HOUSE BILL NO. 280 "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." JIM POUND, STAFF, REPRESENTATIVE JAY RAMRAS, spoke in support of the legislation. He read from the sponsor statement: CSHB 280 is interestingly enough a bill requested of this body by the industry. Under its language, mines operating in the state would be taxed by the state on the true and real value of real and tangible property. Precious metal exploration has continued in the state and several of the locations being developed are not located in organized boroughs. Without the language of CSHB 280 development companies are operating with an uncertain and potentially unstable set of rules for taxation. Using AS 14.17.410 (b) (2) as a tax base, mines in unorganized boroughs would be assessed a four- mill levy. Boroughs forming later would be allowed to tax at their established property tax rate. Language in the bill also creates a special mining property tax account and allows the legislature to appropriate that money into the public education fund. Essentially this is an offer by the mining industry to assure funding for Alaska's Education System. HB 280 is limited to large producers only. Mines producing less than $10,000,000 are exempt from the tax formula. This keeps what is left of our once profitable mom and pop mines in operation. In a world market, stability both politically and financially are critical to success for these companies that invest millions of dollars just searching for precious metals. Creating a stable tax base for an industry that creates hundreds of jobs in Alaskan communities makes sound fiscal sense. It also gives unorganized areas of the state a clear understanding of the income they will receive from a mine, once they become a borough and can receive the tax benefit. 4:53:42 PM Co-Chair Chenault asked if there was a current limit on what municipalities could tax. Mr. Pound noted that there was not. He thought that the Fairbanks North Star Borough taxed the Fort Knox Mine at the existing mil levy on property (14 mils). The Red Dog Mine pays the Northwest Arctic Borough a severance tax based on mineral production (3 percent). The Usebelli Mine also pays the Denali Borough a severance tax. 4:54:43 PM Co-Chair Chenault asked the effect on the Donlin Creek Mine and the Kensington Mine. He asked about the tax structure. Representative Weyhrauch explained that the City and Borough of Juneau has a two-tier tax structure. These mines currently pay 6.6 mils. If they connect to services the mil rate would increase to 11. In response to a question by Representative Chenault, Mr. Pound noted that the legislation would not affect any current mines operating within an organized borough. A 4-mil levy on personal property would be imposed on mines operating outside of a municipality. There is nothing in the legislation, which would prevent a municipality from annexing a mine, but they would be required to come in under the existing property tax structure. The state tax would end when the mine is annexed. The legislation does not affect the municipality's tax. 4:56:40 PM Vice-Chair Stoltze referenced AS 43.67.020 on page 3. Mr. Pound explained that for a period of 15-years, the tax language in place under AS 43.67.020 would be restricted to the particular taxes listed "except where a municipality may comes in and do personal property tax on a new one". After the 15-year period, the door opens up and there are no exemptions at all on what can and cannot be taxed. Vice-Chair Stoltze mentioned gas line provisions. He questioned the affect of the legislation on constitutional issues. Mr. Pound discussed his understanding of the intent of section 20. He explained that prior to [a mine] being annexed into a municipality, for a period of 15-years taxes are levied based on the items on the list: (1) taxes on the sale or use of minerals; (2) taxes on or measured by gross or net income from the taxable property, including income from the exploration for, production of, or of minerals or taxable property; and (3) any license, excise, fee, charge, severance, throughput, or other tax on or pertaining to the taxable property or services used in or associated with the taxable property or in its maintenance or operation unless the tax is also levied on property not subject to tax under AS 43.67.010(a).  Vice-Chair Stoltze wanted to make sure that the legislation was on solid constitutional ground. 5:00:11 PM Representative Holm expressed concern with the ability to exempt previous taxing authorities. He felt it would be appropriate for the state of Alaska to have an even playing field. He recommended that the "grandfather provision" be reviewed. He pointed out that the residents of the state own the resource, not the municipality adjacent to the resource. The state of Alaska cannot constitutionally allow the municipality to tax the resource. He suggested that the activity could not be grandfathered in because it is illegal in the first place, even though it has been occurring. Mr. Pound agreed that there are constitutional questions that must be addressed by the courts. 5:03:10 PM Representative Holm recommended that the issue be addressed before it is passed out of Committee. 5:05:51 PM Vice-Chair Stoltze referenced similar provisions relating to the gas line. He asked about the 15-year exemption. BRETT FRIED, ECONOMIST, TAX DIVISION, DEPARTMENT OF REVENUE, noted that he was not qualified to answer that question. 5:06:52 PM ETHAN FALATKO, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, did not feel there would be a constitutional issue with the statute. He noted that Article X allows the state of Alaska very broad authority to delegate taxing authority to municipalities. 5:08:44 PM JAMES FUEG, PLACER DOME, JOINT VENTURE, referenced the handout from the Donlin Creek project. He commented on the size of the project. A mine in that area would employee over 400 people. There are benefits in addition to those listed in HB 280. He read from prepared testimony: • The handout presented to you is a brief description of the ongoing work at the Donlin Creek Project. As you can see, if a decision is made to move forward with development of a mine at Donlin Creek this will be one of the largest and most complex resource development projects in Alaska. Current estimated capital costs for the project are welt in excess of $1 billion dollars. A mine at Donlin Creek would employ ~ pay royalties to the shareholders of Alaskan Native Corporation of Calista Corporation, the mineral est~iho1der for the deposit, and pay Mining License Taxes and Corporate Income Taxes to the State. These benefits are in addition to the potential payments proposed under HB 280. • One of the biggest uncertainties facing mineral development in the unorganized borough of Alaska., and hence the Donlin Creek Project, amongst others, is the lack of any defined tax structure at the local level. This makes it extremely difficult to accurately predict future operating margins and costs when one is developing the complex economic models that must be completed prior to making a billion dollar investment decision, such as we are facing at Donlin Creek. This in turn makes it harder to achieve a positive decision on such large investments. • HB 280 presents several mechanisms for companies, who wish to invest in mine development in Alaska, to address these uncertainties, while at the same time providing a mechanism for the industry to contribute to the cost of education in their communities and, should a local government be formed at some point in the future, contribute to the cost of funding local government. 5:11:30 PM KEVIN RITCHIE, ALASKA MUNICIPAL LEAGUE, JUNEAU, noted that the League represents future municipalities that might form. He noted that there have been improvements to the legislation. He observed that taking away taxing authority in any manner is of concern to the municipalities. He addressed section 2 (c), which allows a municipality to negotiate a payment in lieu of taxes unless the property is subject to a state contract. He felt that the subsection would take away the authority, which is granted in other parts of the bill, for the municipality to define what is needed to pay for schools, roads, public safety and other services. He encouraged the Committee to review the language more closely. Mr. Ritchie discussed section 3. Section 3 would broaden the severance tax issue to all municipalities. The provision was recently added. Previously, the bill only impacted the formation of new boroughs. He did not think there was a current severance tax on minerals. 5:14:56 PM STEVE VAN SANT, STATE ASSESSOR, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, (via teleconference) offered to answer questions of the Committee. 5:15:34 PM STEVE BORELL, ALASKA MINERS' ASSOCIATION, ANCHORAGE, (via teleconference) noted that the mining industry is volunteering to pay a new tax, through HB 280. The tax would be on large mines operating in the unorganized borough at a constant rate for a period of 15 years from the first production at the mine. The industry already pays several taxes to the state depending on the type of land where the mining occurs. A mining license tax is paid to the state regardless of whether the land is on state, federal or private land. Mining also pays corporate income tax, mining claim rentals, production royalty on state owned land, and property tax when the mine is in the organized borough. Mines would also pay taxes to future boroughs. He stressed the need for tax certainty. 5:17:53 PM Co-Chair Chenault asked about AS 43.56 properties assessed by the state and the tax proposed on the mining industry. Mr. Van Sant observed that AS 43.56 oil and gas properties, which are assessed by the state and cross-jurisdictional lines between communities, are levied a 20-mil tax by the state. Municipalities levy their mil rate against the 20-mil tax. Oil companies do not pay more than 20 mils on any evaluation. The State would retain authority to assess a tax on mining property contained within certain boundaries, which don't cross-jurisdictional lines. The 4-mil assessment would come directly to the state unless a municipality was formed. 5:20:54 PM Co-Chair Chenault inquired how the value of the 4 mils would be determined. Mr. Van Sant responded that the bill would require them to value property based on the cost approach, which is based on actual costs. This approach is used on the Red Dog Mine. The state also uses this approach on AS 43.56 property along with market and income approach to value. 5:22:07 PM Vice-Chair Stoltze asked if there were legal concerns. KATHRYN KURTZ, ATTORNEY, LEGISLATIVE LEGAL SERVICES, (via teleconference) pointed out that the state has the power of taxation and has the authority to set a tax rate. Vice-Chair Stoltze asked if there were potential problems with locking into the rate. Ms. Kurtz could not address the gas line issue. She commented that the bill would give the state of Alaska the power in lieu of taxes. It does not cause a great deal of legal concern because of the scope of the issue. She acknowledged that a surrender of the state's taxing power would be unconstitutional. 5:26:42 PM Representative Holm asked if the state has the right to give away the taxing authority on minerals owned by the residents of the state and allow municipalities to impose a severance tax. Ms. Kurtz pointed out that the state of Alaska has broad powers in determining the taxing power of municipalities. The state currently has a taxing structure, which allows municipalities to impose property taxes, sales and use powers. 5:29:17 PM Representative Joule asked if the bill would change the arrangements of existing borough operations. Mr. Pound did not think it would affect existing operations. 5:31:02 PM Co-Chair Chenault asked if 4 mils was a reasonable amount and how it is determined. Mr. Van Sant responded that the 4 mils levy is determined by the school contribution in Title XIV, which changes each year depending on the value of the mine. The value of the mine is determined by cost. The tax value would increase as the investment increases. He noted that AS 43.56 property is 20 mils times the value. The value would go down each year if new dollars were not invested in the mine. The 4-mil rate is not based on the ore extracted but on the investment in the property. 5:35:08 PM Representative Holm MOVED to ADOPT Amendment 1: Page 4, line 2 Insert new subsection (c) (c) Property tax imposed by a municipality under AS 29.45 is in place of the tax levied under AS 43.67.010. In the case of a municipality incorporated after January 1, 2005, the transition provisions of AS 29.05.140 govern the transition from assessment by the department to assessment by the municipality.  Re letter the remaining subsection accordingly Page 5, line 20 Following "after" Delete "an assessment" Insert "a determination" Page 6, line 26 Insert new (2) (2) "department" means the Department of Revenue or the Department of Commerce, Community, and Economic Development; Re number the remaining paragraphs accordingly   Page 7, line 6 Following "The Department of Revenue" Insert "and the Department of Commerce, Community, and Economic Development" Vice-Chair Stoltze OBJECTED. 5:35:33 PM Mr. Pound noted that the amendment deals with how property tax is imposed on a municipality under Title 29. A new borough would have up to two years for transition. The time line for appeals was restructured to allow 30 days after a determination. The Department of Commerce, Community and Economic Development was added under the definition of department and given the power to formulate regulations. 5:37:44 PM Co-Chair Chenault asked for the definition of determination. Mr. Pound clarified that there are 50 days. Vice-Chair Stoltze WITHDREW his objection. There being NO further OBJECTION, Amendment 1 was adopted. HB 280 was HELD over. HOUSE BILL NO. 280 "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." Vice-Chair Stoltze referred to Article IX [Alaska Constitution], and questioned if there is a problem with the legislature surrendering the power of taxation. Mr. Pound restated that legal counsel, as indicated by Ms. Kurtz, does not have a problem with it. 8:52:14 AM Representative Kelly referred to Vice-Chair Stoltze's question and summarized that the question is if the state has the right to transfer taxing authority to another entity. Representative Holm said he spoke with Jack Chenoweth from the Alaska Legislative Legal. He referred to a memo, which states that the legislature has the right to restrict taxation authority and to give it away. The legislature has prohibited municipalities from taxing oil or gas. He noted that the legislation would change a severance tax to a mil tax, which would allow municipalities to tax the infrastructure but not the minerals. He maintained that the legislature has a fiduciary obligation to set state policy that clarifies that the resources are owned collectively and should benefit all Alaskans. He maintained that resources need should be brought into the community pot and it would be bad policy to allow individual communities to benefit. 8:56:46 AM Mr. Pound corrected earlier testimony by clarifying that the Northwest Borough does not collect a severance tax. 8:57:20 AM Representative Holm MOVED to ADOPT Amendment 2: Page 2, Lines 18-19 DELETE [other than a tax imposed before January 1, 2006] Co-Chair Chenault OBJECTED for discussion purposes. Representative Holm explained that the amendment would remove the retroactivity provision. This would prevent municipalities from charging a severance tax on a mineral resource. Mr. Pound stated a concern that some boroughs already use a severance tax. 8:58:12 AM STEVE VAN SANT, STATE ASSESSOR, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, (via teleconference) commented on Amendment 2. He explained that Denali Borough collects a severance tax on gravel and coal, which results in approximately $56 thousand. The Kodiak Island Borough collects a severance tax on timber. He thought that the Lake and Peninsula Borough also has a severance tax, which has not been collected. 9:00:42 AM Co-Chair Chenault asked Representative Holm to clarify the intent of the amendment. Representative Holm stated that the amendment would prevent any re-cooping or retroactivity. He questioned if those communities that currently have severance taxes in place could collect a mil tax. 9:01:48 AM Mr. Van Sant replied that they could have a sales tax or a property tax, but it would take some work. He pointed out that the 4-mil levy is for the unorganized boroughs. Representative Holm thought the bill might have some unintended consequences. He asked if the Denali Borough currently has a property tax. Mr. Van Sant noted that the Denali Borough does not collect property tax. The Borough collects a bed tax and severance tax. Representative Holm noted that the [severance tax collected in the Denali Borogh: $56 thousand) is insignificant. 9:05:02 AM Representative Kelly requested an opinion from the mining industry. 9:06:20 AM At ease. 9:14:31 AM JAMES FUEG, PLACER DOME, MEMBER COUNCIL OF ALASKAN PRODUCERS, testified via teleconference. He addressed the mining perspective on granting severance taxes. He said, in general, the mining industry does not support them, but is in favor of grandfathering in existing severance taxes. Representative Holm asked if this was a constitutional position. Mr. Fueg said no. 9:16:31 AM Representative Joule asked for clarification. Representative Holm replied. A roll call vote was taken on the motion to ADOPT Amendment 2. IN FAVOR: Kelly, Holm OPPOSED: Joule, Moses, Stoltze, Weyhrauch, Foster, Hawker, Chenault, Meyer The MOTION FAILED (2-8). Representative Joule MOVED to report CSHB 280 (FIN) out of Committee with individual recommendations and the accompanying fiscal impact notes. Representative Holm OBJECTED. A roll call vote was taken on the motion to report CSHB 280 (FIN) out of Committee. IN FAVOR: Stoltze, Foster, Hawker, Joule, Chenault, Meyer OPPOSED: Moses, Weyhrauch, Holm, Kelly The MOTION PASSED (6-4). CSBH 280 (FIN) was REPORTED out of Committee with a "no recommendation" recommendation and with a new fiscal impact note by the Department of Revenue, and with a new fiscal impact note by the Department of Commerce, Community and Economic Development. 9:22:13 AM