CS FOR SENATE BILL NO. 23(FIN) "An Act relating to transferable film production tax credits and film production tax credit certificates; requiring the legislative audit division to audit the Alaska film production incentive program; and providing for an effective date by amending the effective dates of secs. 3 and 4, ch. 63, SLA 2008." 4:43:28 PM Vice-chair Fairclough MOVED to ADOPT proposed committee substitute for CSSB 19(FIN), Work Draft 27-LS0252\XX (Bullock, 4/13/12). Co-Chair Stoltze OBJECTED for purpose of discussion. Representative Costello highlighted the changes in the work draft. The work draft incentivizes the Alaska Hire program. The program was separated into two main sections. One section referred to those in the film industry who were considered "above the line", which include producers, directors, writers, and editors; and the other section referred to workers considered "below the line." The "below the line" workers referred to electricians, caterers, and much of the behind the scenes workers on film sets. She stated that the "below the line" section sustained the base tax rate at 30 percent overall, extended the program for ten years, and continued the funding at the current level at $200 million. The Alaska Hire bonus was doubled from 10 percent to 20 percent. The House Labor and Commerce incentive for rural Alaskans would be set at 6 percent, which was higher than the current program. The 2 percent incentive remained the same for films that were produced in the off-season. Co-Chair Thomas clarified that the 6 percent incentive was "additional" to the current incentive. Representative Costello stated that the work draft removed the 44 percent cap on the credits. The first scripted television show to produce 16 episodes would be incentivized, because episodic television brought more jobs over the long term. The "above the line" credit had been tied to Alaska Hire, and required spending on Alaska businesses. The base rate for the "above the line" credit was 5 percent, so companies could earn a higher credit by hiring Alaskans and patronizing Alaska businesses. Fifty percent of the amount that is spent on the wages and benefits to Alaskans and Alaska business, would be credited in the "above the line" section 4:48:45 PM Representative Costello stressed that she wanted Alaskans involved in the film productions that were produced in the state. The bill aimed to increase the credibility of the review process by creating the Alaska Film Incentive Review Commission, housed in DOR. Four commissioners would sit on the commission, including the commissioners from DOR, DNR, DOL, and DCCED. A majority of the members of the commission must approve the script and summary of the pre-qualifying process. Co-Chair Stoltze wondered if the commissioners from those departments were the actual commissioners, or designees. Representative Costello responded that the commissioners would be the actual commissioners from those departments. Representative Costello stated that the administrative function of the program was put into DOR, because it is a tax program. The promotion portion of the program would be kept in DCCED, which is the department that was marketing Alaska's development. A 75 cents on-the-dollar buy-back option was included in the work draft to provide some certainty for some smaller productions that may not be able to find a corporate tax payer who could buy the credit. The credit was adjusted to remove competition with the private sector, but also provide some stability. In addition, people were no longer allowed to broker the credit. She looked at page 13, lines 9 through 11, "The commission may not approve an application for a film production that the commission finds is contrary to the natural resource development policy of the state." 4:51:59 PM Representative Doogan asked for more information regarding page 13, lines 9 through 11. Representative Costello explained that currently the program required a review of the script to ensure that there was nothing in conflict with Alaska's constitution. That portion of the program remained the same, but language was changed from "shall" to "will." By elevating the review board to the commissioner- level, it added some additional accountability in the review of the scripts. Representative Doogan asked for an explanation about why the script could not be against the natural resource policy of the State. Representative Costello replied that an example would be that the film could not include an overview of fracking and its damage to the environment, when the state was possibly considering fracking technology in the state. Co-Chair Stoltze furthered that it would be anything produced by Michael Moore. Representative Doogan wondered if this would be considered censorship. 4:55:15 PM Representative Costello replied that the only time that the issue of censorship was brought to the committee's attention, was in relation to people who testify in public hearings. She stated that there was nothing that could prevent freedom of speech. However, in terms of "censoring scripts", the State had an interest in reviewing the scripts for the credit. There were several items in the bill that the commission would be considering, and happened to include Alaska's natural resources. Ninety percent of Alaska's state government was funded from oil production. The State had an interest in protecting its ability to develop resources responsibly, without encouraging a public relations campaign that could be detrimental to that effort. Representative Doogan wondered what would happen if a person provided a script to the commission, and the script was rejected because it did not "toe the party line", and therefore the film company sued the State. He wondered if this would be defensible in court. Representative Costello deferred to Co-Chair Stoltze. Co-Chair Stoltze replied that he did not believe it was considered "free speech" if the State was paying for it. Representative Doogan stressed that he was concerned whether or not this change was "protected legal ground." Co-Chair Stoltze replied that he only wanted to pass the bill if it was considered "protected legal ground." Representative Gara believed the legislation was important, and shared the concerns of Representative Doogan. He referred to a movie entitled, "Salmonberries." Someone could have made the case that the movie made Kotzebue look bad, or someone could say that the movie "opened peoples' eyes" to a different part of the world. He was concerned about allowing a State bureaucrat to determine whether or not a movie was in the best interest of the state. He added that censorship was also an issue in this discussion, because he felt that the commission would be too partisan. 4:59:13 PM AT EASE 4:59:37 PM RECONVENED Representative Doogan remarked that he did not want to have a political debate. 4:59:52 PM AT EASE 4:59:59 PM RECONVENED MATT MOSER, STAFF, SENATOR JOHNNY ELLIS, stressed that the purpose of the bill was economic development. He remarked that there was a provision in the bill that did not allow pornography. Co-Chair Stoltze remarked that Senator Ellis inserted the provision on pornography, and Senator Ellis did not believe that the provision on pornography was not considered "censorship." Mr. Moser agreed. Representative Neuman looked at page 4; lines 16 through 19, regarding the total number of tax credits in aggregate may not exceed $100 million for a qualified production. He wondered if that was $100 for only one production. Mr. Moser replied that the intention was that there were $100 million in credits available for the first five years of the program, and $200 million in credits in the second ten years of the program. Representative Neuman wondered if the $100 million was the total amount of credits the State would provide, or if it was for one individual production. Mr. Moser replied that he had not had a chance to look at the draft, but it should say $200 million for "productions" qualified under AS 44.25.120. Representative Neuman surmised that it was a cumulative number. Mr. Moser agreed. Representative Gara understood that the side effect of the "best interest of the state" issue would be a side effect of attracting tourism in the state. Mr. Moser agreed. Representative Gara commented that there did not have to be an agreement for every provision of the bill, and accepted Mr. Moser's response. Co-Chair Stoltze would hold the bill to get an opinion from Department of Law on the censorship issue. Co-Chair Stoltze CLOSED public testimony. 5:04:50 PM RECESSED 6:45:14 PM RECONVENED SENATOR JOHNNY ELLIS, SPONSOR, addressed most recent concern with language in the bill. The committee substitute elevates the script review of television and film production scripts to the commissioner level, and he supported that change. He stressed that the Alaska Constitution requires the development of Alaska resources for the maximum benefit of the people. So, if there was ever a film or television project that was antithetical to the Alaska Constitution and its purpose, the project could be appropriately prohibited. The Parnell administration and Alaskans should turn down movies or documentaries that were not in the best interest of the people. Co-Chair Stoltze thanked Senator Ellis. Representative Neuman MOVED to ADOPT Amendment 1: On page 4 line 16 Delete "a production" Insert "productions" On page 4 line 18 Delete "a production" Insert "productions" Representative Neuman explained that the amendment represented the money as a cumulative amount and not per production. Senator Ellis approved the amendment. 6:52:19 PM DAN BRANCH, SENIOR ASSISTANT ATTORNEY GENERAL, COMMERCIAL/FAIR BUSINESS SECTION, DEPARTMENT OF LAW, introduced himself. Representative Doogan asked the way the bill is drafted in a way that certain people could make a decision not to fund a production and wanted to know whether that is legal. Mr. Branch replied that the language was legal. The reason is because the bill does not restrict speech but the way the state decides to spend its money. Representative Neuman MOVED to ADOPT Amendment 1. There being NO OBJECTION it was so ordered. 6:55:18 PM Vice-chair Fairclough asked for clarification pertaining to the fiscal notes attached to the bill. She pointed out that the fiscal notes reflected and addition of $100 million; she understood that the intention was to add $200 million. Representative Costello replied that page 2 of the Department of Revenue fiscal note, under the section "revenues," declared that the bill would increase the total tax credit from $100 million to $200 million, and was not a correct reflection of the bill. She explained that the legislation intended to increase the credit from $100 million to $300 million because of the addition of $200 million over the next ten years. She concluded that the fiscal note would need to be changed to reflect the intended fiscal impact of the bill. Vice-chair Fairclough interjected that the legislation would affect the DOR's taxation division. She spoke to fiscal note #3, dated 4/13/2012, 5:45p.m. She purported that the projected spending from FY14 to FY18 increased funding to support 4 positions: $460,000 in FY14; $448,400 in FY15 through FY18. She noted that the bill language referenced in the analysis should be changed to reflect a $200 million tax credit between 2013 and 2023. Additionally, the total accumulation should be changed to $300 million. She pointed out that the revenues section of the analysis should be changed to reflect increases in the total tax credits from $100 million to $300 million. She explained that it would allow for approximately $20 million in tax credits, per year, over three separate 5 year periods. She relayed that under expenditures it should be noted that there were 2 positions that DOR was proposing to be transferred in, and 2 that were additions. Vice-chair Fairclough discussed the NEW fiscal note, which affected the Department of Commerce, Community and Economic Development (DCCED). She shared that the department was proposed to spend between FY13 and FY 18; $281.200, with 2 full-time positions. Vice-chair Fairclough stated that the NEW fiscal note, which was allocated to the Legislative Audit Division, reflected zero fiscal impact. Co-Chair Stoltze wondered if DOR had been assisting DCCED with tax auditing. CURTIS THAYER, DEPUTY COMMISSIONER, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, replied that DOR was currently assisting with the tax certification portion of the program. Vice-chair Fairclough requested further explanation of the two additional auditing positions discussed on the DOR fiscal note under expenditures. Mr. Thayer responded that the department currently had two people helping to manage the program that the department wished to retain. The fiscal note proposed that the two positions remain within DCCED because the department was responsible for the promotion, follow-up, coordination, and the marketing of the film program. Co-Chair Stoltze maintained confusion as to where the extra work was being generated that required the two additional positions. Mr. Thayer deferred the question to DOR. Co-Chair Stoltze asked if the new positions would have been necessary if the program were handled exclusively by DCCED. Mr. Thayer responded that the auditing had been done by the business development specialist. He said that when the program was originally designed, DCCED handled the pre- qualifications, the auditing function of going through the applications, and the final application. He stated that DCCED had turned those responsibilities over to DOR. He furthered that DCCED had also been responsible for the marketing function and the coordination functions, which had been split up because it was believed that the same individual should be doing the auditing and handling the pre-qualifications at the same time. 7:01:57 PM JOHANNA BALES, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE (via teleconference), understood that the bill created an executive director position to work with the newly created review commission. Additionally, the bill required an on-site liaison to consult producers on large productions, which had necessitated the creation of the second position. Representative Costello commented that the intent was not to have a full-time liaison position. Co-Chair Stoltze suggested that the fiscal note would need to be adjusted according to interpretation of the bill. Representative Costello thought that it would be prudent to reduce the number of positions, and to keep in communication with the department as staffing needs were brought to light. 7:04:32 PM Vice-chair Fairclough directed attention to the fiscal note from DOR, which suggested the extraction of two employees from DCCED; however, the same two positions were also listed on the fiscal note for DCCED. She stated that from a legislative perspective, the additional two people had not been anticipated. She said that she understood why DOR would want one dedicated person, requested further explanation of the DCCED request for 2 additional positions. Mr. Thayer replied that the purpose of the film production promotion program was to work with organizations in the private sector for expansion and development of the film production industry in the state; to promote Alaska as an appropriate location of a film production; to provide production assistance through connecting film directors, makers, and producers with Alaska location scouts and contractors, including contractors providing assistance with permit applications. He stated that those responsibilities were currently covered by DCCED in addition to the pre and post application. He understood that the fiscal note requested 2 positions but that the department often had 4 or 5 people splitting duties to handle all of the aforementioned activates. He testified that as deputy director he had dedicated, at one point, 20 percent of his working day to this program. Representative Gara understood that the department currently had liaisons that promote Alaska. He wondered where the extra work for the department was going to come from. Mr. Thayer replied that the work would continue with the existing amount of employees. Representative Gara thought that that the fiscal notes could be zeroed because most of positions were being transferred between agencies. Mr. Thayer reiterated that the program had the promotional component, the pre application component and the final application part of the program. He said that some of the workload was still being handled by, and would remain in the department by statute. 7:07:52 PM Vice-chair Fairclough moved to amend the DOR fiscal note; FY14 through FY18, $230.200 and 2 positions. She believed that the money would fund one Tax Auditor III (Range 20) and one Tax Technician ii (Range 12). Ms. Bales asked about the provision in the bill that expects an executive director consult the newly formed commission and to oversee the staff of the Film Office. Representative Costello interjected that there was currently an individual within DCCED that was serving in the position. She stressed that it had not been the intent of the subcommittee to hire a new executive director. Co-Chair Stoltze asked if the handling of the position was to be left up to the department. Representative Costello responded that the bill stated that the departments should work together to determine how the position was filled. Representative Doogan understood that the fiscal notes could be improved by requesting two positions in DOR and two in DCCED. Vice-chair Fairclough replied that that was the intent of her motion. 7:10:51 PM Representative Gara expressed confusion as to why DCCED needed the two new positions. He felt that DOR needed two new positions for taxes, and there was obvious coordination. Vice-chair Fairclough explained that DOR had not been doing audits; Legislative Audit had been handling audits from the legislative side. The effort would now move to DOR; DCCED would continue to work with DOR, as well as continuing to promote and interface in a variety of ways to put the Film Office to work for the state of Alaska. She said that the request from DCCED had been that the committee would recognize that if the program was successful DOR would need to be involved. She added that the functionality could be revisited in 2013. Vice-chair Fairclough asked if there was any reason why the executive director should not reside in the Film Office. Mr. Bales stated that she saw no reason why the executive director could not reside in the Film Office. She felt that DOR would be content with two auditor positions to oversee the applications. Vice-chair Fairclough stated that the subcommittee had been trying to establish a working arrangement that provided transparency for the film industry and for the credits being used. Ms. Bales explained that there was a provision in the legislation that stated that the executive director must oversee the staff. She thought that there should be a separation of duties written into legislation. 7:14:10 PM Representative Wilson thought that the fiscal note from DCCED would not add two more positions, but would maintain an already established full-time development specialist, and a full-time administrative assistant II; detailed half- time to the film promotion program. She queried what the other half-time duties would include. Mr. Thayer responded that the administrative assistant to the program would additionally serve as the administrative assistant for DCCED in Anchorage. Representative Wilson understood that the two positions already existed and were not being created. Mr. Thayer replied that the department remain at the status quo. 7:15:26 PM AT EASE 7:18:03 PM RECONVENED Representative Costello MOVED to report HCS CSSB 23(FIN) out of committee with individual recommendations and the accompanying fiscal notes. There being NO OBJECTION, it was so ordered HCS CSSB 23(FIN) was REPORTED out of committee with a "do pass" recommendation and with two new fiscal impact notes from the Department of Revenue and the Department of Commerce, Community and Economic Development and one new zero note from the Legislature. [Note: The committee rescinded its action to report out HCS CSSB 23(FIN) on 4/14/12 and took corrective action. See House Finance Committee minutes dated 4/14/12, 10:25 a.m.] 7:19:41 PM AT EASE 7:23:37 PM RECONVENED