HB 40-MUNICIPAL TAX EXEMPTION: FARM USE LAND  8:35:22 AM CO-CHAIR NAGEAK announced that the final order of business would be HOUSE BILL NO. 40, "An Act establishing a municipal tax exemption for certain farm structures." 8:35:36 AM REPRESENTATIVE SHELLEY HUGHES, Alaska State Legislature, speaking as the sponsor of HB 40, began by highlighting the beginnings of agriculture in Alaska and the potential for increased agriculture in the state. The purpose of HB 40 is to strengthen agriculture in the state even though it's currently a small sector of the state's economy. This legislation, HB 40, would provide municipalities the option to exempt specific food storage and production buildings for those farmers who derive at least 10 percent of their income from farming activities. The aforementioned would benefit farmers by relieving the tax burden. Furthermore, it would benefit Alaskans because residents would have increased access to locally grown food. Representative Hughes told the committee that the need for HB 40 came to light after learning from farmers that at the end of the harvest season they were turning produce back into the soil because it was too expensive to pay the taxes to store it. Therefore, residents lose the opportunity for that produce to be available for purchase. Moreover, the less local food there is in Alaska, the more food from the Lower 48 must be transported to Alaska. The food from the Lower 48 is likely to have been harvested seven to nine days before it reaches store shelves in Alaska, and thus that food has lost some of its nutritional value. 8:39:57 AM GINGER BLAISDELL, Staff, Representative Shelley Hughes, Alaska State Legislature, explained that HB 40 is fairly specific in its municipal tax exemption of farm food storage and production buildings for which at least 50 percent of the building must be used for farm food storage and production. The building has to be owned or leased by an individual that is actively engaged in farming. This exemption also includes dairy production and milking facilities. However, HB 40 does not include slaughter houses, basic ranching, or fishing. 8:42:08 AM CO-CHAIR LEDOUX moved to adopt CSHB 40, Version 28-LS0229\N, Bullard, 1/28/13, as the working document. CO-CHAIR LEDOUX objected for purposes of discussion. 8:42:54 AM REPRESENTATIVE FOSTER acknowledged that it's an optional program, but asked if there has been any opposition to HB 40, including from the Alaska Municipal League (AML) or any communities. REPRESENTATIVE HUGHES said that she was not aware of any opposition, but deferred to her staff. MS. BLAISDELL informed the committee that she has placed calls to AML, but not heard from them. However, she said she has spoken with many city officials in various locations and the local assessors are very much in favor of HB 40. In fact, the Matanuska-Susitna Borough is drafting a resolution in support of HB 40. 8:44:20 AM REPRESENTATIVE REINBOLD spoke positively regarding HB 40, but acknowledged that the exemption will result in municipalities/boroughs receiving less money from taxes. She then asked if the Matanuska-Susitna Borough is okay with that reduction in tax revenue. REPRESENTATIVE HUGHES related that her region is fine with the proposal as they deem it as important enough to provide relief to the farmers. 8:45:37 AM REPRESENTATIVE REINBOLD highlighted that HB 40 has a zero fiscal note. 8:45:45 AM CO-CHAIR LEDOUX pointed out that the language of HB 40 is permissive as it uses the term "may." 8:46:13 AM REPRESENTATIVE DRUMMOND, speaking as a recent Anchorage Assembly member, related that although a property tax exemption may be optional, there is great difficulty in not offering it. Therefore, she expressed interest in the comments of municipalities and boroughs in the state. She opined that as a member of a borough assembly she would question whether the significant amount of tax burden not received by the local government will be shared with the remaining property taxpayers in the borough or wiped from the books. She explained that the senior property tax exemption and disabled veteran's property tax exemption in Anchorage has been offered for 25-30 years. Although initially the state reimbursed communities for those property tax exemptions, the state began to reimburse less and less until the state doesn't reimburse any of the exemptions. For Anchorage, the total of those property tax exemptions is around $25 million, which is a sum that can't be ignored by the municipal governing body. Therefore, that $25 million is shared among all the other property taxpayers in the municipality and costs each municipal resident a little more to provide these exemptions. She inquired as to the amount of property tax this would total were all the farmers who qualified took advantage of the proposed exemption. REPRESENTATIVE HUGHES reminded the committee that [Version N] specifies that farming activity must constitute at least 10 percent of the farmer's income, which is a protection from abuse. She recalled that the amount of property tax the Matanuska-Susitna Borough wouldn't receive were HB 40 to pass is estimated to be $3.5 million. MS. BLAISDELL informed the committee that under the original legislation, which specified that to qualify for the proposed exemption 50 percent of the food storage or production building had to be used for farming, the state assessor estimated that property tax in the Matanuska-Susitna Borough to be about $3.6 million. However, in Version N the qualification was changed to require the food storage or production building to be used almost exclusively for farming, and thus the estimated tax exemption may be less than anticipated under the original version. She related that Fairbanks felt the impact of the proposed exemption would be negligible and Delta Junction doesn't tax the farming industry so there would be no fiscal impact to them. 8:52:05 AM CO-CHAIR LEDOUX pointed out that the legislation uses the term "person" rather than "individual." Therefore, she surmised that if an individual formed a LLC or S corporation and [its building] was used exclusively for farming activity, even if the income from the LLC didn't constitute more than 10 percent of the individual's gross income the exemption would still be available to the LLC. REPRESENTATIVE HUGHES replied yes, it would be 10 percent of the LLC's income. 8:53:10 AM REPRESENTATIVE FOSTER inquired as to who determines that a person derives at least 10 percent of their income from farming activity. MS. BLAISDELL related her belief that it would be the local assessor. 8:54:30 AM STEVE VAN SANT, State Assessor, Division of Community and Regional Affairs, Department of Commerce, Community & Economic Development (DCCED), explained that typically the local assessor calculates whether 10 percent of the person's yearly gross income is from farming activity. However, the farmer has the option of letting the state assessor's office know whether the farming income reaches 10 percent of the farmer's yearly gross income. He estimated that about half a dozen farmers send their income tax returns to the state assessor's office rather than the local assessor. 8:55:13 AM CO-CHAIR NAGEAK opened public testimony. 8:55:24 AM DON DYER, Economic Development Director, Department of Economic Development, Matanuska-Susitna Borough, related that the cost of property tax is a large portion of the cost for farming, particularly for dairies. Dairies operate with a very thin profit margin and thus the proposed tax exemption would make them more profitable and provide an incentive to expand. Mr. Dyer, as an owner of a vegetable farm, related that because of Alaska's weather, one of the significant costs is storage that will keep vegetables from freezing until they're sold. Therefore, HB 40 would be a significant help with that. 8:57:08 AM LARRY DEVILBISS, Mayor, Matanuska-Susitna Borough, began by noting that he was the director of the Division of Agriculture for a few years. He then stated his support for HB 40 as it provides another strategic tool to incentivize and increase food production in the state. He was supportive of it being an optional exemption, which if administered as the other property tax exemptions would be by an application process during which it's scrutinized closely. With regard to the senior and veteran's property tax exemptions, Mayor DeVilbiss reminded the committee that those are mandatory exemptions. The proposal in HB 40 is an optional and flexible tool for which he has heard no negative feedback. He informed the committee that although a resolution in support of HB 40 is on the Matanuska-Susitna Borough's upcoming agenda, he expressed the need to ensure that the use of the term "person" does include those farmers who operate as an LLC, which is the case for most farmers. 8:59:32 AM CO-CHAIR NAGEAK closed public testimony. 8:59:48 AM MS. BLAISDELL pointed out the following changes encompassed in Version N. In Version N, the term "individual" was changed to "person" at the request of farmers and Legislative Legal Services. The term "individual" means that a single person owns and operates the farm and its structures and would've been the only people eligible under HB 40. In Version N, the use of the term "person" means that the legislation applies to individuals, LLCs, and other types of financial corporations such as S corporations. While that language change broadens who could benefit from the legislation, the sponsor felt the change was important because of the current structure of farming organizations. 9:01:27 AM CO-CHAIR LEDOUX withdrew her objection to the adoption of Version N. [There being no further objection, CSHB 40, Version 28-LS0229\N, Bullard, 1/28/13, was adopted as the working document.] 9:01:37 AM CO-CHAIR LEDOUX moved to report CSHB 40, Version 28-LS0229\N, Bullard, 1/28/13, out of committee [with individual recommendations and the accompanying fiscal notes]. There being no objection, CSHB 40(CRA) was reported from the House Community and Regional Affairs Standing Committee.