Legislature(2005 - 2006)
02/22/2006 09:09 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB418 | |
| 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
February 22, 2006
9:09 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
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."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 418
SHORT TITLE: MINING PROD. & LICENSE TAXES/ROYALTIES
SPONSOR(S): REPRESENTATIVE(S) SEATON
02/01/06 (H) READ THE FIRST TIME - REFERRALS
02/01/06 (H) W&M, RES, FIN
02/22/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
IAN LAING, Staff
to Representative Paul Seaton
Alaska State Legislature
POSITION STATEMENT: Elaborated on the figures and tables from
the Fraser Institute study.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:09:15 AM. Representatives
Weyhrauch, Rokeberg, Samuels, Seaton, and Wilson were present at
the call to order. Representative Moses arrived as the meeting
was in progress.
HB 418-MINING PROD. & LICENSE TAXES/ROYALTIES
9:09:21 AM
CHAIR WEYHRAUCH announced that the only 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."
9:09:55 AM
REPRESENTATIVE SEATON informed the committee that this bill is a
result of Article VIII, Section 2 of the Alaska State
Constitution, which reads as follows: "The legislature shall
provide for the utilization, development, and conservation of
all natural resources belonging to the State, including land and
waters, for the maximum benefit of its people." He remarked
that this bill fulfills this duty by considering a 3 percent
production tax on all mine products. He added that this bill
will result in more parity between the different segments of the
[mining] industry, and it replaces the existing mining license
tax, which is a net tax, with one that is a net smelter return
(NSR). He noted that it's not referred to as NSR in this bill,
but for mine minerals, it's the equivalent. From [Alaska's]
gross tax, the production and the transportation smelting fees
are subtracted. He stated that it's the value established at
the end of the smelter because it's difficult to establish an
ore value as it comes out of the ground because that's generally
not the first point of sale. Furthermore, the bill ensures that
the Department of Revenue (DOR) is able to ensure that these are
"arm length" transactions in order that there isn't shuffling of
resources and income. He further noted that this bill moves
away from the problem of being able to shift net income to an
"untaxable" body. He referred to four tables which are a
condensed version of the legislative research report that was
completed on June 28, 2005. Table one is entitled, "Percent of
Resource Production Value Paid to State and Municipalities from
Oil and Gas, Mining and Fishing Industries, FY 03 - 05 (in
$Million)."
The committee took an at-ease from 9:13 a.m. to 9:16 a.m.
REPRESENTATIVE SEATON again referred to table one and directed
the committee's attention to the "% Value to State" column. He
noted that for the oil and gas industry, it was 18.8 percent in
2003, 20.2 percent in 2004, and 22.1 percent in 2005. In regard
to the mining industry, he noted that between 2000 and 2004, the
percentages ranged from .5 percent to .8 percent. In regard to
the fishing industry, he further noted that between 2003 and
2005, the percentages ranged from 2.5 percent to 2.9 percent.
He turned to the "% Value to Municipalities" column and stated
that the percentage was approximately 2 percent from the oil and
gas industry, 1 percent from the mining industry, and 2.5
percent from the fishing industry. He stated that the "% Value
Total" was approximately 22 percent from the oil and gas
industry, 1.5/1.6 percent from the mining industry, and 5
percent from the fishing industry.
9:18:11 AM
REPRESENTATIVE ROKEBERG, in regard to tables 3 and 4 and fiscal
year (FY) 2004, inquired as to whether the $29,462,779 total
from the fishing industry on table 3 is separate from the
$29,027,456 total from the fishing industry on table 4.
REPRESENTATIVE SEATON confirmed that the totals are separate.
REPRESENTATIVE ROKEBERG surmised that the $29,462,779 total from
the fishing industry on table 3 goes into the State general fund
(GF) and the $29,027,456 total from the fishing industry on
table 4 is distributed to the municipalities.
REPRESENTATIVE SEATON confirmed that Representative Rokeberg is
correct and added that most of that comes from the raw fish tax,
which is basically 3 percent of the gross value of the produced
fish. He further added that it's 5 percent of the gross value
of the produced fish if it's done on a "floater" rather than a
shore-based plant. That amount of tax is then split equally
between municipalities, or the Department of Commerce,
Community, & Economic Development (DCCED) distributes it to
communities and half of it is kept by the state.
9:19:18 AM
REPRESENTATIVE ROKEBERG, in regard to the mining industry, noted
that in FY04, $8.8 million went to the State and $10.9 million
went to municipalities. He expressed his confusion regarding
these numbers and the percentages from table 1.
9:19:44 AM
REPRESENTATIVE SEATON replied that the State and municipality
don't split the taxes from mining. The municipality acquires
the mining tax. He referred to table 3 and noted that the
mining industry is comprised of various taxes. The majority of
municipality revenue comes from property taxes and severance
taxes from some boroughs.
REPRESENTATIVE ROKEBERG surmised, "The state governmental take
is about 60/40 to the municipalities for mining and 50/50 for
fishing."
REPRESENTATIVE SEATON confirmed that Representative Rokeberg is
correct and added that there is a lot more municipality take
that doesn't appear in this table. When [Legislative Legal and
Research Services] constructed this table, it forgot to include
the fishing industry's local property taxes as well as the
vessel license fees, which cost up to $900 per vessel and will
increase to $3,000 in the future. In addition, this table
doesn't include the permit fees. He noted that the majority of
the State revenue from the mining industry comes from property
taxes.
9:22:10 AM
REPRESENTATIVE ROKEBERG suggested that Representative Seaton
examine the amount of GF State money invested in the fishing
industry.
REPRESENTATIVE SEATON remarked that [the legislature] needs to
examine the different resources in Alaska and how they compare.
9:23:38 AM
CHAIR WEYHRAUCH surmised that this isn't the "universe" of other
taxes in the state. He further surmised that there's also a
timber tax, which is related to a severance tax.
REPRESENTATIVE SEATON responded that he didn't examine the
timber industry. He noted that there has been discussion
regarding the appropriate tax level for the fishing industry.
He further noted the consideration of 3-5 percent of the gross
"ex-vessel" price, which is a produced resource price. He
relayed that fishermen would love to pay on their net tax
because they would never have to pay any taxes, which is
basically what's happening in the mining industry. The mining
industry is paying on a net tax, which allows for cost shifting,
which changes the net and whether taxes need to be paid.
9:25:00 AM
REPRESENTATIVE SEATON clarified that he's not saying that the
mining industry is doing something wrong. He mentioned that the
legislature designed the tax system and it expects the industry
to abide by it. He said that the legislature set up a tax
system that only returned .6 percent to the State and there
isn't blame on the mining industry for abiding by the tax
structure. He remarked that it's essential for the legislature
to be informed as to the basic justification and equity of the
tax structure and how it compares globally before changing it.
He referred to a table entitled "Significant Taxes in Selected
Jurisdictions" and directed the committee's attention to Alaska
and Alaska proposed, which is under the proposed HB 418. The
corporate income tax would remain the same and the royalty,
instead of 3-7 percent of net profits, would be 3 percent of
gross sales, which is equivalent to NSR. The costs of
transportation and smeltering are subtracted from the gross
sales. In response to Chair Weyhrauch, he noted that the source
of the data is the Fraser Institute.
9:27:45 AM
REPRESENTATIVE SEATON noted that Argentina has a corporate
[income] tax rate of 35 percent and its royalty is a 3 percent
NSR. Argentina also has a value added [tax on imported
equipment], a dividend withholding tax of 0-35 percent, and a
interest withholding tax of 15[.05] percent, or 35 percent on
"intercompany" loans. He stated that Alaska doesn't have a
mechanism to prevent tax shifting. He further noted that
Australia has a 30 percent corporate [income] tax rate, compared
to Alaska's 9.4 percent above $90,000. Australia's royalty is
1.25-7.5 percent NSR and it also has dividend and interest
withholding taxes. Botswana has a 25 percent corporate income
tax and its royalty is 15 percent NSR. Brazil has a 33 percent
corporate income tax and its royalty is 3 percent of gross sales
of gold. He relayed that there have been comments that Alaska
would be out of the mainstream if it were taxing on NSR or a
gross amount of the tax. He further noted that China has a 33
percent corporate [income] tax and its royalty is 2 percent of
the gross revenue, which is more than NSR. He characterized
South Africa as interesting because it's highly mineralized.
CHAIR WEYHRAUCH, in regard to policy framework for existing tax
policy on mining, commented that Alaska's policies, on an
international basis, encourage investment.
9:31:43 AM
IAN LAING, Staff to Representative Paul Seaton, Alaska State
Legislature, relayed that various sources were used to produce
the tables. Primarily, a book compiled by James Otto, a mining
tax specialist from the Colorado School of Mines, was used. In
addition, sources were used to accommodate for more recent
changes in tax structure. For example, there have been more
recent efforts in Peru and South Africa to change the tax
structure to something that's more equitable (indisc).
REPRESENTATIVE SEATON pointed out that the aforementioned are
included in the footnotes on page 4 and that he added Alaska and
Alaska (proposed). He informed the committee that the Fraser
Institute is a Canadian socioeconomic organization that conducts
a survey amongst all of the mining companies. The mining
companies rate the various countries based on their
attractiveness to conduct business as well as their mineral
potential. He noted that the data is from the 2004/2005 study.
REPRESENTATIVE SAMUELS commented that the problem with comparing
a state to a country is that the federal income tax affects the
rankings. He said, "It's a huge component. It's another 35/40
percent."
9:34:21 AM
REPRESENTATIVE SEATON responded that [the federal income tax] is
not included in his calculations. He questioned whether NSR is
reasonable. He noted that he also has state comparisons.
REPRESENTATIVE SAMUELS expressed his interest in comparing the
total government take.
MR. LAING clarified that [the total government take] is included
in the investment attractiveness index.
9:35:55 AM
REPRESENTATIVE SEATON mentioned that for Alaska and Alaska
(proposed), he would be able to include [the total government
take]. He explained that there is a net island royalty for
Greens Creek Mine because it's within the U.S. Forest Service.
Greens Creek Mine's president testified that it has yet to pay
on the net island royalty. Therefore, the government take from
Greens Creek Mine has been zero. He acknowledged that there's a
corporate tax difference.
REPRESENTATIVE SAMUELS surmised that [Greens Creek Mine] escaped
the local tax, but not the federal tax. He reiterated his
interest in the total government take - local, state, and
federal - in order that comparisons can be made to other
countries.
REPRESENTATIVE SEATON replied that he would be able to include
the corporate income tax. He acknowledged the difficulty in
determining the individually negotiated deals on federal land.
He said that he would also able to investigate import/export
duty for comparison.
9:39:00 AM
REPRESENTATIVE SEATON directed the committee's attention to the
Fraser Institute study. He referred to figure 1, "Policy
Potential Index" and noted that Alaska is in the middle. He
referred to figure 2, "Current Mineral Potential - Assuming
Current Regulations/Land Use Restrictions" and noted that Alaska
is toward the bottom. He referred to figure 3, "Best Practices
Mineral Potential - Assuming No Land Use Restrictions in Place
and Assuming Industry 'Best Practices'" and clarified that best
practices means very little regulation - environmental or
taxation. He noted that Alaska is ranked number 3, so its
mineral potential is very high if it assumes the same structure
across everything. He referred to figure 17, "Composite Policy
and Mineral Potential" and noted that Alaska is ranked number 6.
9:41:43 AM
REPRESENTATIVE WILSON asked, "With our policies and with our
potential, why don't we see more? Just because of the areas
that are way out in the middle of nowhere and things like that?
We should see a lot more going on then, shouldn't we?"
REPRESENTATIVE SEATON answered that there is a lot going on in
Pebble, Donlan Creek, Fort Knox, and Red Dog, for example. He
relayed that [Alaska] has a fairly strict regulatory process.
In regard to regulations, Alaska is "down at the bottom," and in
regard to mineral potential, Alaska is "way up at the top." He
noted that Alaska is ranked number 6 in composite policy and
mineral potential.
9:43:31 AM
REPRESENTATIVE WILSON agreed that there is a lot going on in
Alaska. Considering that Alaska is ranked number 6, she said,
"I still feel like we should be seeing more. Because of our
environmental regulations, that's probably the main thing that's
holding back right now."
REPRESENTATIVE SEATON responded that it's not just the
environmental regulations; it's also Alaska's permitting
regulations, tax structure, the Department of Natural Resources
(DNR), and the federal government.
9:44:40 AM
MR. LAING mentioned that the 64 selected regions are considered
to be the most attractive to mineral investors. In regard to
the investment expenditures in Alaska, he stated that last year,
$70 million dollars was spent on exploration and $209 million
was spent on development. The aforementioned is part of the
$1.6 billion that is spent in the mining industry in Alaska. He
stated that in the search for a more equitable tax structure,
Alaska has to be able to continue to attract investors. He
relayed that "money executives" are hesitant to invest in Alaska
because of environmental regulations, regulatory duplication and
inconsistencies, and infrastructure, which is often in remote
locations. The aforementioned have tended to keep Alaska from
the very top of that list.
REPRESENTATIVE SEATON referred to figure 8, "Taxation Regime"
and noted that Alaska is "way up there at the top." He added
that [the taxation regime] is low in the "Strong deterrent to
investment" category. He referred to table A6, "Taxation
Regime" and noted that 12 percent of the respondents said that
Alaska's taxation regime encourages investment and 62 percent
said that it's not a deterrent to investment.
9:48:52 AM
REPRESENTATIVE ROKEBERG noted that Pogo is the only mine to
begin production in the last 12 years. He further noted that
the legislature passed an exploration credit tax, which is in
repeal by this bill.
9:50:07 AM
REPRESENTATIVE SEATON discussed Section 1 and the legislative
intent of the bill. Section 5 is amended to read that the
production royalty is 3 percent of gross value at the point of
production. Section 7 is amended to read that the commissioner
shall, upon request, furnish to DNR copies of tax returns,
reports, and documents filed. Section 12 reads that the mining
production tax after December 31, 2006 starts at 0.6 percent and
increases to 3 percent by [2010]. He clarified that the tax is
on NSR on minerals. He noted that this bill also exempts
taxation on the first $50,000 from the point of sale. Section
43.66 provides for the deferment of the production tax for the
first three years, except for the production of sand, gravel,
coal, or rock. He stated that for mineral production, which has
a high capital expenditure, there would be a deferment of those
taxes. Gross value at production is defined as well as how to
get there with NSR. This bill authorizes DOR to reject values
that don't appear to be "arm length," determined by the fair
market value. He informed the committee that there are also
provisions for determining reasonable transportation costs,
which allow the department to not accept them if they're not
reasonable, and requires that the tax be paid before April of
the following year. Section 43.66.160 exempts an individual
from being required to file taxes if his/her total gross value
of production is less than $10,000. Currently, there's a law
that requires everyone who mines minerals to file taxes. He
noted that a number of people are violating the law and not
filing tax returns, and this bill actually exempts them in order
that someone earning under $10,000 is not required to file.
Those that earn under $50,000 are not required to pay tax
because there's that $50,000 tax exemption. He further noted
that affiliated taxpayers are required to file a combined
statement. He remarked that a number of these provisions ensure
that there isn't tax shifting. He summarized that this bill
changes the net tax to a production tax, which is basically NSR
with a schedule for implementing that.
CHAIR WEYHRAUCH requested, "Unless those statutes that are
repealed in Section 15 are just sort of ministerial clean-up, if
they're substantive repealers, could we see what is being
repealed under Section 15?"
REPRESENTATIVE SEATON obliged and added that it's mostly that
the net mining tax was repealed.
9:55:06 AM
CHAIR WEYHRAUCH inquired as to which statute the exploration
credit tax is in and requested a copy of that statute.
REPRESENTATIVE WILSON referred to the [handout] from DOR
regarding ounces of gold, silver, lead, zinc, sand, gravel, and
the proposed tax on the gross value. She asked, "What
difference is it from now compared to what your bill would be?"
9:56:41 AM
CHAIR WEYHRAUCH announced that the committee would adjourn at
10:00 a.m. and gave Representative Seaton the option of
answering Representative Wilson's question on Friday.
REPRESENTATIVE SEATON opted to answer Representative Wilson's
question on Friday.
9:56:52 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:56 a.m.
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