SENATE BILL NO. 25 "An Act relating to the motor fuel tax; relating to the disposition of revenue from the motor fuel tax; relating to a transportation maintenance fund; and providing for an effective date." 10:21:37 AM Co-Chair MacKinnon OPENED public testimony. 10:22:10 AM JEFF WAFFORD, UPS, LOUISVILLE, KY (via teleconference), testified in opposition to SB 25. He discussed the impact the bill would have on UPS (copy on file): Thank you for the opportunity to provide testimony on the proposed Motor Fuel Tax Bill and the impact it could have on UPS and the air cargo industry. UPS is one of several in our industry that oppose an increase in the tax on jet fuel. UPS appreciates the long- standing working relationship with the State of Alaska. We have more than 1,100 employees in Alaska, including 489 pilots who are domiciled here. Traditionally, Alaska has played an important role in UPS's global reach; not only do we deliver to thousands of customers daily, but Anchorage serves as our gateway to the Asia-Pacific region. Anchorage also serves as the training location for our Representative Doogan-11 and 747 fleets. UPS located in Alaska because of the business-friendly climate created by elected leadership. We pay close to $6 million in general and aviation taxes here, as well as approximately $7.2 million in landing fees annually to cover costs at airports. We have also invested into the local area, spending millions on a flight training center that celebrated its tenth anniversary in Anchorage last year. We sympathize with the situation you are faced with. We also understand that the budget outlook in Alaska for future years in sunder a tremendous amount of scrutiny given the lower price of oil and what it means to the budget of Alaska. UPS is in a unique situation as it related to the proposed motor fuel tax bill. First, UPS faces the risk of higher taxes on two different business units; ground in the form of the motor fuel tax increase and air in the form of the increased jet fuel tax. Second, UPS actually supports the increase in the motor fuel tax as it is a pure user fee. UPS uses most, if not all, of the reads in Alaska and we believe we should pay into maintenance of that infrastructure. However, we oppose the jet fuel tax as it's not a user fee. UPS and other airlines already pay user fees to airports in terms of landing fees. As I mentioned earlier, we pay roughly $7.2 million in landing fees to the Alaska International Airport System each year. AIAS is self-sustaining and requires little if any state funding as the passenger and commercial airlines pay for operational support and infrastructure improvements. In fact, the AIAS is thriving, and making an important economic impact on the state. According to a DOT study, the AIAS accounts for 17,000 jobs, including one in ten jobs in Anchorage and one in 20 jobs in Fairbanks. Increasing the jet fuel tax also increases the indirect subsidy to airports where there are no landing fees and which UPS does not regularly use. UPS does contract with carriers to deliver packages to airports outside of the AIAS, but this is on a minimal basis, and UPS is already paying jet fuel taxes on domestic flights to subsidize those airports, along with fees to the contracted carriers for any costs they may incur. In addition, UPS, Delta, and other members of the aviation community, including those involved in Airlines for America and the Cargo Airlines Association, are concerned that targeting the aviation industry for a budget shortfall could cause a reduction on cargo and commercial flights to Alaska. This increase could also cause an accelerated push toward dependence on newer aircraft that can bypass Anchorage, as at least one cargo carrier had started to do already. A decrease in the number of flights raises further concerns, including the potential of diminished investments in infrastructure if not as many airlines are paying into the aviation fund through fuel taxes. As it stands, cargo-related revenues account for nearly two-thirds of AIAS revenues. If higher costs cause carriers to fly elsewhere, this could indirectly lead to either a reduction on revenues, or lead to the remaining carriers having to pay more into the system to account for those who bypass Alaska. Again, UPS empathizes with the state of Alaska and its budget deficit. We appreciate the partnership we've had here and the growth-friendly environment that has allowed UPS to operate here over many years. We hope that you will greatly consider the consequences of what an increase in the jet fuel tax can mean to the great state of Alaska. 10:27:29 AM DANA DEBELL, DELTA AIRLINES, LOS ANGELES (via teleconference), testified in opposition to SB 25. She relayed that Delta currently operated 17, peak day flights to Alaska into Anchorage and Fairbanks, where they operated year round, and seasonally into Juneau, Sitka, and Ketchikan. She expressed concern that the increased income tax would make an already tough environment to operate in even more challenging. She expounded on the benefits that Delta doing business in Alaska brought to the state. She asserted that the tax increase would compound the already challenging competitive environment. She shared that through the connection to Delta hubs in various cities, Alaska was only one-stop away from over 600 destinations on 5 continents. She reiterated that it was a challenge to operate profitably in Alaska. 10:30:49 AM FRED STURMAN, SELF, SOLDOTNA (via teleconference), testified in opposition to the bill. He expressed concern for the budget shortfall in his area of the state and the subsequent job losses. He did not believed that taxes should be implemented until further budget cuts were made. 10:33:45 AM AVES THOMPSON, ALASKA TRUCKING ASSOCIATION, ANCHORAGE (via teleconference), spoke in support of the bill. He expressed support the development of a balanced, durable, and long term fiscal plan that utilized cuts to state government, use of permanent funds earnings, and taxes if required. He believed that the tax proposed in the legislation was acceptable within the framework of a long term fiscal plan. He thought that action was critical during the current legislative session. He said that the association supported a motor tax increase if the funds were dedicated to transportation needs. He stated that the trucking industry paid 45 percent of the state motor fuel tax. He suggested that intent language could be added that would make a commitment to a highway fuel tax account that could be used for roads and bridges. He hoped that the uses of the Public Transportation Fund could be reined in so that the funds could be directed toward transportation maintenance. He relayed that he supported the change made by the house that extended the implementation date to $.08 in 2017, and the same in 2019. 10:37:13 AM Co-Chair MacKinnon CLOSED public testimony. 10:37:45 AM RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE, discussed the presentation, "State of Alaska Department of Revenue: SB 25 - Motor Fuel Tax," (copy on file). He said that the presentation contained information from two departments, revenue and transportation, as well as sectional analysis and fiscal note information. 10:38:16 AM Commissioner Hoffbeck turned to Slide 2, "Motor Fuel Tax Increase": "An Act relating to the motor fuel tax; relating to the disposition of revenue from the motor fuel tax; relating to the transportation maintenance fund; and providing for an effective date." 10:38:57 AM Commissioner Hoffbeck showed Slide 3, "Motor Fuel Tax History": · Began in 1945 · Tax rates have increased over time, but structure unchanged · Last increase: highway 1970, marine 1977, aviation fuel 1994 · Tax was suspended from Sept. 1, 2008, to Aug. 31, 2009 · In 2015, HB 158 added $0.0095 surcharge on · motor fuels and some other refined fuels · Intended for spill prevention and response fund 10:39:55 AM Commissioner Hoffbeck discussed Slide 4, "Relative Motor Fuel Tax Rate": · Alaska's fuel taxes are among lowest in U.S. (1) o Highway fuel: lowest and the longest time since increase o Jet fuel: 35thout of 50 o Aviation gas: 24thout of 50 · Under this bill, Alaska taxes would be: o Below national average for highway fuel o Above national average for jet/aviation fuel (1)Per Institute on Taxation and Economic Policy 2017 No comprehensive data for other states' marine fuel taxes. However, we believe that in most states the "marine" rate is the "highway" rate. Therefore, our "marine" rate is likely also one of the lowest in the country. 10:41:51 AM Commissioner Hoffbeck turned to Slide 5, "Motor Fuel Tax Proposal," which showed a table that reflected the change in rates over time under the bill. The current price of highway fuel was $.08, and was expected to go up 50 $.16 on July 1, 2017, and $.24 on July 1, 2018. The current price of marine fuel was $.05, and was expected to go up to $.10 on July 1, 2017, and $.24 on July 1, 2018. The current price of jet fuel was $.032, and was expected to go up to $.064 on July 1, 2017 and $.096 on July 1, 2018. They current "off road use' credit was -$.06 and was expected to change to -$.12 in July 2017, and -$.18 in July 2018. 10:42:42 AM Commissioner Hoffbeck displayed Slide 6, "Motor Fuel Tax Impacts (examples)," which showed a table that offered several examples of how the prices would affect Alaskans. 10:44:25 AM Commissioner Hoffbeck moved to Slide 7, "Disposition of Revenues": · Creates "Transportation Maintenance Fund" as a new fund within the General Fund. o Aviation fuel taxes are other funds (dedicated as required for participation in a federal program) under current law o HB 60 moves taxes on highway and marine fuel from Undesignated General Fund to Designated General Fund for budgeting o Creates confidence that revenues from motor fuel will be used to build and maintain transportation infrastructure Commissioner Hoffbeck said that people were more willing to pay a tax when they were given assurances that the fund would support the infrastructure for which the tax was being collected. He related that though the funds could not be dedicated, a designated fund structure would be created within the general fund. [He noted that the slide should reflect SB 25, not HB 60.] 10:45:24 AM Senator Micciche asked how the funds would be accounted for in the budgetary process. Commissioner Hoffbeck stated that the money would be set in separate funds: aviation, marine, and highway, and the money to fund the services for those areas would be drawn from the fund first. He said supplemental funds would come from other general funds sources. Senator Micciche asked whether Commissioner Hoffbeck envisioned earmarking the funds. Commissioner Hoffbeck answered in the affirmative. 10:46:39 AM Senator von Imhof wondered whether there had been an analysis done on how the increase would affect the fees and taxes already paid to the state by large jet airlines. Commissioner Hoffbeck offered to provide a report compiled by DOT that examined landing fees and taxes associated with various airport operations in hub cities. 10:47:50 AM Commissioner Hoffbeck spoke to Slide 8, "Revenue Impact": o Additional revenue about $40 million first year, $80 million per year thereafter ƒ$0.4 million will be shared with municipal-owned airports ƒRemainder: Transportation maintenance fund, special accounts for road, water transport, and aviation facilities o Estimates based on fall 2016 revenue forecast o Does not account for changes in fuel demand or stockpiling Commissioner Hoffbeck noted that approximately $71.4 million would come from marine and highway taxes, and approximately $9.3 million from jet fuel. He shared that the fall 2016 revenue forecast assumed that $370 million gallons of highway fuel would be sold within the state, 120 million gallons of marine fuel, 130 million gallons of jet fuel, and 10 million gallons of aviation fuel. He added that of the 130 gallons of jet fuel that was taxed there was 480 million gallons that were exempt because of the international flight exemption. 10:49:05 AM Co-Chair MacKinnon clarified that the tax was proposed to collect $40 million additional dollars. 10:49:25 AM Commissioner Hoffbeck addressed Slide 9, "Implementation Cost": o Dept. of Revenue must update: ƒTax Revenue Management System (TRMS) ƒRevenue Online (ROL) which allows a taxpayer to file a return and apply for a dealer license online ƒTax return forms o One-time implementation cost of $50,000 to recreate tax forms and reprogram and test the tax system to accommodate the rate changes o No additional costs to administer the tax program Commissioner Hoffbeck qualified that there was minimal cost associated with implementation of the tax. 10:49:59 AM Co-Chair Hoffman asked which airports in the state were municipally owned. Commissioner Hoffbeck agreed to provide the information at a later date. Co-Chair Hoffman wondered how much the average Alaskan benefitted from the taxes on marine fuel. Commissioner Hoffbeck deferred the question to a later date. 10:51:09 AM Vice-Chair Bishop understood that the taxes would be collected at the wholesale level, and not the retail level. Commissioner Hoffbeck answered in the affirmative. Commissioner Hoffbeck listed the municipalities that were receiving payments from the gas tax funds: Yakutat Wrangell Wasilla Venetie Tribal Government Thorne Bay Soldotna Sitka Seldovia Kwinhagak Pelican Palmer North Slope Borough Nenana Kodiak Ketchikan Klawock Kenai Kake Juneau Haines Igiugig Delta Junction Craig Anchorage Akutan 10:52:04 AM Senator Dunleavy asked requested clarification of the definition of "off road use credit". Commissioner Hoffbeck explained that there was a provision within the statute that allowed users to apply for reimbursement of the tax paid on motor fuel purchased in association with the highway tax that was used for non- highway related purposes, such as a four-wheeler. Senator Dunleavy surmised that Alaskan's who used the gas for their four wheelers could apply for the credit. Commissioner Hoffbeck answered in the affirmative. 10:53:21 AM Senator Olson wondered whether the Origin Destination exemption under AS 43.40.100 would remain intact under the legislation. Commissioner Hoffbeck stated that the bill did not change the exemption in any way. Senator Olson thought that the exemption created an unfair advantage for carriers that traveled internationally. Commissioner Hoffbeck replied that the justifiability of the exemption had been questioned. He shared that part of the exemption was federally mandated; if a flight was leaving Anchorage or Fairbanks to land in a foreign destination it could not be taxed. The state had increased the exemption by saying that if a flight was arriving from a foreign destination it would not be taxed, which expanded the federally required exemption. He admitted that the fairness of the exemption was in question, but that generating business was also a consideration. 10:55:35 AM Senator Olson wondered if the administration would be in favor of abolishing the exemption, in order to create a more equal playing field. Commissioner Hoffbeck said that the economics of abandoning the exemption would need to be studied before a determination could be made. 10:56:33 AM MARK LUIKEN, COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, referenced the presentation "Alaska Department of Transportation and Public Facilities - Senate Bill 25" (copy on file). Commissioner Luiken looked at Slide 2, "Scope": o This briefing addresses the Department of Transportation & Public Facilities (DOT&PF) operating budget. o The funds generated by Alaska's Motor Fuel Tax that will be placed in the Alaska Transportation Maintenance Fund (DGF/Other) replace an equal amount of Unrestricted General Funds (UGF) that currently fund DOT&PF's operating budget. ƒUGF to DGF fund swap: $64.8M ƒUGF to Other fund swap (Aviation): $4.5M ƒTotal fund swap: $69.3M o The budget components that are recipients of the fuel tax revenue are the regional Highways & Aviation components and the Alaska Marine Highway System. SB 25 was HEARD and HELD in committee for further consideration. Co-Chair MacKinnon discussed housekeeping.