Legislature(2011 - 2012)CAPITOL 106
02/18/2011 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB118 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 118 | TELECONFERENCED | |
| += | HB 125 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 118-RESEARCH AND DEVELOPMENT TAX CREDIT
3:21:51 PM
CHAIR OLSON announced that the only order of business would be
HOUSE BILL NO. 118, "An Act relating to a tax credit for
corporate income taxes paid for qualified research and
development expenditures; and providing for an effective date."
3:22:16 PM
CURTIS THAYER, Deputy Commissioner, Department of Commerce,
Community & Economic Development (DCCED), explained that HB 118
would provide a 20 percent tax credit for qualified research and
development conducted by corporate taxpayers in Alaska. The
research and development (R&D) tax credit is intended to
stimulate private sector investment, entrepreneurial activity,
and business expansion in Alaska. Other states offer similar
credits and this bill would allow Alaska to compete with them
and bring long-term benefits to our economy. The cap on the
research and development tax credit may not exceed $10 million
per taxpayer per year. The research and development activities
or the payroll of the employees must take place in Alaska, he
stated.
3:24:05 PM
MR. THAYER related that purpose of the R&D tax credit is to
discover informational technologies and other R&D activities.
In order to qualify for R&D activities, a corporation must meet
the purpose, which is to discover informational technologies and
any application that would be useful in developing new or
improved components. All of the R&D activities must constitute
a process of experimentation, such as development of a new or
improved product, process or formula, development of prototypes
or models, building or improving manufacturing facilities,
development or improvement of software technologies, certificate
testing, and development or application for patents. Activities
that do not qualify for the R&D tax credit would include
exploration activity for asserting the existence, location
extent or quality of ore or mineral deposit, duplication of
existing business components, surveys or studies such as market
research, advertising, or routine data collection, or research
in the social sciences, arts, or humanities.
MR. THAYER related the R&D tax credit could induce corporations
to conduct independent research in Alaska. The R&D tax credit
is supported by the Department of Commerce, Community, and the
Economic Development Advisory Council, which has been directed
to identify means to induce investment and to help increase the
viability of business. Other supporters of the R&D tax credit
include Alaska businesses and chambers of commerce, as well as
municipalities and economic development councils. This
initiative also parallels efforts by the Anchorage Economic
Development Corporation to establish relationships with
corporations looking to relocate to favorable locations in
Alaska.
3:25:20 PM
MR. THAYER stated HB 118 would also impose a reporting
requirement on the Department of Revenue (DOR) so the
legislature and the public will be aware of the fiscal impact
and economic benefits of the R&D to the state.
MR. THAYER explained that the R&D tax credit would be offered
for 20 percent of qualified R&D expenditures that exceed the
average qualified R&D expenditures as defined in 26 U.S.C 41(d)
(Internal Revenue Code) for the three years immediately
preceding the year in which the credit is claimed. Unused R&D
tax credits may be carried forward for up to seven years after
the expenditure for which the credit is claimed.
MR. THAYER related that in order to prevent a corporate taxpayer
from claiming more than one benefit for a single expenditure the
bill also provides that a R&D tax credit may not be claimed for
expenditures that a corporation deducted in calculating its tax
liability or for which it claimed a federal credit apportioned
to Alaska. This bill would help put Alaska on a level playing
field since over half of other states have similar programs.
The R&D tax credit would stimulate private-sector investment,
entrepreneurial activity, and business expansion in Alaska that
will bring opportunity and sustainable long-term benefits to our
economy. He characterized HB 118 as good for economy and
Alaskan families.
3:26:43 PM
WANETTA AYERS, Manager, Office of Economic Development,
Department of Commerce, Community & Economic Development (DCCED,
provided background information on HB 118. She stated that the
federal research and development (R&D) tax credit was
established in 1981, has been reauthorized 14 times, and is
authorized through 2011 [slide 1]. There has been substantial
interest in permanently extending the R&D tax credit to help
companies create good jobs and increase future productivity and
growth.
3:27:47 PM
MS. AYERS outlined the four part test to determine what
constitutes R&D according to the Internal Revenue Code (IRC)
[slide 2], as follows:
Technological in Nature must fundamentally rely on
the principles of physics, biology, chemistry,
mathematics, and computer science.
Level of Technological Uncertainty - activities have
an associated level of uncertainty related to the
development or improvement of a product or process.
Process of Experimentation - incorporates a process of
theoretical and physical evaluation designed to
evaluate one or more alternatives.
Permitted Purpose - requires that the goal of the
activity is to improve the fit, form, or function of a
product or process for a business component.
MS. AYERS commented that much of the permitted purpose was
outlined by Mr. Thayer's information.
3:28:37 PM
MS. AYERS discussed the Innovation Agenda [slide 3], which she
said is being discussed at the national level. The America
COMPETES Act changes the approach to economic development, she
said. A large part of this seeks to strengthen the capacity of
the U.S. Economic Development Administration (EDA) to accelerate
the commercialization of new technologies, products, processes,
and services. The EDA has been restructured and the federal act
formally establishes the EDA's Office of Innovation and
Entrepreneurship at the Department of Commerce to foster
innovation and the commercialization of new technologies,
products, processes, and services with the goal of promoting
productivity and economic growth in the United States.
MS. AYERS related that U.S. President Barack Obama wants to out-
build, out-innovate, out-educate, and out-hustle and be the
economic survivors [slide 4].
MS. AYERS referred to the U.S. map that highlight the 34 U.S.
states that have some form of R&D tax credits or incentives
[slide 5].
MS. AYERS related that HB 118 would create a new tax credit for
qualified R&D development, essentially for every five dollars
spent by the private sector for R&D, one dollar would be
credited back against the state's tax obligation. Corporations
are allowed a total R&D credit up to $10 million per taxpayer
per tax year for the three years immediately preceding the year
in which the credit is claimed, she said.
3:30:45 PM
JOHANNA BALES, Deputy Director, Tax Division, Anchorage Office,
Department of Revenue (DOR), stated that the governor is hoping
to bring in new businesses to Alaska and to entice R&D in
Alaska. The main focus of HB 118 is to help diversify the
economy, she said.
MS. BALES provided a section-by-section analysis of the bill.
Section one would allow a taxpayer 20 percent credit on the R&D
expenditures that are incurred in Alaska that exceed a three
year average of R&D expenditures in the prior three years. She
said that any existing R&D would not qualify for a credit unless
the R&D increased or if new R&D activity happened. The
corporate taxpayer would be allowed 20 percent credit not to
exceed $10 million per year. The corporate taxpayer could carry
forward any credit towards tax liability for up to seven years.
As Deputy Commissioner Thayer previously pointed out, a taxpayer
could not take a deduction for the expenses in the calculation
for the corporate income tax liability. She related that a
federal R&D tax credit also exists. Currently, under Alaska's
corporate tax structure, companies can apportion a part of the
federal credit for business in Alaska, but they would not be
allowed to take the federal credit, as well. She commented that
the Department of Revenue (DOR) would report back to the
legislature any R&D activity.
3:34:01 PM
REPRESENTATIVE HOLMES said it sounds like a good idea. She
referred to state and federal credit. She wondered what the
advantage would be since a federal credit process exists. She
asked for the necessity of allowing a state R&D tax credit since
the corporation would not be eligible for both the state and
federal credit.
MS. BALES explained the federal process. Taxpayers perform a
calculation of all the R&D activity conducted throughout the
nation. The corporate tax is based on a "water's edge basis" so
even though the activity is not conducted in Alaska, the
corporation can take a credit in Alaska. She pointed out that
the credit is generally very small since the portion of the
activity that took place in Alaska is also very small. This
bill would allow a 20 percent R&D tax credit on expenditures
that took place in Alaska. The state is hoping to entice
corporations to do R&D in Alaska. She related a scenario in
which a company performs cold regions R&D, which might be
conducted in a northern state such as Minnesota or Wisconsin.
She related that if those states offer tax credits and Alaska
does not, that this bill would help entice the corporations to
do business in Alaska. She predicted that the R&D tax credit
offered credit directly for those expenses would be larger than
the federal credit the corporation is currently taking.
3:36:16 PM
MS. BALES, in response to Representative Holmes, explained that
R&D tax credits offered by other states vary significantly from
state to state. Some do not have a limit and some have a credit
for the amount of expenses until the corporation has exhausted
the credit. Some offer six percent tax credits and other states
offer 20 percent R&D tax credit. She said it is difficult to
find an average. The DOR piggybacked the federal law, which
allows corporations R&D tax credits ranging from 14 to 25
percent, depending on whether the expenditures are new
expenditures or prior expenditures. She stated that even
federal calculation is complicated and diverse. The DOR
reviewed other states and took a mid-range approach of 20
percent, but only for expenditures that were increasing in the
state.
3:37:57 PM
REPRESENTATIVE HOLMES said it would be helpful to have something
in writing that outlines the exceptions. She asked to what
extent these credits are applicable to oil and gas, and mining.
She offered her belief that the R&D tax credits would not apply
to oil and gas but she thought perhaps some technology research
might qualify.
MS. BALES explained that with respect to mineral exploration
that if the corporation qualifies for federal credit the
corporation would qualify for the proposed R&D tax credit in
Alaska. She noted that federal law does not allow expenses for
exploration to ascertain the existence, location, or extend of a
mineral ore deposit. The reason for this is because under
federal law those activities are allowed to use an exploration
incentive credit. Thus, the federal law would not also offer a
R&D tax credit. She offered her belief that would be the only
limitation for oil and gas companies. She pointed out that if
the oil and gas corporation also performed other R&D, such as
tertiary recovery or other activities, the credit would apply in
Alaska so long as it qualified under federal law. She offered
to provide research on the types of expenses oil and gas
companies could use.
REPRESENTATIVE HOLMES also asked her to address the extent that
this would overlap with existing credits in the oil and gas
arena. She referred to the zero fiscal note. She asked whether
the department could provide a ballpark figure on the
anticipated credits, and if it would range from $10 million or
$10 billion.
MS. BALES suggested that the state would like to attract new
corporations so any additional activity would bring in increased
revenues from corporate taxes. She said she was unsure of the
level of current activity, but she offered to try to provide the
committee with some ideas on the amount of projected activity.
3:41:53 PM
MARK MEYERS, Vice Chancellor, Research, University of Alaska,
explained that the overall research at University of Alaska
(UA), is approximately $123 million per year, largely stemming
from the National Science Foundation grants. He stated the UA
also conducts some private research. He related that the UA is
interested in stronger private public partnerships in research.
He said that his office sees some significant opportunities to
do so. Thus, the UA is forming an office for intellectual
property and commercialization. The lab capacity is quite
sizeable and other states have used that to their advantage to
develop private/public partnerships. He said that in developing
intellectual property, some of the money returns to the state in
the form of royalties on the developed intellectual property.
Along that line, there are many opportunities for ongoing
research in biomedical fields, advanced instrumentation for
space craft, for unmanned aircraft, and unmanned submarine
vehicles. He suggested a substantial work is also performed in
engineering design, energy technology, aviation technology,
transportation infrastructure and construction. Thus, any
credit the state could offer may help entice additional
research. Alaska has a unique natural laboratory for this type
of research, including the ability to use air space to fly
unmanned vehicles since there are few places in the country this
activity can happen. He said that the unique environment offers
opportunities to train Alaskans at the UA to use these research
capacities and to develop the research themselves. He offered
his support for HB 118 as a means to strengthen the state's
economy.
3:45:19 PM
CHAIR OLSON asked whether his research at the UAA is similar to
the research he conducted at the federal United States
Geological Survey (USGS).
MR. MEYERS answered yes, but his research ranges from biology,
water, remote sensing, atmospherics and geophysics. The
difference at UAA is that his research also involves the
humanities, arts, and engineering.
3:45:52 PM
KATHRYN DODGE, Economic Development Specialist, Fairbanks North
Star Borough (FNSB), stated that the Fairbanks North Star
Borough (FNSB) supports HB 118. She explained that the FNSB has
worked with the University of Alaska Fairbanks (UAF) to
strengthen the private industry funded research and the
federally funded research in the community and in the state.
This bill provides a tool to help move that effort forward. She
related that she works with oil and gas recovery. While the UAF
and FNSB have developed some relationships with private
industry, additional effort could be made. Big companies tend
to conduct research in their headquarter areas and the R&D tax
credits provide enough of an incentive for companies to at least
consider conducting research in Alaska. She offered her belief
that this is a very strong and important tool to move Alaska
towards an innovative economy. The state has struggled with low
numbers of patents. She anticipated that HB 118 would increase
the number of patents, which is indicative of an entrepreneurial
economy. The FNSB has also worked to commercialize the
technology but the research doesn't necessarily lend itself as
well, but she thought this bill could help focus on research
with commercial potential. She concluded by offering support
for HB 118. She encouraged members to move the bill forward.
3:48:20 PM
CHAIR OLSON stated his intention to keep the public testimony
open.
[HB 118 was held over.]
3:49:03 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB118 Ver A.PDF |
HL&C 2/18/2011 3:15:00 PM |
HB 118 |
| HB118 Sectional Analysis.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 118 |
| HB118 Sponsor Statement.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 118 |
| HB125 Fiscal Note - REVISED -DPS-ABC-2-15-11.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 125 |
| HB125 Opposing Documents - Email Kent Bowman 2-17-2011.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 125 |
| HB125 Opposing Documents - Letter Shirley Gifford 2-17-2011.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 125 |
| HB125 Opposing Documents - Email Scott Carson 2-17-2011.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 125 |
| HB125 Supporting Documents - Kalenka 2-18-2011.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 125 |
| HB118 Draft Proposed Amendment ver A.1.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 118 |
| HB118 Supporting Documents-CCED-DED-2-18-11-Powerpoint.pdf |
HL&C 2/18/2011 3:15:00 PM |
HB 118 |