Legislature(2005 - 2006)
02/24/2006 09:09 AM House W&M
| Audio | Topic |
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| 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 24, 2006
9:09 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Norman Rokeberg
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
02/22/06 (H) Heard & Held
02/22/06 (H) MINUTE(W&M)
02/24/06 (H) W&M AT 9:00 AM CAPITOL 106
WITNESS REGISTER
IAN LAING, Staff
to Representative Paul Seaton
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented information on HB 418 on behalf
of Representative Seaton, sponsor.
KARL HANNEMAN, President
Council of Alaska Producers (CAP)
Juneau, Alaska
POSITION STATEMENT: His testimony in opposition to HB 418 was
read by Rich Heig.
RICH HEIG, Vice President
Council of Alaska Producers (CAP);
General Manager
Greens Creek Mining Company
Juneau, Alaska
POSITION STATEMENT: Spoke in opposition to HB 418.
RICK VAN NIEUWENHUYSE, President & Chief Executive Officer (CEO)
NovaGold Resources, Inc.
Vancouver, Canada
POSITION STATEMENT: Spoke in opposition to HB 418.
STEVE BORELL, P.E., Executive Director
Alaska Miners Association, Inc.
Anchorage, Alaska
POSITION STATEMENT: Spoke in opposition to HB 418.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 9:09:10 AM. Representatives
Weyhrauch, Gruenberg, Moses, and Seaton were present at the call
to order. Representatives Samuels and Wilson arrived as the
meeting was in progress.
9:09:28 AM
The committee took an at-ease from 9:09 a.m. to 9:10 a.m.
HB 418-MINING PROD. & LICENSE TAXES/ROYALTIES
9:10:15 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."
9:11:31 AM
IAN LAING, Staff to Representative Paul Seaton, Alaska State
Legislature, directed the committee's attention to the following
three updated documents in the committee packets entitled:
"Significant Taxes in Select Jurisdictions," "Metal Mines
Taxation Comparison of All Taxes," and "Top Metal Producers."
He explained that the first document, which provides an
international comparison of mining taxation, was modified to
include corporate taxes and duties to Alaska and "Alaska
(Proposed)" as well as to Canada and its provincial taxes. The
second document, he continued, shows a state comparison of
mining taxes and the third document compares both United States
and international mining production. The latter document, he
noted, should be used for "general comparison purposes only, ...
the rankings can change from year to year and may not
necessarily be exactly accurate."
REPRESENTATIVE SEATON, referring to the chart showing the
taxation of metal by state, said that the second column lists
the investment attractiveness rankings [taken from] the study by
the Fraser Institute. He indicated that Nevada is ranked 1,
Alaska ranked 6, and most of the other states ranked in the 40s
or 50s. "So [Alaska] is far more attractive for many reasons,"
he said.
MR. LAING, in response to a question by Representative
Gruenberg, said that the Fraser study does not include a similar
chart showing state attractiveness rankings, however, it does
have charts comparing the tax regimes - net, gross, or otherwise
- of different states and countries and the effect this has on
investment attractiveness.
REPRESENTATIVE GRUENBERG indicated that reviewing how the states
compare to other jurisdictions in addressing similar issues is a
helpful guide to him. He asked whether it is possible to
manipulate factors in such a way as to determine their effect on
attractiveness and to "scale it against other kinds of things
like revenue raising ... so we can qualify it as well as
quantify it."
MR. LAING said this was the intent of distributing the Fraser
study and that the charts before the committee are an attempt to
"pare down" the study's findings. The charts show, he
summarized, the different taxes in Alaska for the major resource
industries, the different mining-specific taxes in different
nations and different states in addition to the many different
factors considered in determining investment attractiveness in
the mining industry.
9:18:57 AM
KARL HANNEMAN, President, Council of Alaska Producers (CAP), had
his written testimony paraphrased by Rich Heig as follows
[original punctuation provided]:
The Council of Alaska Producers (CAP) is an
association representing companies involved in
exploration, development, and active operation of hard
rock mines in Alaska. Our industry is committed to
sound operating practices, protection of the
environment, and growth of an industry that has the
potential to provide much needed private sector
economic diversification throughout Alaska.
The mining industry has worked hard with the
legislature over the last two decades to improve the
investment and regulatory climate in Alaska.
Significant fiscal policy improvements, such as the
exemption of minerals from municipal in-situ taxation
and the passage of the Exploration Incentives Act,
both of which passed through your committee, have
combined with other regulatory changes to greatly
improve the perception of Alaska as a good place to do
business. In fact, for several years after the
passage of the Exploration Incentives Act, members of
the Council and other mining company executives often
cited the Incentives Act in speeches around North
America as a reflection of the positive support from
the Alaska government.
HB 418 would undermine these efforts by imposing a
complicated and regressive tax on an industry that has
yet to reach its potential. A stable and fair tax
policy is necessary to continue to attract investment
capital. The existing tax regime, which combines
corporate income taxes, a 7% net profits mining
license tax, rents, and a 3% net profits royalty, was
established after years of litigation on the issue of
what constituted an equitable return to the State.
Poorly crafted and ill-advised legislation is a poor
substitute for the extensive legal and public process
that established the current tax regime.
Tax payments from the mining industry to the State are
up significantly in recent years, even though Alaska
still only has one hardrock mine on State land. The
Legislature has worked hard to provide a stable
climate for investment. The CAP asks that you not
pass HB 418 and allow the industry to grow and reach
its potential.
9:22:18 AM
RICH HEIG, Vice President, Council of Alaska Producers (CAP);
General Manager, Greens Creek Mining Company, referring to the
Fraser Institute survey on mining companies, said that he agrees
with the findings that show Alaska as having "improved the
climate dramatically for mineral development [which has]
happened over the last couple of decades." He opined, however,
that the tax proposed in HB 418 is "aggressive" for an industry
still emerging from difficult times, and it will not support
continued growth. He also noted the difficulty in comparing
Alaska's mining tax to the tax rate in other countries because
it does not show the difference in where the earnings are
applied. That is, he explained, other countries may require
higher taxes to fund social benefits for citizens whereas in
America, it's often the employer who provides the medical and
retirement benefits to workers. Regarding the comparisons made
at the last meeting between the mining and fishing industry, he
observed that the latter does not face the same detriments to
development as does the mining industry, which often must deal
with infrastructure challenges such as lack of roads or power.
Also, in regard to Representative Seaton's discussion on the
"shifting of revenues," he expressed his belief that this is not
allowed by the Department of Revenue (DOR) and that there are
mechanisms in place to prevent this from happening. He said,
"If this is such a concern, I would expect we could provide the
factual examples that exist to support the concern for shifting
of revenues." As to a statement made at the last meeting
regarding Greens Creek Mining Company not having paid its net
island royalty to the United States (U.S.) Forest Service based
on the current tax structure, he said:
I did state a year ago that Greens Creek [Mining
Company] has not paid any funds against the net island
royalty; however, we have not avoided nor attempted to
avoid the net island royalty payments. Simply put ...
we have not mined in any areas that are subjected to
the net island royalty under the agreement from the
late 1990s when the net island royalty was put in
place. We have not mined in any areas that are
susceptible to the net island royalty.
MR. HEIG, referring to the chart showing the top metal producers
worldwide, said that Greens Creek Mining Company is primarily
the largest silver producer in the U.S. having produced 559,000
"kilograms," not "metric tons" as specified on the chart.
9:27:52 AM
CHAIR WEYHRAUCH asked for clarification from Mr. Heig on his
statement that Greens Creek Mining Company hasn't paid any funds
against its net island royalty.
MR. HEIG explained that "net island royalty" is a federal
program administered under the Bureau of Land Management (BLM),
however, the [mines] are on U.S. Forest Service lands. He said
the royalty is on those areas mined outside of the company's
"existing extra lateral rights within our mining area" which was
determined in the Land Exchange Agreement in the late 1990s. In
response to Chair Weyhrauch's question regarding why the company
has not mined in areas susceptible to the net island royalties,
he clarified:
It's not because of the tax and we hope there are
resources to mine and we find them in our exploration
program. It's just the way that the structure was
designed, as far as what is susceptible to net island
royalty and what is not ... and that gets into a
discussion on extension of extra lateral rights from
existing claims [which] is a very detailed discussion.
9:29:37 AM
REPRESENTATIVE GRUENBERG asked how many kilograms are in a
metric ton.
MR. HEIG said that there are 31.10348 grams per troy ounce and
that the 559,000 metric tons, if in kilograms, would convert to
17 million ounces, "although Greens Creek does not produce this
amount." In further response to questions by Representative
Gruenberg, he noted that whereas there might be byproduct silver
credits from other operations, Greens Creek is the only primary
producer of silver. Furthermore, he said he was not aware of
any other silver mines "coming online" in Alaska as primary
producers. When asked what the differences might be in the
silver mining industry versus the mining of other hard minerals,
he clarified that Greens Creek produces its silver into a zinc
and lead concentrate that is sold to smelters around the world,
and does not produce silver bars.
REPRESENTATIVE SEATON said that he wished to clarify two points
made earlier. The first, he stated, deals with whether cost
shifting takes place under the current tax structure. He
referred to correspondence from the Department of Revenue (DOR),
which explained that this practice is hard to track and that
audits are not currently performed to determine if cost shifting
is happening. He said he also wanted to clarify that it was
never his intent to relay that "the mining industry is doing
anything wrong." Whereas the current tax policy for the
industry does not provide a reasonable return, it is one that
the State of Alaska adopted, not the mining industry, he opined.
Therefore, he said he does not fault the industry "for following
the tax policy to the full vantage that they can within the
State of Alaska."
9:34:12 AM
RICK VAN NIEUWENHUYSE, President & Chief Executive Officer
(CEO), NovaGold Resources, Inc., explained that the company is a
junior exploration and mining company with headquarters in
Vancouver, British Columbia (BC). NovaGold Resources has
invested approximately $25 million in Alaska during the last 5
or 6 years and is currently working on 3 projects with different
partners: the Rock Creek project in Nome; the Donlin Creek gold
project, which is a joint venture with Placer Dome/Barrick
located in the Kuskokwim Gold Belt region on lands owned by the
Calista Corporation and the surface rights owned by the
Kuskokwim Corporation; and the Arctic project, a joint venture
with "Rio Tinto Zinc" (RTZ) located in the Northwest Arctic
Borough adjacent to lands owned by the State of Alaska and lands
owned by NANA Regional Corporation. He noted that his company
and its partners have spent a combined $100 million on all three
projects to date and have yet to receive any return on
investment. "A tax such as is proposed in HB 418 is what I
would consider an extremely regressive tax," he said and
highlighted that there is already a 7 percent net profits tax in
Alaska, which "is the correct kind of a tax to apply to the
mining industry." With the huge amount of capital required to
develop any of these mines - due to the lack of infrastructure,
no central power grids, and no roads - he expressed his belief
that it "is very unfair to have a tax come off of the top ...
before your investors are getting a return on their investment
...." He opined that this would send a very negative message to
the mining industry worldwide and "very strongly would urge the
committee to put a no-vote on HB 418."
9:38:59 AM
CHAIR WEYHRAUCH asked Mr. Van Nieuwenhuyse to explain NovaGold's
affiliation with Alaska mines.
MR. VAN NIEUWENHUYSE explained that his company purchased the
Alaska Gold Company six years ago, a company that's been in
operation since the 1920s in the Nome area of Alaska, and where
now a sand and gravel business is operated. It is there, he
continued, that the Rock Creek Mine is being developed, which
will be Nome's first modern, open pit, hard rock mine. The Rock
Creek Mine will produce about 100,000 ounces of gold and employ
approximately 135 people. The company is currently in the
permitting process and expects to have its permits by May or
June and the first gold ore by the end of the year. He then
mentioned the other two projects currently being developed:
Donlin Creek, one of the largest undeveloped gold projects in
the world at 28 million ounces, and the Arctic deposit, which is
a copper, lead, zinc deposit in the Northwest Arctic Borough
region. He said that the company has already spent $5 million
and will spend an additional $3 million with this year's budget.
REPRESENTATIVE SEATON said he wanted to make sure Mr.
Nieuwenhuyse understood that the tax proposed in HB 418 replaces
the current mining license tax, and is not an additional tax.
Furthermore, he informed, it is a net smelter return tax, which
is not applicable prior to production or before there are
returns. He also highlighted the provision included in the bill
for a three-year deferral of taxes to allow mining companies and
their investors to recover more capital in the first three years
of production. He then asked Mr. Van Nieuwenhuyse if he did
business in Canada as well as in Alaska.
MR. VAN NIEUWENHUYSE said that [NovaGold Resources, Inc.] has
several big projects in the Canadian provinces of British
Columbia and the Yukon as well. Then referring to the tax
proposed in the bill, he opined that "a 3-year tax holiday is
not going to go a long way to paying off [the] $1.5 billion"
needed to invest in the Donlin Creek project to extract that
first ounce of gold. He said he disagrees strongly with the
statement that "[company] investors would get a return" because
a project like Donlin will probably take five years before there
is any return on the invested capital. He assured the committee
that he does understand that the tax is "not over the top" of
the existing net profits interest tax that currently exists and
one that he opined is a good tax, recommending, "if it ain't
broke, don't fix it."
9:43:08 AM
REPRESENTATIVE SEATON, returning attention to the chart
entitled, "Significant Taxes in Select Jurisdictions," which
lists the mining taxes to several Canadian provinces, and asked
Mr. Van Niewenhuyse to compare these figures to those taxes
proposed in the bill.
MR. VAN NIEUWENHUYSE relayed that BC has a net profits tax not a
net smelter tax. He also explained that this province has some
of the cheapest power in the world, at 3.2 cents per kilowatt-
hour (kWh), which is part of where the corporate tax is applied.
For comparison purposes, he said that a project like Donlin
Creek would likely cost 10 to 11 cents per kWh and relayed that
even the proposed gross royalty tax "would be very detrimental
in encouraging investment in a yet young industry in Alaska."
REPRESENTATIVE SEATON, again referring to the comparative study
on taxation, informed the committee that BC has a profits tax of
13 percent, which is "considerably above" Alaska's mining tax,
and has a minimum tax of 2 percent, unlike Alaska which has no
minimum tax.
MR. VAN NIEUWENHUYSE, responding to Representative Wilson's
question regarding available power in northern BC, confirmed
that this region has very little power available, which is one
of the things the BC government is currently considering
installing. He said that his company does have a copper/gold
project in the area that produces a concentrate, requiring a
significant amount of power, which is then shipped to smelters
overseas. Installing the power lines would likely be a project
done by the BC government, he explained, and would provide
relatively inexpensive power to developers in that region.
9:49:06 AM
REPRESENTATIVE GRUENBERG asked if he was correct in
understanding Mr. Van Nieuwenhuyse's perspective of Alaska's
mining industry as one in a developmental stage rather than a
producing stage since it lacks the infrastructure of other
jurisdictions.
MR. VAN NIEUWENHUYSE said this is correct and that there are
very few mines in Alaska. He commented that the lack of
infrastructure does have an effect on attracting new industry
and that "having good taxes that recognize the hurdles that
exist in the state would be appropriate."
REPRESENTATIVE GRUENBERG said that the charts don't capture this
factual distinction, and therefore he requested comparisons to
similar jurisdictions showing how they partner with the
industries to ensure that "the industry can grow and so that the
government can get sufficient royalty and taxes to maintain
itself ...."
MR. VAN NIEUWENHUYSE relayed that he currently had no charts
available, but offered to find "fair and objective" comparative
information.
9:52:11 AM
STEVE BORELL, P.E., Executive Director, Alaska Miners
Association, Inc., expressed his concern with the proposed
changes to tax policy in HB 418 and additionally with the timing
of the proposal. With passage of the Alaska Native Claims
Settlement Act (ANCSA), Section 17(d)(2) ("d-2"), and the
resulting lands debate, and with passage of the Alaska National
Interest Lands Conservation Act (ANILCA), he said the
[association] has been working extremely hard "to convince
mining companies ... to consider investing in Alaska." He
recalled that because of the uncertainty [of how these land
debates] would be resolved, about 80 different [mining]
companies either closed their businesses in Alaska or decided
not to develop in the state - an occurrence which the Alaska
Miners Association is trying to reverse. He noted that
currently, precious metal, base metal, and coal prices are all
elevated and said he couldn't "recall a time ever before when
all three of those major mining sectors ... have been high at
the same time." However, he pointed out that for most of the
past 20 years, the mining industry "has been suffering under
very low [metal] prices" and yet those currently operating in
Alaska, continue investing and risking the very limited
exploration dollars despite these low prices.
MR. BORELL then addressed the Mining License Tax of Alaska,
which is a special targeted tax required of the mining industry
on all metals produced. He opined that it's to be a progressive
form of taxation based on the net proceeds from mineral
production. In addition to this tax, he informed the committee
that the mining industry also pays rent and production royalty
taxes. He speculated that when the 2005 data is available, it
will show significant increased payment to the state's general
fund (GF), and this with only 4 large operating mines during
that year, with a fifth mine currently adding to the pool. He
pointed out that when a miner is successful, the state shares in
that success, and even operating at a loss, the industry
provides jobs and in some cases pays local property taxes that
have been essential for local communities. He expressed his
disappointment with the analysis provided at the previous
committee meeting which, when referring to the amount of tax
revenue generated, failed to mention that at that time there was
only one large mine operating on state land. He relayed that
during the 1980s, when there were no hard rock mines operating
in Alaska, "establishing a stable and appropriately progressive
tax in advance of an investment was a good policy ... and it's
helped set the stage to attract significant risk capital to
Alaska that now is beginning to mature into a core business."
9:58:57 AM
CHAIR WEYHRAUCH announced that HB 418 would be held over.
9:59:56 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:59 a.m.
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