Legislature(2005 - 2006)
03/27/2006 08:59 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB418 | |
| HB492 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 418-MINING PROD. & LICENSE TAXES/ROYALTIES 8:59:44 AM CHAIR WEYHRAUCH announced that the first order of business would be HOUSE BILL NO. 418, "An Act relating to a mining production tax; relating to the mining license tax; relating to production royalties on minerals; relating to exploration incentive credits; and providing for an effective date." [Before the committee was the proposed committee substitute (CS) for HB 418, Version 24-LS1456\S, Chenoweth/Bullock, 3/22/06, which had been adopted as the work draft on 3/22/06]. 9:00:01 AM IAN LAING, staff to Representative Paul Seaton, Alaska State Legislature, on behalf of Representative Seaton, sponsor of HB 418, provided a brief summary of the bill's intent which is to determine whether a better return on investment, for the exploitation of the resources in the mining industry, can be expected without harming [future] investment by the industry. He informed the committee that the mining industry currently pays federal, municipal, and state taxes. He listed the major taxes on the state level that are primarily affected by the bill: the Mining License Tax; royalties for mineral and coal; and claim rentals on state land. He then directed the committee's attention to the revised table in the committee packet [labeled "State Revenue Collected through Major Taxes and Fees on Mining - FY 98-03"] and explained that it now includes figures through fiscal year 2004 (FY 04). MR. LAING then highlighted some of the key differences between the existing Mining License Tax and Version S. One of major differences, he said, is that of changing the current "percent depletion" method of the Mining License Tax to a "cost depletion" one. A mining company would no longer be allowed to annually deduct a percentage of gross even after its costs have been recouped, he clarified, because by using a cost depletion method, only a percent of a mining company's development expenses, equal to the percent of the total ore body that is mined, would be an allowable deduction. He noted that this change will [largely] tend to apply to the larger mines that have a general idea of what the ore body is. However, he remarked that the bill does allow some flexibility for smaller operations with insufficient resources to determine the consistency of the ore body. He went on to explain that the current Mining License Tax, after deductions are applied, is calculated as a percentage of net income. Yet in Version S, he highlighted that these percentages have all been raised by 2 percent of net income with an additional tax bracket of 11 percent for income over $500,000. Additionally, he said, Version S would eliminate the deduction of indirect expenses which again would apply to much larger mining operations. MR. LAING informed the committee that the most substantial change proposed in Version S is made to mineral royalties. He noted that every other rights holder in the state - from Native corporations to the university and Mental Health Trust lands - charges a mining royalty. This royalty, he explained, is quite different than the current 3 percent of net income the state calculates and charges under the [Mining License Tax]. Version S would implement a new royalty that charges 3 percent of "net smelter return" (NSR) which changes the royalty from a profits tax to one based on the actual mineral value. He listed some of the allowable deductions with the NSR tax: return from the smelter, transportation expenses, smelting fees and penalties. In response to Chair Weyhrauch, he explained that a "nonsmeltable" is any "mineral that occurs in its native state." He deferred to Department of Natural Resources (DNR) for a more thorough definition, explaining that he is unaware of any mineral mined in Alaska that would be considered nonsmeltable. MR. LAING then turned the discussion to coal royalties and informed the committee that Version S proposes that the 5 percent adjusted gross value, currently in regulation, not only be put into statute but also adopted as the minimum royalty. Furthermore, he noted that the rate allows for the deduction of transportation costs from the point at which the coal is weighed and loaded, to its point of sale. He opined that this would be of no substantial difference to the industry because it only adopts what's currently established in regulation. 9:11:05 AM CHAIR WEYHRAUCH asked how "the point at which it is weighed" differs from "mine mouth." MR. LAING said that "mine mouth" is somewhat of a misnomer and has no specific definition. He explained that not until the coal is extracted, transported to a crusher, crushed, and loaded for transport is its value assessed and an adjusted gross value assigned. Then directing the committee's attention to rents for coal and minerals, he highlighted that Version S proposes the same rates currently in regulation - $3.00 for coal and $3.30 for minerals - be adopted as the minimum, with ties to the Anchorage Consumer Index, and adjusted as needed every 10 years. 9:13:22 AM REPRESENTATIVE SEATON further clarified what is meant by "depletion." He said that currently depletion can be done one of two ways: by cost or by a [percent] of gross value of the minerals. He explained that Version S focuses on the cost method which allows for costs to be depleted, however, subtracting the amount for mined minerals is not. 9:14:18 AM REPRESENTATIVE WILSON, referring to the Mr. Laing's mention of coal rental rates being tied to the Anchorage Consumer Index, inquired as to whether this is currently done or a proposed change. MR. LAING stated his understanding that it's the minerals rent that's currently tied to the Anchorage Consumer Index; Version S applies this to coal rent as well. 9:14:54 AM REPRESENTATIVE SEATON indicated that the proposed rates, though tied to the "Consumer Price Index," would only be adjusted every ten years. He clarified that it's not meant to be an annual increase in the rents. 9:15:22 AM MR. LAING added that if the Anchorage Consumer Price Index were applied to the coal value at the time it was adopted, it would total $5.25 and does account for inflation. 9:16:31 AM DICK MYLIUS, Acting Director, Division of Mining, Land and Water, Department of Natural Resources (DNR), in response to Chair Weyhrauch, explained that he has heard general concern from the industry as to what the possible impacts might be on future development should the current taxing structure change. He said, however, that he has not received any specific feedback on [Version S]. In further response to Chair Weyhrauch, he opined that it was beyond his division's capability to analyze how the changes to the current tax structure would change the economics to the industry. 9:18:10 AM REPRESENTATIVE SEATON inquired as to whether Mr. Mylius perceives the additions [to the rents] on coal are "basically just putting in statute the minimums of what [is currently done] in regulations, except for changing the ... reassessment period from 20 years to 10 years." MR. MYLIUS stated his agreement in as far as it pertained to coal fees currently in regulation. In further response to Representative Seaton, he agreed that the cost method of depletion is one of two methods currently used; however, his division has not yet evaluated the effects of changing to this method alone. 9:19:40 AM REPRESENTATIVE WILSON requested Representative Seaton provide further explanation on the possible depletion methods. REPRESENTATIVE SEATON explained that currently, the [mining industries] can either deplete based on costs put into a project or can subtract from taxes a percent of the minerals no longer in the field. He stated his understanding that many of the larger mining operations deduct a "huge part" of taxes because they "used up more of the minerals [which] are no longer there to take." The proposed tax change in Version S, he clarified, allows the depletion of costs as a deduction, however, not the depletion of minerals removed from the ground. 9:21:06 AM CHAIR WEYHRAUCH inquired as to whether there is a depletion allowance for oil in federal law. REPRESENTATIVE SEATON expressed his belief that there is no oil depletion allowance at the state level. 9:22:12 AM NELS TOMLINSON, Economist, Tax Division, Department of Revenue (DOR), summarized those questions asked by the committee at a previous hearing on HB 418, and then answered by Dan Stickel and Johanna Bales from the DOR Tax Division, in a memo dated March 3, 2006. In regard to the possible impact of the bill on tax revenues should the Pogo and Kensington mines be excluded from the analysis, he directed the committee's attention to the charts on page two of the memo that summarize the effect. He relayed that revenue increases [from the proposed tax change] would be approximately $1 to $4 million smaller per year than what was previously determined in the department's original fiscal note. As for "an estimate of the deductions taken from gross revenue to arrive at a taxable income," he listed the 2004 totals for the industry as a whole: the depletion allowance amounted to 18 percent of gross income; the direct mining expenses were approximately 52 percent of gross income; and indirect mining expenses amounted to 6 percent of gross income. 9:25:07 AM The committee took an at-ease from 9:25 a.m. to 9:28 a.m. 9:28:00 AM CHAIR WEYHRAUCH inquired as to whether the "Schedule A" Mr. Tomlinson referred to is based on the aggregate of the tax returns from the companies. MR. TOMLINSON said this is correct. 9:28:31 AM REPRESENTATIVE SEATON inquired as to whether the memo before the committee is based on the original bill and not Version S. MR. TOMLINSON said this is correct. CHAIR WEYHRAUCH asked Representative Seaton how Version S would affect the analysis provided in the memo. REPRESENTATIVE SEATON expressed his belief that it would be a considerable change. He explained that upon hearing industry concerns regarding a tax based on gross as proposed in the original bill, Version S was drafted to return to the original structure of the mining tax, eliminating some of the problems of indirect costs. These changes would affect the percentages shown on the charts in the memo by reducing the amounts of revenue, he said. Should Version S move from this committee, he remarked, a new fiscal note would be prepared prior to the bill hearing in the House Resources Standing Committee. 9:29:42 AM REPRESENTATIVE WILSON asked Mr. Tomlinson whether DOR could provide the committee with [a revised fiscal note] in response to changes proposed in Version S. MR. TOMLINSON expressed that this would be possible. 9:30:05 AM CHAIR WEYHRAUCH requested that the possible impacts to the mining industry be addressed. 9:30:18 AM JOHANNA BALES, Excise Audit Manager, Tax Division, Department of Revenue (DOR), confirmed that the information in the memo "really doesn't apply anymore to [Version S]." She informed the committee that she applied the changes [proposed in the Version S] to the income in 2004 and estimated, by denying the use of percentage depletion, that there would be a $7 million increase in the Mining License Tax. By applying the new tax rate shown on page 9 of Version S, she explained that the current tax rate is adjusted up by 2 percent, with a new tax rate of 11 percent added and the use of a graduated tax rate denied. Based on these changes, she relayed that there would be an increase of an additional $7 million a year with an overall impact on revenue estimated at $14 million per year. 9:32:10 AM REPRESENTATIVE SEATON noted that in the original bill, revenues were "graduated in under the gross tax" to where revenues for 2011 or 2012 were projected to be approximately $30 to $45 million. However, he explained that in Version S, the increase would be approximately $15 million "because it doesn't grade in." He summarized that although this amount is not nearly as much as those generated in the original bill, it would still be an increase to the current tax revenues of approximately $8 million. 9:33:28 AM MR. TOMLINSON directed the committee's attention to the third question addressed in the March memo which read: Has any economic analysis been performed that might indicate at what point the tax burden on the mining industry becomes onerous? MR. TOMLINSON explained that DOR has not yet done such an analysis and is unable to tell the exact impact on the industry at this time. He relayed that the department does "know that increasing the tax is going to ... slightly decrease the profitability [to the mining industry]" and perhaps cause mines to leave a little more ore in the ground. Additionally, he said that although a company on the verge of profitability might be swayed by changes to the tax structure, DOR is not aware of any company in the state at this particular stage of investment. He then addressed the final question in the memo as to what the mining industry pays the state in corporate income taxes. He highlighted that the approximate tax liabilities of $133,000 in FY 04 and $120,000 in FY 05 are actually far lower than can be expected now that the mineral prices are much higher. CHAIR WEYHRAUCH inquired as to whether the increase on mineral prices from this year to last could be quantified. MR. TOMLINSON directed the committee's attention to the projections [derived from the tax changes proposed in the original bill] on page 2 of DOR's fiscal note which show the Mining License Tax revenues for FY 08 at approximately $20 million and for FY 09 at $18 million. Should mineral prices return to their long-term average, he explained that tax revenues of $5 million a year are projected from approximately FY 08 to FY 11. 9:36:39 AM REPRESENTATIVE WILSON requested clarification of the wording in the March memo which reads, "[DOR] may receive zero or more than one tax return from a company in a given fiscal year." MR. TOMLINSON explained that this is a matter of timing and that it's possible to receive two tax returns from one company within the same fiscal year: one year's return submitted just after the June 30 cutoff and the following year's return submitted prior to its June 30 cutoff. REPRESENTATIVE SEATON returned to Mr. Tomlinson's earlier explanation of the projected changes in tax revenues for FY 08 and FY 09 given the possible fluctuations in mineral prices. He inquired as to whether Mr. Tomlinson might have misinterpreted Chair Weyhrauch's request for information on "corporate income taxes" by instead provided the figures for "Mining License Tax" revenues. MR. TOMLINSON confirmed that he had mistakenly quoted figures for the Mining License Tax, not those for corporate income tax. Although he said that he does not have with him a set of projections for corporate income for the mining industry, he opined that it would be reasonable to take those Mining License Tax numbers as surrogates for the increase [in mineral prices] ...." 9:39:18 AM MS. BALES interjected to note that one difference between the Mining License Tax and corporate income taxes is that the former is based on the mining activity in the state as opposed to the latter tax that uses a "waters-edge" basis. She explained that everything a corporation does is dictated by its activity in the United States. She opined that it's difficult to predict that significant increases in the Mining License Tax will actually result in matching increases in corporate taxes because there are many more variables involved. She further clarified that a single [corporate] taxpayer could report different industries and activities. As per the request of Chair Weyhrauch, she defined "waters edge" as meaning activity "within the United States" [versus worldwide]. Unlike the oil and gas corporations, she explained that all other industry corporations "look at all their activity that's conducted in the United States, ... take a percentage of their activity in Alaska, and they allocate all of their income from activities in the United States." 9:41:10 AM REPRESENTATIVE SAMUELS inquired as to how many mines in Alaska paid corporate income taxes and asked whether these taxes came solely from the Red Dog Mine. MS. BALES highlighted that there are approximately 180 mining taxpayers, however, she estimated that less than a quarter of those are organized as C Corporations filing corporate tax returns. She said that the remainder file either as individual royalty owners, S Corporations, or partnerships. In further response to Representative Samuels as to whether the corporate income taxes paid are equally distributed, she relayed that only a few pay the corporate income tax based on the activity that they have. "The larger mines are held by corporations and there are just a few of those," she said. REPRESENTATIVE SAMUELS asked whether one could assume this trend [to incorporate] would continue over the next couple of years [or], whether the currently incorporated mines would [just] expect to pay a little more. MS. BALES said the [latter] would be a correct assumption. 9:43:41 AM CHAIR WEYHRAUCH, having determined there was no further testimony, announced that the bill would be held over.
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