Legislature(1993 - 1994)
03/25/1994 08:15 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 498 - Mineral Exploration Incentive Credits REPRESENTATIVE RICHARD FOSTER, PRIME SPONSOR, stated HB 498 provides for exploration credits up to 50 percent of the qualified exploration expenditures to offset state royalty payments. He said he introduced this bill because most of the exploration moneys now within the United States (U.S.) are going overseas and he felt without an incentive, the state will not be able to provide the jobs and economies within the state. He said HB 498 will help give an incentive to larger companies to spend their money in the state. Number 031 REPRESENTATIVE CON BUNDE asked if there are specific projects which HB 498 might address. REPRESENTATIVE FOSTER replied the bill is more for preparation. He said many of the larger companies have always been present throughout the state because of the tremendous mineral resources present. REPRESENTATIVE BUNDE wondered if HB 498 will encourage development. REPRESENTATIVE FOSTER responded it will. He pointed out the state has the most massive untapped coal deposits left in the U.S. He said there are many poverty stricken people living in western Alaska and a development such as a coal deposit, in conjunction with the Red Dog, will provide an economy which will replace some of the state services currently in demand. (CHAIRMAN WILLIAMS noted for the record that REPRESENTATIVE DAVIES joined the committee at 8:30 p.m.) REPRESENTATIVE BUNDE made a MOTION to ADOPT CSHB 498(RES). CHAIRMAN WILLIAMS asked if there were any objections. Hearing none, the MOTION PASSED. Number 064 REPRESENTATIVE DAVID FINKELSTEIN recalled a constitutional issue a few years ago regarding required lease payments, where the state could not have a system which did not have lease payments. He thought applying credits to lease payments might result in a situation where the state is in violation of the Constitution again. JERRY GALLAGHER, DIRECTOR, DIVISION OF MINING, DEPARTMENT OF NATURAL RESOURCES (DNR), responded that Representative Finkelstein is referring to the 6(i) litigation. He said the Supreme Court of Alaska found that the state was required under Section 6(i) to produce a cash income from the disposition of its minerals. The Supreme Court stated specifically that the state is required to have a cash rent and/or royalty. He stated DNR does not believe HB 498 conflicts with 6(i) because currently there is a cash rent and royalty on minerals. HB 498 does not affect the production of cash through rental. He said DNR supports HB 498. REPRESENTATIVE JOE GREEN noted the fiscal note analysis says HB 498 is retroactive to January 1, 1994, and asked if that is still DNR's intent. MR. GALLAGHER responded HB 498 is retroactive. DNR views HB 498 as looking forward for about 15 years. He said it is important to recognize as stated on page 3, lines 4-6, the credits are specific to an individual site. If a company or individual explores a site and puts that site into production, then during that 15 year period, there can be a credit back against the royalty or taxes. He noted DNR does not have a problem with the retroactive date. REPRESENTATIVE GREEN asked if there is a reason for the retroactive date. MR. GALLAGHER responded he did not know of a specific reason or project. REPRESENTATIVE GREEN referring to page 2, line 31 and page 3, lines 1-6, clarified that subsections (1) and (2) are necessary because in one instance the credits are for taxes incurred from production of a site and the other is if nothing is found and money has been expended, there will be an incentive for those dollars. Number 126 MR. GALLAGHER stated the credit is received at the site if it goes into production. REPRESENTATIVE GREEN clarified subsection (1) applies to production and (2)... DAVID ROGERS, REPRESENTATIVE, COUNCIL OF ALASKA PRODUCERS, stated the subsections being referred to say a company or individual can take the lesser of 50 percent of exploration costs as defined in HB 498 or 50 percent of the combined tax royalty obligation, whichever is less. REPRESENTATIVE GREEN expressed concern, in regard to page 4, line 27, "When authorized by AS 27.30.010, the commissioner shall allow...", about the word "shall". MR. ROGERS said the intent is to say a company or individual is entitled to the credit if the requirements of the law are met. He stated this is a conforming amendment to the tax and royalty law. Number 159 REPRESENTATIVE BILL HUDSON clarified HB 498 is an option to the explorer. MR. ROGERS said that is correct. REPRESENTATIVE HUDSON clarified if an explorer applies, the commissioner must grant an incentive credit and HB 498 says the lesser of, meaning the credit can be 50 percent to 100 percent. MR. ROGERS responded the limit is 50 percent. He said the credit is 50 percent of costs or 50 percent of taxes and royalty payments, whichever is less. Number 180 REPRESENTATIVE HUDSON asked how HB 498 will apply to nonstate land. MR. ROGERS said HB 498 will apply the same way to nonstate land. (CHAIRMAN WILLIAMS noted for the record that REPRESENTATIVE MULDER joined the committee at 8:35 a.m.) Number 187 REPRESENTATIVE FINKELSTEIN said he did not understand how HB 498 will apply to nonstate lands. MR. ROGERS responded if a mining company explores nonstate lands and pays taxes, the company can use the credit against its taxes. REPRESENTATIVE FINKELSTEIN asked in situations where nonstate land is involved, is there a problem in having enough of a relationship to know whether or not the exploration is actually being done. MR. GALLAGHER responded it is not a problem because there is a provision on page 2, beginning on line 13, which says data needs to be provided to the department as one of the requirements to grant the credits and added subsection (d), says after 36 months, the department will make that data available to the public. Therefore, the state is receiving something of real value and the public eventually will also. REPRESENTATIVE FINKELSTEIN clarified the credits can only be applied to a mining company's successor and cannot be transferred. MR. ROGERS responded that is correct. REPRESENTATIVE FINKELSTEIN clarified the applicant's successor in interest is an entity who completely buys out another entity. MR. ROGERS said that is correct. Number 221 REPRESENTATIVE JOHN DAVIES clarified that land the state grants to municipalities where the state reserves mineral rights is considered state land for these purposes. MR. GALLAGHER responded yes and stated those are still state-owned minerals and a state royalty is still paid. REPRESENTATIVE GREEN wondered if HB 498 applies to any exploration. MR. ROGERS said the bill does. REPRESENTATIVE GREEN asked if a mining company explores on land next to their present claim, will the credits apply. MR. ROGERS responded it has to be within the area. He said on page 3, lines 2 and 3, and lines 5 and 6, it states "on the parcel or site on which the exploration activity occurred." If a large area is involved and the activity occurred within that area and turned into a producing mine, the credit can be taken against income from the producing mine. MR. ROGERS clarified Representative Green's concern is where there is an existing mine in operation, the entity goes to adjacent land, explores, and tries to take that credit against the income stream from the adjacent mine. REPRESENTATIVE GREEN said that is correct. MR. ROGERS said that is not the intent, but perhaps one could read it that way. MR. GALLAGHER said DNR recognizes that concern. He pointed out in the mining license tax statute and regulations, there is a provision which says new operations receive a 3 1/2 year exemption from the mining license tax. He stated there is concern that as existing mines expand, a company might say this is not an expansion of the old mine, but rather this is a new mine enabling a 3 1/2 year exemption. He pointed out there are a whole series of regulations in the Department of Revenue's mining license tax provisions which define old mines and new mines. When regulations are established if and when HB 498 is implemented, that issue will need to be addressed. Number 278 STEVE BORELL, EXECUTIVE DIRECTOR, ALASKA MINERS ASSOCIATION (AMA), testified via teleconference and said AMA supports CSHB 498(RES). He stated changes made in the CS will provide clarification of terms and add restrictions to the applicability of the bill. For example, the definition of geochemical methods has been changed in the CS with the replacement of the term ore samples, with the new phrase, soil rock vegetation and similar samples. He stated the term ore in the mining industry, by definition, refers to material that cannot be mined and produced at a profit. However, the geochemical sampling foreseen in HB 498 will occur during the earliest phases of exploration--long before it is known if there is a mineral deposit actually there. MR. BORELL stated the CS also clarifies that credits are for a specific site where the exploration occurs and can be transferred to a successor in interest for that site. He said the ability to transfer this credit to a future potential owner is essential. Projects often transfer hands before the ultimate mining operation takes place. The change made in the CS is more restrictive than the original bill but it appears to be a reasonable change. He pointed out the CS clarifies that only direct costs for exploration work qualify and overhead, depreciation, etc., do not. MR. BORELL said AMA feels HB 498 is an important bill and will help encourage both the small prospector and the large international mining companies to vest in the state. He noted that HB 498 comes at an important time because there is a mass exodus of exploration funds away from federal lands throughout the western U.S. due primarily to the increasingly, oppressive regulatory climate in the U.S. for all development and efforts to change the federal mining law. He stressed Alaska cannot change many of those factors but HB 498 can provide an incentive to encourage vestment in the state. MR. BORELL commented that HB 498 will send a positive message to the mining industry that Alaska is seeking to improve its investment climate and provide one more indication the state is working to encourage mineral development. He said HB 498 could not come at a more important time and gave examples of other countries encouraging mineral investments. Number 362 REPRESENTATIVE HUDSON stated he has an idea which perhaps will enhance HB 498. He said on page 3, line 23, where it indicates eligible costs "includes direct labor costs, including the cost of benefits, for employees...", specifically in regard to direct labor costs, he wondered if another subsection could be added which would say "allowable direct labor costs under (A) above may receive a 10 percent credit factor for every Alaska resident employed and used in the work described in AS 27.30.010(a)(1)". He inquired if there would be any desire for an allowable deduction for direct labor costs, as an incentive to hire more Alaska residents. MR. BORELL stated a deduction would provide an additional incentive. He said there are two categories of people who work for mining companies; the very highly technical qualified people a company will either have in state or will bring in from outside and the other work will be performed by people who are hired locally. The idea which Representative Hudson described will not change those categories of people but will provide additional encouragement to hire locally. He could think of no downside to the suggestion. REPRESENTATIVE BUNDE stated the idea is a good one, but wondered about criteria proving Alaska residency and possible constitutional problems. REPRESENTATIVE FINKELSTEIN said the issue Representative Bunde brought up is already addressed as the Department of Labor has developed techniques to differentiate between residents and nonresidents. He stated while it is true a person can come up and become a resident, they have to give up their residence in another state and state they are taking up residency in Alaska. He pointed out that many of the jobs being discussed are time on, time off type jobs. He felt the suggested idea is a good one and noted someone from the Department of Law will need to address the constitutionality of it. REPRESENTATIVE HUDSON stated the most important element is that a person has to declare they are a resident of Alaska and no other state; there is a minimum of 30 days residency; and there is a requirement of other indicia of proof that they are a resident of Alaska such as a drivers license, voter registration, etc. He did not believe it will be difficult for DNR, with the Department of Law's assistance, to define in regulations what a resident is. REPRESENTATIVE FINKELSTEIN felt the idea will not have a constitutional problem because the constitutional problem relates to restricting people's right to travel within the country. He said what was attempted to impose on the oil fields was the restriction that a person cannot work in certain circumstances which limited someone's right. With this idea, no one's rights are being limited. REPRESENTATIVE HUDSON added that the state gives a five percent credit for in-state purchases, etc. He felt the idea might be quite constructive. Number 473 MR. ROGERS felt the concept is good as long as it can be done technically and is constitutional. REPRESENTATIVE BUNDE asked what the bill sponsor thought of the idea. REPRESENTATIVE FOSTER responded he has no objection. REPRESENTATIVE HUDSON made a MOTION to CONCEPTUALLY AMEND CSHB 498(RES) adding the language, "allowable direct labor costs under (A) above may receive a 10 percent credit for every Alaska resident employed and used in the work described in AS 27.30.010(a)(1). MR. ROGERS asked how the 10 percent credit will work. REPRESENTATIVE HUDSON replied the credit will be a factor on all eligible employment costs. The credit will be elevated by 10 percent if Alaskans are hired and will increase the size of an entity's deduction. REPRESENTATIVE FINKELSTEIN said conceptually there is a problem in what it is going to take to hire Alaskans and what the threshold to get to 10 percent is. He said another approach, which will give direct benefit, is to give the credit for direct labor costs for the employment of Alaskans. Number 564 REPRESENTATIVE HUDSON said he thought about a possible threshold as to the numbers, but he would like to leave it open. The company will get 10 percent on whatever the particular labor is, get 10 percent inflation, and there is an incentive for the companies to put 100 percent in. REPRESENTATIVE FINKELSTEIN clarified if a company has a work force of 100 people and 99 of them are not Alaskans, the company still gets the credit. REPRESENTATIVE HUDSON replied the credit would be received for one person. REPRESENTATIVE FINKELSTEIN clarified a portion of the work force gets the 10 percent. (CHAIRMAN WILLIAMS noted for the record that REPRESENTATIVE JAMES joined the committee at 9:07 a.m.) Number 590 REPRESENTATIVE FINKELSTEIN felt the amendment should be even more conceptual than just the language. When the amendment is drafted, there may be a need to even change the language. He felt the intent is clear. REPRESENTATIVE HUDSON stated conceptual is conceptual. The idea is to provide a 10 percent credit factor for mining companies who use Alaska residents in this particular process. How the attorneys decide to accomplish that is up to them. CHAIRMAN WILLIAMS asked if there were any objections to the motion. Hearing none, the MOTION PASSED. Number 621 CARL MEYER, CHIEF OF APPEALS, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE (DOR), stated he is present to answer questions. REPRESENTATIVE FINKELSTEIN noted the revenue lost is indicated to be a range of $0 to $186 million. He wondered if the revenue lost will actually be somewhere between $0 and $93 million since it is only half. MR. MEYER said that is correct. The amount of the fiscal note will be up to $93 million. He thought the fiscal note had been changed but perhaps not submitted yet. REPRESENTATIVE HUDSON thought perhaps the revenue could conceivably be a positive as opposed to a negative, because the bill will help create revenue not existing if exploration was not encouraged through some sort of incentive. MR. MEYER responded that is possible, but not likely. REPRESENTATIVE HUDSON pointed out if a company does not do anything, the state gets nothing but if a company puts money into something through the incentives being provided and something is found, the state gets half of what is found. Number 680 REPRESENTATIVE FINKELSTEIN said the potential for that type of pay off is not reflected in the fiscal note because it is way off in the future. He pointed out it is unlikely the state will lose much money in the immediate future for the same reason because exploration activities are involved. He clarified that the Red Dog mine is only going to get credits for new exploration they have done since the effective date of HB 498 which is January 1, 1994, resulting in no significant reduction in an entity which is already in production. MR. MEYER responded he was not sure. He said the credit is determined by the Department of Natural Resources and DOR will apply the credit once it is determined. REPRESENTATIVE DAVIES recalled it was mentioned earlier there are currently DOR regulations which distinguish between new and old mines and asked Mr. Meyer to comment on those regulations. MR. MEYER said he is not familiar with those regulations. He stated DOR does have a provision which provides that new mining operations are exempt from tax for 2 1/2 years. There are questions as to what is a new mining operations and there have been cases before the DOR. TAPE 94-41, SIDE B Number 000 MR. MEYER did not feel those regulations will apply to HB 498. REPRESENTATIVE DAVIES thought the concepts in DOR's definitions of what is a new mine versus an old mine will be taken by DNR and rewritten into DNR regulations. He asked Mr. Meyer if the DOR concepts work. MR. MEYER replied he cannot answer the question. REPRESENTATIVE FINKELSTEIN clarified that a company in existing production, the only effect on their royalty payments is if they have started associated exploration since January 1, 1994. Otherwise, there will be no reduction. Number 025 MR. GALLAGHER responded the mining business has three fundamental phases: exploration, development, and production. He stressed HB 498 applies to exploration. On page 3, line 21, it says, "direct support of exploration activities." He felt development drilling around existing mines will not qualify as a deduction. He said HB 498 only applies to new properties not currently in production. REPRESENTATIVE GREEN said with the oil incentive credits, the costs are approved by the commissioner as being applicable under the exploration idea. He noted HB 498 does not have that provision and asked if the bill did, would it avoid any problems in the future or will DNR regulations handle the problem adequately. MR. GALLAGHER felt DNR's regulations will address the problem. He pointed out there is a big difference between the two programs. REPRESENTATIVE HUDSON made a motion to MOVE CSHB 498(RES) as conceptually amended, with revised fiscal note, out of committee with INDIVIDUAL RECOMMENDATIONS. CHAIRMAN WILLIAMS asked if there were any objections. Hearing none, the MOTION PASSED.
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