HB 367-TAX CREDITS FOR EDUCATIONAL CONTRIBUTIONS  8:06:18 AM CHAIR SEATON announced that the first order of business would be HOUSE BILL NO. 367 "An Act relating to tax credits for cash contributions by taxpayers that are accepted for certain educational purposes and facilities; and providing for an effective date." [Before the committee was HB 367, Version E] 8:07:36 AM KENDRA KLOSTER, Staff, Representative Cathy Munoz, Alaska State Legislature, referred to the responses provided to the committee, in a letter of March 16, 2010 from Johanna Bales, Tax Division, Department of Revenue, and explained the information. She referred to Attachments 1-6, which answer questions raised during the last committee meeting on Version E. She explained that Attachment 1 compares the benefit of an income tax deduction to a "credit for contribution of $50,000,000 to a university." Attachment 1 illustrates the differences between the deduction and credit, and demonstrates that the value of the credit is much larger. 8:09:18 AM CHAIR SEATON noted that HB 367 indicates how a credit or deduction would work. He asked whether it shows how the additional expense would affect corporations since the corporation would need to contribute 50 percent from its corporate profits. 8:10:30 AM MS. KLOSTER stated that the scenario on Attachment 1 picked the maximum of $50 million, which represented a tax credit in the amount of $25 million. She explained that either a deduction or credit could be taken. She referred to Attachment 2, to assumptions that compare the order of credits. Two different types of credits were used, the Income Tax Education Credit or the Film Production Tax Credit (FPTC). The difference is that the Income Tax Education Credit (ITEC) would not have a tax carry over, unlike other tax credits such as the Film Production Tax Credit. She explained the carry-over procedure indicated on the handout. Comparing Attachments 2 and 3, Attachment 2 shows that the ITEC was fully used and results in tax credits available for future use that carry over to the next year. The amount is greater than if the ITEC was not used first. 8:11:57 AM MS. KLOSTER referred to Attachment 4 showing the credits for FY 07, FY 08, and FY 09, which provides information requested by the committee. Attachment 5 shows a breakdown by the type of tax for FY 07, FY 08, and FY 09. She related that the last page provides suggestions from the Department of Revenue (DOR). 8:12:46 AM REPRESENTATIVE GARDNER referred to Attachment 5. She said, "The note underneath says that the amounts do not include contributions that would have enjoyed the tax credit but the taxpayer did not claim the credit and instead claimed a deduction." She asked for the circumstances in which a taxpayer has the choice between taking a tax credit or a deduction. MS. KLOSTER offered her belief that the taxpayer would have the choice. CHAIR SEATON asked whether the reason is because the tax credit is limited to $200,000 and the deduction is unlimited. 8:14:29 AM CHAIR SEATON opened public testimony on HB 367. 8:14:46 AM DENNIS STEFFY, Director, Mining and Petroleum Training Services (MAPTS), University of Alaska (UA), stated that his division has benefited several times from the existing statute. He commented that the division has been discussing more ambitious joint projects. He stated that the limit on the amount of deductions or credits has not been attractive. He offered his belief that raising the limit would be beneficial. He recalled that up until the 1980s donations from vendors has funded the Vocational Education Department. Technology is not something companies can donate, but "serious cash money" must be spent in order for students to become competitive. He urged passage of HB 367. 8:16:27 AM CHAIR SEATON asked him to identify the program. MR. STEFFY related that he is the director of the University's Mining and Petroleum Training Service, which has statewide branches wherever industry is operating. He stated that he is in Southeast Alaska for attrition work at Greens Creek Mine and to provide training for the startup of the Kensington Mine, he stated. His division works cooperatively with industry on projects that could not be funded any other way. 8:17:07 AM REPRESENTATIVE BUCH disclosed that he has previously worked with Mr. Steffy on international partnerships on oil and gas. 8:17:58 AM CHAIR SEATON asked whether he has been working on petroleum processes. MR. STEFFY answered yes, the first class was taught in 1999. He said he is not active in the program. 8:18:26 AM REPRESENTATIVE MUNOZ asked about the infrastructure needs for the program he directs. MR. STEFFY explained the importance of training people to work in the states petroleum and mining industry. He offered that a tremendous number of high paying jobs are available. He expressed frustration with non-Alaskans in these jobs. Currently, the division has been in Juneau training students for the Kensington, Greens Creek, Niblack, and Pogo mines using a portion of the AJ Mine. The biggest need is to obtain high technology mining machinery simulators. He emphasized that he must have a more economical way of preparing people for jobs, using portable simulators. He stated that if Alaska expands its offshore oil production, that the division will "step up" its health and safety programs including cold water survival. He has been discussing a partnership to develop a cold water survival facility in the Kenai or Soldotna area. He anticipated the facility would cost about $11 million. He offered his belief that the bill under consideration would make doing business in Alaska more attractive to companies. 8:21:01 AM CHAIR SEATON closed public testimony on HB 367. 8:21:10 AM CHAIR SEATON asked for any comments from the tax division, particularly on Attachment 1. He read, "The purpose is to compare the benefit of a deduction or credit of $50 million." The credit column indicates another $25 million from corporate funds to the University of Alaska. ROBYNN WILSON, Income Audit Manager, Tax Division, Department of Revenue, explained that this compares the benefit of a deduction to a credit. She compared it to federal taxes to illustrate her point. She explained that with respect to federal tax obligations, benefits exist in paying mortgage interest and subsequently deducting the interest along with other deductions, such as a child care tax since the deductions directly reduce the overall tax obligation. She referred to Attachment 1 in members' packets. Under the current statute, assuming a contribution of $50 million, the taxpayer has a choice of a deduction or a credit, but not both. This principle of not taking both a deduction and a credit for the same contribution is in current statute. The previous example in the graph, in the second column, demonstrates the effect when the taxpayer elected to use a credit. The outcome is that the $25 million deduction represents 50 percent of the actual contribution. 8:23:57 AM CHAIR SEATON asked if he understood correctly, that Attachment 2 is a comparison of Attachment 3. MS. WILSON agreed. She stated the current statute for higher education tax credit does not indicate how credits should be "ordered." She stated that some tax credits have a carryover and some do not. The reason that is important is apparent when calculating the tax obligation. When the taxpayer having a choice of tax credits, it would be helpful to place in statute that the education tax credit has priority. If the other tax credit has priority, the taxpayer could lose the benefit of the education tax credit. She said she wanted to bring this to the committee's attention. At the last hearing, she brought up "ordering" and thought it would be helpful for the committee to have an example to illustrate the different scenarios. This is true of any two credits that have different carryover number of years. She said she selected three tax credits for comparison, including the Education Tax Credit. She pointed out that the Alaska Oil and Gas Exploration and Development Credit already requires being applied first. She selected the Film Production Tax Credit (FPTC) as an example of another tax credit with carryover capabilities. 8:26:49 AM CHAIR SEATON questioned the need to mandate that taxpayers be directed in a particular direction since it appears that complex taxpayers would be receiving these credits. He asked whether the state should mandate the structure for tax credits. MS. WILSON suggested that the committee consider placing the structure in statute. She directed attention to Attachment 6, and explained the suggestions could be used as an amendment to clarify the priority. CHAIR SEATON asked for clarification. MS. WILSON explained that defining "tax due under this chapter" would apply the education tax credit as the next priority. She further explained that with the current level of the education tax credit, that it is not such an issue, but certainly if the education tax credit is bumped up the quite a bit the issue becomes more apparent. 8:29:18 AM REPRESENTATIVE KELLER recalled "a soft recommendation" for this change. He asked whether the beneficiary of this change would be education, in general. He asked for clarification from the taxpayer's perspective. MS. WILSON answered that it would depend on the circumstances, whether the taxpayer intended to make an education contribution or considered other credits since each taxpayer has different circumstance that will need to be considered. She offered her belief that having clear legislative intent would be helpful. 8:30:17 AM CHAIR SEATON envisioned the suggested change would provide an incentive to use the credit MS. WILSON characterized it as a "taxpayer friendly" amendment and would provide clarity regarding the administration of the tax. 8:31:35 AM MS. WILSON, in response to Representative Gardner, highlighted that the education tax credit was initially drafted to apply to all the taxes and the insurance provisions are first in the statutes, under Title 21. 8:32:10 AM REPRESENTATIVE EDGMON referred to Attachment 1 to an assumption, with read, "--company does all of its business in Alaska" and asked if that represented a side note or is a requirement. MS. WILSON answered that it is not a requirement, but represents an assumption for this example. She said she also considered providing an example in which a taxpayer conducts business in multiple jurisdictions, which seemed complicated. She explained that Alaska taxes a piece of its income so the benefit of a deduction is lower. The point of Attachment 1 is to highlight that the benefit of a credit is more valuable than the benefit of a deduction. 8:33:31 AM REPRESENTATIVE EDGMON referred to Attachment 4, titled "Alaska Education Tax Credit Credits Claimed" and asked the reason the Fishery Resource Landing Tax dramatically decreased from FY 08 to FY 09. MS. WILSON said she did not know. 8:33:56 AM REPRESENTATIVE KELLER turned to Attachment 6, and asked whether currently the taxpayer has the choice to prioritize the education tax credit or another credit. He asked whether ambiguity in the statute is the reason for the suggested language change. MS. WILSON agreed there is ambiguity in the law. This is a policy call for the committee to decide. The examples provided in Attachments 2 and 3 should help with the decision. 8:35:18 AM CHAIR SEATON, with respect to applying tax credits, asked if any issues arise for a "complex" taxpayer applying for multiple credits as to the prioritization of the tax credits. MS. WILSON offered the statute changes would help make the tax credit application process clear. Currently, as the statutes are amended to allow for additional tax credits, it becomes problematic for the department. 8:36:26 AM REPRESENTATIVE GARDNER asked for the distinction between deductions and credits in the bill. She further asked whether federal charitable contributions are deductions or credits. MS. WILSON referred to page 5, line 23-28 to AS 43.20.014(d), which read, "also be allowed as a deduction under 26 U.S.C.170 against the tax imposed by this chapter; and[.]" She interpreted that to mean that Alaska bases its taxes on corporations starting with federal taxable income. Thus, the federal return, with some modifications is used to calculate the Alaska tax. She highlighted that 26 U.S.C.170 references the provision of the Internal Revenue Code that allows the charitable contribution. The section outlines that if a taxpayer claims a credit, a deduction cannot also be claimed. REPRESENTATIVE GARDNER asked whether charitable donations earn a credit or a deduction under federal law. MS. WILSON stated that under the federal code, charitable donations have a tax deduction benefit, similar to a personal tax return. 8:39:08 AM REPRESENTATIVE BUCH asked whether this is the first time that priorities have been aligned in Alaska. MS. WILSON cited AS 43.20.043, the Tax Development and Exploration Credit, which creates a prioritized credit that specifies the tax credit will be applied first. She remarked that the Congress has been specific about which credits are applied first for federal tax credits. 8:40:18 AM CHAIR SEATON referred to Attachment 6 and asked Ms. Wilson to explain the next DOR suggested edit to HB 367. 8:40:28 AM MS. WILSON explained that the current statute indicates that a taxpayer cannot claim more than $150,000 for the education tax credit. She provided a scenario in which a taxpayer was subject to the corporate income tax and the fisheries business tax. The statute says the taxpayer cannot claim more than a $150,000 credit, but could apply the credit "wherever the taxpayer sees fit" between the corporate tax, fish tax, or some combination of taxes. However, the definition of taxpayer is fundamentally the problem. She described another scenario in which a big oil corporate company performs work in Alaska. The department would expect to have subsidiaries, such as pipeline, exploration and production, and marketing companies. Those corporations commonly file one tax return. MS. Wilson related that when the education tax credit was initially enacted, the minutes show the intent was to give a single $150,000 credit to the oil company. However, since the definition refers to the individual corporation, it is not clear whether the corporation is entitled to receive one credit or three $150,000 credits. Additionally, using that scenario, it is possible that two would file a consolidated tax return and one would file separately and the question of the amount of tax credit is also unclear. This ambiguity also exists in the fisheries business tax area. She suggested that if the legislative intent is to offer one $150,000 credit, the statute should be amended to clarify the intent. She referred again to Attachment 6 to the suggested language change, which defines "affiliated group" so the tax credit would apply to the group. She further explained that it could be expanded to all tax types and to related tax groups. 8:44:36 AM CHAIR SEATON referred to page 5, line 19 of Version E, to AS 43.20.014(d) which read (d) A contribution claimed as a credit under this section may not (1) be the basis for a credit claimed [AS A CREDIT] under another provision of this title; (2) also be allowed as a deduction under 26 U.S.C. 170 against the tax imposed by this chapter; and (3) when combined with contributions that  are the basis for credits..." CHAIR SEATON asked if any distinction exists and whether this refers to existing language. MS. WILSON responded that she used existing statute and did not consider the specific language in HB 367. She referred to the language in paragraph (3), "...contributions that are the basis  for..." and related her understanding this will not change the meaning but does provide a clear statement of what is already in statute. She drew attention to the language in the Attachment 6, which read, "If the taxpayer is a member of an affiliated  group, then the credit may not exceed $150,000 for the  affiliated group." She explained that clearly limits the credit to a single tax credit of $150,000 and if the credit is increased, that figure would be replaced with the new credit. 8:46:31 AM CHAIR SEATON asked whether the DOR has any issue with the language previously mentioned in paragraph (3) of Version E. MS. WILSON agreed. She pointed out that Attachment 6 would add a definition for "affiliated group." She explained that definition is in statute at AS 43.20.073 would be duplicated in this bill. 8:47:31 AM MS. WILSON, in response to Representative Munoz, referred to Attachment 6, and statutes that should be comformed, as well. CHAIR SEATON advised that the matter could be handled as a conceptual amendment that would make the changes uniformly throughout the bill. 8:48:44 AM REPRESENTATIVE KELLER made a motion to adopt Conceptual Amendment 1, which read: On page 5, line 26: If the taxpayer is a member of an affiliate group the credit made not exceed $25 million for the affiliated group. AS 43.20.014(e)(3) "affiliated group" means a group of two or more corporations in which 50 percent or more of the voting stock of each member of the group is directly or indirectly owned by one or more corporate or noncorporate common owners, or by one or more of the members of the group. Similar language to be added to other provisions of the other taxes to which the credit would apply [AS 21.89.070, 21.89.074, AS 43.55.019, AS 43.56.018, AS 43.65.018, AS 43.75.018 and AS 43.77.045]. 8:50:22 AM REPRESENTATIVE KELLER clarified his Conceptual Amendment 1 would include language to paragraph (3), as follows: Following "with" Insert: "when combined with contributions that are the  basis for credits taken during the taxpayer's tax year under AS 21.89.070, 21.89.075, AS 43.55.019, AS 43.56.018, AS 43.65.018, AS 43.75.018, or AS 43.77.045..." CHAIR SEATON that specific language is currently in Version E. There being no objection, Conceptual Amendment 1 was adopted. 8:51:12 AM CHAIR SEATON added that the language for Conceptual Amendment 1 is taken from Attachment 6, adding the affiliate group definition to all taxes. 8:51:56 AM CHAIR SEATON stated there is also a recommendation by the DOR to consider edits to prioritize Education Credit before other tax credits. CHAIR SEATON made a motion to adopt Conceptual Amendment 2, to add a paragraph as follows: AS 43.20.014(e)(2) "tax due under this chapter" means the tax liability after application of the credit under AS 43.20.043 and before application of any other credits allowable under this chapter. REPRESENTATIVE KELLER objected. He said there does not appear to be enough information to support adding the language in Conceptual Amendment 2. 8:53:17 AM CHAIR SEATON suggested that he initially had that trepidation. However, future revenue officers and commissioners could change the usefulness of the tax credit by interpreting this in an ambiguous manner. He suggested that Conceptual Amendment would provide necessary clarity. REPRESENTATIVE KELLER offered that is possible. However, he offered his belief that it may be important to allow the industry to decide how to apply the tax credits. He suggested that if the industry would like to "go a step further" that this bill has another committee of referral and the issue could be handled in that committee. REPRESENTATIVE EDGMON echoed the previous comments. He stated that on the surface the bill seems simple, but the details of HB 367 have far reaching implications. He suggested that it may be important to have more discussions to delve into the impacts of HB 367. 8:55:58 AM CHAIR SEATON asked about the possible consequences of adopting Conceptual Amendment 2. MS. WILSON advised that Conceptual Amendment 2 would give the DOR clear guidance in preparing regulations and tax return form. It would maximize the credit usage for the education credit. She stated that "clearing up the ambiguity would be the biggest benefit." She was not aware of any downside. CHAIR SEATON related that if Conceptual Amendment 2 was adopted, and taxpayers had concerns, the language could be removed from the bill. He expressed concern that if the DOR would like more direction and guidance to "write" regulations with any downside to the industry, that his preference is to adopt Conceptual Amendment 2. REPRESENTATIVE KELLER maintained his objection. He opined the statute could be made ambiguous in another way. 8:59:27 AM CHAIR SEATON restated Conceptual Amendment 2, as follows: AS 43.20.014(e)(2) "tax due under this chapter" means the tax liability after application of the credit under AS 43.20.043 and before application of any other credits allowable under this chapter. CHAIR SEATON asked whether that language also needs to apply to other sections of the bill. MS. WILSON answered yes. CHAIR SEATON related Conceptual Amendment 2 is a conceptual amendment. 9:00:03 AM A roll call vote was taken. Representatives Buch, Munoz, Edgmon, and Seaton voted in favor of Conceptual Amendment 2. Representatives Keller and Gardner voted against it. Therefore, Conceptual Amendment 2 was adopted by a vote of 4-2. [The clerk reported the tally as 4-2.] CHAIR SEATON asked for a count. He asked to void the tally. REPRESENTATIVE GARDNER indicated her vote was a "Yea" vote. He stated that the vote would be retaken. 9:00:10 AM REPRESENTATIVE KELLER stated in lieu of time he would like to remove his objection. CHAIR SEATON announced that Conceptual Amendment 2 was adopted. 9:02:47 AM REPRESENTATIVE EDGMON related that he is still "catching up" and has some questions. He said he supports the concept, but has concern over the fiscal impact. He said he does not feel he has a full understanding of the fiscal impact at this point. CHAIR SEATON reported that the fiscal note is an indeterminate fiscal note. REPRESENTATIVE BUCH agreed with Representative Edgmon. He said he would like more time to have confidence we are moving in the right direction. He stated that he would like another hearing on the bill. CHAIR SEATON stated several members would like another hearing. [HB 367 was held over.] 9:06:06 AM HB 367-TAX CREDITS FOR EDUCATIONAL CONTRIBUTIONS    CHAIR SEATON announced that the committee would take up HB 367. REPRESENTATIVE MUNOZ made a motion to offer a Conceptual Amendment 3 to lower the tax credit from $25 million to $5 million. CHAIR SEATON referred to page 3, line 25, and stated the Conceptual Amendment 3 would lower the tax credit from $25 million to $5 million. REPRESENTATIVE BUCH objected for purpose of discussion. REPRESENTATIVE BUCH offered to assist. He removed his objection. There being no objection, Conceptual Amendment 3 was adopted. [HB 367 was held over.] 10:03:18 AM