HOUSE BILL NO. 118 "An Act relating to a tax credit for corporate income taxes paid for qualified research and development expenditures; and providing for an effective date." 8:40:00 AM SUSAN K. BELL, COMMISSIONER, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (DCCED), relayed that HB 118 worked to stimulate private sector investment, and business activity and expansion. She discussed that the bill would allow Alaskan corporate taxpayers to receive a 20 percent tax credit that would not exceed $10 million per tax payer per year. The bill required either research and development activity or the payroll of employees to take place in Alaska. There was a "three year look-back" to ensure that the credit was applied only to expenditures above a base-line. The bill mirrored the federal definition related to research, development, and allowable activities, including, the discovery of technological information and the development of new or improved business components through a process of experimentation. Qualifying activities included the development of new prototypes, processes, or formulas; building or improvements of manufacturing facilities; and the development of new technologies or patents, etc. Customary market research and data collection were excluded. Exploration activity used to determine the existence or quality of any ore or mineral deposits was not allowable and included mining and oil and gas exploration; however, the industries were eligible for processes, manufacturing, and patents under the legislation. Entrepreneurial successes in the state included Alaska berry growers that had been exploring the antioxidant rich nutraceutical value of berries and sawmills that had been turning mill waste into fuels. She discussed biofuels and that the tax credit would help solve the high moisture content that existed particularly in Southeast Alaska. Other examples included the use of tidal energy to create ice at sea that was currently being done at a university outside of Alaska, and turning seafood processing byproducts into valuable products. Forty other states had established a similar tax credit, including North Dakota that had one of the most aggressive tax credits in the nation. She communicated that Alaska's universities had not been as engaged. Ms. Bell relayed that the University of Alaska Fairbanks chancellor Brian Rogers had submitted a letter of support for HB 118 and the university looked forward to increasing its engagement on issues that faced Alaska and had created an office of Intellectual Property and Commercialization. 8:44:44 AM Vice-chair Fairclough asked whether the tax credit was in the amount of $10 million. Ms. Bell responded that the credit was up to $10 million per tax payer. She noted that in many of the examples she had provided that the applicable uses would be much less. Industries, including aerospace, had indicated that their scale of research was far above the $10 million limit; however, they encouraged the passage of the legislation. Vice-chair Fairclough wondered how the state would project whether it had the funds to offer the credit in the future. She discussed that the film credit had a cap of $100 million. Ms. Bell replied that the fiscal note from the Department of Revenue was indeterminate. She suggested that the committee could consider setting a ceiling. She noted that DCEED did not anticipate any operational expenses. Vice-chair Fairclough conveyed that the credit could represent a substantial amount of money that the state may have trouble forecasting. She thought that the committee may want to consider a ceiling. She added that it would be helpful to use other states as an example regarding a potential ceiling and the use of the credit. She cited concern that the ability to carry the credit forward for seven years increased the state's liability. She also wondered about language that did not allow the use of a federal credit (Page 2, Line 10). Co-Chair Stoltze noted that Vice-chair Fairclough's questions would be addressed during the fiscal note discussion. Representative Wilson wondered how the $10 million figure had been determined. Ms. Bell replied that the department had mirrored the federal law in order to keep the concept simple. Representative Wilson asked for verification that a company could not sell its tax credit. Ms. Bell answered in the affirmative. She detailed that the credits were not transferrable and had to be used by the company conducting research and development. Representative Gara wondered whether those conducting explorational drilling would receive over 100 percent of their cost with credits that included the 20 percent taxpayer credit, a 20 percent capital expenditure credit, a 40 to 50 percent deduction, and a federal research and development credit. He discussed that directional drilling could be considered a new or improved component that would apply under the research and development definition of the credit. He explained that improvements were made on the North Slope on a daily basis in order for the oil industry to remain competitive. The legislature had devised legislation that contained numerous credits and deductions to impact the industry. He referred to charts that had shown that with the combination of deductions, credits, and oil prices above $80 a barrel that the state was paying between 70 to 80 percent of the activity cost. He expressed doubt that the taxpayer credit should be added to the list of credits that the oil industry would potentially receive. 8:50:56 AM CURTIS THAYER, DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT, replied that a company would not receive both a federal tax credit and the state tax credit for resource development. The bill had a three- year look-back and the resource and development would be over and above the normal resource and development that a company would expend. Representative Gara wondered why it would be a good idea for the state to pay for the tax credit in addition to the other credits and deductions that existed under the oil tax law. He reiterated that a company could obtain an improved component through directional drilling expansion. He stated that the three-year look-back would be solved because costs went up every year on the North Slope and the most recent year would always be more expensive. Mr. Thayer responded that the "exploration activity for the ascertation of existence, location, extent, or quality of ore or mineral deposit" did not qualify. Representative Gara responded that some of the activity was not related to exploration and there were many things that happened on the North Slope that might qualify. JOHANNA BALES, ACTING DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, replied that there were currently oil and gas credits including the qualified capital expenditure credit and the annual loss carry-forward credit that could be used in conjunction with the resource and development credit. She opined that it was something that could occur but it would be under limited circumstances. She noted that a simple change could be made to the legislation to prevent tax payers from receiving credits from multiple locations. Representative Edgmon observed that there were two types of corporate income taxes and he wondered whether the fisheries business tax and mining license tax would be the largest participants under the tax credit that did not apply to the oil industry. 8:55:05 AM Ms. Bales replied that the corporate income tax applied to all industries, but there were minor differences in the statute related to oil and gas companies. She explained that all companies that paid corporate income tax would be eligible for the credit for research and development outside of exploration activities. Representative Edgmon asked whether all industries would have an equal opportunity to take advantage of the credit. Ms. Bell responded in the affirmative. She relayed that the intent had been to help stimulate investment, manufacturing, and innovation. Representative Doogan asked whether the credits would be stackable with any other existing credits that a company was eligible for. Ms. Bales responded that the credits would not be stackable. She explained that if a company was allowed a federal credit that it could choose either the state or federal corporate income tax credit. In limited circumstances the expenditures for the resource and development credit could be utilized for some of the oil and gas tax credits as well. 8:58:06 AM AT EASE 8:58:38 AM RECONVENED Representative Doogan asked whether the credits were stackable in some circumstances. Ms. Bales responded that the credits were not stackable because there were two separate tax programs involved. She expounded that the corporate income taxes could only be used with one credit. Representative Doogan wondered whether the tax credit could potentially be an additional 20 percent on top of other tax breaks that the state provided to the oil industry. Ms. Bales responded in the affirmative. She read from Page 2, Line 11 of the bill, "any federal credit that had been apportioned to the state and claimed under AS 43.20.021," and explained that the removal of the words "AS 43.20.021" and the insertion of the words "under this title" would eliminate the ability to use the expenses in a separate tax credit program. She expressed that the committee might consider making the revision if it had strong concerns about the issue, but she did not know how the administration would feel about the change. She relayed that the circumstances in which a company could use the same expenditures for credits could only occur when a company had a loss in the oil and gas tax. Representative Doogan was concerned that Alaska could be responsible for a $300,000 million per year program if there were a high number of oil companies that could potentially take advantage of the $10 million credit. He stressed that he did not support the portion of the bill. 9:03:16 AM Representative Guttenberg wondered how it would be possible to know the tax credit was working in the intended way. He asked whether there would be an audit or accountability for the credits. Ms. Bales responded that the credit piggybacked the federal definition that was relatively strict. She detailed that tax payers would be required to provide proof that research and development had been conducted in Alaska and that it met the definition of the federal law. The department would provide oversight and would report how many people took advantage of the program. The intent of the legislation was to bring in new technology, industry, and research and development activity into the state. Representative Guttenberg wondered whether the research would be public at any point. Ms. Bales replied that the information may or may not be reported due to tax payer confidentiality. Companies were hesitant to disclose business processes that could help their competition. She observed that there was a balance between a need to know and public curiosity and that faith in the tax administration was important. 9:06:11 AM DAN WHITE, ASSOCIATE VICE CHANCELLOR OF RESEARCH, UNIVERSITY OF ALASKA FAIRBANKS (UAF)(via teleconference), supported HB 118 and believed that it would allow the state to provide an incentive to businesses to take advantage of new opportunities. The legislation helped contribute to the university's mission to conduct resource and development and move it into the private sector that was a critical element of economic development in Alaska. He stated that the bill would build a bridge between business and industry and that funded research at the university would lead to job growth and economic diversification. Businesses gained competitive advantages in the global market when UAF conducted applied research and licensed the technology to the private sector. He detailed that the link was enhanced when businesses were able to invest in resource and development. ALLAN JOHNSTON, ENCORE CAREER, TEAM NETWORK, (via teleconference), voiced strong support of the legislation. He was very supportive of economic development in Alaska. He had been a sponsor of business plan competitions at Alaska's universities. He discussed that Alaska had come in last in the entrepreneurial capacity index that was listed in the 2008 Milken survey. It was important to encourage the ability to dream big in Alaska. He thought it was a good idea to put a cap on the amount the bill would pay out. He expressed that the state needed to take advantage of the many opportunities that were available and to be competitive on a national and global basis. He supported the university's ability to commercialize and its tie to the private sector. 9:10:16 AM CHRISTI BELL, DIRECTOR, UNIVERSITY OF ALASKA CENTER FOR ECONOMIC DEVELOPMENT (via teleconference), stated that the university system was very supportive of HB 118 and of greater private sector research and development and opportunities through public and private collaborations. With the tax credit the university could market the incentives to private firms to encourage assets at the university such as the super computing system. Research helped the ability to offer scholarships and would help students grow, to foster innovation, and to create jobs. The National Science Foundation had found that 73 percent of finance papers cited that industry patents were funded through contracts with university research operations. Alaska was struggling to bring new research to the economy and needed to be competitive in new innovations and processes. She emphasized that the state ranked between 43rd and 51st in a national survey. She discussed that many states offered resource and development tax incentives to attract corporations and businesses and to encourage investment in resource and development facilities. 9:15:07 AM PETER STITZEL, SITKA MEAL, OIL, AND GELATIN (via teleconference), testified in strong support of the legislation. He believed that supported research through the resource and development tax credit could effectively inspire firms to establish Alaska-based operations. He expressed that wild Alaska salmon waste was a special and rare opportunity and that its presence in Sitka had caught the attention of nutraceutical, feed, and pet food companies. He thought the Sitka facility would become an incubator for the offshoots of many businesses, particularly in the nutraceutical business. BILL POPP, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ANCHORAGE ECONOMIC DEVELOPMENT CORPORATION (via teleconference), spoke in support of HB 118. He thought the bill would diversify Alaska's economy by attracting new business and innovation including tech transfer opportunities and venture capital. He believed the legislation represented an important component in a strategy to develop new industries in information technology, renewable energy, life sciences, biotech, and other. Co-Chair Thomas CLOSED public testimony. Vice-chair Fairclough asked whether the administration objected to a CS that would eliminate the ability to supplement other oil and gas credits. She cited that Lockheed Martin had expressed interest in facility and pharmaceutical companies could be big ticket items interested in research and development. 9:19:55 AM Ms. Bell responded that the department would discuss the idea internally and would get back to the committee. She explained that DCCED wanted to be as open as possible and recognized the existence of technological challenges in all industries and the opportunity for processes and patents, etc. Vice-chair Fairclough relayed that she had advocated for the oil and gas tax credits and was open to economic development; however, she believed that oil and gas tax credits belonged in the oil and gas bill and not in HB 118. She asked the department to provide information on how other states used the tax credit. She expressed that in terms of fiscal stability that it was important to know what the limit was that the state could expend in a year, but that job creation would help ease her concern about the amount of the $10 million credit. She was interested in a cap on the amount and did not want stackable credits. She wondered why a seven-year carry-forward of the credit was necessary for a large corporation that was not dependent on stability and felt that the time period was too long. Representative Gara wondered whether the credit would apply to a new tobacco or liquor store because of the "new component" definition and what would preclude them from applying under the legislation. He was troubled that the state would be incorporating a federal definition of research and development and cited a portion of the language: "for development of a new or improved component of the tax payer." He added that he was a proponent of incentivizing high tech and new innovative business. Ms. Bell replied that the first threshold that research and development was required to meet included the following four items: "purposes discovering information technological in nature; the application of which is intended to be useful in the development of a new or improved component of the tax payer; substantially all of the activities constitute a process of experimentation; and, the experimentation is for a qualifying activity or purpose." 9:25:08 AM Representative Gara wondered whether seafood companies that filed as C corporations would not be eligible for the credit because they paid the raw fish tax and were not corporations. Ms. Bell responded that in order to qualify the company would need to be an Alaska tax payer as a C corporation eligible for corporate tax payers. Representative Gara recommended a sunset and a report to allow the legislature to review the credit in three years and to assess whether it had been working. Co-Chair Thomas stressed that communities were dependent on the raw fish tax and he hoped companies were eligible for the credit. 9:27:59 AM Representative Doogan requested a better explanation of what would be allowable under the bill. He was concerned about the use of federal tax codes because the information was not very specific and the language was broad. He wondered what was included under the federal code that allowed development of new technology. HB 118 was HEARD and HELD in committee for further consideration. 9:29:49 AM AT EASE 9:36:16 AM RECONVENED