Legislature(1997 - 1998)
01/16/1997 09:05 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
16 January 1997
9:05 a.m.
TAPES
SFC-97, #1, Side 1 (000 - 588)
Side 1 (588 - 323)
CALL TO ORDER
Senator Drue Pearce, Co-chair, convened the meeting at
approximately 9:05 a.m.
PRESENT
In addition to Co-chair Pearce, Senators Donley, Torgerson,
Parnell and Adams were present. Co-chairman Sharp was
excused from the meeting and Senator Phillips arrived
shortly thereafter.
ALSO ATTENDING: Senator Gary Wilken; Wilson Condon,
Commissioner, Department of Revenue; Dr. Charles Logsdon,
Chief Petroleum Economist, Division of Oil and Gas Audit,
Department of Revenue;
Deborah Vogt, Deputy Commissioner, Department of Revenue;
Chris Miller, Chief, Research and Analysis, Department of
Labor; John Boucher, Labor Economist, Department of Labor;
Jeff Hadland, Economist, Department of Labor; Dwight
Perkins, Special Assistant to the Commissioner, Department
of Labor; Mike Greany, Director, Legislative Finance
Division; and aides to committee members and other members
of the legislature.
SUMMARY INFORMATION
STATE REVENUE UPDATE
by the
DEPARTMENT OF REVENUE
Upon convening the meeting Co-chair Pearce invited
representatives of the Departments of Labor and Revenue to
join members at the committee table and commence
presentation of updated revenue projections. Presenting
testimony for the Department of Labor were Chris Miller,
John Boucher and Jeff Hadland. Presenting testimony for the
Department of Revenue were Commissioner Wilson Condon; Dr.
Charles Logsdon; and Deborah Vogt, Deputy Commissioner.
Co-chair Pearce welcomed the committee members and advised
that the purpose of this meeting was to have a revenue
forecast presentation by both Departments of Labor and
Revenue. The Department of Labor presented an overview of
the Alaskan economy and the Department of Revenue presented
the current year projections along with highlights that were
non-oil and gas revenue related.
Mr. John Boucher gave a brief sketch of the current status
of the State of Alaska's economy. He referred to the
department's handout (see attached).
He said recent trends seen in Alaska wage and salary job
growth were a leading economic indicator. Currently the job
count showed the economy was continuing to move forward;
although the state was currently in a period of slower job
growth than traditionally seen. The size of the economy was
about 264,000 wage and salary jobs. That excluded some
sectors of the economy and that number had continued to grow
since 1995. Even though relatively slow job growth has been
seen as compared to historic levels that understates the
constant churning going on in Alaska's economy. The past
year the department had tracked statistically new hires. A
new hire was an individual who, in their most recent period
of employment, had a job with a new employer. They are
tracked back four quarters and a new hire was an individual
that had a new job to them. Each new hire represented an
opportunity for an unemployed Alaskan to join the work
force. It showed that seasonality has and will remain a
major factor in the ability for Alaskans to join the labor
force.
The role of non-residents in the economy remained fairly
significant. In 1995 there were nearly 80,000 individuals
out of 350,000 that worked in Alaska that were considered
non-residents, using the permanent fund dividend (either
application filed or the previous years dividend check) as
an indicator of residency. Those individuals earned $923
million in Alaska and that represented a significant
potential leakage from the State's economy that could
potentially be captured either through wages that would be
spent in Alaska or Alaskans joining the labor force in place
of those non-residents.
He referred to where Alaskans worked in 1990 and 1996. This
helped illustrate where Alaska's economy ass currently
headed. He explained that oil and gas industry was included
in the mining section. He said that the Department of
Labor's current classification did not allow tourism jobs to
be identified separately from other industry jobs. They are
known as an important factor in the transportation sector,
under entrepreneurs and under services and trade sectors of
our economy. Aleyeska Pipeline was currently counted in the
transportation industries as a support for the oil sector.
In the last six years certain sectors of the economy have
grown in terms of employment opportunities and others
shrunk. Seafood and timber manufacturing industries have
grown smaller when it comes to their share of the pie. The
military, federal government, government of all types and
the oil and gas industry have also become smaller parts of
the pie. The industries that have more or less displaced
those have been the services sector, construction sector and
retail trade. An individual may work for a company and then
contract out, essentially moving to a different type of
company performing the same job. These were the trends seen
during the 1990's with the rise of the trade sector.
He referred to the unemployment rate and said that there had
been relatively slow job growth during the last several
years. The unusual thing, looking historically, is
relatively low unemployment rates. This year is the fourth
year in a row that Alaska's unemployment rate was under 8%.
It is not unusual in previous years for the annual
unemployment rate to have been from 9-1/2% to 10-1/2%. Low
unemployment was an unusual situation and at the same time
basic industries were shrinking. The national economy was
much healthier now and individuals that would normally have
moved to Alaska for job opportunities were staying closer to
home. Also, there had been some outmigration in the State
due to military base closures and larger layoffs. There was
a smaller pool of workers out there competing for the
available job opportunities and one of the results had been
a lower unemployment rate.
He then moved on to looking at Alaska in an historical
perspective. There had been pretty much sustained growth
since statehood. There were many reasons for this but
generally there had been a slow-down in the rate of growth
over time. He then referred to what the expectations for
the future were. As the economy has grown the growth rates
seen in the '60's, '70's and early '80's were getting much
more difficult to duplicate. The economy was beginning to
look more like the national economy. With that came a
different set of expectations. It was expected within the
next five to ten years the growth would converge more with
national trends that diverge.
In talking about the last several years of the economy
growth rates for 1995 and 1996 are relatively slow when the
overall period of the 1990's was looked at. Presently
growth is less than one percent per year. There were a
number of causes for this, but primarily it was because of
significant economic setbacks such as oil industry cutbacks.
The timber industry and seafood processing sector have been
continuing to struggle and they have been accompanied by
downsizing on the federal government side and the military
side. There have been significant dampers on potential job
growth. The economy still managed to show some job growth
despite these factors. Slower growth was going to be a
factor in the future. Some trends were probably going to
continue. It was not expected the services and trade
sectors to continue carrying Alaska's economy.
Referring to the last page of the handout from one day to
the next one could probably move some of the items from the
bear to the bull column and from the bull to the bear
column. However, things were dynamic and could change.
Some positives now were new oil investments and potential
new oil finds coming on line which should be positive for
employment, additional hardrock mining activity and
anticipated visitor industry. Anchorage and Fairbanks
looked to continue to benefit in growth in Pacific Rim
trade. There was continued growth in the permanent fund and
also the cost of doing business had continued to be
favourable in comparison to other locations in the country.
There had been no tremendous wage pressures and there was no
difference between Alaska wages and the rest of the country.
In employing residents the more income captured in the
local economy the more vital those local economies were
going to be.
On the downside, it was anticipated that the government
sector in Alaska was going to continue shrinking both on the
military, federal and the state side. There did not appear
to be any reversal in the timber industry right now. There
was the closure of the Ketchikan Pulp Mill on the horizon,
salmon markets continuing to struggle and all were aware of
what the long term outlook of Prudhoe Bay was.
Senator Pearce asked about British Petroleum announcing at
the end of the year they would be making fairly significant
investments in exploration but at the same time announcing
their plans to downsize their present work force both in the
actual Prudhoe Bay field and the Anchorage headquarters and
if there had been enough information to codify what that
really meant in terms of jobs for Alaskans.
Mr. Boucher indicated that he did not think that had gone
into effect yet, however, new technologies always seemed to
be a duel-edged sword. Production may be increased but that
may mean less jobs. That is a trend occurring in every
industry.
Senator Pearce asked if there was a feel for the Anchorage
support jobs that would be more administrative and if these
were affected by the downsizing. She wanted to be sure they
were not moving the accounting section to Cleveland, for
instance.
Mr. Boucher said he had not made an assessment on this
matter.
Senator Adams referred to the chart reflecting unemployment
below 8% and asked that he explain how that particular
average had been arrived at. Were people who had to apply
for jobs placed in there? Mr. Boucher explained that it was
the result of a regression equation which took into account
the trend and unemployment claims and the result of a survey
that was conducted house-to-house. It was not a perfect
method in terms of measuring unemployment, particularly in
rural Alaska. Senator Adams said the chart was inaccurate
because it was not calculated right. Welfare roles need to
be looked at. It was wonderful to tell the people, even in
the Governor's speech, Alaskans were below for unemployment,
which is not true. It is much higher because an accurate
count in rural Alaska was not being done. Mr. Boucher said
he was aware of the situation and they were trying to make
strides in the shortcomings of the measurements of
unemployment in Alaska. It must be considered that the
definition of unemployment is someone looking for a job
during the past four weeks and that is where most of rural
Alaskans fall out of the picture. Senator Adams indicated
that in most parts of rural Alaska there were not jobs to
look for. That is why the chart was inaccurate.
Wilson Condon, Commissioner of Revenue and Chuck Logsdon,
Chief Petroleum Economist were invited to join the
committee.
Mr. Condon referred to summary tables from their autumn 1996
revenue forecast. This summarized revenues actually
received in FY 1996 and their projections as of 1 November
for FY '97, '98 and '99. Mr. Chuck Logsdon continued the
presentation referring to oil prices and where they were and
where they were going. He referred specifically to a
monthly publication that they did because the oil price
situation was fairly dynamic and they liked to keep everyone
updated as to the effective movements of oil prices and
current year estimates. The main point of interest was with
prices as they were presently they were running at $100
million above the November 1 projection. He addressed the
chart indicating "ANS oil prices", 1985 to 2010. The first
thing noted was the 1985 - 1987 period being a downward
trend in oil prices. It should be noted in the forecast
that in the middle was the price bubble was being
experienced now. Looking further the nominal dollar price
drifted up towards $25 while the real dollar price fell and
stayed level at about $16/barrel. They felt this was no
different from the long term forecasts that have been made
in the last few years and not all that different from what
others who engage in this type of speculation felt was
likely to occur. It is further thought that this trend will
stabilize at around the $16/barrel. On the supply side,
technology has proven over the years to be a very
significant impactor on the supply side of any, even
depletable, resource. In the case of petroleum that meant
liquid fossil fuels. As technology advanced not only are
more liquid hydrocarbons being discovered in the ground more
of the liquid hydrocarbons that are in the ground are being
produced such as the North Slope.
Over time, technology allowed one to produce things that
were not quite as liquid as others and there was a lot of
fossil fuel in the ground, whether low cost liquid
hydrocarbons like the oil in Saudia Arabia or the somewhat
more difficult to produce stuff in abundance on the North
Slope. There are literally trillions and trillions of
barrels. Technology advances will continue to make the
supply more available. At the same time on the demand side,
there were a number of factors that suggested oil prices
would tend to trend around the $16/barrel level. It was
known that technology also improved the efficiency of the
energy consuming capitals stock. The economic trends
right now would suggest that the West would probably be
using at a much lower rate than those who do things like
telecommunicate and spend more time on the Internet than
they do on the road. The developing countries would also be
growing fairly rapidly and their increased use of fossil
fuels would also begin to grow. One of the big drivers on
the demand side was population growth and as the world
economies mature the population growth rates begin to come
down. That would also put a lid on the demand side.
Finally the greening of the global economy. If it became an
overriding policy goal to impose taxes or regulate fossil
fuel consumption for reasons such as global warming, those
are also factors which would limit demand over the long
haul. These were not necessarily original thoughts but a
compilation of what many people who are engaged in this sort
of speculation about long term oil prices generally feel is
going to be the case.
Looking at the price bubble, there was a very positive
influence on the oil revenues and revenue picture in
general. He referred to early 1996 when it became apparent
demand was outrunning supply. Crude inventories and
petroleum product inventories began to fall quite rapidly.
As a result price moved up fairly rapidly; by March it was
over $20/barrel. During that period of time there was
concern by the refineries and the purchases of oil that it
was a temporary phenomena because Iraq was close to getting
the embargo lifted totally and there would be the export of
humanitarian oil. Also the oil fields in the North Sea were
coming on at a fairly rapid pace. It was generally felt in
the industry that oil prices would be coming down. As a
result inventories were kept quite lean, while at the same
time demand continued to be quite strong, resulting in oil
prices staying relatively high. What happened in the fall
was that Iraq was going to export and then they never showed
up on the market. The North Sea additions to production did
not occur quite as robustly as was expected and yet the
global economy, which was called the core driver of demand,
remained very strong. Therefore the winter period came in
with a lean inventory. With lean inventories and a series
of winter storms and extraordinary cold in January North
Slope crude was $24/barrel. The weather bureau just
announced that this winter has been the coldest in the
midwest. However, it is believed that the bubble is going
to burst. The graph showed the price coming down in about
April. First, seasonal demand will go away; second, higher
energy costs would show up as a damper on global economic
growth; and third, there would be a fairly significant non-
OPEC production response to the higher oil prices. As a
case study, Alaska's North Slope technological innovations
that were being pioneered would inevitably spread world wide
and with higher prices there would be more wells drilled and
more production showing up. Seasonal demand would go away,
core demand would weaken and there would be a big surge on
the supply side with the price coming back down.
He referred to the outlook for fiscal year '96, '97, and '98
as the oil price went up. For '97 the estimates are over 2-
1/2 billion barrels and well over 2 billion in '98 compared
to the spring forecast. The '96 level due to last spring's
higher oil prices was booked in at 50 million over what had
been predicted. That was the value of the bubble. He
concluded by referring to the futures market and implied ANS
prices. He cautioned those looking at the futures price
saying it was probably a pretty good measure of value in the
next few months because there was a great deal of buying and
selling and futures contracts for delivery several months
out. The futures market was a measure of market expectation
or downside risk because the futures price was lower farther
out into the future. He compared the February 1997 price
for ANS at $23.51 with the futures price for implied ANS
price in February 1998 of $18.50. Essentially the futures
market is down about $5. The fall forecast for '98 was
$17.71/barrel. The current spot price is $24.35/barrel.
The bottom line was to enjoy a nice little revenue injection
due to the price bubble but as it stands most of the things
looked at today suggest the bubble will burst and would fall
under the forecast of $16/barrel.
Senator Pearce asked what the current projections for fiscal
year '97 revenues were and Mr. Logsdon said $21.63 was
expected out to the penny. That is essentially based on
using futures prices for the next four months. That would
be a surplus just over $100 million or $2-1/2 billion of
general fund unrestricted revenue. In terms of the fall
forecast we are about $100 million ahead or over the '97
budget. Senator Pearce referred to the revenue chart
showing the January 1997 forecast for revenues in fiscal
year '98 has increased over '97 and asked what the new
number would be. Mr. Logsdon said this was based on a price
that would be about $1.50/barrel above so that would be
roughly $19.00/barrel. That would be a futures market
assessment.
Senator Adams asked about contracts prices with the state
and how did they lag behind the actual prices. Mr. Logsdon
said a major attempt had been made to get the prices on a
contemporary basis. The prices were fairly close because
the state required the companies to pay their production tax
using spot price. The tax return was going to be due a
month after the month of production so there were some
timing effects on when the check would be received. There
were also some timing effects to the extent that they may be
delivering the oil in a different month than produced so
there could be some minor timing differences. Basically on
the royalty and severance tax side the state was currently
being paid spot prices. Commissioner Condon added that when
spot price quotes are seen for West Texas Intermediate or
ANS in the daily paper, for the most part those are for
deliveries that are to occur next month. A spot price
quoted today, mid-January, would be a quote for a delivery
to occur in February.
Senator Adams referred to revenue forecasts for FY '97 at
$21.63. Some rely on Cambridge Energy at $22.00 and that is
a $0.37 difference. The FY '98 estimate is $17.71.
Cambridge is $19.50 and that is $1.79 difference. Should
the committee be looking at the Cambridge estimate or taking
an average between the two for actuality? Are there
different philosophies because of an act of God such as cold
weather or perhaps the mind game that is going on with Iraq?
Which estimate should the committee be looking at? Mr.
Logsdon recommended the futures market projection,
realizing another short run assessment for fiscal years '98
and '99 would be made probably for release around the first
of April.
Senator Adams referred to the $100 million surplus and Mr.
Logsdon said for fiscal year '97 that was the current
estimate. Senator Adams said that with this money we were
paying back the constitutional budget reserve money that we
had borrowed. Mr. Logsdon said that was what he understood.
Senator Adams said that pot of money in the constitutional
budget reserve was about $3.1 billion. He asked how a
dollar change was measured in the average price. Mr.
Logsdon said the current rule of thumb was $100 million.
That was driven by the current rate of production of about
1.4 million/barrel/day.
Commissioner Condon turned to projected production volumes
which was the other major variable in terms of oil revenue.
The question that a number of folks have asked was about the
recent announcements by ARCO and BP, their commitment to
make additional investments in Alaska and would that change
in any way the revenue forecast. He referred to the next
graph showing the dotted line being the fall '96 forecast
and the solid line reflecting what productions volumes would
be if the additional investments announced by ARCO and BP
bore the fruit they hoped it would bear. In the short term
that would not make any difference but beginning in FY '99
if those investments work the way companies hoped then there
would be an increase in production over what was previously
forecast of 25,000 barrels/day. That increases out to the
year 2005 when the increase production volume would be
300,000 barrels/day. That would take effect if those
investments worked out as well as those companies hoped. In
terms of revenue that would mean $25,000,000/year in
additional revenue. In the year 2005, remembering that much
of the new production is going to be what is referred to as
marginal fields where the tax rate as a consequence of the
way the economic limit factor works, will not be at the same
level as the tax rate that applies to the production
currently coming from the Prudhoe Bay and Kuparuk River
fields. That was believed to be the effect of additional
investments that ARCO and BP announced they are going to be
if the investments work as they have projected. Another
question is the Cambridge Energy Research associates
projection of production that was put before the Legislature
two years ago. The next graphic was a reflection of
additions to the annual general fund revenue that would
result from the production increases not yet reflected in
any revenue forecasts. When looked at what it would mean
for overall State revenue with the current tax arrangements
that are on the books and the other revenues that would come
into the State given the revenue raising measures that it
employs what would be seen is nominal dollars coming into
the general fund for the seven year period from FY '99
through 2005, right around $1.9 billion, a fairly level
annual revenue during that period of time. What the
additional investments and production would mean, if they
bore fruit, was that for this seven year period there would
not be a nominal decline in State revenue. It would hold
pretty steady right around $1.9 billion.
Senator Pearce asked if the gas pipeline was in the
projections and Commissioner Condon said it was not. The
gas pipeline would not come on stream and be productive
revenue before FY 2005.
Senator Adams said in the Budget and Audit meeting earlier
the Senator from Chugach brought up the effects of two new
legislations that were passed were incentives on oil
companies of the North Slope and asked what was the amount
of tax breaks given to encourage the new production.
Commissioner Condon said none of the taxes had been changed
over the last couple of years. There have been some
modifications made with respect to royalty arrangements with
respect to the North Star field and arrangements were made
in the previous year providing the possibility for other
royalty changes but none have occurred. The basic fiscal
arrangements pertinent to all this projected production save
North Star have remained exactly as they were prior to two
years ago. Obviously the perception of the industry, the
investment climate and the desirability of Alaska as a place
to do business, members of the industry would say have
changed in terms of willingness of the government to search
for ways where it believed the public and private interests
of the oil companies were common. The last couple of years,
both from the legislative branch and the executive branch
perspective there had been an effect, but we have not
sacrificed and actually gained revenue. Senator Adams asked
if the new legislation and fiscal arrangement were good
arrangements. The State of Alaska was not giving too much
of their resources away and Commissioner Condon said he did
not believe so.
Commissioner Condon continued regarding corporate income
taxes and what was seen on the next page (of the handout)
was a table that reflected the tax liabilities or the
returns that were filed in FY '96. In looking carefully
back at the front page in the handout, there was reflected
corporate income tax of $227 million, $173 million of which
is from the corporate income tax as applied to oil and gas
companies. He explained the difference between $170 million
and $96 million. $96 million reflected the amounts that
showed up on tax returns when they were filed. Tax returns
filed in FY '96 related to money that was for the most part
paid to the State in FY '95 because tax payers must file on
a quarterly basis and then for the most part they file their
tax returns on September 15 which comes after the end of the
fiscal year. That reflected the difference. Information
received from the tax returns filed in FY '96 one would
observe that 94 taxpayers pay 92% of the corporate income
tax that was paid to the State of Alaska. There were 1,000
corporations that pay $1,000 or more and if the cut-off line
was $100 there are 2,000 corporations.
Senator Pearce asked how oil and gas corporations were
defined and if they had to be producers or would MAPCO who
did not produce oil in Alaska come under the same category.
Deborah Vogt, Deputy Commissioner, Department of Revenue was
invited to join the committee. She said AS 43.20.072, which
applied to oil and gas corporations as did old separate
accountings to a tax payer who is either a producer or a
pipeline transporter of oil or gas. Senator Pearce noted
there are 37 companies that are either pipeline transporters
or producers. Ms. Vogt concurred. Commissioner Condon said
that if the numbers were looked at closely one would see
there was rather a dramatic increase in projected revenue
and actual revenue received during FY '96 from what would
have been received in FY '95. This $96 million figure for
oil and gas companies clearly reflected the fact worldwide
oil and gas companies in the last couple of years have been
considerably more profitable than they were in the preceding
couple of years. The next chart for fiscal years '93
through '96 was a comparison for the number of gallons of
gasoline sold versus the taxable gallons of gasoline. What
occurred there was the ever increasing use of ethanol as an
additive to gasoline and under the provisions of the tax
applicable to motor fuel there is a tax exemption for fuel
that has ethanol added to it. While motor fuel use has gone
up the number of gallons that the gasoline tax applied to
went down and consequently revenue on gasoline has gone
down. The revenue on other motor fuels has not gone down so
that the overall motor fuel tax revenues have not dropped
steeply in the same way they would have if one was just
looking at the gasoline part of motor fuel revenues.
Senator Phillips asked if the administration was going to
introduce a constitutional amendment for the dedication of
the gasoline tax this year or next and Commissioner Condon
informed the committee that he did not know. He said it had
been brought up and discussed. Senator Phillips said that
his district had an interest and would like to see it
dedicated.
Commissioner Condon said another matter discussed in
preparation for this hearing was shared taxes. He did not
know if the amount of money seen being shared with
communities was going to remain a little over $25
million/year. There was nothing of any note that can be
observed between or with respect to any of the various kinds
of taxes and fees that we do share with local communities.
He continued on to fisheries and said the table (in the
handout) simply reflected the projections of catch value and
consequent tax revenue by fisheries. He called the
committee's attention to what happened in calendar year 1995
and what was thought would happen in calendar year 1996 as
payments were made to the State in April which was when
payments for the principal fish taxes were due. He noted
further the breakdown in terms of halibut, salmon, herring,
shellfish and groundfish; what projected value of the catch
was during the last season and revenue believed will show up
April 1 when the tax payments are due for fish.
Senator Parnell referred to the corporate tax issue and on
the first spread sheet (general fund unrestricted revenue)
and noted the projected corporation general income taxes at
$5.1. He asked if the numbers reflected the governor's
initiative as announced in the State of the State address
regarding the education tax credits. Was this a reflection
of the lost revenue in his projections? Commissioner Condon
said they did not. Senator Parnell asked what the projected
lost revenue would be at this point and Commissioner Condon
said he did not know.
Senator Pearce asked the Commissioner if he could give an
overview of exactly what information about the corporate tax
liabilities was available under Alaska Statutes even though
much is held confidential. It was very difficult for the
legislature and the people of Alaska to make an informed
decision about any sort of a tax credit bill that might be
before the legislature when it was known who the tax payers
were and what they were paying. She also wanted to know
whether any of the international air carriers were on the
list and if $1 million was being given to them just to land
in Anchorage, which is a worthy goal. It was still a lot of
money to be given up.
Ms. Vogt said the confidentiality statutes permitted
providing the legislature any information that did not
disclose the particulars of any specific taxpayer. She said
there was a deficit in the information made available to the
legislative body and they were trying to best address it.
Senator Pearce said she did not know if the Governor was
going to address the particular incentives mentioned Tuesday
night again in the State of the Budget address but certainly
not much of a discussion could be had until more information
was available.
Commissioner Condon said the assignment had been approached
by trying to collect some fairly extensive information about
the various sectors of the economy that legislators had
expressed an interest in and staff members had been spoken
to about information they would like to see that is not
available. Staff was asked to collect information about
other things and not just the tax returns as they went about
it. The priorities of their assignments could be changed if
members of the Finance Committees and the Legislature wanted
specific information developed, information from the tax
returns in particular. That could be done quickly. Senator
Pearce said it was hard to know what to ask for when one did
not know what was there. The legislature was kind of
shooting in the dark. One needs to know the question to ask
to get the information needed. It is a difficult process.
Senator Pearce asked if international airlines paid
corporate income taxes or not. Ms. Vogt said some
international airlines paid corporate income taxes.
Commissioner Condon also pointed out tour ships and tour
ship companies. Ms. Vogt addressed this issue referring to
a piece of litigation before the Alaska Supreme Court that
was going to be argued next month. She referred to "OSG
bulk ships" and it addressed a number of issues, the central
one being from a tax policy perspective on whether a
particular provision of the United States Tax Code is
incorporated into the State tax code. Section 883 had to do
with the fact that the United States does not tax the income
of foreign flag ships. The United States used separate
accounting, taxing income based on source, whereas almost
all the states, like Alaska used some sort of apportionment
formula to tax income, whether it be waters' edge or world
wide. In taxing by apportionment, the federal code was
incorporated into the Alaska Code for the purpose of
defining what was income and what deductions were
appropriate. One of the federal provisions of 883,
expressed the federal decision not to tax foreign ships in
return for the fact that most foreign nations do not tax
American ships when they are plying the waters of the world.
The problem with melding the two systems, separate
accounting and apportionment was those rules do not fit.
The argument in "OSG bulk ships" was that section 883 was a
sourcing rule and should not be incorporated into the State
Code like the rest of the sourcing rules that the Courts and
the State have found impliably not to be incorporated into
the State's code. Section 883 became involved because those
tankers have affiliates throughout the world that are
foreign ships and the question was whether to include that
income. The tax auditors have included all of the so called
factors associated with that income into the denominators of
the formula for apportioning. If the income is not put in
there would be an unbalanced approach as to what was
Alaska's share. The issue gets more interesting when you
look at the foreign bottoms that are doing business in
Alaska which are the cruise ships. The same argument is
made that because of section 883 the Feds have determined to
leave that income out of the Federal pot should Alaska also
then leave it out. It is an issue that should have an eye
kept on. She did not know how much was involved because
that information was not received from tax payers.
Senator Pearce reviewed tomorrow's schedule for the
committee beginning at 9:00 a.m.
ADJOURNMENT
The meeting was adjourned at approximately 10:25 a.m.
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