Legislature(2007 - 2008)
03/23/2007 07:44 AM House W&M
| Audio | Topic |
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| 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 23, 2007
7:44 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
Representative Bob Roses
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
03/16/07 (H) Heard & Held
03/16/07 (H) MINUTE(W&M)
03/21/07 (H) W&M AT 7:30 AM HOUSE FINANCE 519
03/21/07 (H) Heard & Held
03/21/07 (H) MINUTE(W&M)
03/23/07 (H) W&M AT 7:30 AM HOUSE FINANCE 519
WITNESS REGISTER
JOHANNA BALES, CPA, Excise Audit Manager
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 156.
KERWIN KRAUSE, Mineral Properties Manager
Division of Mining, Land and Water
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 156 and mining
issues.
ED FOGELS, Deputy Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 156 and mining
issues.
STEVEN C. BORELL, P.E., Executive Director
Alaska Miners Association, Inc.
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 156.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:44:45 AM. Present at the call to
order were Representatives Hawker, Fairclough, Wilson, Cissna,
Seaton, and Gruenberg. Representative Roses was excused.
7:46:23 AM
HB 156-MINING PROD. & LICENSE TAXES/ROYALTIES
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."
7:46:44 AM
REPRESENTATIVE SEATON offered Amendment 1 which read [original
punctuation provided]:
Page 2, lines 8-9, following "lease;":
Delete "the annual rental shall be effective for a
period of not more than 20 years;"
Insert "[THE ANNUAL RENTAL SHALL BE EFFECTIVE FOR A
PERIOD OF NOT MORE THAN 20 YEARS;]"
Page 6, line 8, following "determining the"
Delete "tax"
Insert "production royalty"
Page 7, line 24, following "of"
Delete "exemption"
Insert "deferral [EXEMPTION]"
CHAIR HAWKER objected for purpose of discussion.
REPRESENTATIVE SEATON explained that Amendment 1 contains three
technical amendments. The first part removes from statute the
language that leases shall be effective for a period of not more
than 20 years. The second inserts a reference to "production
royalty," and the third deletes a reference to "exemption" and
inserts "deferral," so as to be consistent with other sections
of HB 156.
7:48:14 AM
CHAIR HAWKER removed his objection, and there being no further
objection, Amendment 1 to HB 156 was adopted.
7:48:46 AM
REPRESENTATIVE SEATON moved offered Amendment 2 which read
[original punctuation provided]:
Page 3, line 9, following "shall be"
Delete "not less than $3.30 for each acre"
Insert "not less than $1.65 for each acre during
the first five years of a lease and not less than
$3.30 for each acre after the first five years of a
lease"
Page 7, line 25 through page 8, line 4:
Delete all material and insert:
* Sec. 12. AS 43.65.010(c) is amended to read:
"(c) The license tax on mining is imposed on the
net income of the taxpayer from the property in the
state, computed with allowable depletion, plus royalty
received in connection with mining property in the
state. The tax rates applicable to the amount of a
taxpayer's net income are as follows:
over $100,000 and not over $250,000...............5 percent
over $250,000 and not over $500,000..................$7,500
plus 7 percent of the excess over $250,000
over $500,000 and not over $1,000,000...............$25,000
plus 9 percent of the excess over $500,000
over $1,000,000.....................................$70,000
plus 11 percent of the excess over $1,000,000."
Page 9, line 9, following "federal":
Insert "or state"
CHAIR HAWKER objected for purposes of discussion.
7:49:27 AM
REPRESENTATIVE SEATON explained that the first part of Amendment
2 on page 3, line 9, institutes a rental fee on metal mines of
not less than $1.65 an acre for the first five years of a lease.
The rent adjusts to a base level of not less than $3.30 an acre
after the first five years of a lease. The second part of the
amendment affects page 7, line 25 through page 8, line 4, and
elevates the net income necessary to trigger application of the
mining license tax from $40,000 to $100,000. It sets forth the
following tax brackets: $100,000 to $250,000; $250,000 to
$500,000; $500,000 to $1 million, and over $1 million in net
mining income. He stated that Amendment 2 conforms to previous
presentations to this committee.
CHAIR HAWKER observed that a "Non-renewable Resource Tax
Comparison Chart" which compares the current mining tax and
royalty provisions with those proposed under the bill had been
provided to the committee.
REPRESENTATIVE SEATON went on to explain that the amendment to
HB 156, page 9, line 9 is to assure that there is no deduction
of the mining license net tax from another net tax. Amendment 2
clarifies that neither net federal or state taxes can be
deducted from the mining license tax.
7:51:08 AM
JOHANNA BALES, CPA, Excise Audit Manager, Tax Division,
Department of Revenue (DOR), agreed that table chart titled "HB
156 - Proposed Changes to Mining License Tax Rates" contains
calculations of the mining license tax under the provisions of
Amendment 2 offered by Representative Seaton. She stated in
response to a question that she has had the opportunity to
review Amendment 2 and that she is comfortable that the proposed
changes would exempt from taxation the first $100,000 of net
mining income even if the taxpayer's income went over $100,000.
CHAIR HAWKER clarified that the first $100,000 of income is
exempt from taxation under the proposed marginal tax rate
structure of Amendment 2.
7:52:40 AM
REPRESENTATIVE SEATON agreed that the aforementioned
characterization correctly describes his intent. He explained
that the tax rates under the proposed bill and the current
system equalize at the point of $850,000 in net mining income.
Under the current and proposed scenario, a taxpayer with
$850,000 in net mining income would owe $56,500. When net
mining income is below $850,000, the provisions in the proposed
bill will result in a lower tax rate for the mine operator.
When net mining income is over $850,000, the taxpayer would pay
more under the provisions of the bill. For example, when a
taxpayer's net mining income is $5 million, the taxpayer would
owe $347,000 under the current tax structure, but would owe
$510,000 under the tax rates proposed in the bill, he explained.
7:55:51 AM
CHAIR HAWKER conveyed his understanding that Amendment 2
proposes a lesser tax obligation for mines with less than
$850,000 in taxable income, and proposes to impose, to a varying
degree, a higher tax obligation for those with more than
$850,000 of taxable mining income.
REPRESENTATIVE SEATON agreed with the aforementioned
description.
7:56:23 AM
REPRESENTATIVE WILSON requested more information in graph form
regarding the bill's effect on tax rates.
7:57:14 AM
CHAIR HAWKER removed his objection to Amendment 2, and there
being no further objection, Amendment 2 was adopted.
7:57:54 AM
REPRESENTATIVE GRUENBERG suggested that small mining operations
be notified of the tax break provided by the bill. Furthermore,
he would like to know the net effect of the bill on the state's
tax revenues from mining.
7:58:50 AM
REPRESENTATIVE SEATON acknowledged the benefit of providing
information to those affected by the proposed bill, but pointed
out that until an amended bill is adopted and moved from
committee, the only version available to the public is the
bill's former version. He noted that the public can get
information by listening to committee proceedings and stated
that his office is working to inform interested persons of the
changes wrought by the proposed amendments.
8:00:45 AM
CHAIR HAWKER said that he would appreciate a chart that details
the tax effects of the proposed bill. He recalled that in a
prior hearing, Ms. Bales estimated that 166 taxpayers currently
file mining license tax returns and requested that DOR provide
information regarding how the bill would affect small and large
mining operations.
MS. BALES replied that she has prepared a fiscal note
incorporating the effects of Amendments 1 and 2 and it has been
transmitted to the committee. She stated that her review of the
proposed amendments concludes that the revenue projections under
the bill would be very close to those in the original fiscal
note prior to adoption of Amendments 1 and 2. She went on to
say that based on tax data from fiscal years 2005 and 2006, the
bill would increase the mining license tax for approximately 5
of the 166 taxpayers that file mining license tax returns.
8:05:41 AM
CHAIR HAWKER asked how the proposed changes may apply to
upcoming, but not currently producing, mining operations.
MS. BALES replied that determination is a bit more difficult,
but that DOR is currently working with its economists on this
issue.
8:06:38 AM
REPRESENTATIVE CISSNA asked how many mining leases may exist for
smaller mining operations and how much time and investment
mining leaseholders must spend to maintain their claims.
8:09:53 AM
KERWIN KRAUSE, Mineral Properties Manager, Division of Mining,
Land and Water, Department of Natural Resources (DNR), explained
that there are about 35,000 active mining claims on state land,
with about 110 leases. Lease holders are required to annually
perform at least $100 worth of work for every 40 acres of claim
area. Claim holders must also pay a rental fee. The
requirements of the mining license tax and royalty obligations
are triggered when a claim begins production.
8:11:08 AM
REPRESENTATIVE CISSNA asked which of these claim holders are
required to file a mining license tax return.
MR. KRAUSE explained that there are approximately 200 small
placer mining operations in the state. He estimated that 125 of
those operations would have mining activity that triggers the
need to file mining license tax and royalty returns. He
estimated that most small miners have income of less than
$100,000.
REPRESENTATIVE SEATON stated he will request that DOR set forth
the mining tax obligations as proposed by the bill in various
income categories.
8:14:42 AM
REPRESENTATIVE WILSON noted that although the bill may provide a
tax break for smaller mine operations, the larger mines provide
support for smaller mine operations. She expressed concern that
too large of a tax increase on larger mines may hamper
development in the state.
8:17:30 AM
REPRESENTATIVE FAIRCLOUGH asked whether there is any
relationship between DNR's mining oversight activities and the
filing of a tax return. She questioned whether the proposed
changes to the mining license tax would lessen DNR oversight of
mining operations.
8:18:19 AM
ED FOGELS, Deputy Commissioner, Department of Natural Resources,
replied that there is not really any relationship between a
mine's income level and DNR inspection efforts. He said that
DNR will inspect mines in the exploration stage as well as those
that are in the production stage. In response to a further
question, he explained there are approximately 1,000 claim
holders for the 35,000 claims in the state. He noted that many
claim holders hold more than one claim and that some of them may
hold "thousands of claims." He went on to say there are about
200 permitted and producing mine sites, and that DNR annually
inspects as many as possible. He said DNR visits large mines at
least once a calendar year quarter, or even more frequently.
Smaller operations tend to be grouped in certain areas, such as
the Forty Mile area near Fairbanks, and that mining operations
staff visit as many mines as possible during the summer.
8:21:08 AM
MR. KRAUSE estimated that DNR inspects about half of the smaller
mine operations each year.
8:21:21 AM
REPRESENTATIVE FAIRCLOUGH sought further information as to how
DNR classifies mines as either big or small if not based on
revenues and the filing of a tax return.
MR. FOGEL explained that the state has many small placer mine
operations with under $100,000 in annual income. From that
level, there is a jump to very large operations such as the
Green's Creek, Red Dog, and Fort Knox mines.
REPRESENTATIVE FAIRCLOUGH reiterated her opinion that it appears
that inspections are based in part on mining revenue and
therefore it appears that DNR focuses attention on the larger
mines.
MR. FOGEL agreed that DNR focuses most of its attention on the
larger, more complex mining operations.
8:23:34 AM
REPRESENTATIVE FAIRCLOUGH stated she supports policy development
to increase employment opportunities for Alaskans, but would
like further clarification as to whether proposed changes in
taxation could have an adverse effect on regulatory oversight of
mining operations.
MR. KRAUSE replied that he does not think the proposed change in
the mining tax will make a difference in DNR's mining oversight
activities. He said that DNR has had one section that focuses
on larger mines, while another section focuses on smaller
operations. He explained that other resource agencies, such as
the Office of Habitat Management & Permitting in DNR, the Alaska
Department of Fish & Game, the Department of Environmental
Conservation, the federal Environmental Protection Agency, and
the United States Army Corps of Engineers also have oversight of
mining activities.
8:25:54 AM
REPRESENTATIVE SEATON clarified that the first version of the
bill proposed to excuse some operations from filing mining
license tax returns. He eliminated that exemption from the
proposed bill after discussions with DOR because every mining
license holder must file a mining license tax return each year
to renew their mining license and he did not want to disturb
that system. He explained that the current and proposed tax is
based on a net income determination, and that even a large
operation could have no net income.
8:27:07 AM
REPRESENTATIVE CISSNA asked whether small mining operations tend
to be seasonal, while larger mines tend to work year round.
MR. FOGELS replied that many small operations are seasonal, and
will operate from time of the spring thaw until the onset of
winter. He said that larger operations tend to operate year
round.
8:30:35 AM
REPRESENTATIVE SEATON reminded the committee that the mining
license tax is only one part of the mining tax regime. Mine
operators are also are required to pay rents, royalties, and
corporate income tax. Due to these many factors, it may be
difficult to prepare a chart that integrates the various tax
regimes with the proposed changes, such as the change to net
smelter return to determine royalty payments owed.
8:31:57 AM
CHAIR HAWKER observed that the bill covers three major
components: the mining license tax, royalty payments, and rents.
It proposes a major change in the calculation of royalty
payments on metal mines from 3 percent of net income, to 3
percent of net smelter return. He observed that royalty
payments may be contractual and asked whether the proposed
changes would affect existing lease terms between claim holders
and the state.
REPRESENTATIVE SEATON said he believes the royalty payment
obligations are contractual, and that he could provide further
information on the bill's affect on existing leases.
MR. FOGEL said it is his understanding that the bill would
increase the royalties for all miners. In response to a
question, said he believes that any change in the royalty
provisions would affect all existing operations. He agreed that
DNR administers royalty provisions, while DOR administers the
mining license tax.
8:33:56 AM
CHAIR HAWKER asked whether DNR could estimate the effect of the
bill on the state's royalty revenues for both large and small
mines.
MR. FOGEL replied that the DNR's initial fiscal note estimates
an royalty increase of about $3.5 million for FY 08, and that
his agency is working to refine those calculations.
8:35:30 AM
REPRESENTATIVE FAIRCLOUGH asked Representative Seaton if he
could incorporate all three components-mining license tax,
rents, and royalties-and show the impact of the proposed changes
to each individual component as well as the impact of the bill
as a whole.
REPRESENTATIVE SEATON indicated that while he would attempt
further graphing of the proposed changes, there are difficulties
with integrating the changes into one chart. He reminded the
committee that the mining license tax is calculated on net
profits, but the bill proposes to calculate royalties due on net
smelter return. He also noted difficulties with predicting net
income for mining operations because so many factors work to
determine net income.
8:37:36 AM
REPRESENTATIVE FAIRCLOUGH suggested that it may be useful to
review actual mining revenues from FY 05 and calculate the
bill's effects on those revenues as a way to compare the current
mining tax laws to the proposed changes.
REPRESENTATIVE SEATON reminded the committee that individual
taxation information is confidential, but that he could get
aggregate figures from DOR to provide further comparisons for
the committee.
8:39:03 AM
CHAIR HAWKER said he understands the difficulties of forecasting
the bill's effect, but that he supports the efforts to present
the bill's effect on large and small mines in an accurate and
understandable manner.
8:40:03 AM
REPRESENTATIVE SEATON agreed that mine operations pay mining
license taxes, rents, royalties, and corporate income taxes. He
reminded the committee that the state does not receive royalties
for mining operations on non-state land. Therefore any
predictions about the bill's effects will not include rents and
royalties paid to federal or private landowners. Furthermore,
corporate taxes are not changed by this bill.
MR. FOGEL responded to a question by explaining that of the
state's five biggest mines, the Pogo Gold Mine and Usibelli Coal
Mine are the only ones on state land.
8:43:35 AM
STEVEN C. BORELL, P.E., Executive Director, Alaska Miners
Association, Inc., opined that any model of the bill's effects
would need to include more than the mining license tax because
the bill has several pieces to it. He expressed concern over
the proposal to charge royalties based on net smelter return,
which he described as "a gross royalty." He indicated that
royalties charged on some private lands may be around one and
one-half to two percent. He explained that with private
landowners, a mine's operator can negotiate with the landowner
to arrive at an acceptable royalty figure, but that kind of
negotiation cannot happen if a royalty rate is set in statute.
He also expressed concern with the proposed changes to depletion
allowances. The situation is further complicated because
precious metals, such as gold, should considered differently
from other base metals, he opined. He said that a few years
ago, most mines were losing money and it is only recently that
mineral prices have risen.
8:49:44 AM
CHAIR HAWKER said he is troubled by the proposal to eliminate
the percentage depletion deduction from the mining license tax.
He also set forth for the committee's consideration that there
are provisions in the oil and gas tax regime whereby a taxpayer
can petition DNR for royalty relief in some situations.
8:51:11 AM
MR. BORELL noted that while the ability to negotiate royalty
payments may work once a company is in operation, it is not so
helpful for a mining operation still in the exploration stage.
He explained that because of uncertainties in the outcome of any
royalty negotiations, a mining operator may use a conservative
approach and evaluate a project based on the highest royalty
percentage that could be imposed. He opined that this could
stop development of projects at a very early stage. He reminded
the committee that medium and large mining companies often do a
"bankable feasibility study" to determine whether to proceed
with a large project.
8:53:52 AM
REPRESENTATIVE CISSNA asked what could be done to make the
proposed legislation more acceptable to the mining industry and
yet still provide some additional revenues for the state.
MR. BORELL replied that in his opinion, the two most disturbing
parts of the bill are elimination of percentage depletion
allowance and the imposition of royalties based on net smelter
return. He went on to say that there is very little
infrastructure to support mining in the state, and that mining
provides the state with a great deal of infrastructure. He
noted that in Juneau the first electricity generated was due to
mining activities. Today mines are still building
infrastructure, such as roads, airstrips, and power lines, he
opined.
8:59:15 AM
REPRESENTATIVE CISSNA observed that the state is responsible for
much infrastructure, and asked whether infrastructure
development is deductible from net income, therefore deductible
from the determination of net smelter return.
MR. BORELL agreed that the state has provided some
infrastructure, but that there are still many areas in the state
that lack road access.
9:01:12 AM
CHAIR HAWKER answered a question by explaining that a marginal
tax structure means that as income increases, further earnings
are taxed at the next tax bracket. For example, under the bill
as amended, the first $100,000 of mining income is not taxed.
However, income over $100,000 but under $250,000 is taxed at 5
percent. He emphasized that the marginal tax on every dollar of
income under $100,000 is zero and is not subject to taxation
regardless of whether there is income over $100,000.
[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
9:05:02 AM.
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