01/31/2013 08:00 AM House COMMUNITY & REGIONAL AFFAIRS

         HB  40-MUNICIPAL TAX EXEMPTION: FARM USE LAND                                                                      
                                                                                                                                
8:35:22 AM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK announced that the  final order of business would                                                               
be  HOUSE BILL  NO.  40,  "An Act  establishing  a municipal  tax                                                               
exemption for certain farm structures."                                                                                         
                                                                                                                                
8:35:36 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SHELLEY   HUGHES,  Alaska   State   Legislature,                                                               
speaking  as the  sponsor of  HB  40, began  by highlighting  the                                                               
beginnings  of  agriculture  in  Alaska  and  the  potential  for                                                               
increased agriculture in  the state.  The purpose of  HB 40 is to                                                               
strengthen agriculture in the state  even though it's currently a                                                               
small sector  of the state's  economy.  This legislation,  HB 40,                                                               
would provide  municipalities the option to  exempt specific food                                                               
storage and production buildings for  those farmers who derive at                                                               
least 10  percent of their  income from farming activities.   The                                                               
aforementioned  would  benefit  farmers   by  relieving  the  tax                                                               
burden.     Furthermore,  it   would  benefit   Alaskans  because                                                               
residents  would have  increased  access to  locally grown  food.                                                               
Representative Hughes told the committee  that the need for HB 40                                                               
came to light after learning from  farmers that at the end of the                                                               
harvest  season they  were  turning produce  back  into the  soil                                                               
because  it was  too  expensive to  pay the  taxes  to store  it.                                                               
Therefore, residents lose the opportunity  for that produce to be                                                               
available for purchase.   Moreover, the less local  food there is                                                               
in Alaska,  the more food from  the Lower 48 must  be transported                                                               
to Alaska.   The food  from the Lower 48  is likely to  have been                                                               
harvested seven to  nine days before it reaches  store shelves in                                                               
Alaska,  and thus  that food  has  lost some  of its  nutritional                                                               
value.                                                                                                                          
                                                                                                                                
8:39:57 AM                                                                                                                    
                                                                                                                                
GINGER  BLAISDELL, Staff,  Representative Shelley  Hughes, Alaska                                                               
State Legislature,  explained that  HB 40  is fairly  specific in                                                               
its municipal tax  exemption of farm food  storage and production                                                               
buildings for which  at least 50 percent of the  building must be                                                               
used for farm  food storage and production.  The  building has to                                                               
be owned or  leased by an individual that is  actively engaged in                                                               
farming.    This exemption  also  includes  dairy production  and                                                               
milking facilities.   However, HB  40 does not  include slaughter                                                               
houses, basic ranching, or fishing.                                                                                             
                                                                                                                                
8:42:08 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  LEDOUX moved  to adopt  CSHB  40, Version  28-LS0229\N,                                                               
Bullard, 1/28/13, as the working document.                                                                                      
                                                                                                                                
CO-CHAIR LEDOUX objected for purposes of discussion.                                                                            
                                                                                                                                
8:42:54 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   FOSTER  acknowledged   that  it's   an  optional                                                               
program, but  asked if there  has been  any opposition to  HB 40,                                                               
including  from   the  Alaska  Municipal  League   (AML)  or  any                                                               
communities.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HUGHES  said  that  she  was  not  aware  of  any                                                               
opposition, but deferred to her staff.                                                                                          
                                                                                                                                
MS. BLAISDELL  informed the committee  that she has  placed calls                                                               
to  AML, but  not heard  from them.   However,  she said  she has                                                               
spoken  with many  city officials  in various  locations and  the                                                               
local assessors are  very much in favor  of HB 40.   In fact, the                                                               
Matanuska-Susitna Borough is drafting a  resolution in support of                                                               
HB 40.                                                                                                                          
                                                                                                                                
8:44:20 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  REINBOLD spoke  positively regarding  HB 40,  but                                                               
acknowledged    that    the     exemption    will    result    in                                                               
municipalities/boroughs  receiving less  money from  taxes.   She                                                               
then asked  if the  Matanuska-Susitna Borough  is okay  with that                                                               
reduction in tax revenue.                                                                                                       
                                                                                                                                
REPRESENTATIVE HUGHES  related that her  region is fine  with the                                                               
proposal as  they deem it  as important enough to  provide relief                                                               
to the farmers.                                                                                                                 
                                                                                                                                
8:45:37 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE REINBOLD highlighted that HB  40 has a zero fiscal                                                               
note.                                                                                                                           
                                                                                                                                
8:45:45 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  LEDOUX  pointed out  that  the  language  of HB  40  is                                                               
permissive as it uses the term "may."                                                                                           
                                                                                                                                
8:46:13 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DRUMMOND, speaking as  a recent Anchorage Assembly                                                               
member, related  that although  a property  tax exemption  may be                                                               
optional,  there   is  great  difficulty  in   not  offering  it.                                                               
Therefore,   she   expressed   interest  in   the   comments   of                                                               
municipalities and boroughs  in the state.  She opined  that as a                                                               
member  of a  borough  assembly she  would  question whether  the                                                               
significant  amount  of tax  burden  not  received by  the  local                                                               
government will  be shared with the  remaining property taxpayers                                                               
in the borough  or wiped from the books.   She explained that the                                                               
senior  property tax  exemption and  disabled veteran's  property                                                               
tax  exemption in  Anchorage has  been offered  for 25-30  years.                                                               
Although  initially the  state reimbursed  communities for  those                                                               
property tax  exemptions, the state  began to reimburse  less and                                                               
less until  the state  doesn't reimburse  any of  the exemptions.                                                               
For  Anchorage, the  total of  those property  tax exemptions  is                                                               
around $25 million,  which is a sum that can't  be ignored by the                                                               
municipal governing body.  Therefore,  that $25 million is shared                                                               
among all  the other property  taxpayers in the  municipality and                                                               
costs  each municipal  resident a  little more  to provide  these                                                               
exemptions.  She  inquired as to the amount of  property tax this                                                               
would total were all the  farmers who qualified took advantage of                                                               
the proposed exemption.                                                                                                         
                                                                                                                                
REPRESENTATIVE  HUGHES reminded  the committee  that [Version  N]                                                               
specifies  that  farming activity  must  constitute  at least  10                                                               
percent  of  the farmer's  income,  which  is a  protection  from                                                               
abuse.    She  recalled  that  the amount  of  property  tax  the                                                               
Matanuska-Susitna Borough wouldn't receive were  HB 40 to pass is                                                               
estimated to be $3.5 million.                                                                                                   
                                                                                                                                
MS.  BLAISDELL informed  the committee  that  under the  original                                                               
legislation,  which specified  that to  qualify for  the proposed                                                               
exemption 50 percent  of the food storage  or production building                                                               
had to  be used  for farming, the  state assessor  estimated that                                                               
property tax  in the Matanuska-Susitna  Borough to be  about $3.6                                                               
million.    However, in  Version N the qualification  was changed                                                               
to require  the food  storage or production  building to  be used                                                               
almost  exclusively  for  farming,  and thus  the  estimated  tax                                                               
exemption  may  be  less  than  anticipated  under  the  original                                                               
version.   She  related that  Fairbanks  felt the  impact of  the                                                               
proposed  exemption  would  be   negligible  and  Delta  Junction                                                               
doesn't  tax the  farming industry  so there  would be  no fiscal                                                               
impact to them.                                                                                                                 
                                                                                                                                
8:52:05 AM                                                                                                                    
                                                                                                                                
CO-CHAIR LEDOUX  pointed out that  the legislation uses  the term                                                               
"person" rather than "individual."   Therefore, she surmised that                                                               
if  an  individual  formed  a  LLC  or  S  corporation  and  [its                                                               
building] was used exclusively for  farming activity, even if the                                                               
income from  the LLC  didn't constitute more  than 10  percent of                                                               
the  individual's  gross  income  the exemption  would  still  be                                                               
available to the LLC.                                                                                                           
                                                                                                                                
REPRESENTATIVE HUGHES replied yes, it  would be 10 percent of the                                                               
LLC's income.                                                                                                                   
                                                                                                                                
8:53:10 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER  inquired  as  to who  determines  that  a                                                               
person derives at  least 10 percent of their  income from farming                                                               
activity.                                                                                                                       
                                                                                                                                
MS.  BLAISDELL related  her belief  that  it would  be the  local                                                               
assessor.                                                                                                                       
                                                                                                                                
8:54:30 AM                                                                                                                    
                                                                                                                                
STEVE  VAN  SANT,  State  Assessor,  Division  of  Community  and                                                               
Regional Affairs,  Department of  Commerce, Community  & Economic                                                               
Development (DCCED), explained that  typically the local assessor                                                               
calculates  whether  10  percent  of the  person's  yearly  gross                                                               
income is  from farming  activity.  However,  the farmer  has the                                                               
option of  letting the state  assessor's office know  whether the                                                               
farming income  reaches 10 percent  of the farmer's  yearly gross                                                               
income.  He estimated that about  half a dozen farmers send their                                                               
income tax  returns to  the state  assessor's office  rather than                                                               
the local assessor.                                                                                                             
                                                                                                                                
8:55:13 AM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK opened public testimony.                                                                                        
                                                                                                                                
8:55:24 AM                                                                                                                    
                                                                                                                                
DON DYER,  Economic Development Director, Department  of Economic                                                               
Development, Matanuska-Susitna Borough, related  that the cost of                                                               
property  tax  is  a  large  portion of  the  cost  for  farming,                                                               
particularly  for dairies.    Dairies operate  with  a very  thin                                                               
profit  margin and  thus the  proposed tax  exemption would  make                                                               
them more  profitable and  provide an incentive  to expand.   Mr.                                                               
Dyer, as  an owner of a  vegetable farm, related that  because of                                                               
Alaska's weather,  one of the  significant costs is  storage that                                                               
will   keep  vegetables   from  freezing   until  they're   sold.                                                               
Therefore, HB 40 would be a significant help with that.                                                                         
                                                                                                                                
8:57:08 AM                                                                                                                    
                                                                                                                                
LARRY  DEVILBISS,  Mayor,  Matanuska-Susitna  Borough,  began  by                                                               
noting that  he was the  director of the Division  of Agriculture                                                               
for a  few years.   He then stated  his support  for HB 40  as it                                                               
provides another strategic tool  to incentivize and increase food                                                               
production  in the  state.   He  was supportive  of  it being  an                                                               
optional exemption,  which if administered as  the other property                                                               
tax exemptions  would be by  an application process  during which                                                               
it's  scrutinized  closely.    With  regard  to  the  senior  and                                                               
veteran's property  tax exemptions, Mayor DeVilbiss  reminded the                                                               
committee that those  are mandatory exemptions.   The proposal in                                                               
HB 40 is an optional and flexible  tool for which he has heard no                                                               
negative feedback.   He  informed the  committee that  although a                                                               
resolution  in  support of  HB  40  is on  the  Matanuska-Susitna                                                               
Borough's upcoming agenda,  he expressed the need  to ensure that                                                               
the  use of  the term  "person"  does include  those farmers  who                                                               
operate as an LLC, which is the case for most farmers.                                                                          
                                                                                                                                
8:59:32 AM                                                                                                                    
                                                                                                                                
CO-CHAIR NAGEAK closed public testimony.                                                                                        
                                                                                                                                
8:59:48 AM                                                                                                                    
                                                                                                                                
MS. BLAISDELL  pointed out the  following changes  encompassed in                                                               
Version N.   In Version N,  the term "individual" was  changed to                                                               
"person"  at  the  request  of   farmers  and  Legislative  Legal                                                               
Services. The term  "individual" means that a  single person owns                                                               
and operates  the farm and  its structures and would've  been the                                                               
only people eligible under  HB 40.  In Version N,  the use of the                                                               
term "person" means that the  legislation applies to individuals,                                                               
LLCs,  and  other  types  of financial  corporations  such  as  S                                                               
corporations.   While  that language  change  broadens who  could                                                               
benefit from  the legislation,  the sponsor  felt the  change was                                                               
important   because  of   the   current   structure  of   farming                                                               
organizations.                                                                                                                  
                                                                                                                                
9:01:27 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  LEDOUX  withdrew  her  objection  to  the  adoption  of                                                               
Version N.   [There being no further objection,  CSHB 40, Version                                                               
28-LS0229\N,  Bullard,  1/28/13,  was   adopted  as  the  working                                                               
document.]                                                                                                                      
                                                                                                                                
9:01:37 AM                                                                                                                    
                                                                                                                                
CO-CHAIR  LEDOUX moved  to report  CSHB 40,  Version 28-LS0229\N,                                                               
Bullard,   1/28/13,    out   of   committee    [with   individual                                                               
recommendations and the accompanying fiscal notes].  There being                                                                
no objection, CSHB 40(CRA) was reported from the House Community                                                                
and Regional Affairs Standing Committee.