04/03/2012 01:30 PM Senate LABOR & COMMERCE

           HB 252-SMALL BUSINESS INCOME TAX EXEMPTION                                                                       
                                                                                                                                
1:33:38 PM                                                                                                                    
VICE  CHAIR  PASKVAN  announced consideration  of  HB  252  [CSHB
(FIN), version 27-LS1085\D, was before the committee].                                                                       
                                                                                                                                
1:33:46 PM                                                                                                                    
REPRESENTATIVE MIA  COSTELLO, sponsor  of HB 252,  explained that                                                               
the  premise  behind  this  bill  is  to  diversify  the  state's                                                               
economy. The  state depends  on the  federal government,  the oil                                                               
industry and then everything else, she  said, but it can expect a                                                               
decrease  in  federal spending,  and  this  bill focuses  on  the                                                               
"everything  else"  aspect of  the  economy  by encouraging  fast                                                               
growing businesses to come to  Alaska and become corporate income                                                               
taxpayers.                                                                                                                      
                                                                                                                                
She said  that right  now the  state of  Alaska has  about 16,000                                                               
corporate income tax  returns coming in; about half  of those pay                                                               
no corporate income  tax, and of the remaining  3,100, only about                                                               
900  companies  pay more  than  $1,000  in corporate  income  tax                                                               
annually.  HB 252  would exempt  qualifying  industries from  the                                                               
state's  corporate income  tax until  they reach  $50 million  in                                                               
gross  aggregate assets.  This  bill dovetails  with federal  law                                                               
that exempts people  from capital gains tax if they  invest in an                                                               
initial  public offering  (IPO) and  keep their  money in  it for                                                               
five years.  In order  for a  company to be  considered a  1202 C                                                               
corporation, it  has to have  $50 million gross  aggregate assets                                                               
or less, cannot be in an  exempted industry and 80 percent of its                                                               
assets have  to be  used in  the daily  conduct of  its business.                                                               
That portion of  the federal definition really makes  it apply to                                                               
a small  slice of  industries, but  this bill  exempts additional                                                               
industries to those in the federal law.                                                                                         
                                                                                                                                
1:37:04 PM                                                                                                                    
REPRESENTATIVE COSTELLO  said she was trying  to attract software                                                               
development,    biotech,   pharmaceutical,    telecommunications,                                                               
superconductors,  business  technologies   and  solutions,  media                                                               
storage  servers, video  games, mobile  apps and  industries that                                                               
deal  primarily   with  intellectual  property  and   that  don't                                                               
typically have many physical assets.                                                                                            
                                                                                                                                
1:38:10 PM                                                                                                                    
VICE CHAIR PASKVAN  asked how long these tax  provisions apply to                                                               
a company.                                                                                                                      
                                                                                                                                
1:38:27 PM                                                                                                                    
JOSHUA  WALTON, staff  to  Representative  Mia Costello,  replied                                                               
that neither  the federal version  nor the state version  of this                                                               
exemption has a time limit, but  the time limitation for how long                                                               
a company can  qualify comes through the asset  cap. He explained                                                               
that when  companies are  starting up they  are looking  for fast                                                               
growth; as  they grow  they either become  profitable or  not. If                                                               
they are not profitable, they go  away. If they are, they wind up                                                               
accumulating assets which  count towards the $50  million cap. At                                                               
least  80 percent  of those  assets have  to be  rolled into  the                                                               
active conduct of  their business: things like  paying the costs,                                                               
increasing   their   production   or  additional   research   and                                                               
development.                                                                                                                    
                                                                                                                                
VICE CHAIR PASKVAN asked if a  company stays under $50 million in                                                               
assets, would the exemption continue to apply.                                                                                  
                                                                                                                                
MR. WALTON said that was correct.                                                                                               
                                                                                                                                
REPRESENTATIVE COSTELLO  added if  this bill becomes  law, Alaska                                                               
would  be  the  first  state  to  piggyback  on  federal  1202  C                                                               
corporation law.                                                                                                                
                                                                                                                                
SENATOR PASKVAN opened public testimony.                                                                                        
                                                                                                                                
1:40:54 PM                                                                                                                    
JON  BITTNER,  Vice  President,  Anchorage  Economic  Development                                                               
Corporation (AEDC),  said they strongly  supported HB  252. These                                                               
incentives  are  extremely  important to  generating  a  stronger                                                               
economy in  Alaska as well  as generating interest  in relocating                                                               
here  from  outside.  This measure  also  dovetails  nicely  with                                                               
several federal and municipal opportunities  that are coming down                                                               
the pike over  the next year. On the federal  level, the Jobs Act                                                               
changes  several regulations  in the  SEC code  that hasn't  been                                                               
changed  since  1933;  these  changes  will  generate  a  lot  of                                                               
interest and new business that  could take advantage of this kind                                                               
of incentive. In Anchorage, it  could dovetail with the Municipal                                                               
Angel Fund  that is coming on  line soon. There has  never been a                                                               
better time than right now for businesses to come to Alaska.                                                                    
                                                                                                                                
VICE CHAIR PASKVAN asked his thoughts on a time limitation.                                                                     
                                                                                                                                
MR. BITTNER replied  that they would leave the details  up to the                                                               
legislature.                                                                                                                    
                                                                                                                                
VICE CHAIR PASKVAN said he supported  the bill, but was trying to                                                               
figure out some sideboards for it.                                                                                              
                                                                                                                                
1:43:59 PM                                                                                                                    
SENATOR DAVIS said she was looking  at letters of support and was                                                               
impressed  with someone  who was  born and  raised in  Alaska and                                                               
started his  business at age  16. He is now  19. He was  born and                                                               
raised  in  Alaska  and  is  now   in  Europe.  He  is  quite  an                                                               
entrepreneur.                                                                                                                   
                                                                                                                                
VICE CHAIR PASKVAN said that the  man she was referring to, Tyler                                                               
Arnold, had provided written testimony.                                                                                         
                                                                                                                                
1:45:00 PM                                                                                                                    
ALLEN JOHNSTON,  representing himself, said  he had been  with an                                                               
investment company for  the last 35 years  and strongly supported                                                               
HB 252.  This is the  best bill he had  seen for the  least cost,                                                               
the most  leverage for changing  the psychology in Alaska  as far                                                               
as  getting  people  to  think  "can  do"  in  identifying  local                                                               
problems and  becoming involved in  their solutions  and creating                                                               
different  types of  companies that  don't make  any sense  to do                                                               
here right now.  He remarked that this exemption could  work as a                                                               
catalyst for a lot wonderful initiatives that are happening now.                                                                
                                                                                                                                
VICE  CHAIR  PASKVAN  remarked that  he  remembered  meeting  Mr.                                                               
Johnston in Fairbanks about 25 years ago.                                                                                       
                                                                                                                                
1:47:03 PM                                                                                                                    
REPRESENTATIVE  COSTELLO  presented  video testimony  from  Tyler                                                               
Arnold in which  he explained that his current  start up, "Simply                                                               
Social," is a 1202 C corporation  based in Alaska. He said he may                                                               
be global,  but he acts  local and unfortunately, Alaska  has one                                                               
of the highest  state corporate income tax rates  in the country.                                                               
HB 252  would not  only remove this  burden but  would strengthen                                                               
the state's global competitiveness by  waiving the state tax rate                                                               
for like-minded tech startups and high growth companies.                                                                        
                                                                                                                                
He said  he chose  to incorporate in  Alaska partly  because it's                                                               
his home,  but also because he  was able to attracted  nine local                                                               
accredited angel investors who chose  a path forward in mentoring                                                               
and funding him. He hoped lawmakers would be equally supportive.                                                                
                                                                                                                                
1:50:30 PM                                                                                                                    
The video with Mr. Arnold's testimony ran from 1:48 to 1:50 p.m.                                                                
                                                                                                                                
MR. WALTON said  there was an 11 hour time  difference in Romania                                                               
and Mr.  Arnold had  a sore  throat, so  he wasn't  available for                                                               
questions right now and offered to provide contact information.                                                                 
                                                                                                                                
SENATOR  PASKVAN found  no questions  from committee  members and                                                               
asked if this tax had any appropriate sideboards.                                                                               
                                                                                                                                
1:51:44 PM                                                                                                                    
JOHANNA  BALES, Deputy  Director,  Department  of Revenue  (DOR),                                                               
said this  version of HB  252 has  a 10-year sunset  provision on                                                               
page  2, line  22. She  said the  department had  no issues  with                                                               
version D of HB 252, but didn't have an official position on it.                                                                
                                                                                                                                
VICE CHAIR  PASKVAN, finding no  further comments,  closed public                                                               
testimony and held HB 252 in committee.