Legislature(2015 - 2016)BUTROVICH 205
02/03/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| SB137 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 115 | TELECONFERENCED | |
| *+ | SB 137 | TELECONFERENCED | |
SB 137-ELCTRNC TAX RETURN;MINING LIC. TAX & FEES
4:17:27 PM
CHAIR GIESSEL announced consideration of SB 137.
JERRY BURNETT, Deputy Commissioner, Department of Revenue (DOR),
thanked the committee for hearing the governor's mining tax
bill. He said since 1913, Alaska has had a mining tax. The
original mining license tax was .5 percent on mining net income
over $5,000 collected on both net income from mining operations
and from mining-related royalties. So, an owner collecting the
royalties would pay a mining tax, as well as the operator of the
mine. It came primarily from businesses engaged in coal and hard
rock mining; gravel pits and quarry rock were exempt from the
tax.
He said there were numerous changes from 1915-1953, but in 1951,
the Territorial Legislature adopted a 3.5 year exemption for new
mining operations. The current tax structure, in place since
1955 (pre-dating statehood) is as follows: incomes of zero to
$40,000 pay no tax; incomes from $40,000 to 50,000 pay $1,200
plus 3 percent over $40,000; incomes from $50,000 to 100,000 pay
$1,500 plus 5 percent over $50,000, and incomes over $100,000
pay $4,000 plus 7 percent over $100,000 net.
4:20:14 PM
ED FOGELS, Deputy Commissioner, Department of Natural Resources
(DNR), Juneau, Alaska, said Alaska has six major mines that are
currently operating and about 570 smaller placer and suction
dredge operations that were permitted in 2015. The top 200 of
those register enough on the tax scale and contribute as much to
the economy as one major large mine. There are 34,197 active
mining claims on state land. Of the six large operating mines,
five are hard rock mines and one is a coal mine and are as
follows:
1. The Red Dog Mine is an open pit lead and zinc mine and is
operated by Teck Alaska, Incorporated, on NANA Native
Corporation land; it is one of the largest zinc producers in the
world and employs 610 people.
2. The Fort Knox Mine is an open pit gold mine near Fairbanks on
state and private lands and is operated by Fairbanks Gold Mining
and has 600 employees. It is the largest taxpayer of the
Fairbanks North Star Borough.
3. The Pogo Mine is an underground gold mine located 38 miles
northeast of Delta Junction on state land. It's operated by
Sumitomo Metal Mining and employs 320 people.
4. The Usibelli Coal Mine is operated by Usibelli Coal Mine
Incorporated, is owned by a local family, and employs 140
people.
5. The Kensington Mine is an underground gold mine located near
Juneau and is operated by Coeur Alaska on Forest Service land.
6. The Greens Creek Mine, also operating on Forest Service land,
is an underground silver, zinc, lead and gold mine located close
to Juneau and is operated by Hecla Greens Creek Mining and
employs 415 people.
He said that the Nixon Fork Mine has been in temporary cessation
since 2013, but it has been maintained and monitored, and
hopefully will open again.
4:22:53 PM
CHAIR GIESSEL asked why Nixon Fork is suspended at the moment.
MR. FOGELS answered the reason is that commodity prices right
now are too low and the expense of the operation is too great to
justify operating. He thought the company was looking for more
investors.
CHAIR GIESSEL said one could construe that economic factors
affect the ability of a mine to continue operating.
MR. FOGELS agreed.
CHAIR GIESSEL asked what assessment was done on the proposed tax
as far as its effect on a mine like Nixon Fork.
MR. BURNETT answered that the department looked at the tax on
net income so as economic factors go down the tax will also go
down. In fact, from the time they started looking at this tax
proposal the estimated revenue went down from $12 million to $6
million. They have discussed this with the mining companies and
found that the tax rate is much less of a concern to them,
because it is on net income and is still fairly low, than
suspending the tax holiday.
CHAIR GIESSEL pointed out that Nixon Fork closed for economic
reasons and increasing taxes would accelerate those economic
reasons for other mines.
SENATOR STOLTZE asked if any of the operating mines are in
unincorporated areas.
MR. FOGELS said that Pogo and Nixon Fork Mines are in
unincorporated areas.
SENATOR STOLTZE asked if there were any local, production or
severance taxes.
MR. BURNETT answered that he didn't have all the details, but
the Fort Knox Mine is the largest taxpayer in the Fairbanks
North Star Borough and the Greens Creek and Kensington Mines are
the one and two largest taxpayers in Juneau. The Red Dog Mine
pays a Payments in Lieu of Taxes (PILT) and a severance tax to
the Northwest Arctic Borough and is the only taxpayer there.
He said these mines are an important source of local income and
they build a tremendous amount of infrastructure. In Juneau,
residents enjoy hydropower and lower electric rates, and its
third largest taxpayer is the privately owned electric utility
that was actually built to service the local mines. Clearly,
large mines are a major source of local revenue and a major
contributor to local infrastructure in those areas where they
are located.
SENATOR STOLTZEE commented that in previous revenue bills on
other industries, an analysis of government take was part of the
administration's presentation. He asked if there would be an
analysis of government take.
4:28:04 PM
CHAIR GIESSEL concurred and asked Mr. Burnett for a summary of
government take for each of the operating mines.
MR. BURNETT replied that he can't do that for individual mines,
because that is confidential information, but he could do it for
mines as a group. In 2014, 13 taxpayers were in the upper
bracket, which probably means multiple ownership of those mines.
The total income amongst that group was $571 million and they
paid $37,853,000 in state mining license tax. The other 490-plus
mine license taxpayers that filed had a total net income of $1
million.
4:30:00 PM
SENATOR STEDMAN said Alaska can't get the mining industry off
the ground, because it is just too remote and too expensive,
also called green-field costs, to do here. The tax structure is
not what is stopping it, because there is no mining tax for all
practical purposes. However, for the Niblack and the Bokan Mines
in Southeast, taking away the three-year window in the beginning
just creates another hurdle. Those two mines could bring a lot
of benefits to that region, so he was a little bit gun-shy about
putting up more hurdles for these mines that are trying to open.
SENATOR WIELECHOWSKI said a study was done a few years ago under
the Palin Administration comparing Alaska's mining tax to other
states' and countries' around the world. It seemed to have some
good ideas and didn't recommend tax increases. However, it noted
that Alaska's tax structure is very old, going back to 1955, and
there was some thought about updating the structure. He asked to
get a copy of that study, because he thought it could be helpful
in making other changes to encourage development and
exploration.
4:33:59 PM
MR. BURNETT said he was aware of the study and would find out if
it is available.
SENATOR COGHILL said they may not be able to get the whole
picture of mines and their value, but they need to know, for one
thing, if there is a royalty base.
4:34:52 PM
MR. FOGELS responded that DNR's role is not to tax, but to
collect the royalties and property rentals. There are 34,197
mining claims and those generated $6.07 million in 2014. All the
claims - upland and offshore mining leases and some coal leases
- generated $6.8 million in 2014, while production royalty
generated $7.07 million, and coal leases generated $2.3 million.
SENATOR COGHILL said some of his constituents tell him that
miners don't pay royalties, but they do. It's just small,
because they are a smaller mining business.
MR. FOGELS added of the six operating mines, only two are on
state land that pay royalty: Usibelli Coal Mine and Pogo Mine.
The Fort Knox Mine is on Mental Health Trust Land and private
lands, the Kensington and Greens Creek Mines are on federal
land, Nixon Fork is on BLM land and Red Dog is on NANA land.
4:38:02 PM
SENATOR COGHILL said he wanted people to realize that the state
is the landlord to only a small portion of mines. When it comes
to taxation, in Alaska anything green field requires defending
its permitting system in court. Those who come to explore up
here also have to defend themselves in court for the right do
what is quite often permitted. This is a universe of permitting
costs that at the end of the day it is a "deafening taxation" of
a different style, and it needs to be quantified as the state
tries to get its resource industries engaged and working.
SENATOR STOLTZE wanted a better grasp of the administration's
policy behind the proposed taxation. Is it purely to fill the
revenue shortfall, because it's pretty small and may actually be
counterproductive. The idea is to grow the pie not get sinew off
a diminished carcass.
MR. BURNETT responded that the policy behind the legislation is
parts of all the factors Senator Stoltze mentioned. Part of it
is to fill the state treasury, but if the state proposes to
spend money on mine infrastructure and facilities, it is
possibly politically more palatable if people see that the state
is collecting revenue from the mining industry (that would be
reallocated back to it). "The industry has to be seen that it is
paying its way."
4:41:05 PM
SENATOR STOLTZE commented that his takeaway from Mr. Burnett's
reply is that the legislature has to demonstrate credibility to
the public before embarking on fiscal policy and plans and
taxation regimes.
SENATOR STEDMAN asked if the mining industry does separate
accounting.
MR. BURNETT replied that the license tax is separate accounting
on the mining operations in Alaska. Corporate income taxes, as
with the rest of the state's corporate income tax structure, are
allocated based on various factors. For one, it's a portion of
their U.S. income tax.
SENATOR COGHILL said tradeoffs always happen with taxation, and
he is not against the mining industry putting money into state
coffers if the real value can be seen. However, the state
already has the large mines contributing the cost of permitting.
MR. FOGELS answered that was correct; the large mine permitting
process has evolved to where companies enter into an agreement
with DNR to coordinate permitting that is 100 percent
reimbursable to DNR, the Department of Environmental
Conservation (DEC), Alaska Department of Fish and Game (ADF&G),
Department of Health and Social Services (DHSS) or any other
agency that is actually involved in permitting. It is totally
voluntary.
4:44:16 PM
SENATOR COGHILL said the larger mines generally have to go
through a national environmental policy (NEPA) process where the
smaller mines probably wouldn't have to, but the smaller mines
would still have to go through the licensing tax.
MR. FOGELS said that was right.
4:44:57 PM
CHAIR GIESSEL asked what the Red Dog Mine has to reimburse the
Alaska Industrial Development and Export Authority AIDEA for in
the construction of its road. Is there any still outstanding
debt?
MR. BURNETT said they are still paying, but he would have to get
the specific numbers for her.
CHAIR GIESSEL said the social impacts have to be considered,
though it is an unquantifiable item, - like when the Nixon Fork
Mine shut down. She asked if there was a known number of jobs
lost from that.
MR. FOGELS answered that 30 to 40 people worked that project.
SENATOR COGHIL, for context, asked the value of the 3.5 year
exemption on the mining tax for new operations and if it is a
diminishing value.
MR. BURNETT answered that currently a large mine, in particular,
has a large capital construction budget over a long period of
time. So, at the beginning of operations, the first 3.5 years
are not subject to tax, which is quite valuable. The proposal to
remove this is based on a set of assumptions that the mine will
still be economic and that removing it won't affect any major
mining project during the period on the fiscal note.
4:48:18 PM
SENATOR WIELECHOWSKI asked what a production curve for a
standard mine looks like, because he knows that oil companies
produce huge amounts of oil at first to recoup their costs and
then production declines pretty steadily.
MR. FOGELS said typically the production curve for a mine goes
up quickly to a peak and then depending on the nature of the ore
body it stays high, and then as the ore body is depleted, unless
additional reserves are found, production might trickle down
depending on the grades. Typically the highest grades are
produced first to try and recoup those high upfront capital
costs.
SENATOR WIELECHOWSKI asked for a model of how much the state
would have made on other mines and asked if he had any
predictors on future hard rock mines.
SENATOR COSTELLO wanted more information about the context of
this tax proposal. Did the administration use several guiding
principles, or was it just a sentiment of "everyone is going to
feel the pain?" How much of the fiscal gap will this tax address
versus what amount of foregone revenue from projects being
shelved actually contribute to the deficit?
MR. BURNETT responded that there were a lot of discussions. One
factor was that they didn't want to leave any portion of the
economy out because of fairness issues.
4:51:25 PM
SENATOR STEDMAN said on the positive side, the tax structure has
been in place since 1955, so there is a lot of stability, which
he thought was a good sign. But in 1955 the state didn't have
automation and computerization. This bill requires electronic
filing, which is good, but will there be savings within the
department by switching?
MR. BURNETT answered that the department did not intend to add
or delete any positions as a result of passage of this bill.
However, because the legislature appropriated $35 million in
2011 to allow for a new custom off-the-shelf tax management
system that is now operating for all tax types, the department
has been able to delete some Tax Division positions over the
past two years.
None of these bills will change how the department does business
significantly enough to affect its position count. A small
increment is needed for changing the program and forms and
changing tax rates, but after that it's steady. That is one of
the reasons they didn't make changes in tax structures.
4:53:42 PM
SENATOR COSTELLO asked Mr. Burnett to clarify the statement that
position counts were expected to change, specifically that
instituting an income tax would require additional people.
MR. BURNETT clarified that he was referring to changing existing
taxes. Any new taxes will require additional staffing.
CHAIR GIESSEL said the lens they look at these taxes through is
how a proposed tax affects Alaska families, businesses and jobs.
They talked briefly about the Nixon Fork Mine, which is in a
very rural area with very few jobs to begin with, and the loss
of jobs when the mine closed.
She said this committee is interested in growing the pie. A
Livengood mine (a massive gold and limestone (for cement)
deposit) that is in pre-permitting would diversify the economy,
and provide a commodity at a much lower cost than having to ship
it in, which is done now. She asked what was considered as far
as the economic impact of removing the 3.5 year tax holiday on
the Livengood development, which is, at this point, at a
standstill because of commodity prices.
MR. BURNETT said he didn't know the specifics, but he would
provide the committee the information that is available on that
project.
4:56:27 PM
SENATOR COGHILL said they need to look at modeling capital
investment and capital gain to see if the state is missing part
of that top.
4:57:46 PM
SENATOR MICCICHE said he was worried about how the tax policy is
presented across the board. Alaska had been blessed with
enormous revenues from the North Slope that has provided an
economy through the government structure. Some agree that is
appropriate and some disagree, but it is something that can
occur at $107 a barrel oil and not something that can occur at
$30 a barrel.
He said the state's tax policy seems to be looking to continue
that government economy even though the state doesn't have the
revenue. He supported some of the measures that have come before
the legislature this year, but he worries that they are trying
to harvest too much from the producers in the state that really
have the potential to provide jobs at $30 a barrel oil and
provide a sustainable job market as the oil price recovers in
the future. He said Alaska is a resource rich state with nothing
but potential and he hoped they weren't dis-incentivizing future
projects with some shortsighted revenue outlooks today.
CHAIR GIESSEL thanked him for those comments.
MR. BURNETT continued that the mining tax proposal increases the
tax rate on the highest bracket from 7 to 9 percent and removes
the 3.5 year exemption for new mines. It requires electronic
filing and adds an application and renewal fee for the tax
license, which is a substitute for a business license.
SENATOR MICCICHE asked the department to provide an approximate
bracketed government take that isn't related to actual income.
The other taxes, which are in the public record, could
supplement that approximation.
MR. BURNETT said he would do his best to get that information.
SENATOR WIELECHOWSKI said that this was the first time in his
tenure as a legislator that mining taxes were being deliberated.
He also asked for details about how Alaska stands relative to
the mining industry in other states and countries.
SENATOR COSTELLO also want to know how long the average
permitting window is for mining in other states.