HOUSE BILL NO. 63 "An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country; and providing for an effective date." KIM ROSS, EXECUTIVE DIRECTOR, ALASKA AIR CARRIERS ASSOCIATION, ANCHORAGE testified via the teleconference 2 network. She read from written testimony (copy on file). She maintained that HB 63 would provide a tax exemption for a few select air carriers. She stated that the legislation could be unfair and encourage misuse and manipulation of the Anchorage Foreign Trade Zone. Ms. Ross expressed concerned that HB 63 would adversely impact Alaska's local domestic airline industry. She noted that the domestic industry is made up of a wide range of companies, based in Alaska, that provide service to bush communities and larger cities. Ms. Ross asserted that if HB 63 goes into effect, the State of Alaska would lose approximately $4 - $5 million dollars in annual revenues. She maintained that this revenue is earmarked for rural airport maintenance and operations costs. She alleged that this would amount to a 25 percent loss of Alaska's annual budget for operation and maintenance at rural airports. Ms. Ross acknowledged that Alaska does not have dedicated funding, but asserted that "earmarking funds" is a reality. She maintained that a $4 - $5 million dollar a year shortfall would result in increased "user fees", such as airport land lease rates and landing fees. She stated that increased costs cannot be absorbed by the domestic industry. She asserted that local Alaskan operators would be forced to pass on increased costs to the flying public and shippers. Ms. Ross acknowledged that: "Our State is facing a monstrous fiscal gap." She questioned how the general public would respond if they knew that the Legislature was considering elimination of an existing tax base. She stated that, "In essence, our State would be giving away $4 - $5 million dollars in revenue, funds that are critical to continued airport operations in rural Alaska." Ms. Ross maintained that Kurt Parkan, Deputy Commissioner, Department of Transportation and Public Facilities stated, before the House Transportation Committee, that $4 - $5 million dollars would come out of the General Fund. She acknowledged that Mr. Parkan added that there is, "no tie, no link", between fuel tax revenues and the Department of Transportation and Public Facilities' budget for rural airport maintenance and operations. She pointed out that AS 43.40.010(e) states: "... proceeds of the taxes on aviation fuel shall be paid into a special aviation fuel tax account in the state general fund. The legislature may appropriate funds from this account for 3 aviation facilities." Ms. Ross observed that CSHB 256 (TRAN), passed in 1994, added a .07 cent aviation fuel tax. She added that the legislation's preamble stated that: "The purpose of this Act is to increase the tax on aviation gasoline in an amount substantially comparable to the amount that would be derived from the Department of Transportation and Public Facilities reimposition of landing fees at rural state operated airports, and to leave this increased tax in place only so long as the commissioner of Department of Transportation and Public Facilities does not, before January 1, 2000, impose landing fees at those airports at a higher rate than was in effect on January 1, 1994." Ms. Ross asserted that the legislative intent of CSHB 256 (TRAN) was to provide a funding source for "shortfalls" in rural airports maintenance and operations budgets. She noted that the 1994 fuel tax increase was in lieu of a proposed landing fee program, which would have cost approximately 40 cents on the dollar to administer. Ms. Ross provided members with "Projected Revenue Flow" charts, used by the Department of Transportation and Public Facilities to justify the 1994 tax hike (copy on file). She maintained that the charts further depict the "tie" between aviation fuel taxes and rural airport maintenance and operations budgets. Ms. Ross observed arguments that HB 63 will create a "level playing field". She questioned if the playing field needs to be leveled. She asserted that the cost to ship foreign fuel to Anchorage offsets any tax advantage. She noted that fuel weighs 6-7 pounds per gallon. Ms. Ross asked: "What happens if a refinery in Saudi Arabia develops a new process that enables it to refine fuel 5 per gallon cheaper than MAPCO can? How do we again re-level the playing field for MAPCO?" Ms. Ross quoted a MAPCO press release to demonstrate the company's soundness: "MAPCO Reports All-Time Record Fourth Quarter and Annual EPS From Continuing Operations." She observed that MAPCO reported a record year, increased sales volumes at both the Memphis and Alaska refineries, and an annual operating profit of $63.9 million dollars for 1996. Ms. Ross disputed statements by Deputy Commissioner Parkan that competition from Vancouver, Seattle, Portland and the Russian Far East make it necessary for Alaska to develop 4 incentives to retain and attract international cargo carriers. She observed that each additional air mile adds to the fuel and operating costs of the airplane and displaces cargo at 20 to $1 per pound. She stated that "compared to these additional costs, a 3.2 per gallon tax giveaway is insignificant." Co-Chair Therriault responded to comments made by Ms. Ross. He observed that the legislation would not impact attempts by the Majority to reduce the budget by $60 million dollars. He observed that there will be a $60 million dollar reduction in spending. The legislation impacts revenues not spending. Co-Chair Therriault observed that the fiscal impact is approximately $2.8 million dollars. Ms. Ross estimated the impact at $4 - $5 million dollars. He observed that legislation has not been introduced to raise landing fees. He did not anticipate that legislation would be introduced to raise landing fees. In response to comments by Ms. Ross, Co-Chair Therriault stated that it is not appropriate for the State to "level" the playing field when the playing field is in the private sector. He maintained that it is appropriate for the State to level the playing field when there is a state governmental imposed tax, that is only imposed on in-state refineries. Co-Chair Therriault referred to Ms. Ross' testimony before the House Transportation Committee on 1/24/97: "We sympathize with Alaska's oil refineries and understand that they are struggling to compete with fuel suppliers that take advantage of loopholes written into the Foreign Trade Zone (FTZ) rule book. But let's fix the problem, not massage the symptoms." Co-Chair Therriault observed that Ms. Ross felt that the Department of Revenue should be more aggressive in collecting the tax and indicated that consumers should sue the State if they thought the tax was incorrectly collected. He quoted from a letter to Co-Chair Hanley from Deborah Vogt, Department of Revenue: "I'm confident that the conclusions reached by our staff are correct, and that we must continue to exempt fuel used in foreign commerce that is run through the FTZ." Co-Chair Therriault added that Jack Chenoweth, Alaska Legal Services stated that: 5 "I conclude that it is more probable than not, that the Federal Court, using preemption analysis, would not hesitate to invalidate a state tax, such as that excise tax on jet fuel. For that reason, I would conclude that the Department of Revenue presents the position, that more likely than not, would be sustained by the Court, if the questions were eventually litigated." Co-Chair Therriault summarized that the State would not be able to collect the tax. He pointed out that MAPCO had a good year based on strong margins in the mid South. He observed that MAPCO's press release did not say anything about strong margins for the refinery in Fairbanks. He maintained that the jet fuel market is pretty competitive. He stated that the solution of collecting the tax and litigating appears to be a "legal looser" for the State. He noted that the tax was collected, deposited in the General Fund and spent on rural airports. Representative Martin noted that there are no guarantees that a bill will not be introduced to increase landing fees. Co-Chair Therriault reiterated that tax collection as a solution has been exhausted. He observed that every unit of production, jet fuel or gasoline, has a certain amount of fixed cost. He maintained that if the increase production of jet fuel is discouraged then the fixed cost will be shifted to gasoline over heating oil. In response to a question by Representative Martin, Representative Davies clarified that the Alaska Railroad charges for hauling fuel. Representative Grussendorf asked if the Department of Transportation and Public Facilities can demonstrate that no linkage exists. KURT PARKAN, DEPUTY COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES stated that the proof that there is no functional linkage between fuel tax and the Department's budget is contained in the proposed FY 98 operation budget short-form. He observed that there is no reference to the tax as a fund source. He acknowledged that there is a perceived connection based on the fact that the money goes into the General Fund and the legislature may expend money from that for airports. In response to a question by Representative Davies, Mr. Parkan estimated that approximately $20 million dollars was spent on rural airports. 6 Co-Chair Therriault pointed out that the tax impact has dropped. BILL SCHOEPHOESTER, DIRECTOR, ALASKA STATE CHAMBER OF COMMERCE testified in support of HB 63. He maintained that the legislation will fix a problem that gives foreign businesses an advantage over Alaskan businesses. He observed that Foreign Trade Zones (FTZ) have been established to encourage value-added processing in Alaska for items bound for foreign destinations. There are several FTZ locations in Alaska, including Anchorage. During 1996, several loads of foreign refined jet fuel came into the Anchorage Airport fueling system for use under the FTZ. Because of its foreign status, this fuel was exempt from state fuel taxes, allowing it to be sold at a lower price. He maintained that in-state refiners are at a disadvantage. Tax-free foreign jet fuel can be sold in any FTZ. He asserted that the objective in promoting international flights in Alaska is to promote Alaskan business. Representative Martin noted that refineries receive a credit for gasohol. He observed that Anchorage is the only community that uses gasohol year-around. Mr. Schoephoester stated that the State Chamber of Commerce looks at HB 63 as a fix to unequal taxation of businesses competing in the same market. Representative Martin responded that MAPCO receives a lot of state subsidizes. Mr. Schoephoester stressed that he supports FTZ's when they are used for value-added products. He maintained that there is no value-added product. He asserted that a loophole in the FTZ provision is being used to gain a tax advantage. In response to comments by Representative Martin, Mr. Schoephoester observed that the State of Alaska does not produce enough jet fuel to fill its needs. He reiterated that there are two different groups competing in the same market, selling the same product to the same customer, one is taxed and one is not taxed. Co-Chair Therriault observed that the motoring public in the State of Alaska, except for those in Anchorage, pays a tax to help support the road network. He emphasized that Anchorage is not being asked to pay a new tax. Anchorage is only being asked to pay the same tax that the rest of the state pays, "not a penny more and not a penny less, just the same tax." HB 63 was HELD in Committee for further consideration.