HB 118-RESEARCH AND DEVELOPMENT TAX CREDIT  3:26:25 PM CHAIR OLSON announced that the first order of business would be 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." 3:27:00 PM CURTIS THAYER, Deputy Commissioner, Department of Commerce, Community & Economic Development (DCCED), stated that innovation can be expensive and time consuming. It can also spark a chain reaction of investments and capital that spills over into every sector of our economy. Forty other states have recognized that by establishing a tax credit for research and development in addition to demonstrating economic benefits, gives them a competitive advantage over Alaska. This bill, HB 118, would address this issue by establishing a 20 percent tax credit for qualified research and development conducted by corporate taxpayers in Alaska. In effect, the research and development tax credit would stimulate private sector investment, entrepreneurial activity, and business expansion in Alaska. It would bring opportunity and sustain long-term benefits to Alaska's economy. This bill would allow Alaska corporations to receive a 20 percent tax credit, not to exceed $10 million per taxpayer, per tax year. The research and development activities or the employee payroll must take place in Alaska. In a recent column in the Juneau Empire, University of Alaska Fairbanks Chancellor Brian Rogers recognized tangible benefits to incentivize homegrown research and development. He paraphrased Mr. Roger's comments that the Governor's proposal on research and development tax credit has the potential to significantly boost Alaska's economic development in Alaska. Chancellor Rogers has long recognized the value of partnering the knowledge and expertise of university researchers with the needs of communities and private businesses across the state. The University of Alaska has a robust research program that has led to technology development in areas directly relating to the needs of the state's economy including energy, engineering, geophysics, petroleum, mining, health sciences, and agriculture. Mr. Rogers explained how UAF's newly created office of intellectual property and commercialization could augment these efforts and facilitate new partnerships that will work to commercialize intellectual property technology created by UAF's efforts. 3:29:38 PM MR. THAYER continued. The UAF's efforts will offer a strong complement to the Governor's proposal. In most states a healthy private research and development sector work in tandem with university research. This has not been the case in Alaska since very little research and development has occurred in Alaska. The research and development tax credit could change this dynamic. Independent research and development could create a ripple effect that benefits more than just the businesses involved. He referred to a 2005 Federal Reserve Bank of Cleveland study which examined economic drivers for state per capita income. The study indicated the greatest factors related states' innovation and workforce development. A research and development tax credit would incentivize innovation and contribute to specialized work forces. In turn this would lead to an entrepreneurial activity business expansion in the state that would bring jobs and economic opportunity to Alaskans. MR. THAYER related that the bill's details indentify the kind of research which would qualify for the research and development tax credits. He said it is more important to look at other states to review how investing research and development has enhanced their "business friendly" environment and helped them maintain a competitive edge. He stated that Virginia has been at the top of Forbes ten best states for business ranking since it has recognized that promoting science and technology research and development has had a positive effect on its economy. He pointed out that North Caroline has also been honored by the site selection committee in nine of the past 10 years. Over the years, North Carolina has provided tax incentives to encourage research and development and increase technology investments. The state has remained consistent with its support of research and development tax credits. He said that North Dakota was the only state which showed growth through the recent recession and has been high ranked in business climate polls. Research and development tax credits are of the tools in its tool box. He concluded that it is time to place Alaska on equal footing with other states. This bill, HB 118, has the capacity to create job opportunities for Alaskans, and spur growth for Alaska's businesses. It's good for the economy. It's good for Alaska's families and it needs to be part of Alaska's economic toolbox when Alaska is trying to recruit businesses to Alaska. 3:31:57 PM MR. THAYER referred to a PowerPoint presentation in members' packets. 3:32:40 PM REPRESENTATIVE SADDLER asked whether the oil and gas industry sector would benefit or to identify which industry would most benefit from the research and development tax credits. MR. THAYER related that the bill was modeled after a federal research and development program. 3:33:14 PM JOHANNA BALES, Deputy Director, Tax Division, Anchorage Office, Department of Revenue (DOR), answered that could this bill is targeted for corporations. Oil and gas companies are corporations and corporate income taxpayers. In some instances the oil and gas corporations could receive oil and gas production tax credits as well as a corporate income tax credits for the same expenditures, but only in very limited circumstances. She reiterated that the oil and gas credit on the production tax side are very limited. 3:33:59 PM REPRESENTATIVE SADDLER related his understanding that the oil and gas corporation income tax credit and research and development tax credits could overlap, but it is not likely or would happen infrequently. MS. BALES answered yes. She said that oil and gas would not be allowed any exploration credit or the research and development tax credits on exploration activities. However, another oil and gas credit pertains to capital improvements which may allow for depreciation on the capital improvements if the equipment being depreciated is used for research and development. Thus, the research and development tax credits could apply but only in very limited circumstances. REPRESENTATIVE SADDLER asked which industry sector would most likely take advantage of the program. MS. BALES related that the oil and gas corporations could avail themselves of the program to offset their corporate income taxes, but the governor's intent and focus is to bring in new industries, such as the mid to larger size multi-state corporations who could use the research and development tax credits. She reported that 34 other states offer research and development tax credits. The state hopes to bring in new industry to Alaska and this is the first step to incentivize. REPRESENTATIVE SADDLER pointed out that she identified the size of the industry that may benefit from the program. He asked for further clarification on the type of industry. MS. BALES answered the program would likely target the technology-based industries since that is the focus on the federal side. MS. BALES commented that one area the state has had some success in the past is cold region research. She related that Alaska is ideally situated and suited for this type of research. 3:36:31 PM REPRESENTATIVE MILLER asked whether a single company would qualify for four or six tax credits for the same work. MR. THAYER answered no. This bill would apply to new research and development and would reach beyond what has been budgeted. He pointed out HB 118 contains a "look back" provision for three years on the records to identify new research and development for a company. REPRESENTATIVE MILLER related his understanding that there would not be any possibility for tax credit or rebate to develop an existing oil field. In the meantime the oil corporation would be conducting research to remove heavier oil. He asked whether both credits would apply. MS. BALES referred to page 2, line 8 of HB 118. This provision provides that a person may not claim a credit under this section for qualified research and development expenditures which were either deducted in the calculation of tax liability or utilized for any other credits. Thus, if the corporation was allowed another corporation income tax, noting that credit is for corporate income tax, the tax credit could not be utilized anywhere else. The expenditures are not allowed to also be deducted and used in the calculation of any other credit against corporate income tax, she said. 3:38:53 PM REPRESENTATIVE SADDLER asked for an estimate of how well this investment tax credit has worked federally. MR. THAYER responded that the federal research and development tax credits have been in place for over 20 years. The federal program keeps getting extended. He reported that a bill is currently pending. He pointed to other states, such as North Carolina, have successfully used this to bring in Caterpiller, Inc. which provided 1,250 new jobs in North Carolina. He suggested that the state should also review Virginia's aerospace industry since Alaska is trying to expand its Kodiak Launch facility and Ft. Greeley with respect to potential missile defense. 3:39:58 PM REPRESENTATIVE THOMPSON moved Amendment 1 labeled 27-GH1951\A.1, Bullock, 2/17/11, which read as follows: Page 2, line 12: Following "year,": Insert "if three or more taxpayers claim the credit authorized under this section during the immediately preceding year," Delete "names" Insert "number" Page 2, lines 16 - 25: Delete "Notwithstanding AS 40.25.100 and AS 43.05.230, a taxpayer claiming the credit under this section consents to (1) the public disclosure of its name and status as a beneficiary of the credit; (2) inclusion of the amount of the credits granted to it under this section and the number of employees conducting the research and development for which it claims the credit in the cumulative total calculated by the department for reporting purposes; and (3) report on the impact of the credit on research and development for each year that the credit is claimed." CHAIR OLSON objected. 3:40:27 PM MR. THAYER explained the purpose of Amendment 1 is to protect confidentiality of the taxpayer. In response to Chair Olson, he related that the amendment was necessary due to a drafting error, which was discovered by the Department of Revenue (DOR). CHAIR OLSON removed his objection. There being no objection, Amendment 1 was adopted. 3:42:36 PM BILL POPP, President; Chief Executive Officer, Anchorage Economic Development Corporation (AEDC), stated that Alaska is in significant competition with other communities and other states. He pointed out that the AEDC competes daily with over 4,000 economic development organizations. In the "world of incentives" a targeted incentive can be powerful to attract homegrown investments. He explained the AEDC has worked on research and development projects for industries, including the cool supply chain, automotive, renewable energy, military technical, aviation, life science, biotech, and medical industries. This type of tax credit can be beneficial for projects often caught in the "valley of death" or in the early start-up phases in which companies attempt to go beyond the initial concept phase and move to the prototype phase. Another important part of the research and development tax credit is that the credits can help attract research and development venture capital. This is a very difficult proposition in Alaska and the tax credit can not only leverage the money the credit will be applied against, but could generate additional funds which go beyond that by reducing the risk for the venture capitalists to become involved in the research and development startup. He urged support for HB 118. 3:45:05 PM DAN WHITE, Associate Vice Chancellor of Research, University of Alaska Fairbanks (UAF), stated that he has been charged to lead the Office of Intellectual Property and Commercialization at the University of Alaska Fairbanks. The UAF's goal is to move technology from the university to the private sector. Applied research and development used in the private sector gives businesses a competitive advantage in the global market. The critical link in economic development is enhanced when businesses can invest in the research and development itself. This bill would allow the state to provide a significant incentive to businesses to take advantage of emerging opportunities. This bill would contribute to the university's mission to conduct research and development as well as to help move research and development forward in the private sector for long-term economic development. He offered his belief that this would be particularly true if this bill results in businesses and industry funded research at the UAF since this could bridge the two and lead to economic diversification for the state. ALLAN JOHNSTON, Vice President, Wedbush Morgan Securities, stated that he is a very strong supporter of the tax credit. He offered his belief that the tax credits will not be the solution but represents another tool. Currently, the biggest hurdle in Alaska is how to build a culture of empowerment. This bill represents an investment for tomorrow. He said it seems like just yesterday when Ken Thompson who was President of ARCO Alaska, Inc. ran television advertisements depicting a female engineer with a tubular water separator. She indicated that the technology saved the industry over $100 million dollars. He described the pride that comes from changing things within the community instead of waiting for things to happen. Currently, Alaska seems to be waiting for things to happen. He highlighted the collective importance of research and development tax credits to help empower people to make changes. He characterized this bill as a good start. He stated that he will also work to support other tools like the ones this bill offers, as well. 3:48:55 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on HB 118. REPRESENTATIVE JOHNSON remarked that it is about time. Alaska has been lacking in research and development. He offered his belief that Alaska has lost intellectual property due to a lack of opportunities for research. He reiterated that it is about time. REPRESENTATIVE JOHNSON moved to report HB 118, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, the CSHB 118(L&C) was reported from the House Labor and Commerce Standing Committee.