SB 137-ELCTRNC TAX RETURN;MINING LIC. TAX & FEES  4:17:27 PM CHAIR GIESSEL announced consideration of SB 137. JERRY BURNETT, Deputy Commissioner, Department of Revenue (DOR), thanked the committee for hearing the governor's mining tax bill. He said since 1913, Alaska has had a mining tax. The original mining license tax was .5 percent on mining net income over $5,000 collected on both net income from mining operations and from mining-related royalties. So, an owner collecting the royalties would pay a mining tax, as well as the operator of the mine. It came primarily from businesses engaged in coal and hard rock mining; gravel pits and quarry rock were exempt from the tax. He said there were numerous changes from 1915-1953, but in 1951, the Territorial Legislature adopted a 3.5 year exemption for new mining operations. The current tax structure, in place since 1955 (pre-dating statehood) is as follows: incomes of zero to $40,000 pay no tax; incomes from $40,000 to 50,000 pay $1,200 plus 3 percent over $40,000; incomes from $50,000 to 100,000 pay $1,500 plus 5 percent over $50,000, and incomes over $100,000 pay $4,000 plus 7 percent over $100,000 net. 4:20:14 PM ED FOGELS, Deputy Commissioner, Department of Natural Resources (DNR), Juneau, Alaska, said Alaska has six major mines that are currently operating and about 570 smaller placer and suction dredge operations that were permitted in 2015. The top 200 of those register enough on the tax scale and contribute as much to the economy as one major large mine. There are 34,197 active mining claims on state land. Of the six large operating mines, five are hard rock mines and one is a coal mine and are as follows: 1. The Red Dog Mine is an open pit lead and zinc mine and is operated by Teck Alaska, Incorporated, on NANA Native Corporation land; it is one of the largest zinc producers in the world and employs 610 people. 2. The Fort Knox Mine is an open pit gold mine near Fairbanks on state and private lands and is operated by Fairbanks Gold Mining and has 600 employees. It is the largest taxpayer of the Fairbanks North Star Borough. 3. The Pogo Mine is an underground gold mine located 38 miles northeast of Delta Junction on state land. It's operated by Sumitomo Metal Mining and employs 320 people. 4. The Usibelli Coal Mine is operated by Usibelli Coal Mine Incorporated, is owned by a local family, and employs 140 people. 5. The Kensington Mine is an underground gold mine located near Juneau and is operated by Coeur Alaska on Forest Service land. 6. The Greens Creek Mine, also operating on Forest Service land, is an underground silver, zinc, lead and gold mine located close to Juneau and is operated by Hecla Greens Creek Mining and employs 415 people. He said that the Nixon Fork Mine has been in temporary cessation since 2013, but it has been maintained and monitored, and hopefully will open again. 4:22:53 PM CHAIR GIESSEL asked why Nixon Fork is suspended at the moment. MR. FOGELS answered the reason is that commodity prices right now are too low and the expense of the operation is too great to justify operating. He thought the company was looking for more investors. CHAIR GIESSEL said one could construe that economic factors affect the ability of a mine to continue operating. MR. FOGELS agreed. CHAIR GIESSEL asked what assessment was done on the proposed tax as far as its effect on a mine like Nixon Fork. MR. BURNETT answered that the department looked at the tax on net income so as economic factors go down the tax will also go down. In fact, from the time they started looking at this tax proposal the estimated revenue went down from $12 million to $6 million. They have discussed this with the mining companies and found that the tax rate is much less of a concern to them, because it is on net income and is still fairly low, than suspending the tax holiday. CHAIR GIESSEL pointed out that Nixon Fork closed for economic reasons and increasing taxes would accelerate those economic reasons for other mines. SENATOR STOLTZE asked if any of the operating mines are in unincorporated areas. MR. FOGELS said that Pogo and Nixon Fork Mines are in unincorporated areas. SENATOR STOLTZE asked if there were any local, production or severance taxes. MR. BURNETT answered that he didn't have all the details, but the Fort Knox Mine is the largest taxpayer in the Fairbanks North Star Borough and the Greens Creek and Kensington Mines are the one and two largest taxpayers in Juneau. The Red Dog Mine pays a Payments in Lieu of Taxes (PILT) and a severance tax to the Northwest Arctic Borough and is the only taxpayer there. He said these mines are an important source of local income and they build a tremendous amount of infrastructure. In Juneau, residents enjoy hydropower and lower electric rates, and its third largest taxpayer is the privately owned electric utility that was actually built to service the local mines. Clearly, large mines are a major source of local revenue and a major contributor to local infrastructure in those areas where they are located. SENATOR STOLTZEE commented that in previous revenue bills on other industries, an analysis of government take was part of the administration's presentation. He asked if there would be an analysis of government take. 4:28:04 PM CHAIR GIESSEL concurred and asked Mr. Burnett for a summary of government take for each of the operating mines. MR. BURNETT replied that he can't do that for individual mines, because that is confidential information, but he could do it for mines as a group. In 2014, 13 taxpayers were in the upper bracket, which probably means multiple ownership of those mines. The total income amongst that group was $571 million and they paid $37,853,000 in state mining license tax. The other 490-plus mine license taxpayers that filed had a total net income of $1 million. 4:30:00 PM SENATOR STEDMAN said Alaska can't get the mining industry off the ground, because it is just too remote and too expensive, also called green-field costs, to do here. The tax structure is not what is stopping it, because there is no mining tax for all practical purposes. However, for the Niblack and the Bokan Mines in Southeast, taking away the three-year window in the beginning just creates another hurdle. Those two mines could bring a lot of benefits to that region, so he was a little bit gun-shy about putting up more hurdles for these mines that are trying to open. SENATOR WIELECHOWSKI said a study was done a few years ago under the Palin Administration comparing Alaska's mining tax to other states' and countries' around the world. It seemed to have some good ideas and didn't recommend tax increases. However, it noted that Alaska's tax structure is very old, going back to 1955, and there was some thought about updating the structure. He asked to get a copy of that study, because he thought it could be helpful in making other changes to encourage development and exploration. 4:33:59 PM MR. BURNETT said he was aware of the study and would find out if it is available. SENATOR COGHILL said they may not be able to get the whole picture of mines and their value, but they need to know, for one thing, if there is a royalty base. 4:34:52 PM MR. FOGELS responded that DNR's role is not to tax, but to collect the royalties and property rentals. There are 34,197 mining claims and those generated $6.07 million in 2014. All the claims - upland and offshore mining leases and some coal leases - generated $6.8 million in 2014, while production royalty generated $7.07 million, and coal leases generated $2.3 million. SENATOR COGHILL said some of his constituents tell him that miners don't pay royalties, but they do. It's just small, because they are a smaller mining business. MR. FOGELS added of the six operating mines, only two are on state land that pay royalty: Usibelli Coal Mine and Pogo Mine. The Fort Knox Mine is on Mental Health Trust Land and private lands, the Kensington and Greens Creek Mines are on federal land, Nixon Fork is on BLM land and Red Dog is on NANA land. 4:38:02 PM SENATOR COGHILL said he wanted people to realize that the state is the landlord to only a small portion of mines. When it comes to taxation, in Alaska anything green field requires defending its permitting system in court. Those who come to explore up here also have to defend themselves in court for the right do what is quite often permitted. This is a universe of permitting costs that at the end of the day it is a "deafening taxation" of a different style, and it needs to be quantified as the state tries to get its resource industries engaged and working. SENATOR STOLTZE wanted a better grasp of the administration's policy behind the proposed taxation. Is it purely to fill the revenue shortfall, because it's pretty small and may actually be counterproductive. The idea is to grow the pie not get sinew off a diminished carcass. MR. BURNETT responded that the policy behind the legislation is parts of all the factors Senator Stoltze mentioned. Part of it is to fill the state treasury, but if the state proposes to spend money on mine infrastructure and facilities, it is possibly politically more palatable if people see that the state is collecting revenue from the mining industry (that would be reallocated back to it). "The industry has to be seen that it is paying its way." 4:41:05 PM SENATOR STOLTZE commented that his takeaway from Mr. Burnett's reply is that the legislature has to demonstrate credibility to the public before embarking on fiscal policy and plans and taxation regimes. SENATOR STEDMAN asked if the mining industry does separate accounting. MR. BURNETT replied that the license tax is separate accounting on the mining operations in Alaska. Corporate income taxes, as with the rest of the state's corporate income tax structure, are allocated based on various factors. For one, it's a portion of their U.S. income tax. SENATOR COGHILL said tradeoffs always happen with taxation, and he is not against the mining industry putting money into state coffers if the real value can be seen. However, the state already has the large mines contributing the cost of permitting. MR. FOGELS answered that was correct; the large mine permitting process has evolved to where companies enter into an agreement with DNR to coordinate permitting that is 100 percent reimbursable to DNR, the Department of Environmental Conservation (DEC), Alaska Department of Fish and Game (ADF&G), Department of Health and Social Services (DHSS) or any other agency that is actually involved in permitting. It is totally voluntary. 4:44:16 PM SENATOR COGHILL said the larger mines generally have to go through a national environmental policy (NEPA) process where the smaller mines probably wouldn't have to, but the smaller mines would still have to go through the licensing tax. MR. FOGELS said that was right. 4:44:57 PM CHAIR GIESSEL asked what the Red Dog Mine has to reimburse the Alaska Industrial Development and Export Authority AIDEA for in the construction of its road. Is there any still outstanding debt? MR. BURNETT said they are still paying, but he would have to get the specific numbers for her. CHAIR GIESSEL said the social impacts have to be considered, though it is an unquantifiable item, - like when the Nixon Fork Mine shut down. She asked if there was a known number of jobs lost from that. MR. FOGELS answered that 30 to 40 people worked that project. SENATOR COGHIL, for context, asked the value of the 3.5 year exemption on the mining tax for new operations and if it is a diminishing value. MR. BURNETT answered that currently a large mine, in particular, has a large capital construction budget over a long period of time. So, at the beginning of operations, the first 3.5 years are not subject to tax, which is quite valuable. The proposal to remove this is based on a set of assumptions that the mine will still be economic and that removing it won't affect any major mining project during the period on the fiscal note. 4:48:18 PM SENATOR WIELECHOWSKI asked what a production curve for a standard mine looks like, because he knows that oil companies produce huge amounts of oil at first to recoup their costs and then production declines pretty steadily. MR. FOGELS said typically the production curve for a mine goes up quickly to a peak and then depending on the nature of the ore body it stays high, and then as the ore body is depleted, unless additional reserves are found, production might trickle down depending on the grades. Typically the highest grades are produced first to try and recoup those high upfront capital costs. SENATOR WIELECHOWSKI asked for a model of how much the state would have made on other mines and asked if he had any predictors on future hard rock mines. SENATOR COSTELLO wanted more information about the context of this tax proposal. Did the administration use several guiding principles, or was it just a sentiment of "everyone is going to feel the pain?" How much of the fiscal gap will this tax address versus what amount of foregone revenue from projects being shelved actually contribute to the deficit? MR. BURNETT responded that there were a lot of discussions. One factor was that they didn't want to leave any portion of the economy out because of fairness issues. 4:51:25 PM SENATOR STEDMAN said on the positive side, the tax structure has been in place since 1955, so there is a lot of stability, which he thought was a good sign. But in 1955 the state didn't have automation and computerization. This bill requires electronic filing, which is good, but will there be savings within the department by switching? MR. BURNETT answered that the department did not intend to add or delete any positions as a result of passage of this bill. However, because the legislature appropriated $35 million in 2011 to allow for a new custom off-the-shelf tax management system that is now operating for all tax types, the department has been able to delete some Tax Division positions over the past two years. None of these bills will change how the department does business significantly enough to affect its position count. A small increment is needed for changing the program and forms and changing tax rates, but after that it's steady. That is one of the reasons they didn't make changes in tax structures. 4:53:42 PM SENATOR COSTELLO asked Mr. Burnett to clarify the statement that position counts were expected to change, specifically that instituting an income tax would require additional people. MR. BURNETT clarified that he was referring to changing existing taxes. Any new taxes will require additional staffing. CHAIR GIESSEL said the lens they look at these taxes through is how a proposed tax affects Alaska families, businesses and jobs. They talked briefly about the Nixon Fork Mine, which is in a very rural area with very few jobs to begin with, and the loss of jobs when the mine closed. She said this committee is interested in growing the pie. A Livengood mine (a massive gold and limestone (for cement) deposit) that is in pre-permitting would diversify the economy, and provide a commodity at a much lower cost than having to ship it in, which is done now. She asked what was considered as far as the economic impact of removing the 3.5 year tax holiday on the Livengood development, which is, at this point, at a standstill because of commodity prices. MR. BURNETT said he didn't know the specifics, but he would provide the committee the information that is available on that project. 4:56:27 PM SENATOR COGHILL said they need to look at modeling capital investment and capital gain to see if the state is missing part of that top. 4:57:46 PM SENATOR MICCICHE said he was worried about how the tax policy is presented across the board. Alaska had been blessed with enormous revenues from the North Slope that has provided an economy through the government structure. Some agree that is appropriate and some disagree, but it is something that can occur at $107 a barrel oil and not something that can occur at $30 a barrel. He said the state's tax policy seems to be looking to continue that government economy even though the state doesn't have the revenue. He supported some of the measures that have come before the legislature this year, but he worries that they are trying to harvest too much from the producers in the state that really have the potential to provide jobs at $30 a barrel oil and provide a sustainable job market as the oil price recovers in the future. He said Alaska is a resource rich state with nothing but potential and he hoped they weren't dis-incentivizing future projects with some shortsighted revenue outlooks today. CHAIR GIESSEL thanked him for those comments. MR. BURNETT continued that the mining tax proposal increases the tax rate on the highest bracket from 7 to 9 percent and removes the 3.5 year exemption for new mines. It requires electronic filing and adds an application and renewal fee for the tax license, which is a substitute for a business license. SENATOR MICCICHE asked the department to provide an approximate bracketed government take that isn't related to actual income. The other taxes, which are in the public record, could supplement that approximation. MR. BURNETT said he would do his best to get that information. SENATOR WIELECHOWSKI said that this was the first time in his tenure as a legislator that mining taxes were being deliberated. He also asked for details about how Alaska stands relative to the mining industry in other states and countries. SENATOR COSTELLO also want to know how long the average permitting window is for mining in other states.