03/14/2007 07:08 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB61 | |
| Overview: Mining Tax, Department of Revenue | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 14, 2007
7:08 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Andrea Doll
COMMITTEE CALENDAR
HOUSE BILL NO. 61
"An Act relating to tax credits for cash contributions by
taxpayers that are accepted for certain educational purposes,
including vocational education programs and courses at the
secondary school level; and providing for an effective date."
- MOVED CSHB 61(W&M) OUT OF COMMITTEE
OVERVIEW: MINING TAX, DEPARTMENT OF REVENUE
-HEARD
PREVIOUS COMMITTEE ACTION
BILL: HB 61
SHORT TITLE: TAX CREDIT FOR CONTRIBUTIONS TO VOC ED
SPONSOR(s): REPRESENTATIVE(s) NEUMAN
01/16/07 (H) PREFILE RELEASED 1/5/07
01/16/07 (H) READ THE FIRST TIME - REFERRALS
01/16/07 (H) W&M, FIN
03/14/07 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
REPRESENTATIVE MARK NEUMAN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 61.
REX SHATTUCK, Staff
to Representative Mark Neuman
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Explained changes in the committee
substitute for HB 61 on behalf of Representative Neuman,
sponsor.
PAUL DICK, Chief of Operations-Juneau
Tax Division
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions on HB 61.
LAMONT C. ALBERTSON, Executive Director
People's Learning Center
Bethel, Alaska
POSITION STATEMENT: Testified in support of HB 61.
JOHANNA BALES, CPA, Excise Audit Manager
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Presented an overview of Alaska's mining
license tax and answered questions.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:08:13 AM. Present at the call to
order were Representatives Hawker, Wilson, Fairclough, Roses,
and Seaton. Representatives Gruenberg and Cissna arrived as the
meeting was in progress. Representative Doll was also in
attendance.
HB 61-TAX CREDIT FOR CONTRIBUTIONS TO VOC ED
7:09:16 AM
CHAIR HAWKER announced that the first order of business would be
HOUSE BILL NO. 61,"An Act relating to tax credits for cash
contributions by taxpayers that are accepted for certain
educational purposes, including vocational education programs
and courses at the secondary school level; and providing for an
effective date."
REPRESENTATIVE MARK NEUMAN, Alaska State Legislature, speaking
as the prime sponsor of HB 61, explained that much of the bill
currently exists in statute because current law allows tax
credits for donations to post-secondary schools. The bill's
provisions would also allow taxpayers to take a tax credit for
their donations to secondary schools. He explained that the
credit allowed is the lesser of: an amount equal to 50 percent
of contributions of not more than $100,000 and 100 percent of
the next $100,000; or 50 percent of the taxpayer's net liability
under Title 43. He explained that a taxpayer who contributes
$200,000 to vocational education could take a tax credit of
$150,000. He noted that major corporations can pay upwards of
$2 million in taxes annually. He went on to say that a credit
of $150,000 is not a huge reduction in the amount of taxes the
state receives, but that a donation of $200,000 would be a
tremendous benefit to a vocational education program. He said
that he believes vocational education programs are an important
component of education, particularly in rural Alaska.
7:12:58 AM
CHAIR HAWKER clarified that existing statutes allow for certain
tax credits, and that this bill allows for taxpayers to avail
themselves of an additional tax credit for donations to high
schools, secondary schools, and vocational education programs.
REPRESENTATIVE NEUMAN agreed that most of the provisions in the
bill are already in statute, but this bill expands the ability
of taxpayers to receive a tax credit for donations at the
secondary level, which he opined could have a positive effect on
graduation rates at the high school level. He assured the
committee that the amounts of credits currently authorized by
statute have not been changed.
REPRESENTATIVE SEATON, in response to a question about the
bill's effective date, reminded the committee that an effective
date other than 90 days after a bill has passed requires a two-
thirds vote of each house.
7:15:44 AM
REPRESENTATIVE FAIRCLOUGH moved to adopt the proposed committee
substitute (CS) for HB 61, Version 25-LSO302\C, Bullock,
3/12/07. There being no objection, Version C was before the
committee.
7:16:30 AM
REX SHATTUCK, Staff to Representative Mark Neuman, Alaska State
Legislature, explained that Version C is intended to clear up
some areas by standardizing language throughout the sections and
clarifying the descriptions contained in the first section.
CHAIR HAWKER clarified that the bill contains tax credits that
already exist which various taxpayer can apply to their state
tax liabilities.
7:17:45 AM
REPRESENTATIVE WILSON expressed her support of vocational
education programs.
7:18:27 AM
REPRESENTATIVE NEUMAN said that industry has stated it would
like to support vocational education efforts.
7:19:15 AM
REPRESENTATIVE SEATON noted that the tax credit applies to the
state's corporate income tax and asked whether it would also
apply if the state enacted a personal income tax.
PAUL DICK, Chief of Operations-Juneau, Tax Division, Department
of Revenue (DOR), agreed that the bill's credit provisions apply
to corporate income taxes. He went on to say that application
to a personal income tax would have to be determined after any
change to the tax laws. In response to a question, he explained
that the property tax education credit in Section 4 applies only
to oil and gas property taxes paid to the state, not to
municipal property taxes.
7:22:20 AM
CHAIR HAWKER noted that the bill allows a taxpayer to take a
credit against certain taxes should the taxpayer decide to make
a contribution to vocational education.
7:22:30 AM
MR. DICK said that in fiscal year (FY) 2005, there were $5
million in contributions made to educational institutions, which
resulted in tax credits of $2.5 million claimed against the
various tax types, such as corporate, mining and fisheries
business taxes.
7:23:50 AM
LAMONT C. ALBERTSON, Executive Director, People's Learning
Center, explained that the People's Learning Center ("center")
combines post-high school secondary vocational education and is
heavily involved in work force development. He said that the
bill would allow his center to accept corporate contributions.
He emphasized that rural Alaska needs work force development and
training to help sustain communities, families, and the region.
He said that any steps that would encourage corporate
involvement would be positive.
7:25:43 AM
REPRESENTATIVE SEATON asked whether any funds received will
qualify the center for matching grant funds.
MR. ALBERTSON replied that there could be matching funds and he
would certainly pursue any opportunity to obtain them.
7:26:21 AM
REPRESENTATIVE CISSNA asked how much was currently invested in
the center.
MR. ALBERTSON replied that he anticipates the project will cost
about $25 million, including in-kind contributions. Thus far,
about $18 million has been raised. He explained that the center
provides a broad range of vocational training opportunities.
7:28:00 AM
CHAIR HAWKER asked about the possible tax effects of this bill
on the state treasury.
MR. DICK replied that it is hard to predict how many taxpayers
will use this tax credit. He said that over the last few years,
the credit program has remained fairly static with about $5
million in contributions that resulted in $2.5 million in
credits. He responded to a question by noting that the bill
does not cover the particulars of whether a donor can dictate
how their donated funds are spent.
7:31:11 AM
REPRESENTATIVE SEATON asked if a single contributor can donate
$1.5 million to the allowable entities.
MR. DICK replied that a donor can contribute $1.5 million, but
the tax credit would be $150,000. He said that currently some
corporate contributors make large contributions, but only claim
$150,000 in tax credits.
7:31:46 AM
REPRESENTATIVE WILSON moved to report CSHB 61, Version 25-
LSO0302\C, Bullock, 3/12/07 out of committee with individual
recommendations and the accompanying indeterminate fiscal note.
There being no objection, CSHB 61(W&M) was reported from the
House Special Committee on Ways and Means.
7:32:07 AM
^Overview: Mining Tax, Department of Revenue
CHAIR HAWKER announced that the next order of business would be
an overview of the state's mining tax laws by the DOR.
JOHANNA BALES, CPA, Excise Audit Manager, Tax Division,
Department of Revenue (DOR), explained that mining taxes were
imposed beginning around 1913. Over the years, the tax rates
have fluctuated somewhat. The last major change to the mining
license tax was in 1955. Since that time, there has been a
series of tax credits applied to the mining tax structure.
7:36:55 AM
REPRESENTATIVE WILSON asked why tax credits were enacted between
1987 and 2002.
MS. BALES replied that during times of low mineral prices, tax
credits were used to encourage exploration and development of
the state's mineral resources. She went on to explain that tax
credits offset tax liability. During times of low prices there
is often no income, and thus no tax liability against which to
apply a credit. Therefore, the credits were not used often, she
said. She explained that the current tax rate structure applies
a base tax amount which varies depending on net income. In
addition to the base amount, the taxpayer pays a percentage
based on its entire net income, which varies depending on the
amount of net income.
7:39:11 AM
REPRESENTATIVE GRUENBERG asked whether there has been
consideration of taxing gross mining income.
MS. BALES replied that she was aware of a bill last year to levy
mining taxes on gross income rather than net. She noted that
changes in tax structures can be difficult and confusing for the
taxpayer. In response to further inquiry, she stated she is not
aware of whether other states review tax credits as
circumstances, such as mineral prices, change. She said she is
willing to research this issue and the issue of taxation based
on gross income for members of the committee.
7:41:36 AM
MS. BALES referred to a chart title "Tax Collections" which was
provided to the committee and noted that mining license tax
revenues had been fairly flat from FY 97 through FY 04.
However, the tax revenue has been increasing since FY 05 and is
expected to continue to increase in FY 07 and FY 08. This is
due to higher mineral prices as the number of taxpayers has
remained fairly static, she said.
MS. BALES explained that persons are required to have a mining
license for property in the development or producing stage
regardless of whether land is owned by the state or federal
government, or by a private party. A person is required to hold
a mining license when that person either: owns and operates
mining property; owns and receives lease or royalty payments
based on production; leases and operates a mining property; or
possesses a mineral interest in a producing property.
7:44:26 AM
REPRESENTATIVE SEATON asked whether an entity such as the Alaska
Mental Health Trust Authority (AMHTA) must have a license if its
land is being explored for mineral production.
MS. BALES replied that the AMHTA would not need a mining license
because it is an arm of the state. However, a private
landowner, such as a Native corporation, must have a license and
report royalties for any mining income from its property.
7:45:38 AM
MS. BALES responded to a question by explaining that a license
from DOR is not required during the exploration phase of mining
development. The Department of Natural Resources (DNR) issues
permits for exploration activities on state land, she said.
7:46:01 AM
REPRESENTATIVE WILSON expressed interest in whether mining
exploration activities in the state have increased.
7:46:16 AM
CHAIR HAWKER asked whether the mining license tax is required of
the property owner only, or whether it is also required of a
lessee or operator of a mining property.
MS. BALES said that it would be required in both instances.
Anyone who owns and operates, or leases and operates mining
property must have a license. She explained that a license is
not needed if mining activities are restricted to holding of
property for exploration, or if a person simply holds a mineral
interest in undeveloped and non-producing properties. Last, no
license is required if the mining activity consists of
extracting sand, gravel, and rock for public or private
construction.
7:48:17 AM
REPRESENTATIVE GRUENBERG asked whether other jurisdictions levy
taxes on non-producing property, noting that sometimes valuable
mineral assets are not produced due to low prices or other
reasons.
MS. BALES was not aware of whether research had been done on the
aforementioned issue. She pointed out that taxes could only be
applied to mineral interests on state lands, but not on private
or federal lands due to the lack of state jurisdiction on those
properties. She said she is not aware of how the federal
government treats held, but non-producing, mineral interests.
7:49:57 AM
REPRESENTATIVE ROSES asked whether both a landowner and a lessee
that operates mining activities on the land would have to pay
taxes on mining income and whether they both pay at the same
rate.
MS. BALES replied that both the owner and the lessee would be
liable to pay the mining tax, but she noted that the lessee
could deduct its royalty costs from its net income. She also
said that the same percentage of tax liability applies to both
the owner and the lessee.
7:51:01 AM
MS. BALES related that a holder of a mining license must file a
mining license tax return. A person receiving gross income from
more than one licensed mining property must aggregate and report
that income on a single return. Furthermore, there is an
exemption from the mining license tax during the first three and
one-half years of production. She indicated that many mining
companies operate at a loss during the first three and one-half
years of production.
MS. BALES emphasized that the mining license tax is an income
tax which is calculated on net income from the mining property.
The taxable net income is the gross income, less royalties paid
and mining expenses. Gross income includes the sales price or
value received for mined minerals, any royalties received from
mining property, and production payments received from a lease.
Once gross income is determined, the taxpayer can deduct direct
and indirect mining expenses to determine net income. Direct
expenses are incident and necessary costs for the extraction of
mined minerals and include labor, maintenance, repair costs,
supplies, depreciation, transportation, and depletion.
7:55:21 AM
REPRESENTATIVE SEATON asked whether there is scheduled
depreciation, or whether a capital investment is deducted in a
single year.
MS. BALES replied that the mining depreciation schedule is based
on federal law and allows the deduction of an asset's cost,
within certain limits, in a single year. The federal
depreciation schedule allows use of accelerated rates, she said.
Ms. Bales went on to say that indirect costs are those
supporting costs that are not directly related to mining, such
as advertising, employee benefits, administrative expenses, and
other taxes.
7:57:06 AM
MS. BALES responded to a question by explaining that the method
of worldwide apportionment for tax calculation applies to the
corporate income tax. She said that corporations that pay
mining license taxes are also required to pay corporate income
tax. Mining entities and other non-oil and gas businesses are
required to calculate their corporate tax using a "water's edge"
method. This method considers only income earned within the
"water's edge" of the United States. For the mining license
tax, the DOR considers only the mining activities in the state
and the income and deductions that apply to the mining activity.
She reminded the committee that an owner of multiple mines must
aggregate income from all mines in the state for purposes of the
mining license tax. She explained that the worldwide
apportionment tax concept applies only to corporate income tax
calculations for oil and gas companies.
7:59:36 AM
REPRESENTATIVE GRUENBERG asked whether it would affect the
state's revenue if a worldwide apportionment concept was adopted
for the mining industry.
MS. BALES responded that she was not aware of the effect of such
a decision without having further knowledge of a company's
worldwide business activities.
8:00:15 AM
MS. BALES informed the committee that deductions not allowed to
determine net income include exploration costs, federal income
taxes, the mining license tax, loss on the sale of mining
equipment or property, net operating losses, and other capital
losses. She emphasized that the mining license tax focuses on
what happens in one calendar year. Taxpayers are not allowed to
carry over their losses from past years as a credit against
future gains, she said. She summarized that the state shares in
the income earned, but not in the losses. In contrast, other
corporate taxpayers can apply losses from previous years to
offset current income, she explained. She reminded the
committee that the mining license tax is in addition to the
corporate income tax.
8:05:05 AM
MS. BALES described depletion as the term used for depreciation
of mineral property used to extract natural resources. This
means that capitalized costs incurred during the development
stage can be depleted or depreciated once the mine begins
production. The taxpayer may deduct whichever method of
depletion, cost or percentage, results in the greater deduction.
Cost depletion allows an owner to deduct its total development
costs over the estimated life of the mine. Once these costs are
deducted there is no more cost depletion. The other method,
percentage depletion, is based on a percentage of gross income
less royalties paid. It is limited to no more than 50 percent
of net income, she explained.
8:09:26 AM
REPRESENTATIVE WILSON asked about the situation in which further
mineral deposits are discovered after all costs are depleted.
MS. BALES replied that it may depend on whether the additional
discoveries count as a new property. She said that additional
development costs after initial production are immediately
deductible, and the taxpayer is still allowed to take percentage
depletion after it has depleted all its cost depletion.
8:10:26 AM
REPRESENTATIVE GRUENBERG asked whether the taxpayer must elect
between cost and percentage depletion.
MS. BALES explained that each year a taxpayer may calculate its
tax liability under each method and choose the method most
favorable to it.
8:10:59 AM
REPRESENTATIVE SEATON asked about the effect of increasing
mineral prices on percentage depletion, and whether the
application of percentage depletion is allowed after the
taxpayer has deducted all of its development costs.
MS. BALES agreed that in the aforementioned situation, the
taxpayer could use percentage depletion. She noted percentage
depletion was developed decades ago by the federal government
and has been used for years. She said that it allows a
deduction that cannot be taken through net operating losses or
exploration costs.
8:12:59 AM
MS. BALES responded to a question by explaining that most states
and the federal government allow taxpayers to annually choose
between cost and percentage depletion. She explained that the
calculations for each method are different. For example, a mine
that operated with positive income for a 10-year period could
have a depreciation deduction that significantly exceeds the
development costs. As a mine earns more income, percentage
depletion may result in a more favorable tax deduction, she
explained. In the situation where a mine has net operating
losses, it is required to calculate cost depletion and deplete
its development costs even though it does not yet have any net
income. She explained that percentage depletion can result in
an overall deduction in the life of the mine that may be greater
than total development costs, but overall the mine may have lost
money.
8:18:23 AM
REPRESENTATIVE WILSON asked whether it is typical for mines to
continue to operate despite losses.
MS. BALES replied that mines can incur losses or temporary
closures over the years, especially since mineral prices
fluctuate. She reiterated that it is typical to have losses in
the first years of production.
8:19:48 AM
MS. BALES explained that the statutory depletion rates vary with
the mineral. The depletion rate for coal is 10 percent, for
metal mines - gold, silver, copper, lead, and zinc - it is 15
percent. Percentage depletion is not allowed for sand and
gravel operations, only cost depletion, she said.
8:20:32 AM
MS. BALES said that once gross income is calculated, the
taxpayer can then deduct its expenses - direct and indirect
costs, royalties paid, depletion - for the current year to
arrive at its net income. The taxpayer then applies the
statutory tax rates to its net income to determine its tax
liability. Once tax liability is determined, the taxpayer may
apply for a tax credit. Tax credits are applied dollar for
dollar against the tax liability. The most significant tax
credit allowed is for exploration costs incurred up to
$20,000,000. Exploration costs include surveying, drilling
exploration holes, underground exploration, sampling, and
metallurgical testing. The exploration costs tax credit must be
applied with 15 tax years of credit approval by the DNR and may
only be used to offset 50 percent of tax liability. She noted
that this credit has not been used very often because it must be
used within 15 years, and mines often have operating losses in
the first 5 to 7 years of operation.
8:23:01 AM
REPRESENTATIVE FAIRCLOUGH inquired as to whether a mining
producer can apply for an exploration cost credit 15 years into
a 50 year mining project.
MS. BALES replied that she believes there is a time limit within
which a mine must apply to DNR for an exploration costs credit
and that the taxpayer can only apply for this credit after the
development stage, but prior to the production stage.
8:24:09 AM
MS. BALES went on to say that allowable tax credits also include
education credits of up to $150,000 for contributions made to
public or private nonprofit two or four-year colleges or
universities in Alaska. The taxpayer can take a credit for 50
percent of the first $100,000 of its contributions and 100
percent of the second $100,000 in contributions. This credit
can be taken against 100 percent of tax liability. Mining
operations that also pay corporate income tax can apply the
exploration costs tax credit or the education credit against
their mining tax or against their corporate income tax, but not
against both.
REPRESENTATIVE SEATON asked whether a corporation can apply the
exploration tax credit to reduce its corporate income tax
liability even if the mining business that generated the
exploration costs is not in production.
MS. BALES replied that she was not sure, but opined that the
taxpayer is required to be engaged in mining activity to take
the exploration costs credit.
8:27:00 AM
MS. BALES responded to Representative Gruenberg's inquiry by
explaining that a taxpayer can choose annually whether to take a
credit against either its mining tax or its corporate income tax
liability. She stated that the mining tax has been a net income
tax since 1913, and that increases in revenue have been due to
increases in the value of mined minerals. She reminded the
members that the state shares in the income of a mining
property, but not in the losses and that most companies have
losses during the first three and one-half years of production.
The exploration costs credit has been in existence since 1995 to
provide an additional incentive to develop the state's minerals,
but has not been taken very often.
8:28:40 AM
CHAIR HAWKER clarified that two agencies are heavily involved in
mining issues: DOR and DNR. The DOR administers the tax laws,
while the DNR administers royalty issues.
MS. BALES agreed with the above characterization, and explained
that the owner of the property owns the right to royalties. If
the state is the property owner, it is the royalty holder. The
state collects about $1.5 million in mining royalties because
much of the larger mining operations in the state take place on
federal, native corporation, or AMHTA lands.
REPRESENTATIVE SEATON clarified that the royalty structure is
basically 3 percent of mining license net income.
8:31:17 AM
REPRESENTATIVE CISSNA noted that mineral prices fluctuate
greatly and asked about the dynamics that affect the prices.
MS. BALES stated that the economies of mining exploration are
driven by the forces of supply and demand for various minerals
and that the DOR economists do look at trends in the mining
industry.
8:33:36 AM
REPRESENTATIVE CISSNA asked about the history of mining revenue
and when the state last received the amount it is currently
receiving.
MS. BALES said that she researched past mining revenue records
and did not find a time when mining revenues were higher than
the state is currently receiving. To further research this, she
would have to determine whether there are records of mining
revenue before the 1950s. She explained that mining development
requires consideration of many factors, such as mineral costs,
exploration, and reclamation costs. Her past research indicates
that mining in Alaska is very expensive, even in areas that are
somewhat accessible.
8:36:28 AM
REPRESENTATIVE SEATON asked whether other state royalties are
based on net income, noting that in other areas the state
receives royalties based on considerations such as value at
point of production. He also asked how the AMHTA royalty
structure works.
MS. BALES said she is not aware of other royalties that are
based on net income, nor is she aware of how the AMHTA royalty
structure works.
8:37:40 AM
REPRESENTATIVE WILSON asked about general revenue increases for
mineral extraction as mineral prices go up, noting that it
appears that mining revenues have risen with the price of
minerals while perhaps taxes received from oil production did
not.
MS. BALES related her understanding that the state did receive
higher production tax receipts as oil prices rose, just as
mining tax revenues have gone up as mineral prices increase.
CHAIR HAWKER clarified that oil and gas production taxes have
increased as wellhead values for oil and gas rose, noting that
in 1999 the state received $358 million in unrestricted oil and
gas revenue, and recently that figure has risen to $1.2 billion.
He noted that the mining license tax is very much a production
based tax.
8:39:34 AM
MS. BALES responded to a question by noting there is nothing in
the mining license tax comparable to the economic limit factor
(ELF) that applies to some oil and gas production.
CHAIR HAWKER reminded the members that the ELF is a mechanism
unique in the state to make accommodations for various costs
from oil and gas fields with different production levels. In
comparison, the mining license tax demands specific
identification and accounting for costs by the operators,
whereas ELF allows estimates in making the determination of
applicability.
8:41:53 AM
MS. BALES offered to research Representative Gruenberg's inquiry
of whether other jurisdictions have changed their tax rate
structure over the last 50 years.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
8:43:50 AM.
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