HOUSE BILL 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." Co-Chair Therriault informed members that work draft #0- LS0262\L, Chenoweth, 3/11/97, had been adopted at a previous meeting. Representative G. Davis MOVED to adopt Amendment #1. [Copy on file]. Co-Chair Therriault OBJECTED for the purpose of discussion. Representative G. Davis explained that Amendment #1 would delete the reference to passenger "water craft", which would change the intent and would increase sales of bunker fuel. Usage of "passenger" restricts sales to cruise ships who utilize bunker fuel. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME & EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE, spoke to the fiscal impact of the amendment. He noted that currently, the marine motor fuel tax is collected by the Department of Revenue and does not provide a report in which the information is separated between the amount of bunker fuel used. There would be $600 thousand dollars of lost tax revenue with passage of Amendment #1. Representative J. Davies questioned if non-passenger water craft was currently fueling in Alaska. Mr. Bartholomew understood that the tax would be placed on fuel purchased or used by the company that actually produces it, selling it then to others who export. He continued, in 1994, a provision was adopted by the Legislature that charged a full marine fuel tax on purchases up to four million gallons. At that threshold, the tax would be dropped from five cents a gallon to one cent a gallon to encourage bunker fuel business outside of Alaska. That action created a revenue increase in the first couple of years, although, to date it has "fallen off". MARK NECESSARY, TESORO, ALASKA, KENAI, noted that the 2 majority of the bunker fuel used was on ships transporting oil throughout the states. He added, the oil industry hopes to attract "takers" who are currently using other sources. Representative J. Davies asked if the amendment would be expanding the exemption to "all" water craft. He inquired if there would be an incentive to the vessels currently fueling outside the State. Mr. Necessary ascertained that bunker fuel sells at a low cost and that the tax is a substantial portion of that amount. From TESORO's perspective, inclusion of the proposed language will provide an opportunity to develop that business. Representative Martin questioned if ship carriers paid taxes in other states. Mr. Necessary understood that they do not which then places Alaska at a disadvantage. The objective is to price the fuel to be competitive with other markets on the West coast. Representative Martin suggested that being "competitive" would be at the State's lost revenue expense. Co-Chair Therriault clarified that royalty oil contracts are not "sweetheart" deals; fair market price is paid. Representative G. Davis added that the bunker fuel that TESORO produces is residual waste product, suggesting that it could be beneficial to major industry. He urged the Committee's support of the amendment. Co-Chair Therriault WITHDREW his OBJECTION. Representative Martin OBJECTED. A roll call vote was taken on the MOTION. IN FAVOR: G. Davis, Foster, Kelly, Kohring, Hanley, Therriault OPPOSED: J. Davies, Martin Representatives Grussendorf, Moses and Mulder were not present for the vote. The MOTION PASSED (6-2). Representative Foster MOVED to adopt Amendment #2. [Copy on file]. PETER ECKLUND, STAFF, REPRESENTATIVE TOM WILLIAMS, provided a historical background, pointing out that since 1990, the State has lost over 60% of the jobs in the Tongess National Forest and the timber industry. He stated that pulp mills used to be a good "source" for using low end boards for milling. The amendment would allow for the State to participate in a new and emerging technology which would produce ethanol derived from wood and wood wastes. 3 Amendment #2 would provide a more narrow focus, keeping the tax incentive in place but only for ethanol that is produced from wood. Mr. Ecklund spoke to the many benefits that a biomass ethanol industry could bring to Alaska: * Create jobs for Alaskans; * Save about $1.5 million dollars per year by decreasing support payments; * Help sustain the Alaskan timber industry; * Help abate pollution from vehicles; * Introduce new ethanol export markets for Alaska to the Lower 48 and Japan; and * Increase corporate taxes going into the Alaskan treasury from the new industry. Representative Martin asked if this would "wipe-out" the ethanol made from other products. Mr. Ecklund replied that corn, barley and other sources of ethanol would not qualify for the tax exemption. Representative Martin questioned if such a restriction would be legal. Mr. Ecklund understood that it would be legal. Co-Chair Hanley pointed out that the 10% ethanol is currently being shipped from out-of-state; Alaska is loosing all that revenue. He voiced concern for the future, suggesting that at some point, producers in Alaska would like to have that advantage. Co-Chair Hanley commented that his preference was to either repeal such an incentive or use a 1.5 cents credit for ethanol, which would be well over the 25% credit incentive. His concern was that with a 100% credit, there would never be an incentive to raise taxes to dedicate a fund. Co-Chair Hanley OBJECTED to adoption of Amendment #2. Ms. Bartholomew spoke to the fiscal impact of Amendment #2. He pointed out that the Department is not opposed to business incentives, although, he stressed the "magnitude" of the incentive provided through Amendment #2. A complete exemption would delete $6 to $8 million dollars annual revenue for the State. The unknown issue is the size of the plant being considered. A feasibility study was provided on eight million gallons, which would meet about 80% of the Anchorage market consumption. That would equate to 100 million gallons of tax free gas. Mr. Bartholomew indicated that the Department did not know at this time, if there would be an incentive to go statewide. He concluded that the State should not loose one of the most standard tax base. Representative J. Davies asked what corporate taxes could be realized through the amendment. Mr. Bartholomew noted that the Department has not looked into that issue. At this 4 time, there are 13,000 corporations in Alaska, although, the largest proportion of revenue tax is provided from a few companies. Representative J. Davies commented that he was uncomfortable with the approach proposed because of the impact on State revenue. He believed that the State must maintain roads. He suggested a 5 year "tax holiday" as an incentive to establish the new business. Mr. Ecklund pointed out that 50-100 direct jobs would result from creating an ethanol wood plant. JACK SHAY, MAYOR, KETCHIKAN BOROUGH, KETCHIKAN, noted that Ketchikan is currently in the throws of restructuring with the close of the mill. Mayors throughout Southeast Alaska have been pleading for the release of the Tongess Land Use Management Plan. When that plan is released, it will demonstrate that there is ample timber to operate any type of producing ethanol facility. He urged the Committee to seriously consider the usage of ethanol from wood products. Representative J. Davies reiterated his support to the Ketchikan community and proposed that by creating some sort of direct "tax holiday" could provide the same incentive that the amendment would. Mr. Shay requested that Ketchikan be aided by the State in any capacity to initiate a methodology to create the facility and eliminate competition from other interests out side of the State. Co-Chair Therriault charged that the State was being requested to provide a "complete" exemption from the State's tax base before the Borough Assembly of Ketchikan had even made a determination if "they" would be willing to contribute an incentive. (Tape Change HFC 97-86, Side 2). A roll call vote was taken on the MOTION. IN FAVOR: G. Davis, Foster OPPOSED: Kelly, Kohring, Martin, J. Davies, Therriault, Hanley Representatives Mulder, Moses and Grussendorf were not present for the vote. The MOTION FAILED (2-6). Representative Martin asked if passage of the bill would bring a gas increase to consumers in Anchorage. Mr. Bartholomew replied that he did not know that market or the 5 dynamics that affect it. People in the industry have testified previously on those effects. Co-Chair Therriault commented that there currently exists a 5.4 cents per gallon tax break offered by the federal government. Co-Chair Hanley MOVED to report CS HB 63 (FIN) out of Committee with individual recommendations and the new Revenue fiscal note. There being NO OBJECTION, it was so ordered. CS HB 63 (FIN) was reported out of Committee with a "do pass" recommendation and with a new fiscal note by the Department of Revenue.