from the
mining license net tax. He said he will offer an amendment to
the bill to propose that federal and state income taxes are not
deductible from the mining license net income tax. He reminded
the committee that changes to PPT disallowed deductions of one
net tax from another net tax.
9:16:40 AM
REPRESENTATIVE SEATON said that the royalty provisions of the
bill remain the same for coal mining - 5 percent of adjusted
gross income. For metal mines, the bill proposes a change from
3 percent of net income to 3 percent of net smelter return. He
explained royalty payments are to compensate the state for the
use of its resources, and under the prior system, the state's
royalty amount was based on the mine's income. Therefore, the
state's royalty share was reduced if the company was not
operating efficiently. He noted that most mines in Alaska are
not on state land, but are on Alaska Mental Health Trust
Authority (AMHTA) or native-owned land. On those lands, the
mining industry may pay royalties of up to 5 percent. Some
royalty provisions on private land are based on a sliding scale
which adjusts depending on the price of minerals. He opined
that since the mining industry will pay 5 percent of net smelter
return on private property, it could also pay a similar amount
to the state.
9:19:29 AM
CHAIR HAWKER asked whether net smelter return calculations
appear elsewhere in state law and whether it is a known concept
within the mining industry.
REPRESENTATIVE SEATON replied that he believes the concept is
used in contracts in the state, such as mining contracts on
AMHTA lands. He noted it is also used in other jurisdictions,
such as Canada and other countries. He went on to say if it was
not defined in the bill, he would make sure a definition
appears.
9:21:11 AM
REPRESENTATIVE GRUENBERG asked whether there is research as to
whether mining companies were asked whether they viewed
investment on state or private lands differently due to the
different tax regimes that apply.
REPRESENTATIVE SEATON responded that the mining officials
interviewed are familiar with Alaska industry and know that most
mines are not on state lands. He opined that their estimations
are based on their extensive knowledge. He noted that the
bigger mines, such as the Red Dog Mine, are not on state land,
and thus pay a net smelter return royalty.
9:22:57 AM
REPRESENTATIVE GRUENBERG observed that Alaska is currently
ranked as the 6th most favorable mining jurisdiction, even
though most mining operations are operating on private land, and
are paying more royalties than those companies would pay to the
state. He went on to opine that this situation may support the
conclusion that Alaska would still be viewed favorably for
mining even if it increased the percentage of royalty payments
required for mining operations on state land.
REPRESENTATIVE SEATON indicated agreement with the
aforementioned observation.
9:24:00 AM
REPRESENTATIVE ROSES asked whether the mining operations on, for
example, AMHTA lands, are subject to other state taxes, such as
the mining license tax, that would apply to mining operations on
state land.
REPRESENTATIVE SEATON replied that mining operations are subject
to all state taxes regardless of where the mining operations
take place.
9:24:39 AM
REPRESENTATIVE SEATON explained that the state charges rent of
$3 an acre for coal under the current law and under HB 156. The
bill proposes to include rental rates in statute instead of by
regulation, as is the current practice. Mineral rents are
currently charged based on a sliding scale that ranges from $.50
to $2.50 an acre. Every 20 years, the rents are evaluated and
readjusted based on the CPI for Anchorage. He explained that
this protects the mines as they know the rental structure and
are able to calculate any rent increase. Under the bill, the
structure would stay similar. The mineral rents would rise to
$3.30 per acre, which is what the price would be if any of the
current 20-year leases were re-negotiated based on the CPI for
Anchorage. The bill uses 2005 as the base year from which to
calculate the adjustments based on the CPI. Furthermore, mining
leases with the state under current law are for 20 years. The
bill proposes to change state leases to a 10-year period. The
reason for that change, he explained, is based on some
discussion and advice from the Department of Law (DOL) in other
areas regarding the ability of the state's ability to limit or
fix factors such as rents and taxes.
REPRESENTATIVE SEATON addressed the difference between taking
royalty-in-kind and royalty-in-value. He said that the
Department of Natural Resources (DNR) had estimated that it
could save the state about two and one-half million dollars a
year if the University of Alaska power plant in Fairbanks could
use royalty coal to power its plant. He said that the royalty-
in-kind provisions would likely not apply to existing leases,
but could be considered in the negotiation of new leases.
9:32:17 AM
NEIL MACKINNON, Owner, Hyak Mining Company testified that past
imposition of a 5 percent net smelter tax in 1948 resulted in
the closure of a Fairbanks mine which did not re-open until
1972. He said that the current mining tax regime has been in
existence since 1955, with some modifications made in the late
1980s when a court decision held the state must either collect
rents or royalties from mining operations on state land. He
said that the state imposed both rents and royalties. He opined
that charging royalties based on net smelter return instead of
net profits is a major change. He said that as a prospector, he
makes his living by exploring for minerals and can offer
prospects for companies to pursue for development. He indicated
that if changes were made to the mining tax structure, he would
not be able to continue to explore in the state. He went to say
that the survey by the Fraser Institute is not current, and
reviews years of economic challenge for the mining history. He
said that the current climate for mining, and thus for positive
mining revenues, has improved and the state may be receive more
favorable revenue returns from mining in the future.
9:36:51 AM
MR. MACKINNON opined that Alaska is not quite as attractive a
place for mining activity as last year's Fraser report would
indicate. He said it was his understanding that under current
Alaska mining law a taxpayer has to chose between cost depletion
and percentage depletion at time of development and that the
taxpayer can not make an election between cost and percentage
depletion each year. He went on to say that oil and gas is a
different industry from mining, and that, within mining, each
mineral is different. Within minerals, there are a variety of
quality issues which affect profitability. He said that raising
the royalty requirement by 3 percent will cut income by 3
percent, and may require the mining operator to have to mine
higher quality rock. He said that years ago he compared mining
operations in Alaska with mining operations in other states. He
said his conclusion was that in Alaska one-third of each dollar
made through mining went to the mining company, another third to
labor and the remaining third went to government. He said that
that under his model, he got the same result if he considered
moving the mining operation to Nevada or Idaho. The one factor
that can be adjusted is how much money the state receives, as
one could not reduce the amount that goes to mining capital or
labor, he opined. He said that his small company could not
afford much risk, and that it puts approximately 10 to 15
percent of its income into exploration. This year he said that
his company is not exploring in Alaska, but instead is exploring
in Nevada because it cannot afford political risks. He
indicated that other mines in Alaska may be affected. He said
that wealth in the ground is of no value until it is produced.
9:42:09 AM
CHAIR HAWKER asked the witness' opinion on the affect the bill
could have on Couer Alaska's Kensington Gold Mine
("Kensington").
MR. MACKINNON opined that since the Kensington was currently in
the process of building mining structures, it would likely "have
to live" with any changes to the tax structure. He said it
could be mothballed. He explained that for years many large
mines will operate and provide jobs at a low return of 3 percent
annually in the hope of receiving a much higher return for one
year. He opined that it is of value to have a mine operate at a
low return rate so as to provide jobs and infrastructure,
particularly in rural areas.
9:43:47 AM
REPRESENTATIVE WILSON asked the witness what the effect of the
bill would be on his company's Alaska activities.
MR. MACKINNON replied that he would not "fold it all up" but he
would direct his money elsewhere due to higher costs,
environmental issues, and state permitting requirements. He
noted that in other areas, such as Nevada, it is much easier to
get to mining sites.
9:45:06 AM
REPRESENTATIVE SEATON asked whether Mr. MacKinnon does any
exploring on AMHTA lands or native lands.
MR. MACKINNON replied not generally, and noted that with AMHTA
lands, he still has to work with a state organization. For
native land, he said that "things will not change in the middle
of the game" and indicated that there are fewer regulatory
obstacles to exploration.
9:45:54 AM
CHAIR HAWKER asked whether the state's regulatory authority
extends to operations on native owned land.
MR. MACKINNON agreed that the state's regulatory powers applies
to operations on non-state land, but said that there is a
difference between land one owns and land one leases, and
indicated there is more freedom with land owned rather than
leased.
9:46:35 AM
REPRESENTATIVE SEATON asked whether requiring net smelter return
will harm exploration on state land even when landowners other
than the state currently collect royalties based on net smelter
return.
MR. MACKINNON replied that the state sets royalty rates in
statute, while royalties with private landowners can be
negotiated based on the actual circumstances. He opined that
because of this, the state should set the royalty requirements
"at the lowest common denominator," or take some other action to
reduce the risk that mining operators will have to pay royalties
on unsuccessful operations.
9:48:00 AM
REPRESENTATIVE SEATON clarified that if there is no production,
there is no royalty based on net smelter return.
9:48:27 AM
CHARLIE BODDY, Vice President, Governmental Relations, Usibelli
Coal Mine, Inc., referred to the Hellenthal poll and said that
it is related to Northern Dynasty Inc.'s proposed Pebble project
and "speaks nothing to the mining industry" as a whole. He also
cautioned the committee not to compare the mining industry with
the oil and gas industry as these industries operate under
totally different scenarios. He noted that the coal industry
pays many taxes and fees that other industries do not pay. He
went on to say this year's bill has not significantly changed
from that proposed last year. Last year his company calculated
that the proposed changes would cost it an additional $500,000.
He said Usibelli is currently producing about one and one-half
million tons of coal annually, with half of that production
being used in state; the other half is exported to Chile and
South Korea. He described these "fragile" contracts as based on
a price per ton basis. He explained that any additional
"pennies per ton" add up and become a significant factor.
9:50:50 AM
MR. BODDY said if one looks at past mining tax revenues there
are years where the state did not receive much in taxes, but
that there are factors to consider besides taxes because the
state does not contribute capital to mining development. He
referenced mining operations of Red Dog Mine and Fort Knox as
currently providing some tax revenue to the state. He went on
to say that in his opinion, the Fraser report is a good
indicator of how mining companies view Alaska for development.
He reminded the committee that despite the fact that Alaska has
the majority of coal reserves in the United States, there is
only one coal mine in the state. He opined that perhaps the
reason for lack of development of coal reserves was based in
part on the remote location of most mining sites. Furthermore,
he referenced that the state lacks some resources available in
other states, such as reports on air and water quality and
climatology. These studies must then be done at the mining
company's expense and at tremendous cost, he said. He said that
mining support industries are significant throughout the life of
a mining project. He explained that the coal industry pays a
federal reclamation tax of $0.35 a ton and for employee medical
costs incurred by coals mines that are no longer in operation.
He emphasized that the bill could cost Usibelli over $500,000
and that in the coal industry, "pennies make a difference."
MR. BODDY clarified that currently the coal industry does not
pay royalties based on 5 percent of adjusted gross income, but
pays based on 5 percent of adjusted gross value.
9:56:52 AM
REPRESENTATIVE ROSES asked what the cost would have been to
Usibelli under the mining tax bill proposed last year.
MR. BODDY replied it would have cost his company an additional
$500,000 to $600,000 a year.
9:57:55 AM
REPRESENTATIVE SEATON clarified that the aforementioned cost
increase would be for mining license net income taxes due, not
for royalty or rent obligations.
MR. BODDY agreed that the increase would be for the mining
license tax as the existing leases would be held harmless from
any price increase. In response to a question, he explained
that coal mine lease lengths vary, but that domestic contracts
are normally for 5 to 10 year periods, while export contracts
used to be for 10 years, but are now anywhere from 1 to 3 years
in length. He further responded by explaining that that many of
the contracts allow the company to "pass through" cost and tax
increases, but said that, as a practical matter, a cost increase
could result in the company losing the contract.
9:59:34 AM
REPRESENTATIVE SEATON clarified that the aforementioned comment
relates to sales contracts with buyers, not to leases of state
land.
10:00:01 AM
MR. BODDY said he believes that any contracts Usibelli currently
holds with state entities, such as the Alaska Railroad
Corporation, cannot be changed until the contract adjustment
period.
[HB 156 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
10:01:57 AM.
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