HB 238 - MINING EXPLORATION INCENTIVE CREDITS Number 0077 CO-CHAIRMAN HUDSON announced the first item of business was House Bill No. 238, "An Act amending the program of exploration incentive credits for activities involving locatable or leasable minerals or coal deposits on certain land in the state; and providing for an effective date." The bill had been heard previously. Co-Chairman Hudson advised that the sponsor had a proposed committee substitute (CS), 0-LS0845\F, Chenoweth, 4/21/97. Number 0122 REPRESENTATIVE AL VEZEY, sponsor, came forward to testify. He said although the proposed CS looks like a substantial rewrite of the bill, it is not. It addresses concerns expressed by the Department of Natural Resources (DNR). Specifically, it provides a means of evaluating data, giving the DNR explicit authority to use consulting services paid for by the party wishing to have its data approved for a tax credit. In effect, it would give the DNR the necessary resources to accomplish the evaluation task. REPRESENTATIVE VEZEY advised there are minor changes taking into account written comments and those received at the previous hearing. The major change is that they moved a section to another part of the bill to make it easier to read. Number 0287 CO-CHAIRMAN SCOTT OGAN referred to Section 1 of the proposed CS, page 1, line 10, and asked whether the state would be giving more in credits than it would be getting back in revenue. Number 0323 REPRESENTATIVE VEZEY replied that the only change in Section 1 is adding item (5) on page 2, which clarifies that geological mapping is an allowable cost. To date, $38 million in potential credits have been filed. By way of comparison, about $700,000 a year in mining tax is collected; although Representative Vezey does not know the number of actual credits taken, it is small. The advantage to the state of these incentives is receiving a tremendous amount of leverage on its dollars. Representative Vezey said the state does not really lose any revenue. It grants a credit when a tax liability is incurred, and that is usually years after the credit accrues. Number 0401 CO-CHAIRMAN OGAN questioned the $700,000 worth of revenue per year, when the state grants millions in credits. REPRESENTATIVE VEZEY said $38 million in allowable credits have been certified by the department, but the number actually used is infinitesimally small in comparison. The credits are "simply sitting in the bank, waiting for an opportunity to use them." Number 0454 CO-CHAIRMAN OGAN asked: If only $700,000 in taxes is being collected in mining taxes, what problem are they trying to fix by giving additional credits? REPRESENTATIVE VEZEY stated that the purpose of this bill is two- fold. First, it adds geological mapping as an allowable expense for credits; that is a small "tweak" that probably could have been interpreted as allowed under existing law. Second, they are creating a new category of tax credits for geophysical, geochemical and geological surveying work released to the public. REPRESENTATIVE VEZEY said the current mineral exploration incentive tax credit only applies to exploration development on a piece of property. He explained, "In other words, if you do an exploration and development program over 1,000 square miles and you develop one square mile of that under the current program, only the cost associated with the one square mile that goes into development is an allowable tax credit. Now, the company will undoubtedly file all the other credits, in the event that they someday become eligible, but it might be 15 years, or never, that they become eligible for actual tax deductions. They're just simply filed and accepted; they're in the bank." Number 0599 REPRESENTATIVE VEZEY said the airborne geomagnetic survey program has unquestionably created an economic boom in Alaska, with only $300,000 to $400,000 in yearly expenditures by the state. As the legislature is unlikely to provide more money to expand the program, they had come up with a plan: If a private-sector company did geophysical surveying, geochemical surveying or geological mapping and released the data to the public, they would receive a tax credit for that work. REPRESENTATIVE VEZEY explained, "And there again, we're getting a tremendous amount of leverage, because it's not so much that we expect everybody will take all their data and try to put it in this bank and get a tax credit, because in the first place, until they have a tax liability, they have no incentive. What we're trying to do here is send out a message that `Hey, we are open for business, and we're going to offer this incentive to you. If you go out and do an exploration program and it turns up goose eggs, and in your opinion, the data is worthless, you can release it to the public and we'll give you a credit against your future mining tax or your future income tax, if you'll just make it available to the public.'" Representative Vezey emphasized that where one person might see no value, somebody else with a different background, training or objective may see real value. Number 0705 CO-CHAIRMAN OGAN referred to page 1, lines 10 and 11 of the proposed CS, which says credits are given "regardless of whether the land is state-owned land". He asked whether Representative Vezey believes it is advantageous to continue with that policy. For example, if exploration was done on private or federal lands, he assumed the state would not get the revenues. REPRESENTATIVE VEZEY said that is incorrect. He referred to the 90/10 revenue sharing agreement between the state and federal governments; mineral severance taxes; and corporate taxes as sources of revenue regardless of land ownership. REPRESENTATIVE VEZEY said they had debated that. If a company surveys private land, he would assume the owner of the land is interested in having it developed and would act like a prudent business manager. The company would have first priority to look this data over. If they do not want to use it, there is an incentive to make it public, which can be done at no cost to the department by providing a tax credit against a mining license tax or income tax. Once the information is public, anyone may evaluate it and talk to the owner of the land. Number 0849 CO-CHAIRMAN HUDSON suggested the option for incentives rests with entities wanting to explore for minerals or develop mineral properties. If they choose the incentive, they must give back to the state geological information, for example. He stated, "It doesn't cost us anything, because they have to come into production before there's a tax obligation." REPRESENTATIVE VEZEY concurred. He emphasized that the primary intent is to send a message. "And we can do that," he said. "There is no value to a tax credit if there's no taxable income. It doesn't mean they might have income from somewhere else that might be taxable. It's just this particular property may not have developed. And that's the big difference between this bill and the bill that we worked on two years ago, is that this bill, ... the property doesn't have to go into production. We're trying to expand this library that catalogs Alaska resources. Because we all say that we're a rich state, but I defy you to tell me what's here." Number 0942 REPRESENTATIVE IVAN IVAN, cosponsor of HB 238, said he comes from an undeveloped area, the Yukon-Kuskokwim delta region. They need to look at available resources, including possibilities for shallow gas wells that could provide cheaper fuel than the diesel currently used in communities. He believes this legislation will afford that. REPRESENTATIVE IVAN said his region contains 6.5 million acres of private land. Including state lands, it is the size of Oklahoma. He stated the hope that the incentive will be available for some of the small operators interested in production of shallow-well gas and for cataloging the resources. Number 1064 REPRESENTATIVE VEZEY said he would like to see the committee get the bill moving. Although he does not believe it will affect exploration this summer, he believes if the message goes out this summer, it may affect the amount of exploration activity in Alaska next year. Number 1146 RUDY VETTER testified via teleconference from Fairbanks, agreeing this may provide increased incentive for exploration. He cited a local example that he believes may ultimately become a mine bigger than the Fort Knox Mine. He hopes this bill, over the long term, does not conflict with current law. He noted that it does not provide penalties nor is it mandatory. MR. VETTER thanked "all of you people who helped us get the airborne data that we've had." He emphasized that the mining industry does not want more taxes or state funding. He said, "Give us the freedom to operate and we can operate very well, and we can take care of all of our environmental factors that are necessary." Number 1320 MILT WILTSE, Director, Division of Geological and Geophysical Surveys, Department of Natural Resources, testified via teleconference from Fairbanks. They had reviewed the proposed committee substitute. While they agree wholeheartedly with the concept, they still have questions. For example, they see confusion as to what old data may be eligible. They also have questions on the definition of "substantial value." MR. WILTSE said Section 4 is particularly difficult to interpret. He stated, "It looked like part of that subsection voided some of the new credits and possibly impacted some of the former bill." It is also unclear whether the credit has a one-time statewide limitation for each applicant or would be for any one set of data. In addition, as the bill is written, he believes most material would be given to the DNR to evaluate, placing the department in a contractual situation. MR. WILTSE agreed with the concept of not building a bureaucracy within the DNR to evaluate submitted data. He believes this can be a private-sector-supported, efficient operation. They would like to work out questions with the sponsor and stakeholders in the mining industry. MR. WILTSE said some people had expressed concern, which he feels may be somewhat valid, that if this is not done correctly, there may be harm to the existing incentive, which is far from anybody's intent. He suggested the intent could be placed in a separate bill to avoid that possibility. He offered to work with others towards a "consensus-opinion bill to go forward in the next session, that we could all support with no reservation." MR. WILTSE stated his belief that the concept is excellent. It may go beyond anybody's expectations in terms of building a geologic data base of material that otherwise would not be available. He stated, "And I'd hate to see us act too much in haste and therefore create a situation that we don't want to create and maybe lose the opportunity of actually putting something like this in place for the long run." Number 1599 REPRESENTATIVE VEZEY responded, "I do think we have addressed his legitimate concerns. Some of his concerns just pertain to exactly what he's talking about. I mean, it takes a lawyer to read some of our statutes. I believe that the only reason to move this bill forward is to put the message out there, because people are making decisions now, and in the next six months, as to how they will spend money in 1998. And I think this would be a good incentive to have out there." REPRESENTATIVE VEZEY suggested a compromise for the "department folks that are nervous about this" would be simply changing the retroactive date to 1998 and making the effective date sometime in 1998. As he visualizes it, if the bill became law this year, it would not produce results for another year. Changing the dates would provide another year to work on the details, but the message would still be out there, loud and clear. Number 1679 CO-CHAIRMAN OGAN expressed concern about the fiscal note for approximately $260,000 to $270,000 per year. Referring to another bill, he pointed out the dive fishery was willing to pay costs to get that fishery going. He asked where this money would come from. He referred to the analysis section of the fiscal note, which is extensive, and advised that it discusses similar programs in Canada. Number 1753 REPRESENTATIVE VEZEY stated his belief that the fiscal note addresses the original bill, not the committee substitute. He stated, "It's assumed in this fiscal note that the DNR would be handling this data, evaluating it professionally and publishing it. The committee substitute spells out that it is a third-party consultant that will do the evaluation, paid for by the person wishing to take the tax credit, and that the person wishing to take the tax credit is responsible for the publication of the data. So it's zero cost. Really the cost is some of the director's time, because the director has total authority over whether or not to accept this information." REPRESENTATIVE VEZEY suggested it will come down to the relationship between the director and the third-party consultant. The director would basically either take the advice of the third- party consultant or not use that consultant. He stated, "So I believe that we've eliminated this, for all practical purposes, to a zero fiscal note." He asked Mr. Wiltse, who had prepared the fiscal note, to comment. Number 1808 MR. WILTSE responded, "What Representative Vezey says is partially true. And I'm sure that that is his intent." He said his own intent is that when the DNR finally puts a program like this into place, it will function along the lines that Representative Vezey is talking about. However, as the CS is written, it provides for an applicant to either submit material to the DNR or go the route that Representative Vezey has articulated. If they do the latter, the cost is theirs. But if they submit it to the DNR, the cost is the department's. The DNR had to prepare a fiscal note for the bill as written, even though they know the intent, as the language does not hit the intent. MR. WILTSE said Representative Vezey is correct that the DNR would seek outside review. What separates state data from other types of mining data is the former undergoes independent peer review. He envisioned initiating a procedure, for example, with a panel of certified reviewers that would meet criteria acceptable to all parties; it would be codified not in legislation but in some procedure equitable to everyone. Somebody submitting data for credit could select a panel, probably of at least three professionals, to review it and pass on a recommendation or summary of their findings to the director or someone else in the DNR. MR. WILTSE said Representative Vezey is also correct that under that scenario, the cost would not be borne by the state. The actual mechanism of retaining consultants, for example, can be worked out. However, the committee substitute leaves open the very real possibility that people would opt to put those costs on the DNR. That is why the amounts in the fiscal note are still there. Number 1969 CO-CHAIRMAN HUDSON said as he hears it, Mr. Wiltse believes this bill can be worked out so as not to harm the current exploration incentives program. However, they need additional time and effort to ensure nothing harms that. MR. WILTSE agreed and stated, "I think a safer way to do it would be in a separate bill. I think if there's a lot of effort put into it, we can probably not do any damage to the original bill." Number 2025 BOB BARTHOLOMEW, Deputy Director, Income and Excise Audit Division, Department of Revenue, came forward to testify. He indicated he had provided questions to the sponsor on issues needing clarification. He agreed the dollar impact is small initially, although it may grow in the future. This bill is for costs of an activity that never goes into production, but there are time lags. Something may not go into production for eight years. He asked: What happens if a company takes credits currently and the mine goes into production? MR. BARTHOLOMEW said these are technicalities. However, if put into law, these technicalities are what the private industry must work with when their tax advisors decide what to do. He cautioned, "And so, if you put it out before it's ready, and you risk a bill getting through next year to correct the technicalities, you may be living with those; you may not get a correction through." MR. BARTHOLOMEW indicated his intention of having the sponsor and the DNR resolve the program. Then the Department of Revenue could say what works on the tax schemes, helping to achieve the goals. He does not believe the tax schemes should drive the legislation. "And so we really haven't taken a position other than there are some issues now that have not been worked out on how the current tax credit would work and how the new program would ferret into that," he explained. "And I think what DNR has been saying is you may want to do it in a completely separate section of the tax code. You may just want to say, `Do it this way' and not merge them." Number 2146 CO-CHAIRMAN HUDSON said he was looking at the concerns of both Mr. Wiltse and Mr. Bartholomew. He asked them whether it was possible to do any rapid determination with the prime sponsor to clean this up. "But absent that, I'm not inclined to move this bill forward," he stated. He asked for input from the committee. Number 2187 CO-CHAIRMAN OGAN commented that the state is not currently saying it is unfriendly to mining. He expressed support for the concept of this legislation. He asked Mr. Wiltse how the fiscal note relates to the committee substitute. Number 2229 MR. WILTSE explained, "The note that is attached to the bill right now is one that I drafted up yesterday. I went back to the original one that we had drawn up, put dollar figures to it and left it the same, because the way the bill is written, this would apply right now. And the reason for that is because there is the choice, you know; there is a choice that people can submit their data right to the department." Number 2248 CO-CHAIRMAN HUDSON announced he was holding HB 238 over. He said he sensed vagueness on the part of testifiers, not displeasure with the bill. He suggested if the departments could meet with Representative Vezey about their major concerns, it would give him a better feeling for the legislation. (Note: The proposed committee substitute was not adopted as a work draft.)