Legislature(2017 - 2018)ADAMS ROOM 519
04/09/2018 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB129 | |
| HB233 | |
| HB399 | |
| SB165 | |
| HB306 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 233 | TELECONFERENCED | |
| + | SB 165 | TELECONFERENCED | |
| + | HB 306 | TELECONFERENCED | |
| += | HB 399 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 129 | TELECONFERENCED | |
HOUSE BILL NO. 399
"An Act disallowing a federal tax credit as a credit
against the corporate net income tax; repealing a
provision allowing the exclusion of certain royalties
accrued or received from foreign corporations for
purposes of the corporate net income tax; repealing
the reduced rate for the alternative tax on capital
gains for corporations; repealing an exemption from
filing a return under the corporate net income tax for
a corporation engaged in a contract under the Alaska
Stranded Gas Development Act; and providing for an
effective date."
3:18:43 PM
Co-Chair Foster invited his staff to the table to begin his
presentation.
BRODIE ANDERSON, STAFF, REPRESENTATIVE NEAL FOSTER,
explained that the opening remarks would be similar to a
piece of legislation that was heard in House Finance in the
previous week. Mr. Anderson read from a prepared statement:
HB 399 is a result of work done over the last few
years with various legislators to address foregone
revenue and to provide the state with the ability to
potentially capture new revenue.
Starting in 2014, the legislation was passed that
required both the Department of Revenue (DOR) and
Legislative Finance to create a report on indirect
expenditures in the amount of foregone revenue not
captured by the state. The first indirect expenditure
report was submitted in 2015. In that report, it
identified a list of indirect expenditures within DOR
that should be terminated.
Last year during the FY 18 budget process, House
Finance Subcommittee for the Department of Revenue
reviewed those indirect expenditures and recommended
the House Finance Committee offer legislation that
eliminates these indirect expenditures.
HB 399 repeals certain credits and exemptions from the
recommendations offered both in the indirect
expenditure and the subcommittee. The indirect
expenditures repealed in HB 399 were selected for the
following reasons: The indirect expenditures did not
meet legislative intent, had limited benefit or wasn't
used, or the purpose of conformity has change since
the credit, or exemptions were created.
House Finance Committee, House Bill 399 repeals the
following indirect expenditures:
• Federal Tax Credits - Currently tax payers can
claim 18 percent of all federal credits against
their corporate income tax regardless of where
the credits were earned. The Department of
Revenue provided an example of a housing credit
that would be eligible to be earned in New York
to be claimed against Alaska's tax liability for
that corporation here.
• Foreign Royalty Exclusions - Currently, tax
payers can hold 80 percent of their foreign
royalty payments against their corporate tax
liability.
• Reduced Rate for Capital Gains - Under Alaska
statutes, Alaska corporate tax payers have a
reduced rate of 4.5 percent on their capital
gains profits. With this repeal capital gains
would be treated like all other profits. In 1986,
the federal government removed their recognition
of a reduced rate for capital gains and then more
recently, through the Trump Administration tax
reform, they went ahead and cleaned up the
language repealing the complete capital gains
section within the federal URC.
• Credit associated with the Stranded Gas Act -
This credit was never utilized to encourage
development under the Stranded Gas Act.
The combined total of potential new revenue is
estimated to be $6.9 million according to the fiscal
note in front of the committee.
3:23:43 PM
Mr. Anderson read the sectional analysis:
Section 1
Statute: AS 43.20.021 (a)
Change: Amends current section
Purpose or Effect: Conforming language, removes the
list of federal credits as eligible items against
Alaska corporate income tax liability.
Indirect Expenditure Item: Federal Credits
Section 2
Statute: AS 43.20.145 (c)
Change: Amends current section
Purpose or Effect: Conforming language for "Affiliated
Groups", removing the reference to the subsection on
foreign royalty payments as eligible Alaska corporate
income tax liability.
Indirect Expenditure Item: Foreign Royalty Exemption
Section 3
Statute: AS 43.20.145 (d)
Change: Amends current section
Purpose or Effect: Conforming language for "Affiliated
Groups", removing the reference to subsection on
foreign royalty payments as eligible Alaska corporate
Income tax liability.
Indirect Expenditure Item: Foreign Royalty Exemption
Section 4
Statute: Repealer Section
Change: Repeals statutes
Purpose or Effect:
AS 43.20.021 (c)
Repeals the reduced rate for capital gains income.
Indirect Expenditure Item: Capital Gains
AS 43.20.21 (d)
Repeals the eligibility of federal credits for Alaska
corporate income tax liability.
Indirect Expenditure Item: Federal Credits
AS 43.20.036 (a) -
Repeals the eligibility of federal foreign tax credit
for Alaska corporate income tax liability.
Indirect Expenditure Item: Federal Credits
AS. 43.20.036 (b)
Repeals the eligibility of federal investment credit
for Alaska corporate income tax liability.
Indirect Expenditure Item: Federal Credits
AS 43.20.042
Repeals the eligibility of federal special industrial
incentive investment credit for Alaska corporate
income tax liability.
Indirect Expenditure Item: Stranded Gas Act Exclusion
AS 43.20.144 (g)
Repeals the exemption for Alaska Corporate tax
liability
for entities participating in contracts related to the
Stranded Gas Act.
Indirect Expenditure Item: Foreign Royalty Exclusion
AS 43.20.145 (b)(3)
Repeals the foreign royalty exclusion.
Indirect Expenditure Item: Stranded Gas Act Exclusion
AS 43.20.145 (g)
Repeals the Stranded Gas Act exclusion.
Indirect Expenditure Item:
Section 5
Statute: Uncodified Law
Purpose or Effect: Applicability Sections 1, 2, 3, and
portions of Section 4 as stated are subject to the
effective date.
Section 6
Statute: Uncodified Law
Change: Adds new section
Purpose or Effect: Transition: Regulations
Effective Date is January 1, 2019
Co-Chair Foster invited Mr. Spanos to the table for
questions.
Representative Wilson asked if the Capital gains being
discussed had to do with Alaskan projects.
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE, clarified that the capital gains
rate would apply to any capital gain under the federal
code. He added that when the language was originally
drafted there was a capital gains rate in the federal code.
The federal tax reform of 2017 removed it. It was the
Department of Revenue's position was that the bill was a
clean-up bill. Because the capital gains rate no longer
existed at the federal level, it no longer existed at the
state level. The state statute pointed to the statute that
was now gone. It was for any long-term capital gain a
corporation had.
Representative Kawasaki asked if it was possible to get an
idea of how many tax payers there were in each of the
different groups. He suspected the division would not be
able to release names because of confidential tax payer
information. Mr. Anderson responded in the affirmative. He
referred the committee to a letter in the back up materials
from the DOR. He relayed that for the reduced tax rate on
capital gains in 2015, the state had 195 recipients
equaling about $3.3 million of impacted revenue.
Representative Kawasaki found the handout with the
information.
3:27:14 PM
Co-Chair Foster OPENED public testimony.
KARA MORIARTY, PRESIDENT, CEO, ALASKA OIL AND GAS
ASSOCIATION (AOGA), read from a prepared statement:
Co-Chair Foster, Co-Chair Seaton, Members of the
Committee:
For the record, my name is Kara Moriarty and I'm the
President/CEO of the Alaska Oil and Gas Association,
commonly known as "AOGA." AOGA is a professional trade
association for the oil and gas industry and I thank
you for the opportunity to discuss the reasons of our
opposition to House Bill 399. Although I am here on
behalf of a diverse group of companies, my testimony
today represents the thoughts and sentiments of each
member, which was approved by unanimous consent.
As I mentioned, I did email the committee more
detailed comments for the record, but in the interest
of time I wanted to summarize our position and
concerns with this bill.
This bill makes several changes to how tax payers
compute Alaska corporate income tax. One of the major
changes is in Section 1 which is categorically
repealing a long list of federal tax credits to keep
them from being used and determining Alaska tax. In
the larger document I included the full list of these
credits in the written testimony.
A number of these federal tax credits do seem unlikely
ever to be used by a company doing business in Alaska.
They could stop being adopted by reference for purpose
of Alaska's income tax without impacting any tax
payers. Yet, except for the historically based
credits, like those for Hurricanes Katrina, Rita, and
Wilma, which were very time specific because they all
occurred in 2005, why should and why would Alaska
preemptively disallow credits for activities simply
because those activities don't occur here yet (almost
similar to the conversation you were having on the
previous bill about sporting tournaments). So why not
leave the door open to credits for bringing new
activities to Alaska. If there proves to be a problem
with the federal credit for Alaskan purposes, then it
could be dealt with at the specific time.
It seems far more appropriate and prudent to my
members to consider the merits of these credits
individually since a good number of them do seem to
reflect sound tax policy for Alaska's purposes. A
couple of examples: Why would you want to exclude the
credit under Internal Revenue Code, Section 45(a), for
employing Alaska Natives to be disallowed. We think
it's good policy for the state to encourage the hiring
of Alaska Natives? Similarly, why should the credit
under Internal Revenue Code, Section 45(p), be
disallowed for Alaskan employers who make up the wage
difference for employees on active duty in military
service? Certainly, I used to be very involved with
the employer support of the Guard and Reserve. We know
we have a lot of people in Alaska who serve in the
National Guard and similar services. Why should
Alaskan small employers providing health insurance for
their employees not get a tax credit for those costs
under Internal Revenue Code, Section 45(r). Again, the
majority of businesses in Alaska are small.
Coming to our own industry, why should the enhanced
oil recovery, or the EOR credit under Internal Revenue
Code, Section 43(a) be disallowed for our corporate
income tax under Alaska Statute 43.20. Surely getting
more oil out of Alaska's aging fields is a good thing.
It's essential for our future, for the industry, and
both for the state.
Specifically, on the EOR credit, it is different than
most of the credits in our current tax system and it's
different in two important ways. First, the credits
that have been most talked about recently in Alaska's
tax code were primarily credits against the production
tax. While HB 399 deals generically with federal tax
credits that Alaska adopted many years ago for the
corporate income tax under AS 43.20.
3:32:13 PM
Ms. Moriarty continued reading from a statement:
Second, and more fundamentally, oil companies' taxable
income is based on their worldwide net income and part
of that net income is apportioned to the Alaskan part
of the business on the basis of the percentages of
their worldwide production, worldwide sales, and
worldwide property at original cost that are in
Alaska.
This means an oil company could actually be losing
money in its Alaska business but still have sufficient
profits elsewhere to have a positive net income
overall of which a part would be apportioned to the
Alaska business on the basis of these percentages and
taxes.
All of this brings us to a second major point overall
with this bill. Just last year HB 111 created the
legislature's oil and gad fiscal system working group,
a bicameral, bipartisan working group to analyze the
state's oil and gas fiscal regime. The working group
to-date, has only met twice since HB 111 was passed
last session and both meetings were more
organizational in nature and they have not yet
considered major policy issues, much less ever
discussed how to change the present fiscal regime. We
would encourage you to think about putting this bill
aside and allowing the legislative working group to do
its work including considering changes to the
corporate income tax.
On the remaining sections of the bill there is a
serious constitutional issue with the language of
Alaska Statute 43.20.145 that HB 399 does not yet
address, which is the definition of "affiliated
group." Again, the written testimony goes into much
more detail on this point. But, if HB 399 is going to
be amending this section of statute AS 43.20.145 we
think that it should replace the obsolete text in that
paragraph based on the 50 ownership or more which
dates back to 1978 and replace it with the unitary
business concept that the United States Supreme Court
has extensively developed after Alaska adopted that 50
percent ownership percentage. We think if you are
going to be making changes, it would be prudent to
make a similar amendment to AS 43.20.144(h)(ii) for
oil companies.
3:34:50 PM
Section 3 doesn't necessarily pertain to us but we
just wanted to highlight that it would repeal the
reference to royalties from the existing phrase of
dividends and royalties taxable to a corporation.
These royalties, again, are not royalties in the oil
and gas sense that we're all very familiar with, but
our royalties used for using intellectual property or
something that has been invented and patented, which
is very commonplace. Again, it did not have an impact
to our members but just thought we would highlight it.
Section 4 repeals eight existing sections. The rest of
the written comments goes into much detail.
I would just close, Mr. Chairman by saying we
currently oppose the bill for those various reasons.
It is more complex than it seems because it is
repealing several sections of federal tax code or our
ability to use credits from the federal tax code. We
would just encourage to utilize the working group for
that purpose.
Representative Kawasaki mentioned that in Ms. Moriarty's
testimony she had mentioned the Internal Revenue Code (IRC)
45(a) for employing Alaska Natives and IRC 45(p) which
talked about active duty military service and another
regarding providing insurance. He asked if corporations did
not currently take advantage of the specific credits she
noted.
Ms. Moriarty answered that they believed corporations were
taking advantage of the credits. Her understanding was that
HB 399 would repeal the ability for corporations to do so.
She reiterated that the legislature might want to take a
pause to really evaluate the laundry list of tax credits
that were under consideration to be repealed to make sure
they were understanding the full impact.
Representative Kawasaki asked if there were companies that
could voluntarily provide information to confirm that they
took advantage of the IRC 459(a) for instance, or the IRC
45(p) for active duty military. Could a company voluntarily
provide the information. He would like to hear from
companies that took advantage of the credit.
Ms. Moriarty replied that if a company wanted to
voluntarily disclose any portion of what they paid in
federal or state taxes, they were entitled to do so. She
could follow up with member organizations to find out if
there was anyone wanting to provide specific examples. She
also suggested reaching out to other Alaska Native
corporations and their subsidiaries, the Alaska Chamber of
Commerce, Resource Development Council, and other business
organizations. She reemphasized that the tax committee was
filled with brilliant minds who loved to get into the
details. As they were getting into the details little red
flags went off prompting the question about whether the
sections should be repealed.
3:38:25 PM
Representative Wilson asked about the foreign royalty
portion of the bill. She wondered about the impact to the
oil industry. Ms. Moriarty deferred to DOR.
Co-Chair Seaton asked if she was saying that the statute
was repealing the federal tax credit. Companies could still
take advantage of those federal tax credits on their
federal returns. They would just not be able to deduct them
against their state corporate income tax. He wondered if he
was correct.
Ms. Moriarty answered in the affirmative. The state
legislature did not have the ability to repeal federal tax
code. However, the legislature had the ability to disallow
companies from using an apportionment against the Alaska
Corporate income tax (companies could not take the full
federal tax credit anyway). However, it was an example of
an incentive the state could offer to make Alaska look more
attractive than other states in the nation.
Co-Chair Foster CLOSED public testimony. He provided the
committee email address for additional written testimony
submissions.
Representative Wilson referred to the fiscal note, OMB
2476, by DOR on page 2. It showed the change in revenue and
had it split out. She asked about the federal credits of
$1.8 million and the reduced rate on capital gains. She
wondered if they were no longer available through the
federal government.
Mr. Spanos responded that the changes on page 2 for federal
credits of $1.8 million and foreign royalties of $1.7
million in revenue impact would only apply if the bill were
to pass. The Department of Revenue had generated the fiscal
note prior to discovering that the reduced rate for capital
gains was affected by the federal tax reform. The
Department of Law noted that the capital gains rate was
eliminated in the federal code and no longer available to
an Alaskan corporation. He confirmed that the $3.4 million
was gone, but the $1.8 million and $1.7 million would be
revenue added to the general fund if the bill were to pass.
Representative Wilson asked for clarification regarding a
foreign royalty.
Mr. Spanos replied that a foreign royalty was only
available for a water's edge corporation, a non-oil and gas
company. Oil and gas companies filed under the worldwide
apportionment which included their income from everywhere.
He had used an example in a previous hearing about total
income being the pie. For oil and gas companies that pie
was their worldwide income. Whereas, for all other non-oil
and gas companies the pie was called "Water's edge" or "US"
income.
3:42:49 PM
Representative Wilson asked if the federal credit applied
to all industries. Mr. Spanos replied that the federal
credit would apply to both oil and gas and non-oil and gas.
Mr. Anderson added that Alaska was currently the only state
that copied all federal credits. He suggested that many
states either piggy-backed on a federal tax credit or would
have language stipulating that federal tax credits applied
only to the expenses that occurred in the state. If a
corporation used a federal tax credit in the state, they
would potentially be eligible for the federal tax credit at
18 percent. He referred to IRC 45(a), the Indian Employment
credit. Any multi-state corporation hiring federally
recognized Indian employees would be able to hold 18
percent of that credit against their Alaska tax liability.
Many states applied it to what was incurred in-state. He
encouraged Mr. Spanos to expand on his comments.
Mr. Spanos noted that the federal credits included what was
available on the federal tax return which was unusual in
that most states would want to incentivize something in
their own state. Alaska's statute would allow the credit
for an expense anywhere. He thought it was important to
note that if it was the intent of the legislature to allow
a credit to incentivize something in Alaska, it would be an
Alaska specific credit rather than a federal credit.
Representative Wilson asked if the bill would be removing
all of it. However, it was possible to insert language that
would tie a federal credit to Alaska. Mr. Anderson
confirmed she was correct. It would be a policy decision by
the legislature.
Representative Guttenberg asked Mr. Spanos to describe the
foreign royalties credit being repealed. Mr. Spanos
explained that what was being repealed was for a water's
edge company (non-oil and gas company) to be allowed an 80
percent exclusion of foreign royalties. For example, if
Company A held a patent and had a foreign affiliate Company
B using the patent, Company B would pay Company A royalties
for the use of that patent. Company A would be able to
exclude 80 percent of those royalties.
3:47:02 PM
Mr. Anderson used Microsoft as an example regarding their
cloud option. The company had been paying a royalty to
Ireland to run the Cloud. If Microsoft had a corporate
income tax in Alaska, they would be able to apply 80
percent of the royalty payment amount against Alaska's
corporate tax liability.
Representative Pruitt suggested that the state might be
putting itself at a disadvantage by repealing the credit.
It might limit the appeal to a future large investor such
as Microsoft or Google.
Mr. Spanos could not speak to any specific company or the
representative's example. However, in general, if the
intellectual property was foreign owned and an Alaskan
business was receiving a royalty from that foreign
business, it would be unusual for a state to allow an
exemption of that income from a foreign payor.
Co-Chair Foster indicated that amendments were due by
5:00 P.M. on Wednesday, April 11, 2018.
HB 399 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster announced that the committee would be
taking a 10-minute break until 4:00 P.M.
3:50:16 PM
AT EASE
4:01:50 PM
RECONVENED