03/28/2018 01:00 PM House RESOURCES

          HB 399-CORP. TAX: REMOVE EXEMPTIONS/CREDITS                                                                       
                                                                                                                                
1:04:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON announced  that the  first order  of business                                                               
would be  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."                                                                                                                
                                                                                                                                
1:05:02 PM                                                                                                                    
                                                                                                                                
BRODIE ANDERSON, Staff, Representative  Neal Foster, Alaska State                                                               
Legislature,  introduced  HB  399  on  behalf  of  Representative                                                               
Foster, co-chair  of the  House Finance  Committee, sponsor.   He                                                               
said  HB 399  is  the  culmination of  work  to address  foregone                                                               
revenue and  to provide the State  of Alaska with the  ability to                                                               
potentially capture new  revenue.  To provide a  brief history on                                                               
how  the bill  came  to  be introduced,  he  noted  that in  2014                                                               
legislation  was  passed that  required  both  the Department  of                                                               
Revenue (DOR)  and the Legislative Finance  Division, Legislative                                                               
Agencies   and  Offices,   to  create   a   report  on   indirect                                                               
expenditures and the  amount of foregone revenue  not captured by                                                               
the State of  Alaska.  The first indirect  expenditure report was                                                               
submitted in  2015 [entitled, "2015 Legislative  Finance Indirect                                                               
Expenditure Report"].  This report  identified a list of indirect                                                               
expenditures  within the  Department  of Revenue  that should  be                                                               
terminated.  Last year during  the fiscal year 2018 (FY18) budget                                                               
process  the House  Finance Subcommittee  for  the Department  of                                                               
Revenue reviewed these indirect  expenditures and recommended the                                                               
House Finance  Committee offer legislation that  eliminates these                                                               
indirect expenditures.                                                                                                          
                                                                                                                                
MR. ANDERSON  explained HB 399  would repeal certain  credits and                                                               
exemptions that are recommended for  termination in both the 2015                                                               
indirect  expenditure   report  and   last  year's   FY18  budget                                                               
subcommittee.   He said the  indirect expenditures that  would be                                                               
repealed in [HB]  399 were selected for repeal  for the following                                                               
reasons:   the  indirect  expenditures did  not meet  legislative                                                               
intent, had limited or no  usage, or their conforming purpose has                                                               
changed.   The following indirect expenditures  would be repealed                                                               
by HB  399:  federal  tax credits, foreign royalty  exclusions, a                                                               
reduced rate  for capital gains,  and credit associated  with the                                                               
Alaska Stranded  Gas Development  Act.   According to  the fiscal                                                               
note before  the committee, he  continued, the combined  total of                                                               
the potential new revenue is up to an estimated $6.9 million.                                                                   
                                                                                                                                
1:07:43 PM                                                                                                                    
                                                                                                                                
MR. ANDERSON  provided a sectional analysis  of HB 399.   He said                                                               
Section  1  would  amend  Alaska  Statute  (AS)  43.20.021(a)  by                                                               
amending  the  current  section  with  conforming  language  that                                                               
removes the  list of  federal credits  as eligible  items against                                                               
Alaska corporate income tax liability.                                                                                          
                                                                                                                                
MR. ANDERSON stated Sections 2  and 3 would amend AS 43.20.145(c)                                                               
and (d),  respectively, by amending  those current  sections with                                                               
conforming language  in the  Affiliated Groups  section, removing                                                               
the reference  to the subsection  on foreign royalty  payments as                                                               
eligible for Alaska corporate income tax liability.                                                                             
                                                                                                                                
MR. ANDERSON explained  Section 4 is the repealer  section of the                                                               
bill.  He said this  section would repeal the following statutes:                                                               
AS 43.20.021(c), which  is the reduced rate in  capital gains; AS                                                               
43.20.21(d), which is the eligibility  of federal tax credits for                                                               
Alaska corporate income tax liability;  AS 43.20.036(a), which is                                                               
the  eligibility  of  federal  foreign   tax  credit  for  Alaska                                                               
corporate  income tax  liability; AS  43.20.036(b), which  is the                                                               
eligibility  of federal  investment credit  for Alaska  corporate                                                               
income tax liability;  AS 43.20.042, which is  the eligibility of                                                               
federal  special  industrial   incentive  investment  credit  for                                                               
Alaska corporate income tax  liability; AS.43.20.144(g), which is                                                               
the  exemption for  Alaska corporate  tax liability  for entities                                                               
participating  in contracts  related to  the Alaska  Stranded Gas                                                               
Development Act; AS  43.20.145(g), which is the  Stranded Gas Act                                                               
exclusion; and  AS 43.20.145(b)(3), which is  the foreign royalty                                                               
exclusion.                                                                                                                      
                                                                                                                                
MR. ANDERSON said Section 5  is uncodified law, the applicability                                                               
clauses.   Sections 1, 2, 3,  and portions of 4  would be subject                                                               
to the effective date, which is  Section 6, and which would add a                                                               
new section  making the  effective date  for this  legislation as                                                               
January 1, 2019.                                                                                                                
                                                                                                                                
1:11:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  offered his understanding that  the genesis                                                               
of  HB 399  is the  indirect expenditure  report assessment.   He                                                               
asked what the  net result is of this in  addition to getting rid                                                               
of some  tax credits.  He  further asked why [these  tax credits]                                                               
were had  in the  first place  - for  example, whether  they were                                                               
incentives or inducements for certain  behavior   and whether the                                                               
State of Alaska will lose something by eliminating them.                                                                        
                                                                                                                                
MR. ANDERSON replied that many  of the indirect expenditures were                                                               
created at the time the tax code  was created.  Many of them were                                                               
legislative intent  to create a  specific behavior.   Since their                                                               
creation  they  maybe haven't  lived  up  to the  expectation  of                                                               
inciting that behavior for corporations within Alaska.                                                                          
                                                                                                                                
1:12:49 PM                                                                                                                    
                                                                                                                                
BRANDON SPANOS,  Deputy Director,  Tax Division, DOR,  stated the                                                               
2015 indirect  expenditure report  tried to answer  that specific                                                               
question on  each individual  expenditure.   The report  tried to                                                               
detail  whether the  indirect expenditure  was  meeting what  its                                                               
intent was,  if DOR knew what  the intent was.   He explained the                                                               
federal  tax credits  were  adopted by  reference  and they  were                                                               
given a specific  rate that was similar to the  tax rate prior to                                                               
adopting [the  state's] new  structure in  1970.   So, basically,                                                               
corporations  were already  getting that  and [DOR]  continued to                                                               
adopt it.   He added  he hasn't gone  back and listened  to those                                                               
hearings  and therefore  doesn't  know if  there  were any  other                                                               
specific reasons.                                                                                                               
                                                                                                                                
REPRESENTATIVE  BIRCH   inquired  whether  there  has   been  any                                                               
consultation  with  those  who  would be  impacted  by  this  and                                                               
whether the feedback has been adverse.                                                                                          
                                                                                                                                
MR. ANDERSON  answered that at  this time the only  true outreach                                                               
would be  the creation of  the 2015 Legislative  Finance Indirect                                                               
Expenditure Report  and discussions throughout  policy committees                                                               
and committees  to discuss  whether indirect  expenditures should                                                               
be removed.  Regarding who is  impacted, he said DOR did submit a                                                               
letter.   Particularly in 2016,  he continued,  273 beneficiaries                                                               
for a total of $1.4  million participated in claiming federal tax                                                               
credits against their Alaska corporate income tax liability.                                                                    
                                                                                                                                
1:15:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PARISH observed the  change in revenue anticipated                                                               
for the Alaska Stranded Gas Development  Act is $0.  He requested                                                               
this be spoken to.                                                                                                              
                                                                                                                                
MR.  SPANOS responded  the credits  were sunset  through statute.                                                               
He said  1994 was the  last date  that [companies] could  have an                                                               
expenditure  that would  create  a credit  and [companies]  could                                                               
carry  it forward  no  later  than 1999.    This  is really  just                                                               
cleanup language, he  continued, in that it  would remove credits                                                               
that no longer exist.                                                                                                           
                                                                                                                                
REPRESENTATIVE  PARISH surmised  this part  of the  bill is  what                                                               
falls  under the  House Resources  Standing Committee's  purview.                                                               
Since this  part is just  conforming language, he said,  he would                                                               
just as soon pass the bill on to the House Finance Committee.                                                                   
                                                                                                                                
MR.  ANDERSON replied  that because  of the  Alaska Stranded  Gas                                                               
Development  Act component  in HB  399 he  was not  surprised the                                                               
bill received  a House Resources  Standing Committee  referral to                                                               
answer that portion of the question.                                                                                            
                                                                                                                                
REPRESENTATIVE PARISH noted the  intended purpose of [the foreign                                                               
royalty  exclusion]  was  to   encourage  foreign  investment  in                                                               
Alaska.  However, he said,  this exclusion has had the unintended                                                               
consequence  of  corporations  transferring certain  assets  like                                                               
patents  to overseas  subsidiaries,  paying  royalties for  their                                                               
use,  and  then  excluding  80 percent  of  those  expenses  from                                                               
income.   He asked how  much of the  total fiscal impact  of this                                                               
portion would be captured by closing this troubling loophole.                                                                   
                                                                                                                                
MR. ANDERSON  drew attention to  the fiscal note, page  2, change                                                               
in revenue estimates,  item 2 on foreign royalties,  and said DOR                                                               
states it could be a potential of $1.7 million.                                                                                 
                                                                                                                                
1:18:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH inquired  whether  it is  accurate to  say                                                               
that  that  suggests  the  vast  majority  of  these  monies  are                                                               
foregone  by  the  state   essentially  to  incentivize  domestic                                                               
companies  sending assets  overseas  or giving  them to  overseas                                                               
holding companies and then paying fees for their use.                                                                           
                                                                                                                                
MR. SPANOS responded  they could be legitimate  royalties and not                                                               
necessarily a  transfer of U.S.  assets to gain that  benefit; it                                                               
could be  some other  asset that  was already  overseas.   Is   a                                                               
multi-national  corporation,   he  said,  the   corporation  pays                                                               
royalties to a  foreign subsidiary or a foreign  parent and would                                                               
receive  a  benefit  of  an  exclusion of  80  percent  of  those                                                               
royalties.   It's unusual for a  state to take that  position, he                                                               
added.                                                                                                                          
                                                                                                                                
REPRESENTATIVE PARISH  asked whether it  would be correct  to say                                                               
that it does create a  positive incentive for sending such assets                                                               
overseas.                                                                                                                       
                                                                                                                                
MR. SPANOS answered yes DOR has seen that happen.                                                                               
                                                                                                                                
REPRESENTATIVE BIRCH  thanked Mr.  Spanos and  said he  found the                                                               
information that Mr. Spanos referenced.                                                                                         
                                                                                                                                
1:20:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON opened public testimony on HB 399.                                                                           
                                                                                                                                
1:20:25 PM                                                                                                                    
                                                                                                                                
MICHAEL  WILLIAMS,   Revenue  Audit  Supervisor,   Tax  Division,                                                               
Department  of   Revenue  (DOR),  at  the   request  of  Co-Chair                                                               
Josephson described his position at  DOR.  He said he specializes                                                               
in  corporate  income tax,  so  he  is  the principle  party  for                                                               
enforcement of these  statutes as they currently  exist and would                                                               
be the principle  party for enforcement of  these statutes should                                                               
they change.                                                                                                                    
                                                                                                                                
1:21:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON closed public  testimony after ascertaining no                                                               
one wished to testify.                                                                                                          
                                                                                                                                
CO-CHAIR JOSEPHSON held over HB 399.