Legislature(2015 - 2016)BILL RAY CENTER 208
05/27/2016 03:00 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB4003 | |
| HB4005 | |
| HB4006 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB4005 | TELECONFERENCED | |
| *+ | HB4003 | TELECONFERENCED | |
| *+ | HB4006 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 4005
"An Act relating to the mining license tax; relating
to the exploration incentive credit; relating to
mining license application, renewal, and fees; and
providing for an effective date."
3:46:21 PM
Mr. Burnett explained HB 4005 was an increase in the mining
license tax rate. The bill would increase the top tax rate
on net profits greater than $100,000 per year from 7
percent to 9 percent. Additionally, the bill would reduce
the tax holiday for new mines from 3.5 years to 2 years,
prevent the mining exploration incentive credits from being
used to reduce royalties (limiting them to the tax), and
added a $50 annual license fee. He noted the license fee
was reasonable because miners were exempted from the
business license fee. He read the sectional analysis (copy
on file):
· Section 1: Eliminates the ability to take the mining
exploration tax credit against royalty payments
· Section 2: Removes references to royalties in the
mining exploration tax credit provisions in AS
27.30.030(a)
· Section 3: Removes references to royalties in the
mining exploration tax credit provisions in AS
27.30.040
· Section 4: Removes references to royalties in the
mining exploration tax credit provisions in AS
27.30.050.
· Section 5: Changes the existing tax holiday for new
mining operations from three and one-half years to 2
years.
· Section 6: Changes the tax rate on mining income in
excess of $100,000 from 7 percent to 9 percent.
· Section 7: Provides for a $50 annual mining license
fee.
· Section 8: Provides that changes to the exploration
tax credit are applicable to royalty payments after
the effective date of section 1. Provides that the two
year tax holiday applies to mining operations that
begin production after the effective date of section
6. Provides that the new tax rate begins the first tax
year after the effective date of section 6.
· Section 9: Provides the exploration tax credit
accounting in current law applies to a mining
operation which began mining production prior to the
effective date of this act.
· Section 10: Allows for the Department of Revenue to
adopt regulations to administer this act.
· Section 11: Provides for an immediate effective date
for section 10.
· Section 12: Provides that the rest of the bill is
effective July 1, 2016.
Mr. Burnett elaborated that the new tax would go into
effect in January 1, 2017.
Representative Gara noted the bill had briefly been in
front of the committee several weeks earlier. He had been
surprised to learn that a company would continue to receive
a tax holiday if they were making profits (for 3.5 years
under current law and 2 years under the legislation). He
understood the justification of not having a profits based
tax if a company was not making profits; however, he
wondered about the justification for giving a company a tax
holiday when it was making profits.
Mr. Burnett responded that mining operations tended to have
very large capital costs prior to the start of operations
and the tax holiday allowed a company to recover some of
those capital costs at the very beginning of production. He
detailed there was no cash out to the companies as a result
of the tax holiday. He furthered that companies tended to
not be as profitable in the first two years of production
as they became once production reached full swing.
Co-Chair Thompson referred to the International Tower Hill
Mines Livengood project that had 300 people working on it
two years back. He detailed the mine was still in the
permitting process and it had tremendous upfront costs
already. He reasoned the tax holiday would allow the mine
to recover some of the startup costs - it would take
several years before the company would actually begin
mining.
3:50:55 PM
Representative Gara conjectured that two-year holiday made
more sense under some circumstances. He provided a
hypothetical scenario where a company invested $10 million
to prepare a mine for operation and became profitable in
year one. He asked if the company would deduct part of the
$10 million from year one so they were truly profitable.
Alternatively, he wondered if a company was not allowed to
deduct the prior costs from the first year of profits.
Mr. Burnett responded that a company was not allowed to
directly deduct prior cost. There was an exploration tax
credit a company may be able to take part of. Additionally,
there was a depletion allowance, which allowed a company to
take a certain percentage of a prior cost. He explained a
company did not take a deduction for prior cost in one lump
like with a cash flow tax (oil and gas was a cash flow tax
rather than a profits tax) where capital costs were taken
when they were spent and credits were taken.
Co-Chair Thompson informed the committee that Brandon
Spanos the deputy director of the DOR Tax Division was on
the line for additional questions.
Representative Gara had heard companies were allowed to
deduct a certain percentage of pre-operations costs. He
referred to the carried forward tax credit and a portion of
costs a company could deduct in the first year. He asked
what portion could be deducted once a company became
profitable.
3:53:21 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), asked for
clarification.
Representative Gara referred to a company's development
costs and asked for an estimate of what portion the company
was allowed to deduct once they became profitable. He
referenced the concept that once a company became
profitable they would still not pay a tax for a few years.
Mr. Spanos replied [note: audio cut out during the
response].
Representative Gara referred to the depletion allowance and
asked for verification a company was allowed to deduct
development costs on a depreciation schedule (similar to
federal law pertaining to federal taxes). He asked for
verification that a company received the money back (the
deductions) over a period of time.
Mr. Spanos replied in the affirmative. He detailed there
was a cost or percentage depletion allowance similar to
federal depreciation or depletion.
3:55:39 PM
Representative Gara asked if the allowance pertained to all
of a company's development costs.
Mr. Spanos responded it pertained to a company's own
capitalized development costs.
Representative Gara asked for verification the allowance
pertained to capital costs but not operations costs.
Mr. Spanos replied no, if there had been an expense in a
given year that would be capitalized. He detailed if a
company had a loss in the year a corporation may be able to
use it against other income. However, in general
development costs were capitalized.
Representative Gara relayed he was getting tripped up on
capitalized versus capital costs. He explained he was used
to oil production taxes and the terms capital costs versus
operations costs. He asked for a definition of capitalized
costs.
Mr. Spanos replied a capitalized cost was an expense that
was not expensed in the current year. He furthered that it
became part of the capital and was expensed through a
schedule over the life of the mine.
Representative Gara asked for verification that a
capitalized development cost could include operations and
capital costs. Mr. Spanos asked Representative Gara to
repeat the question.
Representative Gara complied. He surmised capitalized
development costs could include operations costs (e.g.
labor) and capital costs (e.g. equipment). Mr. Spanos
agreed. He expounded that the labor would be capitalized if
it was part of the development of a mine.
Representative Wilson asked how the mining and fuel tax
bills would economically impact the mining industry.
3:58:15 PM
FRED PARADY, DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCE,
COMMUNITY, AND ECONOMIC DEVELOPMENT (DCCED), responded that
the mining tax itself was a net income tax, which was
somewhat unusual in his experience related to mining. He
shared he had spent 30 years in mining in Wyoming. The
taxes he was most familiar with in Wyoming were severance-
based, not net income-based. The net income tax would not
occur unless a property had a net income. He stated "you
can debate the amount of the haircut, but at the end of the
day you're still growing hair, you weren't bald." He noted
he would leave the specifics of the fuel tax to DOR, but he
believed there was an off-road tax credit against that
because it's a fuel tax.
Representative Wilson indicated that she had spoken with
Fort Knox and she believed even with a credit the fuel tax
would be a huge amount of money (excluding the mining
portion). She thought it was DCCED's responsibility to
consider how taxes would impact business in Alaska. She
added if it was not the department's responsibility, she
wanted to know why.
Mr. Parady that the task had not been given to DCCED in the
current timeframe. He suggested that as everyone looked at
the holistic picture of the situation Alaska found itself
in, of course there were economic consequences to a
$400,000 per hour deficit.
Representative Wilson stressed that HB 4005 was not her
legislation; however, if it was her bill she would come up
with the information [she was currently asking for from
DCCED]. She did not understand why anyone would have to ask
the administration to bring certain things up. She reasoned
there were departments for specific reasons. She redirected
her question to the Department of Natural Resources (DNR).
She asked DNR if it had done any analysis on how the mining
and fuel taxes would impact the mining industry. She
wondered how much money they were talking about, especially
related to mines making over $100,000.
BRENT GOODRUM, DIRECTOR, DIVISION OF MINING, LAND AND
WATER, DEPARTMENT OF NATURAL RESOURCES (via
teleconference), replied that the department had not been
able to conduct an economic analysis at the present time
regarding the bill proposals.
Co-Chair Thompson asked how many mines in Alaska made over
$100,000 per year in taxable profits.
Mr. Goodrum responded that about six mines fell into the
category [note: due to poor audio quality some testimony
indecipherable].
Representative Wilson stated she was not asking trick
questions. She reasoned the administration was asking the
legislature to increase taxes on industry as well as on
individuals without the information she believed should be
required. She wanted to know the overall impact of the
proposed taxes on each industry. She noted the bills would
add an incredible cost to Fort Knox (the estimate did not
include property taxes, which Pogo Mine did not have). She
stated each mine was different and although there were not
a significant number, certain boroughs had different
responsibilities and costs. She thought the information
should have been available either from DOR or DCCED.
4:03:05 PM
Co-Chair Neuman asked if there was a methodology that could
predict the economic impacts of an increased tax.
Mr. Parady replied that in a mine management scenario with
an investment property such as Fort Knox (i.e. an operating
mine) at the time of determining the capital investment a
company would have run best, worst, and probable scenarios;
the internal rate of return; and hurdle rate related to the
range of risk for the investment. He stated the factors
came from all directions including permitting timeline,
scale of investment, rate of return, commodity price
volatility, and other. Across the range of factors a
company was reaching an investment decision. He
acknowledged that uncertainty was the enemy of investment,
which was the reason the tax holiday (at the time the
investment was made) was a fairly significant benefit
because it occurred right at the point where cash was
flowing out the door, but not in. The bill would shorten,
but not eliminate the window. He continued that once a
company began operation, its cost structure was predicated
on all of the variable costs (i.e. labor contracts, fuel,
and other) and commodity price variability. He explained
that mines were driven by economies of scale. He detailed a
company could respond to market volatility by running its
equipment around the clock, year round to spread out fixed
cost and lower per unit cost.
Mr. Parady addressed the particular tax and its impact on
an operating environment. He agreed the change from 7 to 9
percent was not a 2 percent change, it was a two-sevenths
change or 28 percent, which constituted a substantive tax
change. However, it was a tax change occurring on net
income; at that point, it may lessen a mine's ability to
reinvest or hire additional workforce, but it was not
shifting from a profitable to a non-profitable enterprise
on the basis of the tax. He did not have the ability to
model Fort Knox's cost structure; each of the existing
mines knew exactly where their cost structure was against
the current price of gold. He agreed the tax increase would
have an impact, but because it was a net income, it would
tighten their operating margins, but would not position the
mines for failure.
4:06:30 PM
Co-Chair Neuman knew that different mines had internal
information that he surmised the department did not have
access to. He thought the state would have a $3 billion
deficit for some time; he did not anticipate the price of
oil to increase any time soon. He wondered how to measure
that against trying to cover the state's debt. He
questioned whether the money should be taken from the
state's dividend. He was trying to think of some way the
department could model the economic impacts of all the
various information.
Mr. Burnett responded that it was not a simple model. He
specified that each of the mines were different. He
clarified that DOR did receive the mines' cost information.
The largest taxpayers in the group had about $451 million
in profits in 2014 and the tax would take an additional $7
million in taxes per year out of that type of profit
structure. He corrected that prices would be lower based on
commodity prices - the profit was in the hundreds of
millions and the state would take a few million. He
elaborated that the state's tax would reduce the federal
tax. He continued it was not a deduction from the state
income tax, but it was a deduction from the federal income
tax, which was a 35 percent tax. The impact on the
companies was not as great as the dollar amount in the
fiscal note. The 4 cents in additional fuel tax the mines
would pay (he clarified the number was determined by
subtracting 12 cents from 16 cents) was lost in the
volatility of fuel prices. He acknowledged the dollar
amount was significant, but commodity prices also tended to
move together in many cases. He continued that oil prices
and gold prices could move in the opposite directions, but
it was only possible to make predictions or guesses. He
underscored the increase would mean a small dollar impact
relative to the total investment. The bill would not mean
the state would take money before it became profit; the
bill would only take profits with the mining tax.
Co-Chair Neuman requested a comparison of the mining, gas,
motor fuel, and fisheries taxes compared to the taxes in
other states.
Mr. Burnett replied that the department had previously
provided the information to the committee. He noted the
department could locate the information.
Vice-Chair Saddler echoed the comments by Representative
Wilson. He expressed embarrassment on behalf of the
administration that the taxes had been considered for five
or six months, but he did not see any analysis or
consideration of the potential impact of the taxes. He
understood the tax would only be on the profit, but he
wondered if the profit margin could be reduced to a point
where it was not sufficiently profitable. He wondered about
the potential impact on employment, exploration, and future
investments. He assumed there must be a general model that
applied. He believed the administration had been given
sufficient time to come up with some specifics. He was
concerned the administration appeared not to have
considered the impact of the bills.
Mr. Parady assured the committee the administration had not
approached the tax bills with a cavalier attitude. He
explained that mining was a cyclical business. In the past
several years the price of gold had varied between $950 or
$1,000 to $1,400 or $1,500. He detailed the specific
commodity price spread far exceeded any impact in the
suggested tax rate. He agreed that taxes had an effect on
the bottom line of a business and a company would deal with
the bottom line the same way the state was approaching the
current deficit - a business could freeze travel, overtime,
and hiring, and could layoff contractors. He acknowledged
there was an impact when money was pulled out of a
business. However, he spoke to the perspective of the scale
of a change from 7 to 9 percent, which was only on a net
income basis. He underscored the increase was not on a cost
basis. He explained the effect was difficult to quantify
and was less than the effect of the cost variability in the
commodities cycle.
Mr. Parady continued that in his knowledge of taxes in
general, Alaska's mining tax structure, which dated to the
1950s and was based on net income was different than in
other major mining states; the most direct comparison to
Alaska was probably Nevada because it was a hard rock gold
mining state, whereas Wyoming was primarily a coal,
uranium, and trona mining state (albeit trona mining
occurred underground and there were some similarities). He
elucidated that most tax structures were typically based on
a percentage of cost, in Wyoming it was a severance tax
basis. The fact that Alaska's tax structure was on a net
income basis moderated some of the effect. He believed
DCCED had a state-by-state comparison and he would provide
it to the committee.
Co-Chair Thompson noted the committee had received the
comparison in the past.
4:14:00 PM
Representative Gattis discussed that she could not compare
her farms to those in the Lower 48. She detailed that the
cost of fuel and fertilizer was significantly higher.
Additionally, she had to haul in all of her equipment from
the Lower 48. She reminded committee members and others
that Alaska was unlike other states as it related to
logistics. She did not believe it was possible to compare
apples-to-apples.
Representative Gara thought additional discussion was
necessary. He recalled oil tax debates in the past when
there had been a gross tax. He asked whether in low profits
years a mining company would prefer a profits based tax or
a gross tax (like in Wyoming).
Mr. Parady clarified the Wyoming tax was severance tax
based. He detailed the tax was based on the value of the
mineral at the time it was severed from the ground. He
explained it was not a gross on the cost as the value of
the cycle was completed when fed to a refinery or power
plant. He believed a mining company would want the lowest
tax possible at any given point in time.
Representative Gara thought there had to be an answer to
his question. He wondered if a company would prefer a
severance based tax or a tax based on profits during a time
when profits were low or a company was losing money.
Mr. Parady commented on the complexity of the question. He
explained when Russia imploded and Russian yellowcake
flooded the world market and depressed uranium pricing, "we
went to a graduated severance tax." He detailed the tax was
zero percent at $12 per pound of yellowcake and down (1
percent to $14, 2 percent to $16, and back to the original
rate of 4 percent at $18). The point was an effort to
salvage the industry through the low spot caused by the
spike. There had been zero taxes at the low end and an
increase back to the normal taxing rate as the market
returned. He concluded "there's a lot of ways to skin this
cat."
4:17:16 PM
Mr. Burnett responded to Representative Gara's question and
explained that a net income based tax at a zero profit
would be a zero tax; therefore, anytime a company was
losing money or profits were low, the tax would be lower -
unless it was structured as Mr. Parady had discussed.
4:17:43 PM
Representative Gara had been surprised to learn that the
state's royalty was profits based as opposed to based on
the value of the commodity. He asked what the royalty was
on mining.
Mr. Burnett deferred the question to Mr. Goodrum. He agreed
it was a net tax based on the same calculations as the net
mining license tax. He did not have the rate on hand.
Mr. Goodrum answered the rate was 3 percent net profit.
Representative Gara was not interested in raising the tax
on struggling mines (companies that were not making money
or were making very little money). He pointed out that the
bill applied to mining companies making over $100,000 in
profit. He was curious what the fiscal impact would be if
there were a slightly higher tax for companies making
$250,000 per year in profits. He asked about the fiscal
impact of an 11 percent tax on those companies.
Mr. Burnett replied he had answered the question in a
previous committee. Generally speaking, nearly all of the
income above $100,000 was income above $250,000. He
clarified it was nearly all above $1 million. The impact of
2 additional percent on mines earning over $250,000 would
mean a doubling of the fiscal note at about $14 million per
year as opposed to the $7 million.
4:20:08 PM
Representative Kawasaki asked for verification that gas
prices and motor fuel would be rolled into the net income
tax. He surmised companies would have the ability to write
the increase off. Mr. Burnett responded that any
expenditure for operating the mine could be taken as a tax
deduction against profits.
Representative Kawasaki recalled a previous discussion
related to when mining taxes had last been changed (in
1955). He asked if the brackets in Section 6 had been set
at the time. He outlined the brackets as $40,000 to $50,000
at 3 percent, $50,000 to $100,000 was 5 percent, plus
$1,500.
Mr. Burnett replied that the brackets had been set in 1955.
He reminded the committee that there had been no large
mines operating in Alaska at the time. There were numerous
large operating mines in Alaska prior to WWII and nearly
all of the current operating mines had been started in the
1980s, 1990s, and 2000s.
Representative Kawasaki requested additional information on
why the discussions about the brackets had not been
changed. He referred to a Fairbanks resident working in the
summer as a placer miner who made $40,000 to $50,000 per
year and paid 3 percent of net. He continued that the
largest scale mines paid 7 percent (or 9 percent under the
proposed legislation). He thought the "mom and pop" mines
were getting hit disproportionately compared to the larger
mines.
Co-Chair Thompson relayed that in a prior presentation for
HB 4001, a statement had been made that the tax increase
would not impact mom and pop miners at all other than the
$50 annual license fee. He asked if the same applied to the
current legislation.
Mr. Burnett replied in the affirmative; the increase in the
legislation only applied to mines making over $100,000;
therefore, mom and pop organizations would not be impacted.
He addressed Representative Kawasaki's question and relayed
it had been discussed in the House Resources Committee. He
elaborated there had been discussions about expanding the
brackets, which would have very little impact in terms of
how much money the state received. He continued it would be
a policy decision to opt not to tax people at lower levels.
The primary income to the state from the miners was from
the 14 to 20 taxpayers making more than $100,000 in profits
on an annual basis (primarily from the 6 large mines). He
referred to a spreadsheet the department had created for
Representative Kawasaki, which had been shared with the
committee in 2014. He detailed the net profits of the
taxpayers making under $100,000 totaled approximately $1
million.
4:23:57 PM
Representative Kawasaki referred to the discussion about
whether it was possible to make an apples-to-apples
comparison of the mining industry in Alaska and other
states. He believed it was fair to ask the questions. He
wondered if any analysis had been done on what other
countries did. He reasoned Alaska was an international
mining destination and was ranked number 6 worldwide for
investment attractiveness (just behind Western Australia,
Saskatchewan, Nevada, Ireland, and Finland) in a Frasier
report. He noted the committee was familiar with Frasier
pertaining to oil and gas. He continued that Frasier listed
Alaska as number 2 worldwide for best practices, number 11
worldwide for best mineral extraction potential, and other.
He asked if the administration had considered the report
when analyzing the mining license tax.
Mr. Burnett replied that the issues were considered by DOR,
DNR, and probably by DCCED. He affirmed the administration
had looked at taxes in other jurisdictions besides the
United States.
Vice-Chair Saddler commented that the most recent large
mine to open in Alaska had taken a significant amount of
time and had required a Supreme Court decision. He
questioned how many new mines were opening in Alaska. He
referred to page 3 of the bill and asked for verification
the mining tax was on net income, not net profits.
Mr. Burnett replied that net income and profit were
generally considered the same thing.
Vice-Chair Saddler asked for verification the current
mining royalty was 3 percent of net profit. Mr. Burnett
answered in the affirmative.
Vice-Chair Saddler had heard in previous presentations that
the $50 mining tax was in lieu of a royalty. He referred to
the 3 percent net profit royalty and a mining tax royalty.
Mr. Burnett responded that the $50 mining license fee was a
recognition that all other businesses in Alaska paid for a
business license. He continued that companies with a mining
license were exempt from regular business licensing
requirements.
HB 4005 was HEARD and HELD in committee for further
consideration.
4:26:48 PM