CS FOR SENATE BILL NO. 312(FIN) "An Act relating to the deposit of the proceeds of the tax on gambling operations aboard certain commercial passenger vessels into the general fund; providing for a reduction in the excise tax to $34.50 for a passenger for each voyage on a commercial passenger vessel; describing the passengers that are subject to the excise tax and liable for the payment of the tax; providing for a reduction in the state excise tax imposed on a passenger traveling on a commercial passenger vessel by the amount of tax on a passenger traveling on a commercial passenger vessel imposed by a municipality under a law enacted before December 17, 2007; authorizing appropriations from the commercial vessel passenger tax account to the first seven ports of call in the state and for costs associated with commercial passenger vessels and the passengers on board; limiting the use of funds appropriated from the commercial passenger vessel tax account to expenditures related to port facilities, harbor infrastructure, other services provided to the commercial passenger vessels and the passengers on board those vessels and certain other purposes; repealing the regional cruise ship impact fund; relating to the administration of the excise tax by the Department of Revenue and regulations required to be adopted; requiring a report from the Department of Commerce, Community, and Economic Development relating to safely and efficiently hosting passengers; defining 'voyage' for purposes of the excise tax; relating to municipal levies on a passenger on a commercial passenger vessel; and providing for an effective date." 4:53:36 PM RECONVENED MILES BAKER, STAFF, SENATE FINANCE COMMITTEE, proposes to reduce the commercial passenger vessel excise tax from $46 to $34.50 per passenger per voyage. Currently excise tax is split with 25 percent in regional cruise ship impact fund and 75 percent in the commercial passenger vessel tax account. The bill proposes to reduce the current tax by 25 percent and repeal the regional cruise ship impact fund. With SB 312, the $34.50 would go into the commercial passenger vessel tax account. Mr. Baker elaborated that the bill clarifies statute regarding uses and purposes that the legislature may appropriate the tax proceeds for. The first purpose is to make payments to the ports of call; current statute makes payments to first five ports of call. The CS changes the number to seven to reflect larger voyages. Mr. Baker second purpose for legislative appropriation is found in Section 4(d). In addition to making the port of call payments, the legislature may appropriate money from from the account to projects that improve port and harbor infrastructure, provide services to commercial passenger vessels, and improve safety and efficiency of interstate and foreign commerce activity in which the vessels are engaged. 4:58:58 PM Mr. Baker cited Page 3, Line 18, Section B addressing the port of call payments. The language tightens up the purposes for which local port of call payment proceeds can be used. Mr. Baker stated the intent of Senate Finance Committee was to eliminate confusion in existing statute. The current statute left open the question of appropriation for state owned port and harbor facilities. He stated omission of the language "other services to properly provide for vessel or watercraft visits and enhance safety and efficiency of interstate and foreign commerce and such other lawful purposes as determined by the legislature" which has been replaced with the before mentioned language. Mr. Baker mentioned another substantial change, where a local government in a port of call with a local tax levied against passengers was given a choice either to rescind the tax and accept or forfeit the state's $5 payment. The communities that fell into the category were the City and Borough of Juneau and the City of Ketchikan. Both Juneau and Ketchikan had local levies that were greater than $5. The bill proposes a credit against the $34.50 that the state is paying. Those municipalities with a tax in place would not require a greater payment of tax from the passenger. The effect of the change is that the state will collect less money. The $5 payment will work in the current fashion. If the port is a unified city, then the $5 goes to the unified city. 5:04:19 PM Mr. Baker informed that Section 1 addressed the 33 percent tax on gambling proceeds deposited into the commercial passenger tax account. The funds were deposited into this restricted account creating an accounting issue. The 2007 cruise season yielded $6.7 million in gambling tax which was not appropriated, thereby lapsing into the general fund. The 2008 season yielded $6.28 million that lapsed. A reverse sweep placed it back into the restricted account. The projection from DOR is another $5.7 million. Mr. Baker communicated that Section 10 retains the governor's recommended periodic report. He pointed out that Section 13 states an effective date of October 31st; the reduced head tax will take effect next year. Representative Doogan reviewed his understanding of the legislation. He understood that the bill lowered the head tax per passenger to $34.50. He proposed hypothetically that a passenger would stop in Ketchikan, Juneau, and Skagway. When the money is allocated, he understood that each port would receive $5 and the ports already receiving taxes would also get theirs. He understood that Ketchikan and Juneau would receive $12. Mr. Baker explained that the passenger would pay $34.50, but when they arrive in Ketchikan, the vessel would pay the $7 and the $26.50 balance would go to the state. If the legislature appropriates the $5 port of call payments, they would go to all three ports. 5:10:33 PM Representative Doogan understood the mechanism. He wondered where the remaining money goes. Mr. Baker responded that excess money not paid out would stay in the account available to the legislature for appropriation. Representative Doogan asked what would happen when a passenger stops at four ports. Mr. Baker directed attention to handout, "Commercial Passenger Vessel Excise Tax; Effects of CS SB 321(FIN) Per P on State Cash Flow, 4/15/2010 10:00 am," (copy on file). The handout lists the five itineraries that are currently sold. Mr. Baker surmised that if $5 is the port of call payment, and the DOR forecast is correct at 850 thousand passengers, $2.3 million will be available for appropriation after the port of call payments are made. 5:15:13 PM Representative Austerman asked about the $2.3 million available for appropriation. He wondered if the amount was available as a result of Ketchikan and Juneau "double dipping" the municipal tax plus the $5. Mr. Baker replied that the analysis was correct. He pointed out that each provided scenario presents an excise tax of $19.50 because the $15 has been backed out for Ketchikan and Juneau. Representative Austerman summarized that the negative figures seen are the result of increased ports of call. Mr. Baker pointed to second spread sheet "CS SB 312(FIN) Port of Call Payment Scenarios, April 13, 2010" (copy on file). He analyzed the handout which details the revenue projections using both $4 and $5 as examples. The addition of Ketchikan and Juneau in the $5 port call bumps the payment by the state up by $6.1 million based on the projected traffic for the season. Mr. Baker noted that the principal loss to the account would not be caused by the increased ports of call, but because the tax is decreased to $34.50. He reminded the committee that the regional portion would be discontinued. The regional cruise ship fund used to go to the treasury and equaled 15 percent. 5:20:28 PM Mr. Baker explained that the last few appropriation cycles led to port of call payments of $9.9 million and an additional $17 million was appropriated. In FY10, port of call payments of $10 million were made with an additional $54 million appropriated in capital projects. The capital budget before the House Finance Committee includes the language necessary to make the port of call payments for 2010, which are estimated at $10 million. If SB 312 passes the estimation will increase to $15 million. Mr. Baker stated that in the current fiscal year, the May/June travelers will lose $3.1 million with the proposed reduction. The next fiscal year, encompassing July, August, September, October, May and June will equal $22 million per year in loss of revenue. Representative Fairclough asked if Juneau's port fee was $12. Mr. Baker responded that Juneau has $5 marine passenger fee and a $3 port development fee for a total of $8. Ketchikan has a passenger wharfage fee of $7. Representative Fairclough asked how communities would respond to the proposed model of tax implementation. She wondered if other municipalities might try to emulate the Ketchikan and Juneau model. Mr. Baker responded that SB 312 proposed capping the tax at $34.50 per passenger. A community that has raised taxes prior to the passage of SB 312 is grandfathered in. Ketchikan's wharfage fee was initially $6 and was raised to $7 in January of 2007 with a sunset date of January 2010 for review. 5:26:30 PM Mr. Baker commented that Juneau's $5 fee currently has no sunset date, but the $3 fee has a January, 2011 sunset date. He guessed that if Juneau received an additional $5, the $3 port development fee might not be necessary. Representative Fairclough clarified that the legislation seeks to place a cap on maximum collections for the state. The first seven ports of call will be covered by the state at $5 per port. If cities already have a fee intact, they receive the fee in addition to the $5. Mr. Baker responded correct. Representative Fairclough continued that the industry would be subject to an increase by those particular ports of which they could not visit if the added fees were not paid. Mr. Baker agreed, if a port wished to raise a fee, the industry's reaction would be considered. Mr. Baker directed attention to a third spreadsheet, "Distribution of head tax revenue relative to passenger visits FY07-FY10, April 15, 2010" (copy on file). He explained that Juneau passed their $5 marine passenger fee in 1999 and the port development fee in 2002. Ketchikan originally passed their fee in 2005. Both communities worked with the industry communicating their needs for port infrastructure and they proposed their fee. A voter's initiative also passed, adding a state tax of $46, which increased the cost of traveling to Juneau and Ketchikan. The spreadsheet illustrates the reflection of the traffic patterns and the funding. The principal reason that Ketchikan is only at 18 percent of the funding with 27 percent of the passengers and Juneau at 14 percent of the funding with 29 percent of the passengers is because the numbers are skewed. The additional money received by Juneau and Ketchikan is used to pay debt service. 5:32:25 PM Representative Fairclough asked if the state is prohibiting communities in local areas to provide taxes for the others that are unaffected. Mr. Baker stressed that is not the intent of the bill. Representative Doogan understood that a current passenger visiting Juneau and Ketchikan would pay $61. Mr. Baker concurred. Representative Doogan continued that in the new model the passenger pays $34.50 and the state deducts the $7 and $8 for Juneau and Ketchikan. Mr. Baker agreed. 5:34:15 PM Representative Austerman asked about other communities implementing their own tax. He asked if the bill prohibits the implementation of a community tax. Mr. Baker responded no. Representative Austerman asked about the $7 collected in Ketchikan. He wondered if the implementation was prior to the state's $46 tax. Mr. Baker responded yes, the wharfage fee was passed in 2005 and the citizen's initiative went into effect in 2007. Representative Austerman asked if Ketchikan used the $7 bonds for improvements, what will the additional money accomplish. Mr. Baker elaborated that the additional $2.50 would be used for additional improvements in services to the passenger and the vessel. Representative Austerman asked if Juneau's plan was similar. He expressed concern for the other ports since Juneau and Ketchikan would be double dipping. 5:36:58 PM Co-Chair Hawker opened public testimony. 5:37:35 PM ROBERT DINDINGER, ALASKA ALLIANCE FOR CRUISE TRAVEL, ALASKA ACT explained that while the bulk of his membership comes from Southeast Alaska, the community with the second most members is Fairbanks. According to a study by the Department of Commerce, Community and Economic Development (DCCED) the state can anticipate 5000 fewer tourism industry employees in the beginning of the season. He noted that 2500 were lost last year. He believed that the national economy had a significant impact on revenues because cruise passengers spent less money. The situation in 2010 is unique as the carrying capacity of the cruise industry will be down by 140,000 berths. The decrease in cruise travel to Sitka is projected at 40 percent. He commented that with a loss of 40 percent, the bottom line becomes hard to maintain. He opined that the bill provided the only hope for improvement of cruise travel to Alaska. If the bill passes, then a message to financial institutions is provided signaling that Alaska is doing its part to improve the potential economic climate for its citizens. He urged the committee to support the legislation. 5:42:29 PM Vice-Chair Thomas asked if Mr. Dindinger was married to the bill. Mr. Dindinger replied that he spoke in support of this bill. Vice-Chair Thomas asked if he would support any bill. Mr. Dindinger replied that he might support another bill that would accomplish the same task. Vice-Chair Thomas commented on the loss of construction funds. He asked if Skagway should be treated differently than Ketchikan. Mr. Dindinger communicated that he has businesses in Skagway, Juneau, Sitka, and Ketchikan but he was not prepared to provide an opinion about the amount of money provided to each community. He wished only for continued cruise ship business in Alaska. 5:44:14 PM Vice-Chair Thomas stressed that each legislator is concerned about the survival of the communities. He sought equal treatment for all communities. He commented that half of the year's cruise ship tax is waived because of the established effective date. Representative Doogan asked about the 140,000 berth number. Mr. Dindinger responded that four less cruise ships will visit leading to the 140,000 number. Representative Doogan asked why Sitka would experience a 40 percent loss. Mr. Dindinger replied that the prediction is based on the deployment of the ship taken out of the market. Some ships redeployed with a different itinerary. 5:47:05 PM Representative Salmon asked how long Mr. Dindinger was in business. Mr. Dindinger replied that he started his own business in 1980. Representative Salmon asked how many cruise ships companies visit Alaska. Mr. Dindinger replied six or seven. Representative Salmon asked how many cruise ships filed the lawsuit. Mr. Dindinger admitted that he did not know. 5:48:37 PM JOHN BINKLEY, ALASKA CRUISE ASSOCIATION responded that nine member lines represented by the Alaska Cruise Association initiated the lawsuit. Representative Gara opined that the legislature was unfairly put in bad place by the industry. He stated concern that the state is asked to provide substantial tax relief without promise that ships will return to the state. Mr. Binkley replied that the legislation was introduced by the governor and the Senate Finance Committee. The legislation was not created by the cruise industry. He noted that signing the settlement agreement is not in the best interest of the Alaska Cruise Association, but if the legislation is passed, the litigation will be dropped. Representative Gara asked for commitment from the cruise ship industry to bring ships back to the state. Mr. Binkley stated that the change in the head tax is specific to the litigation. Representative Gara asked if ships will return to Alaska if the legislation is passed. Mr. Binkley simply based on change of head tax does not provide quid pro quo to bring back the ships. Marketing is an issue; Alaska lost market share. The reduction in the state's marketing led to a reduction in demand. He mentioned the regulatory issue as some ships cannot operate in Alaska. The time required to set itineraries is also a consideration. Representative Gara elucidated that the industry wants a tax reduction, regulatory changes, and additional money for marketing. Mr. Binkley agreed that those elements often deter ships to other destinations. Representative Gara suggested that if marketing important that is another frustration. Cruise lines stopped contributing to marketing of Alaska by the state. Mr. Binkley explained that cruise lines are able to get a better return on their money elsewhere. Driving demand and reducing costs can change the situation. 5:54:45 PM Representative Salmon commented that his flight business calculates costs of operation with the majority going to the customer. He wondered how the cruise ship industry operates. He expressed confusion and opposed the bill. Mr. Binkley admitted that he did not understand the question. He believed that the cruise ship industry operates in a manner similar to that of Representative Salmon's flight business by reducing some flights if the customer interest wanes. Representative Austerman referenced reducing the tax to $34.50. He understood that the original tax is a $46 head tax, and if a passenger chooses Ketchikan and Juneau they pay $61, but this bill drops the amount to $19.50. Mr. Binkley clarified that the amount does not drop from $61 to $19.50. Representative Austerman opined that the bill is not written that way. Mr. Binkley stated that any tax adjustment will be good for the industry. The industry was willing to drop the litigation in response to a change. Representative Austerman proposed $34.50 with the add-ons for Juneau and Ketchikan. He asked if that would constitute a deal breaker. Mr. Binkley replied yes. 6:00:04 PM Vice-Chair Thomas asked how much dock fees cost. Mr. Binkley responded approximately $30 million a year for private dock fees. Vice-Chair Thomas asked what the total cost would be for the passenger. Mr. Binkley replied $91 million. Vice-Chair Thomas asked if the bill was no longer perceived as the governor's bill. Mr. Binkley clarified his statement. He stated that the bill is similar in net outcome for the passenger. Vice-Chair Thomas commented that Ketchikan averaged $900,000 a year. He recalled that the committee asked the fiscal policy group about the problem with the cruise ship industry. The response was saturation, correction, economy, and cessation of turmoil in the Mediterranean. The head tax was never mentioned as a potential problem. 6:02:53 PM Representative Doogan how many passengers are expected this year. Mr. Binkley replied approximately 850,000 from the large cruise ships that are charged the head tax. Representative Doogan asked if some percentage of those would be paying $61, while others pay $46. The current proposal charges a flat $34.50. He asked for an estimate of the total savings to the passengers if the proposal was in place. Mr. Binkley approximated $22 million in annual savings to the passengers. 6:04:15 PM Representative Gara asked about the average cruise cost. Mr. Binkley responded that the cost was lower last year. The goal for the cruise ship companies is always to fill the ship. A cruise might cost $499 to $2500 for a seven night tour. The time of year also dictates the cost. Representative Gara requested statistics of average passenger spending in Alaska. Mr. Binkley responded approximately $900 per visitor. Representative Gara asked if most passengers cruise one way then fly back home. Mr. Binkley answered yes, but some cruises are round trip. Representative Gara realized that Alaska wants more travelers. He discussed the various costs incurred by cruise ship travelers. Mr. Binkley agreed. He stated that 142,000 less people will visit Alaska as a result of the head tax. The ships must reduce the price to in order to fill the ship, leading to less revenue. If the costs are fixed, they make less money. If the ships return, the volumes will too. 6:09:13 PM Representative Austerman thought that the passengers would come back whether the tax is reduced or not following the global recession. He asked if cruise association discusses saturation point. Mr. Binkley stated that the cruise industry was growing by 6.5 percent. Other destination points are experiencing growth, while Alaska is not. He mentioned the baby boomers and their penetration into the cruise market over next 10- 20 years. The anticipation is for continued growth for the cruise industry. Representative Austerman chose not to debate the issue. 6:11:57 PM Representative Kelly believed that a series of events including taxes and regulations have impacted the cruise ship situation. He asked to know other concerns the cruise industry might have. Mr. Binkley noted that the cruise industry is not bothered or concerned, the economics are simply the bottom line. The industry works their asset for the best return on their investment as publicly held corporations. Alaska is a high cost environment as the only state that has a corporate income tax, gaming tax, ocean ranger tax, regional impact fund tax, in addition to the head tax. Representative Kelly asked about the issue of separating the marketing assistance from state. He understood that the association sought funding in the $20 million range. Mr. Binkley agreed that the additional funding will help as a 50 percent increase in the state's marketing budget. 6:15:11 PM Representative Foster wished the tax could be tied to the number of visitors coming back to Alaska. The cruise ship industry affects the entire state. He wondered how many passengers travel beyond Southeast Alaska and Anchorage. Mr. Binkley responded that DCCED has statistics. He stated that the impacts of the cruise ship industry are ubiquitous. Cruising is often an initial way to see Alaska, and cruisers sometimes return as independent travelers. He spoke of his family business in the visitor industry. Many businesses are struggling. The cruise ship industry will be fine because they can take their assets and go to where they can make the most money, but when they go Alaskans are affected. Representative Austerman referenced the settlement conditions as presented to the committee. The agreement discusses the $34.50 tax and further reducing the excise tax on any passenger by the total amount of taxes imposed on the passenger by municipalities that did not elect to receive funds. He wondered if he perceived the agreement correctly regarding Juneau and Ketchikan. Mr. Binkley answered that he believed that the agreement included Juneau and Ketchikan. 6:20:27 PM Vice-Chair Thomas recalled that the bill was initiated as an initiative to repeal the cruise ship head tax. He wondered why Juneau and Ketchikan were coupled with the initiative. Mr. Binkley responded that the association never proposed that the head tax be repealed. The governor proposed the reduction of the head tax. He added that the Alaska Cruise Association does not have contracts with Juneau or Ketchikan. Vice-Chair Thomas contended that agreements with Ketchikan and Juneau exist regarding head tax and port fees. Mr. Binkley argued that the head tax is elected by people of Juneau and Ketchikan. 6:22:42 PM Representative Fairclough understood that a lawsuit was filed against the state. A settlement has been reached with the Attorney General to resolve the lawsuit if this bill passes. She expressed interest in the resolution of the litigation issue. She opined that the bill encompassed greater issues than the reduction of the head tax. 6:24:23 PM Representative Salmon commented that the bill has the public's support. Representative Gara added that if the case is settled in exchange for reduction of the cruise ship tax, the state might still be sued. He opined that passing the bill might lead to a one way settlement. Mr. Binkley agreed with Representative Gara. The risk of a class action suit exists despite the passage of the bill. He speculated that if the legal ground is plowed by the cruise lines through the litigation, there could be a class of people who may want to sue. The legislation may reduce that risk. 6:27:20 PM JENNIFER GIBBINS, EXECUTIVE DIRECTOR, PRINCE WILLIAM SOUNDKEEPER CORDOVA (via teleconference) opposed SB 312. She observed that the legislators' points were good. She understood the importance of the cruise industry to Alaska's economy. She opined that the bill served the cruise industry. The cruise ship's decisions regarding ship deployment happen years in advance. Alaskan citizens voted to approve the voter initiative initiating the head tax. The voter initiative was passed to protect and preserve the environment of Alaska in partnership with the cruise ship industry. STEVE HITES, SKAGWAY, STREETCAR COMPANY (via teleconference), discussed his company and the loss of revenue because of the head tax. He stressed that the loss of revenue and jobs was not the intent of the cruise ship initiative. He commended Governor Parnell for carrying a message to the cruise ship industry that Alaska is open for business. He urged the committee to follow the governor's lead and pass the legislation out of committee. KARL AMYLON, SELF, KETCHIKAN (via teleconference) offered to respond to questions. 6:36:46 PM TANJA CADIGAN, OWNER, CARIBOU CROSSINGS, spoke in support of the legislation. She spoke of the many employment opportunities available as a result of the cruise industry. She expressed frustration about the pressure placed on small businesses as a result of the head tax. 6:41:45 PM GREG PILCHER, OWNER, WHALE TALES, testified in support of the legislation. He stressed the impact that industry has on his business. 6:43:40 PM CHRIS WILSON, JUNEAU (via teleconference), suggested dividing the head tax into a port fee similar to the management of the airport tax. He wondered about the impact that the cruise ships have on Alaska's waters. The impact is tied to the fishermen. He suggested a new avenue of 1 percent tax appropriated to the state for the improvement of water and sanitation issues. Representative Fairclough asked Mr. Wilson if he supported or opposed the bill. Mr. Wilson stated that he did not support the bill. 6:48:03 PM STAN STEVENS, WILDLIFE TOURS BUSINESS, chair of Alaska Travel Industry Association (ATIA) informed that 70 percent of ATIA's members are small businesses. He commented on the downturn for these small businesses credited to lack of marketing, poor economy, and the head tax. The loss of 140,000 people by the industry will affect small businesses in the interior, Anchorage, and Southeast. He stressed the value of the cruise industry to the whole economic system. Representative Gara relayed a message to the members of ATIA. He pointed out that Alaska levies no income or business tax on the members. Mr. Stevens mentioned that ATIA brought forth a proposal to tax the industry in 2004. The members have suggested taxes as a method of generating additional marketing dollars. He shared stories about his experience as a business owner. 6:54:56 PM Co-Chair Stoltze closed public testimony. Representative Austerman requested opinion about the settlement agreement from Department of Law (DOL). CHRISS POAG, DEPARTMENT OF LAW, explained that when the initiative went into effect, those communities had to choose whether to keep their tax in effect and elect not to receive port of call revenue sharing or their tax expired as a matter of law. The presented offset provision for Juneau and Ketchikan shows that the communities chose not to receive port of call funds. Representative Austerman asked if the communities received the $5 prior to the law going into effect. Mr. Poag replied that the communities can apply to the legislature for appropriations but they do not receive revenue sharing. Representative Austerman asked if the communities would receive revenue sharing under the new law. Mr. Poag replied yes. Representative Fairclough wanted to assure that her office was not flooded with cruise ship lobbyists. 6:57:56 PM Representative Doogan commented that his office received many emails regarding the bill. Vice-Chair Thomas commented that Juneau and Ketchikan received $80 million in regional funds in addition to the collection of port fees. Representative Austerman announced that he planned to submit an amendment during the next hearing of the bill. Representative Gara spoke to the passion generated by the bill. SB 312 was HEARD and HELD in Committee for further consideration. 7:01:03 PM AT EASE 7:11:55 PM RECONVENED Co-Chair Stoltze