HOUSE BILL 197 "An Act providing for exploration incentive credits for activities involving locatable and leasable minerals and coal deposits on certain land in the state; and providing for an effective date." JOHN WALSH, STAFF, REPRESENTATIVE RICHARD FOSTER, explained that Alaska's economic future is dependent upon resource development. Alaska is rich in mineral resources. Many of the communities owe their existence to the rich mineral deposits beneath or near municipal boundaries. He added, future deposits have yet to be discovered and could only be developed following extensive exploration efforts. Mr. Walsh noted that HB 197 would offer an incentive to industry. Under the legislation, exploration dollars invested in development of a producing mine would be eligible for credit against taxes due as a result of production revenues. If the prospect never advances to the production phase, no credits would be released. He added, without tax incentives, current trends would continue. In the past decade, available exploration investments have poured out of the country and into lucrative third world countries. HB 197 proposes a tax credit which would send a strong message to the mineral industry that Alaska is open for business. Exploration dollars would then stay in the State. NEIL MACKINNON, ALASKA MINERAL COMMISSION, JUNEAU, testified in support of HB 197. He pointed out that two mining companies doing business in Alaska have left the State and gone to South America where the governments welcome investments with limited regulation, minimal taxes, and low cost production expenses. He stressed that Chile, Columbia, Mexico, Indonesia and Canada have all benefited from the outflow of U.S. and Alaskan capital. Mr. MacKinnon advised that this exit is detrimental to our long range economic future, and threatens to doom future generations to continued government dependence for cost of living 3 subsidies. He appealed to the Committee to pass the legislation. Representative Martin confessed concerns with "giving away" the State's resources. Mr. MacKinnon pointed out that the State would generate money through the mining claims rental costs. He countered that the State would be generating more capital than at present, through encouragement of exploration, claims taking, and investing. Representative Brown asked if exploration costs were currently deductible. Mr. MacKinnon replied that the costs would be although they did not represent a double deduction. Representative Grussendorf recommended adding an expanded "window of time" opportunity for the investors. Mr. MacKinnon suggested that if a window of time was added that window should be extended for more than four years. Representative Mulder remarked that the market is driven by taxation and royalties. He felt that the proposed legislation could enhance that market. Mr. MacKinnon advised that the legislation is property specific and that the credit is tied to the property and the exploration of that specific place. Representative Martin thought that elimination of the environmental laws would enhance the legislation. Mr. MacKinnon agreed that shortening the permit process would be beneficial. JOE RYAN, STAFF, REPRESENTATIVE AL VEZEY, provided a philosophical overview of the legislation pointing out that there are many places in the world enticing mineral development markets. He added that Alaska also has that resource capability and that those markets need to be made "marketable". DEBORAH VOGT, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE, advised that the Knowles Administration does not support HB 197 or the other tax credit bills before the Legislature. The Department is not in favor of additional tax credits unless it can be shown that the State will benefit from the transaction. She added, HB 197 does not provide an examination of particular projects. She added that there would be no balancing of the attributes of the project and no recognition of a particular projects ability to pay taxes. Currently, there is little collected from mineral taxes in the State. 4 Ms. Vogt pointed out that the legislation would affect the Department of Revenue. The credits should be calculated to guarantee that they do not exceed 50% of the combined amount payable under the two taxes established in statute. That limit would be calculated at each site. The credits could be applied against any or all of the taxable payments. Deputy Commissioner Vogt provided the Committee with a handout illustrating the "Separate Accounting Methods". [Attachment #2]. (Tape Change, HFC 95-59, Side 2). Ms. Vogt continued discussion of the handout. She concluded that the apportionment method of calculating the net income tax would not fit with the tax incentives established in HB 197. The tax incentives are site specific. A corporate tax would be United States or worldwide specific. She added, from a practical perspective, the corporate income tax site specific credit would not fit with world wide apportionment or the "waters edge" nation-wide apportionment. The legislation would credit the license tax. Co-Chair Foster and Ms. Vogt discussed the complications of licensing within the mining sites and the complexities of the taxation concern. Ms. Vogt reiterated that the primary reason that Administration opposed the legislation is that it would provide a tax credit, while at the same time the current Administration does not see any potential revenue to be earned by the State. Co-Chair Foster voiced strong opposition to the Administration's position, noting that legislation would place resources into Western Alaska and work possibilities into an area with high unemployment. Ms. Vogt understood the intent of the legislation although indicated that there would need to be proof that it would accomplish that intent. She pointed out that currently, the mining industry pays little tax; she questioned how the current regulations acted as a disincentive. Ms. Vogt explained that there has been an effort internationally to encourage states to appeal the worldwide unitary tax. The Alaska State Legislature repealed that tax in 1990 except for oil companies. Currently, the "waters edge" apportionment system is used in Alaska. Representative Brown asked if the Department of Revenue was involved in the corporate income tax expense audit. Ms. Vogt understood that obligation would be under the direction of the Commissioner in the Department of Natural Resources 5 and would determine the amount of the credit. She added, the definition of "site" specific would need to be clarified within the legislation. Representative Kelly questioned if the legislation posed accounting problems for the Department. Ms. Vogt responded that there would be significant problems with the legislation as currently drafted. Representative Grussendorf asked specific incentives which the State could offer. Ms. Vogt noted royalties, rent and mining license tax. PAUL DICK, JUNEAU OPERATIONS, INCOME & EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE, added, there is a 3.5 year exemption for the mining license in statute at this time. Representative Martin asked if the Department had authority on privately owned lands. Ms. Vogt replied that taxing authority spreads throughout the State and that it is irrelevant who owns the property. STEVE BORELL, EXECUTIVE DIRECTOR, ALASKA MINING ASSOCIATION, ANCHORAGE, explained that the focus of the bill would bring new mining exploration into Alaska. The credit would not occur until and unless a mine begins operating at a profit. The legislation would encourage both the individual prospector and the larger international mining companies to invest in Alaska. Mr. Borell emphasized that the legislation has come at an important time. As a result of uncertainty over possible changes to the federal mining law and an oppressive regulatory climate, there continues to be an exodus of exploration funds away from federal lands throughout the western U.S. Alaska cannot correct all aspects of these problems but Alaska can adopt the proposed legislation as an incentive to encourage investment. He added, the financial incentives of the legislation would not make or break the project. They would act as an encouragement for companies to invest in Alaska and show the world that Alaska has a new attitude toward mineral investments. Mr. Borell pointed out that the bill contains several important aspects that would encourage investment and at the same time mesh into and follow the existing mining license tax system. This would require a minimum of administrative effort and if successful would result in new mines that would pay royalties to the State. More specifically, the legislation would apply to direct exploration costs only, and could be credited against only one half of the taxes or royalties payable in any given 6 year. Credits would be made against new royalties which currently don't exist. There would be no affect on the existing royalties, applying to all classes of lands. Mr. Borell provided to the Committee and then discussed a handout from the Alaska Miners Association, Inc., addressing the Airborne Geophysical Mapping dated March 1995. [Attachment #1]. Mr. Borell advised that mineral taxes have paid the Department approximately $2 million dollars per year. Representative Brown pointed out that the Department of Mining and License estimated that they received $162 thousand dollars per year. Mr. Borell interjected that the remainder paid to the State originated from coal royalties. (Tape Change, HFC 95-60, Side 1). Representative Martin asked if each type of mineral exploration was taxed at a variable rate. Mr. Borell noted that the legislation categorizes the existence and the location, and that depth, extent and quality are important. He concluded, the reason Alaska receives little revenue to the state coffers through rents, royalties and taxes is because there is little mining currently occurring in the State. Representative Brown expressed concern that the bill would allow miners to take credits for additional sites. Mr. Borell referenced Page 2, Line 4, "....a credit may not be granted under (a) of this section for exploration activity described in that subsection that occurs after the mine construction commencement date." The following language outlines occurrences that would be included in new exploration work that would not qualify. Representative Brown asked for a description of "sites". Mr. Borell replied a site was a mine project which began as a prospect. Co-Chair Foster MOVED to report CS HB 197 (RES) out of Committee with individual recommendations, the Letter of Intent and the accompanying fiscal notes. Representative Brown noted her concern regarding the proposed legislation's effect on the corporate income tax. There being NO OBJECTIONS, it was so ordered. CS HB 197 (RES) was reported out of Committee with a "do pass" recommendation, with the House Resources Letter of Intent and fiscal notes by the Department of Natural Resources dated 3/22/95 and the Department of Revenue dated 3/22/95.