Legislature(2005 - 2006)
03/21/2005 08:31 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| Oversight Hearing on the Education Tax, Natural Resources and Non Oil Tax | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
March 21, 2005
8:31 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Carl Moses
MEMBERS ABSENT
Representative Max Gruenberg
COMMITTEE CALENDAR
OVERSIGHT HEARING ON THE EDUCATION TAX, NATURAL RESOURCES AND
NON OIL TAX
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MICHAEL WILLIAMS, Auditor
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Reviewed the education tax and recent
proposals to reinstate it.
DAN BECK, Superintendent
Delta Junction School District
Delta Junction, Alaska
POSITION STATEMENT: Testified in support of an education tax
such as proposed in Senate Bill 137.
WILLIAM H. CORBUS, Commissioner
Office of the Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: During discussion of the mining license
tax, related that the administration isn't proposing any changes
to the mining license tax.
BRETT FRIED, Economist IV
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Discussed the natural resource revenue of
the state.
AL CLOUGH, Deputy Commissioner
Department of Commerce, Community, & Economic Development
Juneau, Alaska
POSITION STATEMENT: Reviewed the mines in Alaska and their
connection to the area in which they are located, specifically
in regard to the formation of regional governments.
BOB LOEFFLER, Director
Division of Mining, Land and Water
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Discussed the mining industry in Alaska.
RICH HEIG, General Manager
Greens Creek Operation
(No address provided)
POSITION STATEMENT: In representing the Alaska Miners'
Association and the Council of Alaska Producers, reviewed the
mining industry in Alaska.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:31:30 AM. Representatives
Weyhrauch, Samuels, Seaton, Wilson, and Moses were present at
the call to order. Representative Rokeberg arrived as the
meeting was in progress.
^OVERSIGHT HEARING ON THE EDUCATION TAX, NATURAL RESOURCES AND
NON OIL TAX
8:31:49 AM
CHAIR WEYHRAUCH announced that the first order of business would
be to discuss the education tax. He reminded the committee that
an education tax was implemented in Alaska during the 1950s and
was repealed in 1980. During the Twenty-Third Alaska State
Legislature Senate Bill 137 proposed an education tax of $100
per employee, which is basically an income tax that is placed in
the general fund (GF) to be appropriated for education. He
added that some Alaskans believe an individual employment tax
[education tax] would give people in the state a vested interest
in education.
8:33:37 AM
MICHAEL WILLIAMS, Auditor, Tax Division, Department of Revenue,
reiterated the history of the education tax as explained by
Chair Weyhrauch. He informed the committee that the highest
grossing years for the education tax were in 1979, during which
the tax generated $2.5 million, and in 1980 when it generated
$2.6 million. During the Twenty-Third Alaska State Legislature
Senate Bill 137 proposed reinstating an employment tax for
education of $100 per employee. The education tax would have
affected employees, 19 years of age and older, once their gross
wage exceeded $1,000. According to the Department of Revenue's
fiscal note, during the out years this employment tax would have
generated $39 million with an operating cost of $1.1 million.
In addition, during the Twenty-Third Alaska State Legislature, a
similar proposal on the education tax was introduced, House Bill
236, by Representative Wilson. The fiscal note of House Bill
236 projected revenue, in the out years, to amount to
approximately $43 million with an operating cost of $1.1
million. He turned attention to a chart which details the
impact of inflation on the $10 education tax from 1960 to 2004.
That $10 would've been adjusted upwards to $49. Even if the $10
in 1980 had been adjusted for inflation the education tax would
be $19.50 [in 2004]. He placed this in terms of the state's
median household income average. According to the U.S. Census
Bureau the median household income for Alaska in 1979, was
$29,585 and the equivalent of that median household income in
2004, if it were adjusted to reflect inflation, was $63,555. He
offered that the median household income in Alaska from 2001 to
2003, averaged $55,143, and thus reflects a 15 percent
differential because Alaska hasn't kept pace with inflation.
8:37:53 AM
REPRESENTATIVE WILSON highlighted that the original education
tax included a penalty [provision] which was 100 times the
amount of the tax, hence the tax was $10 and the penalty was
$1,000. She suggested that the committee should consider
similar penalty provisions.
MR. WILLIAMS related if the employment tax is reinstated under
Title 43 of the statutes, Section 5 of Title 43 already includes
penalty provisions. Later drafts of House Bill 236 and Senate
Bill 137 included non-payment provisions in order to safeguard
the money from being remitted to the state. In further response
to Representative Wilson, Mr. Williams agreed that the
provisions in the bills from the Twenty-Third Alaska State
Legislature placed the penalty on the employer.
8:39:57 AM
MR. WILLIAMS, in response to Chair Weyhrauch, replied that the
individual [employment] tax was $100 for both Senate Bill 137
and House Bill 236. He added that in House Bill 236 there was
an incremental percentage such that "once your wages ... hit
$1,001, ... it was actually a percentage of that each
incremental dollar until you hit the $100 withholding." In
further response to Chair Weyhrauch, Mr. Williams explained
that the statute repealed in 1980 was a $10 per person tax and
that the aforementioned threshold for House Bill 236 was not a
provision of the original statute. Mr. Williams reiterated that
the original $10 tax amounts to $49, when one accounts for
inflation.
8:40:46 AM
REPRESENTATIVE SEATON related his understanding reinstituting
the 1960 [employment] tax and accounting for inflation would
generate $20 million with an administrative cost of $1.1
million.
MR. WILLIAMS agreed, but noted that the administrative costs are
a relatively flat rate regardless of the volume generated.
8:41:45 AM
REPRESENTATIVE SAMUELS highlighted [House Bill 263] includes a
definition of compensation. He asked if the aforementioned
definition includes the permanent fund dividend.
MR. WILLIAMS answered that the definition doesn't include the
permanent fund dividend however, it would include income from
self-employment.
REPRESENTATIVE WILSON opined that [House Bill 263] didn't
provide any provisions for the permanent fund dividend because
it's used for other things, such as owed back taxes, court
fines, child support, et cetera.
8:42:59 AM
DAN BECK, Superintendent, Delta Junction School District,
related his support for Senate Bill 137. He opined that the
bill would allow residents from rural education attendance areas
(REAA) to pay their "fair share." He highlighted that "hundreds
of people from out of state" have made huge salaries and left
the state with those dollars and yet the pressure is on the
[state] to educate and train a workforce.
8:43:57 AM
CHAIR WEYHRAUCH clarified that no specific bill is before the
committee; this is merely an oversight meeting regarding the
aforementioned bills [from the prior legislature]. Therefore,
Chair Weyhrauch took Mr. Beck's testimony to mean he would
support an education tax, he said.
8:44:48 AM
REPRESENTATIVE WILSON asked if Mr. Beck's school district is an
REAA.
MR. BECK replied, "yes," and related his belief that most
residents [of Delta Junction] support the institution of an
education tax.
8:45:11 AM
REPRESENTATIVE SEATON related that the collected funds [from an
education tax] would not be dedicated back to the district where
the employee was hired.
MR. BECK related that was his understanding of the bill, and
added that the funds wouldn't necessarily be used for education
either.
8:45:30 AM
CHAIR WEYHRAUCH inquired as to the appeal of this type of tax.
MR. BECK explained there has been controversy over the
unorganized boroughs not [contributing] for services, primarily
education, and this type of tax would level the "playing field."
He opined that the unorganized boroughs should offer something
to the state for the services they receive.
8:46:56 AM
CHAIR WEYHRAUCH announced that the committee would turn its
focus to the mining license tax.
8:47:40 AM
WILLIAM H. CORBUS, Commissioner, Department of Revenue, stated
that the administration has supported mining and will continue
to encourage keeping existing mines in operation and developing
new mines. Therefore, the administration is not proposing any
changes to the mining license tax. The revenues received from
the mining license tax are minimal in comparison with the
overall state revenue. However, mining provides other forms of
taxes and provides employment, he opined.
8:50:04 AM
CHAIR WEYHRAUCH relayed that although there is no specific
proposal to raise taxes on the mining industry, it's important
to review the industry, its contribution to the state, and its
tax structure.
8:50:45 AM
REPRESENTATIVE SEATON opined that every major industry in the
state is a vital contributor to the economy; for instance,
fishing is the largest employer in the state and yet there's no
proposals to cut fish industry taxes. He requested a comparison
of spin-off [benefits] and capital intensiveness regarding the
industries, because currently the treatment of industries is
based different political realities rather than economic impact.
COMMISSIONER CORBUS replied that if the presentation doesn't
address Representative Seaton's question, then the department
will have further conversations before the committee.
8:52:30 AM
BRETT FRIED, Economist IV, Tax Division, Department of Revenue,
presented that the natural resource revenue comes to the state
through three means, including taxes, rents and royalties, and
other revenue sources. The direct taxes on natural resource
businesses include the fisheries business tax, the fishery
resource landing tax, which is collected at the local and
statewide level, the local mining tax, and the corporate income
tax for Sub Chapter C Corporations. The indirect taxes are for
purchases made by natural resource businesses and their
employees, including: motor fuel taxes, local sales taxes, and
property taxes. The rents and royalties are paid by businesses
located on state land. The other revenue sources are those
charged for services, fines, forfeitures, licenses, and permits.
He turned to the table entitled, "Statewide Alaska Fish
Revenue", which breaks down the revenue into its component
parts:
Fish Taxes (includes municipal Fiscal Year
share) (FY) O4 Revenue
Salmon and Seafood Marketing $5.3 million
Taxes
Salmon Enhancement Tax $3 million
Dive Fishery Management $0.2 million
Fisheries Business Tax $29.2 million
Fishery Resource Landing Tax $6.9 million
Total Fish Resource Taxes $44.6 million
Corporation Fish Income Tax $3.2 million
Revenue
Total Fish Tax Revenue $47.8 million
MR. FRIED added that the salmon and seafood marketing taxes are
appropriated to the Alaska Seafood Marketing Institute (ASMI);
both the salmon enhancement and dive fishery management taxes
are appropriated to qualified aquaculture organizations; the
fisheries business tax and fishery resource landing tax have a
50 percent share with the [qualifying communities]; and the
corporation fish income tax revenue, includes sub chapter C
corporations and processors. He related that the aforementioned
data was based on actual tax returns as filed, which means most
of the revenues reference calendar year (CY) 2002, and the total
fish tax revenue is about $48 million.
MR. FRIED detailed that other fish revenue, not including charge
for services, fines, or forfeitures, as follows:
Other Fish Revenue Revenues for FY 04
Licenses and Permits $23.2 million
Test Fisheries $1.6 million
Total Other Fish Revenue $24.8 million
Total Fish Revenue $72.6 million
MR. FRIED added that the revenue from licenses and permits goes
to the Alaska Department of Fish & Game fund.
8:57:17 AM
REPRESENTATIVE WILSON recalled that some of the aforementioned
taxes were imposed by the fisheries [industry] in order to
supplement the research the state wasn't conducting. She asked
what percentage of the taxes were self-assessed.
MR. FRIED answered that the salmon enhancement and dive fishery
management are both self-assessed taxes.
8:58:31 AM
REPRESENTATIVE SEATON clarified that the salmon and seafood
marketing tax, salmon enhancement tax, and dive fishery
management tax are self-assessed taxes and appropriated back [to
the local communities]. He pointed out that 50 percent of the
fisheries business tax and the fishery resource landing tax is
shared with the local communities. The total of the
aforementioned two taxes in FY 04 was $36.1 million, and
therefore $18 million went into the state treasury. Add to that
the $3.2 million from the corporate fish income tax and in FY 04
the fisheries industry generated just over $21 million that was
placed in the state general fund (GF), excluding licenses and
permits, he added.
MR. FRIED agreed.
8:59:56 AM
REPRESENTATIVE ROKEBERG asked if there were other local taxes
that were incident to fisheries assets or revenues that aren't
shown on the chart.
REPRESENTATIVE SEATON related that the Lake and Peninsula
Borough, Kodiak, and Unalaska have severance taxes of up to 7.5
percent on fisheries resource. He related his belief that the
aforementioned percent is a significant tax burden placed upon
the gross income of the fishery industry.
MR. FRIED turned to the document entitled, "2004 Municipal Sales
Tax, Special Tax and Revenues", which shows the different raw
fish taxes that are levied in the various communities as well as
the various revenues from those taxes. He noted that the
document doesn't specify any property tax or sales tax
contribution that would be paid by the fishing industry.
9:01:21 AM
REPRESENTATIVE ROKEBERG asked if there are personal property
taxes or other taxes on boats or fishing equipment that might
include a local take.
MR. FRIED said he wasn't sure, but suggested that it would
depend upon the community itself. However, he said that he was
sure that there are local property taxes that are paid by the
fishing industry.
REPRESENTATIVE ROKEBERG commented that this information is very
helpful in terms of the gross government take and where it goes
in the various industries.
9:02:24 AM
REPRESENTATIVE SAMUELS asked if the Department of Revenue runs
numbers on the economic impact, particularly in regard to
fishing in the State of Washington. He inquired as to what the
State of Washington receives when taking Alaska's fish.
MR. FRIED said that he doesn't have such information.
REPRESENTATIVE SAMUELS related that [U.S.] Senator Maria
Cantwell has relayed that those in Washington are in favor of
Alaska not developing its natural resources. Therefore, he
questioned whether the residents of Washington know what they
receive from Alaska's natural resources.
MR. FRIED said that no economic analysis on the fishing industry
or its impact on the State of Washington has been performed.
REPRESENTATIVE SAMUELS noted that 80 percent of the oil in
Washington State's refineries comes from Alaska.
9:03:53 AM
REPRESENTATIVE SEATON returned attention to the document
entitled, "2004 Municipal Sales Tax, Special Tax and Revenues",
and asked if the Kodiak Island Borough's 9.25 mill severance tax
is the fishery tax.
MR. FRIED related his belief that the 9.25 mill severance tax is
from timber and fish.
9:04:37 AM
REPRESENTATIVE ROKEBERG asked if that means that the [9.25] tax
is paid if the fish is landed in Kodiak, but it wouldn't be paid
if the fish was landed in Unalaska.
REPRESENTATIVE SEATON answered that Representative Rokeberg is
correct. He pointed out that Unalaska has a 2 percent raw fish
tax. If the fish was landed in Wrangell or the City & Borough
of Yakutat, one would pay a 1 percent raw fish tax while no raw
fish tax would be paid on fish landed in St. George. He noted
that the [raw fish tax] is a tax on the gross value.
REPRESENTATIVE ROKEBERG questioned how that would impact the
natural market place.
9:05:27 AM
MR. FRIED turned attention to a chart entitled, "Statewide
Alaska Mining Revenue." He explained that the chart was
prepared on a calendar year basis because most of the
information comes from a table prepared by the Department of
Natural Resources (DNR) and the Department of Commerce,
Community, & Economic Development (DCCED). The resources tax,
including the mining license tax, amounted to $1 million in
revenue in FY 03 and that rose to $3.2 million in FY 04. The
rents and royalties in CY 03 amounted to $3.9 million.
Therefore, the total mining tax revenue summed $4.9 million. He
explained that the chart doesn't specify that the corporate
mining income tax revenue in CY 03 was related to the timing
issue with regard to corporation income taxes. He further
explained that although [the division] has the filings from FY
04, most of those tax returns reference 2002. Therefore, one
must return to CY 02 when the revenue amounted to $300,000. The
total other mining revenue amounted to $1 million and when added
to the material sales and fees, the total other mining revenue
summed $5.9 million for CY 03.
9:08:00 AM
MR. FRIED, in response to Representative Seaton, related his
understanding that material sales are for sales of gravel, sand,
and rock. In further response to Representative Seaton, Mr.
Fried confirmed that the state selling someone a material would
be from where the $1.8 million in CY 02 comes.
9:08:33 AM
REPRESENTATIVE ROKEBERG referred to the Department of Revenue's
document entitled, "Alaska's Mineral Industry 2003 - Special
Report 58." That document specifies that payments to
municipalities in 2003 amounted to $10.5 million.
MR. FRIED agreed that the $10.5 million refers to payments to
municipalities, which isn't included in the "Statewide Alaska
Mining Revenue" document. He specified that the payments to
municipalities refers to local taxes and other payments to
municipalities from the minerals industry. In further response
to Representative Rokeberg, Mr. Fried clarified that the
document entitled, "Alaska's Mineral Industry 2003 - Special
Report 58" is from the Division of Geological and Geophysical
Surveys in cooperation with the Office of Economic Development
of the Division of Mining, Land & Water. Mr. Fried confirmed
that the numbers provided in the aforementioned document are CY
numbers.
9:10:35 AM
REPRESENTATIVE SEATON expressed curiosity with placing material
sales in the tax category because that means, for example, that
ice sales are revenue to the state, although it's actually a
sale of an item. Representative Seaton suggested considering
that the sale of something to an industry doesn't mean that it's
a tax on the industry.
9:12:00 AM
MR. FRIED clarified that the material sales comes from DNR's
table, which is the only reason that's listed for mining
although there isn't anything comparable listed for fishing.
CHAIR WEYHRAUCH pointed out that the expense to the fishing
industry for buying ice would be comparable to purchasing drill
bits, which are an essential part of the mining industry. He
asked if the aforementioned is an appropriate comparison.
MR. FRIED replied no. He related his understanding that
[purchasing ice] is like selling gravel or timber from state
land.
REPRESENTATIVE ROKEBERG likened it to a severance tax. "If
we're going to have a statewide severance tax on fish like they
do in Kodiak, then I'd buy the argument otherwise I don't."
Representative Rokeberg commented that it has always been
considered a source of revenue in the state.
REPRESENTATIVE SEATON agreed, but pointed out that it's not a
tax revenue. He reiterated that it's selling [an industry]
something, which he suggested was mainly gravel to build roads.
When a state resource is sold, it isn't the same as a tax. He
expressed the need to have clarification with regard to the
material sales.
9:14:28 AM
REPRESENTATIVE WILSON inquired as to why the mining license tax
revenue increased in 2004 when it rose to 3.2.
MR. FRIED replied that the prices of the minerals gold, silver,
and zinc have increased.
9:15:07 AM
REPRESENTATIVE SEATON turned to the [FY] 02 corporate mining tax
numbers of Table 10 entitled, "Estimated mineral production in
Alaska, 2001-2003" that specifies total [mineral production in
2002] as $1,012,809,000. He asked that the same table be
prepared for fisheries in order to have a comparison in tax
rates versus the value of the raw product.
9:16:14 AM
AL CLOUGH, Deputy Commissioner, Department of Commerce,
Community, & Economic Development (DCCED), said that he would
describe the mineral industry beyond the tax revenue aspect. He
noted that the committee packet should include the municipal
revenue handouts. He highlighted that the Red Dog mine is a
negotiated agreement of about $5.7 million. The Northwest
Arctic Borough doesn't have a property tax. He further
highlighted that the Fairbanks North Star Borough receives over
$4 million in direct tax revenues from the mine. Furthermore,
the mine receives many services. In regard to the Fort Knox and
True North mines, Mr. Clough informed the committee that the
customers of Golden Valley Electric benefit from the power usage
of the mine because it decreases the power cost for residents in
the area. He estimated that it amounts to about a 7 percent
reduction for the residential customers. In Juneau, the Greens
Creek mine pays about $300,000 in property tax to the City &
Borough of Juneau. He highlighted that the Greens Creek mine
isn't in the roaded area, and therefore Juneau receives quite a
benefit without providing a lot of municipal services. Mr.
Clough pointed out that the current operating mines in the
state: Red Dog, Greens Creek, Fort Knox, True North, and
Usibelli Coal Mine are all located within existing boroughs.
However, the Northwest Arctic Borough wouldn't exist without the
Red Dog mine, and the Pogo Project, north of Delta Junction, is
the driver for the current discussion of the formation of the
Delta Borough.
MR. CLOUGH said that when reviewing the mineral industry the
following dates are critical to remember. The mineral deposit
of the Red Dog Mine was first identified in the late 1960s and
it didn't move into production until 1989. The Greens Creek
deposit was first identified in the early 1970s, but was not in
production until 1989. Fort Knox was identified as a good
exploration target in 1984 and production began in 1987.
Exploration at the Pogo Mine began in the mid 1980s and the
actual discoveries at the site were made in 1994. Production
for the Pogo Mine is scheduled for 2006. Mr. Clough highlighted
that the exploration of the pebble, copper, and gold deposit in
the peninsula began in the early 1990s. The earliest production
from the aforementioned would be in 2010. He noted that Donlin
Creek and the Upper Kuskokwim have similar dates. The modern
exploration of the Kensington mine in Juneau began with placer
oil in the early 1980s and the earliest production would be
around 2008. Mr. Clough then turned to the Alaska Juneau Gold
Mine and related that its modern exploration began in 1984 and
culminated with close-out and abandonment of the project in 2000
with $130 million invested. Similarly, the Quartz Hill
(Indisc.) project out of Ketchikan, for which exploration and
discovery occurred in 1974, was abandoned in 1990 following over
$100 million investment.
MR. CLOUGH related that the mineral industry will say that it's
different from other resource sectors in the state, with which
he agreed. From DCCED's perspective, the development of more
large scale mines in the state is associated with family-wage
jobs and economic engines to develop regional government
formation and operation. The most obvious example of the
aforementioned is the association between the Red Dog Mine and
the Northwest Arctic Borough. The association between mines and
regional government formation is also evidenced in the
discussion to organize in the Delta Junction and Kuskokwim
regions. The aforementioned, he opined, is viewed as a positive
for the state.
9:22:24 AM
REPRESENTATIVE ROKEBERG inquired as to how effective the
incentives enacted to encourage mineral development in Alaska
have been. He further inquired as to the impacts of those
incentives on the state revenue stream.
MR. CLOUGH said that the most effective incentives have been the
geophysical exploration programs. The aforementioned required
modest investments of several hundreds of thousands of dollars
per appropriation cycle and have immediately resulted in claim
staking and exploration, from which the state has received
revenue. There are several other incentives that he suggested
would provide a longer term payback. Again, he stated that
providing good data has been the best incentive, although the
tax breaks are certainly beneficial. In particular, the phase-
in and mining license tax [has been beneficial] and recognizes
the high start-up costs of these projects, which is exemplified
in the $1.5 billion in start-up costs for the Pebble Gold
Project. Mr. Clough noted that all of these business sectors
are different.
REPRESENTATIVE ROKEBERG opined that the policy of the
legislature, even since territory days, has been to incent
mining activities in the state. The aforementioned is important
to understand if there is a desire to review taxation that may
impact the aforementioned public policy and shift it. He
mentioned the need to take a broader view.
9:25:16 AM
REPRESENTATIVE WILSON recalled testimony that due to changes
over the last couple of years there has been more interest in
obtaining permits.
MR. CLOUGH agreed.
REPRESENTATIVE WILSON acknowledged that it takes many years from
exploration to production. She inquired as to the number of
years before increases in production are apparent.
MR. CLOUGH informed the committee that the data from the recent
large mining projects illustrate a 15- to 20-year cycle from
discovery, through exploration, and development to production.
The dynamic the [mining] industry is facing is that Alaska,
geologically speaking, is a good place to be, although Alaska
isn't the best place to be due to the cost of exploration,
development, and discovery. In fact, most of these mineral
deposits are located in areas in the state with limited public
infrastructure. The average lead time from discovery to
production is 15 years. He noted that the mineral's price, as
with the price of many resources, is cyclical. Stability is
necessary in order to encourage and maintain interest in Alaska.
The aforementioned is evidenced in the taxation system at the
state and municipal levels. If such certainty is lost, it would
result in a large disincentive for this international
investment. Mr. Clough informed the committee that from the
largest minerals gathering in North America he understands that
Alaska is competing against Australia, South America, and Africa
as well as developing countries. He explained that certainty of
the investment climate, particularly when there are such long
lead times and large capitalization costs, is a major driver in
how money will be spent.
9:29:11 AM
REPRESENTATIVE SEATON pointed out that the latest year for which
there is a complete tax picture is 2002 in which there was a
total mining tax revenue of $3.9 million. According to Table
10, in 2002 there was $1,012,809,000 of extracted mineral value.
He said he didn't mind a proposal by which there is a delay of
taxes. However, the administration has said that the state's
resources would be developed, which would place [revenue] in the
state treasury. He pointed out that in the [current] tax
structure after there is development, there is no time at which
the state recoups any revenue from an over $1 billion extracted
industry. He inquired as to whether the [administration's]
position is to maintain the aforementioned situation or is there
a manner in which a time delay could be instituted.
MR. CLOUGH opined that [the state's mining] is in a marketing
conundrum. He explained that [Table 10] refers to the gross
value of all the dollars in the mineral resource, but it doesn't
necessarily equate to the dollars paid to the mining company
once extraction costs, debt service, et cetera are included. He
noted that four to five years ago, the Red Dog Mine showed a $28
million operating loss for the year. Although the gross value
of the metal was still a big number, the company lost $28
million getting it out of the ground. He also noted that in the
late 1980s low metal prices forced Greens Creek to close its
doors for two-and-a-half years. Mr. Clough offered to provide
the committee with more details with the equations.
9:32:42 AM
REPRESENTATIVE SEATON said that he would like to see some
proposals from the administration such that the state's
resources contribute to the state treasury. From the testimony
today, Representative Seaton surmised that no matter the size of
the mine, [the mines in Alaska, which] include the largest mine
in North America, will only provide 10 percent of what a head
tax for education would provide. Representative Seaton
expressed interest in a program by which resource extraction
[results in funds being placed in the] state treasury, which
doesn't seem to be the case under the current structure.
REPRESENTATIVE ROKEBERG interjected that Representative Seaton's
suggestion should be utilized for all the state's natural
resources, particularly with regard to the fishing industry.
9:34:32 AM
BOB LOEFFLER, Director, Division of Mining, Land and Water,
Department of Natural Resources (DNR), reminded the committee
that mining taxes are net profits taxes. The aforementioned was
established when Alaska became a state. Over the last couple of
years, metal prices have been at a historic low. Mines that
were permitted at $400 gold and built with the expectation of
$400 gold lost a lot of money when gold dropped to $250 an
ounce. Therefore, mines in the state lost money and thus [one
would expect] that net profit taxes wouldn't provide the state
much money. However, as gold prices recover, he predicted that
the mining license tax and the corporate income tax will
recover. He predicted that 2004 would provide better returns
than earlier years. Mr. Loeffler highlighted that mining is a
relatively small industry with less than 3,000 employees and
really only four [sizable] mines in operation. The mining
industry as a whole pays municipalities and the state on the
order of about $5,000 per employee. The large mines probably
pay close to double or more per employee. The aforementioned is
paid in good years and bad years because the real focus and the
fiscal structure of the mining industry has been to ensure that
they support the local municipalities in which they operate. He
opined that the mining industry does a good job of that in high
and low prices.
9:37:27 AM
REPRESENTATIVE WILSON inquired as to the average metal prices
for 2004.
MR. LOEFFLER informed the committee that today gold prices are
roughly $434 per ounce.
9:38:29 AM
RICH HEIG, General Manager, Greens Creek Operation, informed the
committee that he is representing the Alaska Miners' Association
and the Council of Alaska Producers. As mentioned earlier, the
mining industry is a small industry with only four major mines.
However, it's an exciting industry, he said. The present
administration, the legislature, and the regulatory agencies
have done much to support the growth of natural resources in
Alaska. He highlighted the streamlining of the permit process
that has occurred in recent years. The existence of the large
mine permit process in one agency has done much to streamline
the process. In fact, the permitting of the tailings pond
expansion for the Greens Creek Mine is an example of a situation
in which the streamlined permitting process worked. Mr. Heig
highlighted that metal prices are high and future mines will add
revenue in the form of taxes and jobs. He explained that the
mining industry isn't a high return industry, with a 5 percent
rate of return. Furthermore, the mining industry is an
extremely capital intensive industry. For example, Greens Creek
Mine, Inc., spent over $130 million before production and $360
million in capital work since the beginning of production. Mr.
Heig pointed out that there is a lack of infrastructure in the
state, and therefore the industry may spend funds to build its
own infrastructure while other states already have that
infrastructure. He echoed earlier testimony regarding the
cyclical nature of mining, and added that the hope is that the
past two year's of high prices continue as China grows and India
possibly follows. With regard to profitability, he highlighted
that Greens Creek has only been profitable seven of its fourteen
years of existence. The mining industry, he mentioned, is
willing to pay its fair share of taxes in the state and has paid
$700,000 in property taxes. For the mining industry to consider
developing its operations in Alaska, there needs to be a stable
tax climate. Since the profits aren't always there and the
industry faces capital intensive high operating costs, a net
profits tax is the best option, he opined.
9:44:19 AM
REPRESENTATIVE ROKEBERG inquired as to how Alaska's
environmental standards compare internationally. He also
inquired as to the cost impact of those standards.
MR. HEIG specified that Alaska's environmental standards are
similar to those in other areas. However, speaking as an
operator, the state's environmental standards are intense and
more stringent than some other states. With regard to the state
taking over water discharge, he opined that the state could
probably handle it better than the Environmental Protection
Agency. Mr. Heig turned to the Greens Creek Mine specifically
and related that its operating costs attributable strictly to
adhering to environmental requirements exceed $2 million per
year. Mr. Heig specified that the firm, which is part of the
Kennicott Operations in the U.S. and part of the Rio Tinto
organization worldwide, does operate internationally and because
of its size and desire to maintain sustainability in the
industry, one set of environmental standards are administered
throughout the corporation. Therefore, those standards are more
stringent than the regulations in developing countries and equal
the requirements elsewhere.
9:46:59 AM
REPRESENTATIVE ROKEBERG commented that clearly the minerals
industry is a commodity base. In fact, all of Alaska's natural
resources are commodity driven and price sensitive.
Furthermore, environmental controls and other constraints on
business impact investment decisions. The investment
environment in Alaska for minerals sounds similar to the
petroleum industry, he remarked.
9:48:30 AM
REPRESENTATIVE WILSON, referring to the fact that Rio Tinto uses
the same standards in other countries whether they are required
or not, asked whether those countries appreciate that.
MR. HEIG answered that he believes those other countries do
[appreciate it and realize it].
REPRESENTATIVE WILSON asked if Mr. Heig believes Rio Tinto would
be able to do things in other countries that other mining
companies won't because of the use of environmental standards.
MR. HEIG commented that Rio Tinto would like to be the developer
of choice. In further response to Representative Wilson, he
informed the committee that most all of the major mining
companies operate in the same manner.
9:49:46 AM
MR. HEIG, in response to Representative Seaton, confirmed that
Greens Creek Mine is on federal land. In further response to
Representative Seaton, he said that net island royalty is
essentially the same as net smelter return. He noted that "we"
do pay the 7 percent state mining license tax on federal lands.
The net island return or net smelter return is what the forest
service would charge on extraction of minerals not covered under
extra lateral rights, which is based on the value of the
minerals similar to a net smelter return or profits tax.
9:51:20 AM
REPRESENTATIVE SEATON surmised then that the net island is based
on the gross price of the minerals less certain expenses such as
smelter and transportation. If the mine was on state land, he
inquired as to how the net island royalty that's being paid now
to the federal government would compare with what would have to
be paid to the state.
MR. HEIG specified that "we" would still pay the 7 percent
mineral license tax, but because it's on federal land the 3
percent additional tax wouldn't be paid. Therefore, whether the
net island royalty tax would be paid depends upon the mineral
prices.
9:52:30 AM
REPRESENTATIVE SEATON explained that he is trying to understand
the state's royalty share on state lands in comparison to the
federal government's royalties on production on federal land in
Alaska.
MR. HEIG informed the committee that Greens Creek has not paid
any net island royalty tax to the U.S. Forest Service at this
point.
CHAIR WEYHRAUCH announced that this meeting will be continued at
a later date.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:53:50 AM.
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