Legislature(2005 - 2006)BELTZ 211

04/18/2005 02:00 PM COMMUNITY & REGIONAL AFFAIRS


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02:03:53 PM Start
02:04:35 PM SB179
02:51:30 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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Bills Previously Heard/Scheduled
* SB 179 MINERALS TAX/PAYMENTS TO MUNIS IN LIEU
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
    SENATE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE                                                                  
                         April 18, 2005                                                                                         
                           2:03 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Gary Stevens, Chair                                                                                                     
Senator Bert Stedman                                                                                                            
Senator Thomas Wagoner                                                                                                          
Senator Johnny Ellis                                                                                                            
Senator Albert Kookesh                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 179                                                                                                             
"An Act relating to the taxation of mining property; relating to                                                                
contracts approved by municipalities for payments in lieu of                                                                    
taxes; and providing for an effective date."                                                                                    
                                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 179                                                                                                                  
SHORT TITLE: MINERALS TAX/PAYMENTS TO MUNIS IN LIEU                                                                             
SPONSOR(s): SENATOR(s) THERRIAULT                                                                                               
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Senator Gene Therriault                                                                                                         
Alaska State Capitol                                                                                                            
Juneau, AK 99801                                                                                                                
POSITION STATEMENT:  Sponsor SB 179                                                                                           
                                                                                                                                
Steve Borrell, Executive Director                                                                                               
Alaska Miners Association                                                                                                       
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Testified in support of SB 179                                                                           
                                                                                                                                
JAMES FUGUE, Technical and Permitting Coordinator                                                                               
Donlin Creek Joint Venture                                                                                                      
Vancouver, B.C.                                                                                                                 
POSITION STATEMENT:  Testified in support of SB 179                                                                           
                                                                                                                                
Kevin Ritchie, Executive Director                                                                                               
Alaska Municipal League                                                                                                         
217 Second Street                                                                                                               
Juneau, Alaska 99801                                                                                                            
POSITION STATEMENT:  Raised questions regarding SB 179                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  GARY  STEVENS called  the  Senate  Community and  Regional                                                             
Affairs  Standing  Committee  meeting  to order  at  2:03:53  PM.                                                             
Present were Senators Kookesh, Stedman,  Wagoner, Ellis and Chair                                                               
Gary Stevens.                                                                                                                   
                                                                                                                                
         SB 179-MINERALS TAX/PAYMENTS TO MUNIS IN LIEU                                                                      
                                                                                                                                
2:04:35 PM                                                                                                                    
                                                                                                                                
SENATOR  THERRIAULT,  Sponsor,  said   the  intent  is  to  offer                                                               
stability in  unorganized areas with  respect to  generating jobs                                                               
and value for  the state based on the mineral  resources found in                                                               
the unorganized areas.                                                                                                          
                                                                                                                                
SENATOR THERRIAULT spoke to the sponsor statement:                                                                              
                                                                                                                                
     Senate  Bill 179  seeks to  provide  tax certainty  and                                                                    
     make   Alaska   a   more   attractive   territory   for                                                                    
     investment. In  addition, the mining property  tax will                                                                    
     provide funding for schools  in the unorganized borough                                                                    
     and  help   areas  transitioning   to  local   rule  by                                                                    
     providing some financial stability.                                                                                        
                                                                                                                                
     SB 179  levies a property  tax on mining  facilities in                                                                    
     those  areas  of the  State  of  Alaska that  were  not                                                                    
     organized as of  January 1 of this year.  The mill rate                                                                    
     is   tied   to   the   mandatory   local   contribution                                                                    
     requirement  set out  in  the  foundation formula.  The                                                                    
     proceeds  are accounted  for  separately and  available                                                                    
     for appropriation to the public education fund.                                                                            
                                                                                                                                
     In the area surrounding  one of these mining properties                                                                    
     organizes  a local  government, an  additional levy  of                                                                    
     two mills is  charged. The entire amount  is payable to                                                                    
     the new  local government. The only  additional tax the                                                                    
     new local government  may levy against the  mine is the                                                                    
     first $1,000  of a sale  or use of services.  The local                                                                    
     government  will  be free  to  levy  taxes at  its  own                                                                    
     discretion after  the mine has  been in  production for                                                                    
     15 years.                                                                                                                  
                                                                                                                                
     The  development of  the Greens  Creek,  Red Dog,  Fort                                                                    
     Knox, True North,  and Pogo mines over  the last decade                                                                    
     and  a half  has  proven that  mineral development  can                                                                    
     bring   substantial  private   sector  investment   and                                                                    
     employment  to diverse  geographic  regions of  Alaska,                                                                    
     from southeast  Alaska to  the Interior  and on  to the                                                                    
     northwest Arctic.  Other projects  such as  Rock Creek,                                                                    
     Donlin  Creek,  and  Pebble  offer  potential  economic                                                                    
     development to  still other parts of  Alaska, including                                                                    
     eastern and southwestern Alaska.                                                                                           
                                                                                                                                
     From  the perspective  of making  the initial  decision                                                                    
     about    whether    to    invest   in    Alaska,    the                                                                    
     unpredictability   of   future  tax   liability   makes                                                                    
     planning  difficult. This  unpredictability contributes                                                                    
     to  the disincentive  against investment  in mining  in                                                                    
     Alaska because  unpredictable operating costs,  such as                                                                    
     tax  liability,  combine  with fluctuations  in  metals                                                                    
     prices  to  make  projections  of  economic  risk  more                                                                    
     difficult  at the  development decision  stage. Placing                                                                    
     limits on the  extent of new taxes  for metallic mining                                                                    
     operations   will    make   economic    planning   more                                                                    
     predictable   and  thereby   reduce  the   disincentive                                                                    
     against investment in Alaska.                                                                                              
                                                                                                                                
2:08:13 PM                                                                                                                    
                                                                                                                                
CHAIR GARY STEVENS asked if this  might in any way be a deterrent                                                               
to borough formation in the unorganized areas.                                                                                  
                                                                                                                                
SENATOR  THERRIAULT  said  he  wasn't   sure,  but  when  a  mine                                                               
develops,  economic  activity  increases and  jobs  are  created.                                                               
Hopefully that  would generate  the desire to  have some  sort of                                                               
local control over the mine  and also the communities surrounding                                                               
the mine. That's  why the bill also proposes a  2 mill additional                                                               
levy on  the mine if the  area around the mine  organizes. If the                                                               
mine has a life beyond 15  years, then the local government could                                                               
tax at  whatever level it  wanted. All properties in  the borough                                                               
would be taxed at the same rate as the mine.                                                                                    
                                                                                                                                
SENATOR  WAGONER  said  he  likes  the  bill  because  it  brings                                                               
certainty to the full process of opening a mine.                                                                                
                                                                                                                                
CHAIR  GARY STEVENS  asked what  the tax  rates are  in organized                                                               
boroughs.                                                                                                                       
                                                                                                                                
SENATOR THERRIAULT  replied in the  Fairbanks North  Star Borough                                                               
the  general property  tax  is 16  mills, which  is  16 mills  on                                                               
homes, the  mine, and the pipeline  infrastructure. Certainly the                                                               
level of services in that area  is comprehensive and argues for a                                                               
higher  mill  rate.   In  a  more  rural   setting  you  wouldn't                                                               
necessarily  expect all  services  to be  offered  and you  would                                                               
consequently expect the mill rate to be lower.                                                                                  
                                                                                                                                
He was  open to discussion  with regard to  the 4 mills,  but the                                                               
idea is to allow projects to move forward into production.                                                                      
                                                                                                                                
SENATOR THERRIAULT noted that his  staff contacted the assessor's                                                               
office in Fairbanks  to find out exactly what gets  taxed and the                                                               
bill is  structured to treat mines  the same way. The  idea is to                                                               
treat areas equally,  but to also consider the  level of services                                                               
that would be provided in more remote areas.                                                                                    
                                                                                                                                
2:13:24 PM                                                                                                                    
                                                                                                                                
SENATOR  ELLIS  asked  whether  the 4  mill  tax  represents  the                                                               
opening bid  with the  state or does  the sponsor  represent that                                                               
projects won't go forward if it's higher than the bill says.                                                                    
                                                                                                                                
SENATOR THERRIAULT replied he couldn't  make the statement that a                                                               
level  beyond  that  proposed would  mean  no  development  would                                                               
occur.  The  Legislature  is  sitting as  the  assembly  for  the                                                               
unorganized  area and  the rate  is certainly  up to  legislative                                                               
discussion. The proposal is to  tax mines in the unorganized area                                                               
uniformly and encourage the investment in mining in the state.                                                                  
                                                                                                                                
The  original concept  was just  4 mills  to cover  the education                                                               
requirement. Subsequently  he asked the drafters  to increase the                                                               
cap to 6 mills if an area around a mine were to form a borough.                                                                 
                                                                                                                                
SENATOR  ELLIS asked  if there  aren't impacts  and costs  to the                                                               
state beyond providing education.                                                                                               
                                                                                                                                
SENATOR THERRIAULT  replied there  could be. If  local government                                                               
isn't there  to provide services  that are needed, the  state is,                                                               
by default, the provider. But  currently there is no allowance in                                                               
statute  for a  millage rate  to be  charged. If  a mine  were to                                                               
develop  in an  unorganized  area, nothing  would  accrue to  the                                                               
state from property tax currently.                                                                                              
                                                                                                                                
SENATOR  ELLIS said  he understands  the need  for certainty  and                                                               
consistency, but he  questioned whether the 4 mill  rate would be                                                               
based on  the least economic  project and therefore  whether this                                                               
would be good public policy.                                                                                                    
                                                                                                                                
SENATOR  THERRIAULT replied  it is  important to  keep the  least                                                               
economically viable in mind.                                                                                                    
                                                                                                                                
SENATOR  ELLIS  remarked  that  in  the  mining  industry,  world                                                               
commodity prices are the biggest  factor. He wasn't sure how much                                                               
responsibility the state had to take to make projects economic.                                                                 
                                                                                                                                
SENATOR THERRIAULT agreed that commodity  prices and the up front                                                               
investment are  the major factors  determining whether  a project                                                               
will go forward. But absent  this proposal, no money would accrue                                                               
to any governmental  entity in the state  from mining development                                                               
in the unorganized area.                                                                                                        
                                                                                                                                
SENATOR STEDMAN  asked if small  mining claims with little  or no                                                               
development would be taxed.                                                                                                     
                                                                                                                                
SENATOR THERRIAULT explained the property  tax would be levied on                                                               
the mine infrastructure;  the lease itself isn't  taxable and the                                                               
minerals in the ground aren't  taxed either. There is language in                                                               
the  bill to  protect small  mining operations  and as  such, the                                                               
first $10 million dollars in infrastructure is exempt.                                                                          
                                                                                                                                
SENATOR WAGONER  remarked that as written,  nothing precludes the                                                               
state from  reducing the millage  rate for  a number of  years to                                                               
make the project viable.                                                                                                        
                                                                                                                                
CHAIR GARY STEVENS noted the bill says 4 mills.                                                                                 
                                                                                                                                
SENATOR  THERRIAULT agreed  it would  take legislative  action to                                                               
change the rate.                                                                                                                
                                                                                                                                
2:24:58 PM                                                                                                                    
                                                                                                                                
STEVE BORRELL, Alaska Miners Association,  testified on behalf of                                                               
the  association.  He  stated  that through  SB  179  the  mining                                                               
industry is  volunteering to pay a  4 mill property tax  on large                                                               
mines operating  in the unorganized  borough. The tax  rate would                                                               
remain for a period of 15 years from first production.                                                                          
                                                                                                                                
Depending on the  type of land where mining  occurs, the industry                                                               
already pays  several taxes  to the  state. Those  taxes include:                                                               
mining license tax; corporate income  tax; mining claim rental on                                                               
state  and  federal  claims; production  royalty  on  state  land                                                               
claims; and property tax to the municipality in organized areas.                                                                
                                                                                                                                
In the  unorganized area  there is  no municipal  government with                                                               
taxing authority and  it is in those areas of  the state that the                                                               
new tax  is proposed.  The proposed  4 mill tax  is the  amount a                                                               
borough  would  be  required  to   contribute  to  education.  An                                                               
additional  2 mills  would  be levied  if a  borough  were to  be                                                               
established in  the area.  The 4  mill tax would  be paid  to the                                                               
state  until a  borough is  established after  which it  would be                                                               
paid to the borough.                                                                                                            
                                                                                                                                
With  regard to  whether the  tax would  encourage or  discourage                                                               
borough formation, the  industry hopes the bill  would be borough                                                               
neutral.                                                                                                                        
                                                                                                                                
The tax would be levied against  all mines with an assessed value                                                               
of $10 million or more, but  smaller mines could elect to pay the                                                               
tax  if  they  wanted  the   rate  certainty  for  15  years.  As                                                               
previously stated, the  decision to go forward with  a project is                                                               
tied to a number of factors relating to certainty.                                                                              
                                                                                                                                
2:30:44 PM                                                                                                                    
                                                                                                                                
JAMES FUGUE, Technical and Permitting  Coordinator for the Donlin                                                               
Creek joint  venture, stated  that Placer  Dome Inc.  supports SB                                                               
179 for two  reasons. First it provides a mechanism  for the mine                                                               
to  contribute to  the local  community by  providing funds  that                                                               
could  be used  for  education and  local  government. Second  it                                                               
helps provide long-term stability to  assist in making a positive                                                               
decision on a project they expect to be in excess of $1 billion.                                                                
                                                                                                                                
If developed,  the mine  would pay  corporate income  tax, mining                                                               
license tax, and  royalty tax to Calista  Corporation for mineral                                                               
extraction.  SB 179  wouldn't affect  those  payments, but  would                                                               
provide  additional revenue  to the  state or  a future  borough.                                                               
Local communities  would also benefit  through the  jobs created.                                                               
The  company   has  a  history   of  local  hire   and  community                                                               
participation  at Donlin  Creek and  that would  continue if  the                                                               
mine goes forward.  The proposed property tax rate is  set at the                                                               
rate that is currently set for funding education.                                                                               
                                                                                                                                
Preliminary capital  estimates for  the construction of  the mine                                                               
at Donlin  Creek are on  the order of  $1 billion. Under  SB 179,                                                               
this could  result in a  revenue stream  of $4 million  per year,                                                               
which  would cover  about  90  percent of  the  state's cost  for                                                               
education in the local area.                                                                                                    
                                                                                                                                
The project  would construct and maintain  its own infrastructure                                                               
and wouldn't  draw on local  services. The  tax would be  paid to                                                               
the  state  unless   the  community  decided  to   form  a  local                                                               
government.  If that  were to  happen,  the taxes  would be  paid                                                               
directly  to  the  local government,  which  would  help  provide                                                               
financial security to the new government.                                                                                       
                                                                                                                                
2:33:38 PM                                                                                                                    
                                                                                                                                
Referencing language  about the tax  payable upon formation  of a                                                               
new borough,  he suggested amendment to  avoid future uncertainty                                                               
about  the intent  of the  language. As  written the  language on                                                               
page  2, lines  22-23 says  "...the  tax rate  in a  municipality                                                               
incorporated after January 1, 2005  is the mill rate specified in                                                               
AS 14.17.410(b)(2)  plus two mills."  He suggested it  be amended                                                               
to  read  "...is  the  mill  rate  required  to  meet  the  local                                                               
contribution   required    of   that   municipality    under   AS                                                               
14.17.410(b)(2) plus two mills"                                                                                                 
                                                                                                                                
In making  capital investments,  mining companies  place emphasis                                                               
on political and economic stability  at all government levels. In                                                               
the  unorganized borough  there  are no  rules  and therefore  no                                                               
entity to  negotiate agreements regarding  taxation at  the local                                                               
level.  This makes  long term  economic modeling  and forecasting                                                               
difficult  when investment  decisions must  be made.  One billion                                                               
dollars  is  a  significant  investment for  the  company  and  a                                                               
positive decision on economic viability  at Donlin Creek would be                                                               
easier to achieve if the maximum tax level were certain.                                                                        
                                                                                                                                
Placer  Dome  Inc.  supports  the  bill  because  it  serves  the                                                               
interests  of Alaskans  while helping  to provide  the investment                                                               
climate that  will help the  company make a positive  decision on                                                               
the Donlin Creek Project.                                                                                                       
                                                                                                                                
2:35:40 PM                                                                                                                    
                                                                                                                                
CHAIR  GARY  STEVENS  asked for  clarification  on  the  proposed                                                               
amendment.                                                                                                                      
                                                                                                                                
MR. FUGUE referenced page 2, line 23.                                                                                           
                                                                                                                                
SENATOR WAGONER asked  Mr. Borrell to discuss the  three taxes he                                                               
mentioned in terms of cost or percentage.                                                                                       
                                                                                                                                
MR. BORRELL  replied the  mining license tax  is variable  at the                                                               
start  and then  rises  to 7  percent of  net  proceeds from  the                                                               
project.  The state  production royalty  is also  a net  proceeds                                                               
royalty and  it is 3  percent. That  means the state  receives 10                                                               
percent of the profit.                                                                                                          
                                                                                                                                
SENATOR WAGONER said corporate tax would also be due.                                                                           
                                                                                                                                
MR. BORRELL said that's correct.                                                                                                
                                                                                                                                
CHAIR  GARY STEVENS  noted Mr.  Hoffbeck from  the Department  of                                                               
Revenue was available for questions.                                                                                            
                                                                                                                                
2:38:40 PM                                                                                                                    
                                                                                                                                
KEVIN  RITCHIE,  Executive   Director,  Alaska  Municipal  League                                                               
(AML),  testified that  this  is difficult  because  it looks  at                                                               
impacts on boroughs that don't exist.                                                                                           
                                                                                                                                
He suggested that the committee  look at mines that are currently                                                               
operating  in boroughs  across the  state.  Information on  those                                                               
mines would be available through the state assessor's office.                                                                   
                                                                                                                                
The  sponsor's comment  that the  Legislature is  the unorganized                                                               
borough assembly de  facto is a good one.  Although it's positive                                                               
that the mining  industry came forward to talk  about taxation in                                                               
the  unorganized area,  significant discussion  is in  order with                                                               
the state  assessor to clearly  understand how mines  are treated                                                               
elsewhere and  to look at  tax structures. The average  mill rate                                                               
property  tax in  the state  is  between 14  and 15  mills. If  a                                                               
municipality were  to form  and provide  services, you'd  want to                                                               
make sure  that a borough didn't  end up subsidizing a  mine as a                                                               
result of  this bill. Referencing  page 6 relating  to exemptions                                                               
from  municipal tax  and  mining property  tax  he suggested  the                                                               
state assessor could and should provide comment.                                                                                
                                                                                                                                
The AML is  supportive of new business coming into  the state and                                                               
mining in general, but make sure  the book is balanced and that a                                                               
mine wouldn't be  a deterrent to borough formation  as opposed to                                                               
just neutral.                                                                                                                   
                                                                                                                                
CHAIR GARY STEVENS asked if he  had comment on his major concern,                                                               
which  is  whether   this  might  be  seen  as   a  detriment  or                                                               
encouragement to borough formation.                                                                                             
                                                                                                                                
MR. RITCHIE  said depending on  the circumstances and on  a case-                                                               
by-case basis it  could be a detriment. One part  of the solution                                                               
is that everyone  in the borough must be taxed  at the same rate.                                                               
Another is  that during  borough formation  the tax  structure is                                                               
discussed. He  noted the  bill would exempt  the mine  from other                                                               
taxes such as sales tax, which is something else to question.                                                                   
                                                                                                                                
2:45:55 PM                                                                                                                    
                                                                                                                                
CHAIR GARY STEVENS asked the sponsor if he had further comments.                                                                
                                                                                                                                
SENATOR THERRIAULT  referenced page 2,  lines 21-22 and  said the                                                               
original bill specified  4 mills. Because he didn't  want to lock                                                               
the  contributions from  these projects  at  4 mills  and have  a                                                               
future Legislature  boost the required  mill rate  for education,                                                               
he  had the  drafter  put  in language  that  says the  statutory                                                               
education requirement shall be the  millage rate that is paid. If                                                               
the Legislature  adjusts the education  requirement from  4 mills                                                               
to  5 mills,  the millage  rate requirement  would increase  on a                                                               
mine as well.                                                                                                                   
                                                                                                                                
On page 3,  lines 7-9 talk about  a sales tax. A  local sales tax                                                               
levy is  allowed and  is capped  at $1,000.  Clearly, if  a local                                                               
government is formed it can establish a sales tax.                                                                              
                                                                                                                                
Language  on page  6,  lines  18-19 makes  it  clear that  roads,                                                               
storage facilities,  terminals, docks  and other  port facilities                                                               
and airstrips  that are open to  public use are exempt.  He tried                                                               
to draw sensible  lines with regard to taxation and  the level of                                                               
local taxing power  that would be available if  a government were                                                               
to form.  Hopefully this will give  a level of certainty  that is                                                               
required for projects to move forward.                                                                                          
                                                                                                                                
SENATOR  WAGONER commented  it makes  a difference  for a  mining                                                               
company to know in advance what the property tax would be.                                                                      
                                                                                                                                
2:50:40 PM                                                                                                                    
                                                                                                                                
CHAIR GARY STEVENS  said he looks forward to  another hearing and                                                               
held SB 179 in committee.                                                                                                       
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Gary Stevens adjourned the meeting at 2:51:30 PM.                                                                       

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