HOUSE BILL NO. 204 "An Act relating to a product development tax credit for certain salmon and herring products; and providing for an effective date." Representative Costello MOVED to ADOPT the proposed committee substitute for HB 204, Work Draft 28-LS0463\P (Bullard, 2/24/14). Co-Chair Stoltze OBJECTED for discussion. DANIEL GEORGE, STAFF, REPRESENTATIVE BILL STOLTZE, discussed the two changes included in the CS. Prior to the word "herring" on pages 1 and 2, line 12 the word "or" was replaced with "and." There being NO further OBJECTION, the CS was ADOPTED. 2:26:36 PM REPRESENTATIVE ALAN AUSTERMAN, SPONSOR, discussed that the credit for salmon would sunset in 2015. He stated that a number of changes within the industry had precipitated action in the current year; an issue related to herring was a part of the change. The tax credit had been in place for 10 years and had enabled the salmon industry to market new products to compete in the marketplace. He shared that 10 years earlier the cost of pink salmon had been dire at prices of $0.05 to $0.07 per pound. The tax credits had done their job and prices had improved for fishermen; markets had increased providing more places to sell product. Additionally, there were different products to sell. He detailed that to expand the commercial seafood industry in Alaska the bill would add herring and would add value-added products that could be created from the waste stream currently going into the ocean, dumps or other. The concept was that by adding the two items new markets would be created. Co-Chair Austerman explained that the bill would expand the salmon credit to include herring and the underutilized fisheries where significant waste occurred. He discussed that in the past couple of years there had been money in the state budget for the Alaska Seafood Marketing Institute (ASMI) to market herring. He pointed to a can of herring canned by ASMI. The organization had been able to show that the world food aid market was buying protein in the U.S. for global distribution. When efforts began in 2004 to determine how new markets could be created, the tax credit was one step and the other had been to hire someone to look at the different marketplaces where no salmon existed. There had been zero cases of salmon in the world food aid market. 2:30:00 PM Co-Chair Austerman continued that the U.S. had been purchasing soy and corn [back in 2004], but no protein had been included. He shared that in recent years there were over 400,000 cases of salmon going into the food aid marketplace, which created a place for pricing salmon and improved things for the fishermen and processors involved. He believed the same could be done for herring. He detailed that in the past couple of years ASMI staff had been selling the product. The reception had been strong and it looked like the demand existed. He addressed the underutilized waste of salmon and herring. He communicated that ASMI had been purchasing wasted fish product and turning it into a high grade food protein powder that could be used to mix with rice, soybeans, and other. The product could help around shipping cost issues. Co-Chair Austerman addressed other reasons to get into the dried protein powder business. He anticipated that at some point 100 percent of retention would be required of all fisheries in Alaska (similar to the current occurrence in the European Union). He detailed that it would be necessary to have a way of handling the waste stream that came ashore instead of throwing the product away or turning it into pet food; a higher value to the product was anticipated that could allow the industry to grow. He had learned that within the next few years the Environmental Protection Agency (EPA) would no longer allow grinding of product and dumping into the ocean. He detailed that given the change it would become expensive for the industry to handle the waste product; if a higher value for the product could be determined it would become less costly to the industry. 2:33:07 PM Representative Edgmon asked to hear public testimony. Co-Chair Stoltze asked for a definition of cans. Co-Chair Austerman deferred the question to the department for detail on a definition. The bill would also give the industry the option to change the size of its cans. In the past the legislation had allowed the industry to begin using pop-tops; however, the industry did not like pop-tops due to the shelf-life. The goal was to allow the industry to be able to change the size of the can. 2:34:39 PM JEFF BACKLUND, VICE PRESIDENT, NORTH PACIFIC SEAFOODS, spoke in support of the bill. He shared that the company had five facilities in salmon producing areas in Alaska including Alaska Pacific Seafoods in Kodiak; Sitka Sound Seafoods; and three plants in Bristol Bay including Togiak Fisheries, Peterson Point, and Red Salmon Cannery. He discussed that in 2013 the company had processed over 50 million pounds of salmon. Since the program's inception it had used the salmon tax credit for production changes that had allowed the business to reach new markets and increase the quality of the salmon items it produced. The company had added vacuum packed fillet capacity to two operations and was in the process of adding it to a third. He communicated that ice-making capacity was an important component to maintain product quality and was a needed addition to the past reauthorization of the program. He relayed that the tax credits had helped the company meet changing market demands and to maintain high-quality salmon products to benefit all segments of the value chain including harvesters, processors, and coastal communities. He shared that the continuation of the program provided the company with the certainty needed for planning major projects and the flexibility to respond to market changes. The company planned to utilize the worthwhile program. He urged the legislature to extend the salmon product development tax credit. Representative Gara wondered why pre-spiced frozen salmon products were not available in stores. He believed there would be a demand for the products. Mr. Backlund answered that there were many changes occurring in the marketplace pertaining to how companies were approaching the issue. He noted that there had been a big shift from headed and gutted and some canned to fillet production. He thought it may be the next shift. Representative Gara offered it as a suggestion. Vice-Chair Neuman asked if the company used the credits to reduce its corporate tax credits to the state. Mr. Backlund responded that the credits offset capital investment in changing product forms. For example, part of the tax paid by a company could be used as a credit toward investing in processing fish beyond headed and gutted in a fillet line. 2:39:00 PM Vice-Chair Neuman pointed to Section 5 of the legislation and wondered how the credits were claimed each year. He observed that the credits changed from year to year. He discussed claiming credits for capital investments and noted that the bill offered incentive to purchase equipment. He wondered whether there would be a point where doubling up could occur. For example, new equipment could be used for processing herring and other items as well. He asked about paying revenue. Mr. Backlund replied that the administration of the tax credit went through the company's accounting department. He understood that there was a pre-application process with the Department of Revenue (DOR); the department provided an indication of which items would qualify based on the submitted project. He believed it was for new production, not for replacement of existing equipment. Co-Chair Stoltze asked if the company was involved in financially supporting a law suit involving the United Cook Inlet Drift Association and the Cook Inlet Fishermen's Fund. Mr. Backlund did not know. 2:41:25 PM SINCLAIR WILT, VICE PRESIDENT, WESTWARD SEAFOODS and GENERAL MANAGER, ALYESKA SEAFOODS, spoke in support of the legislation. The companies had two plants in Dutch Harbor and one in Kodiak; the Kodiak plant was the one involved in the salmon business. He shared that the companies were members of the Pacific Seafood Processors' Association. He referred to a letter of support he had provided to the committee (copy on file). He communicated that the Kodiak plant had been a beneficiary of the program in prior years. He relayed that the program was a valuable incentive to encourage innovation and new product opportunities and in dealing with waste products. He shared that one of the Dutch Harbor plants had been working with an alternative use of Pollock skins by converting it into collagen. Co-Chair Stoltze asked if the company was involved in financially supporting a law suit involving the United Cook Inlet Drift Association and the Cook Inlet Fishermen's Fund. Mr. Wilt replied that the company had not provided any funds to the organizations. Representative Gara asked about the law suit referenced by Co-Chair Stoltze. Co-Chair Stoltze explained that the law suit was seeking to bring federal management into the Cook Inlet region. The suit had been brought forward by the United Cook Inlet Drift Association and the Cook Inlet Fishermen's Fund. He stated that the groups had previously attempted to eliminate dip net fisheries. Representative Gara asked if the company sold canned salmon. Mr. Wilt replied in the negative. 2:45:07 PM VINCE O'SHEA, VICE PRESIDENT, PACIFIC SEAFOOD PROCESSORS ASSOCIATION (PSPA), spoke in support of the legislation. He shared that PSPA members operated 18 plants that processed salmon throughout the state from Ketchikan to Bristol Bay. He believed the bill had a proven track record of increasing the value of the salmon pack in Alaska. He remarked that great progress had been made since the early 2000s when salmon prices had been in the single digits. He communicated that the program had evolved over time; the current bill added provisions for centrifuges to make food- grade fish oil, which was currently a significant market. Ice machines had been added to the legislation in 2010, which had gone far to improve the quality of fish in Bristol Bay. He believed the program benefited harvesters, processors, fishermen, communities, and Alaskans in general. The program expired in 2015, but it would be beneficial to renew it in the current year to allow for budget planning. He believed the five-year period provided assurance that the state was encouraging the industry to respond quickly to market and technology developments that may evolve. 2:48:04 PM Co-Chair Stoltze asked if the company was involved in financially supporting a law suit involving the United Cook Inlet Drift Association and the Cook Inlet Fishermen's Fund. Mr. O'Shea replied that the company did not provide any funds to the law suit. Representative Gara wanted to see Alaska's salmon make as much money for the state's fishermen as possible. He remarked that fresh pink salmon was less expensive than red or king; he wondered why it was not sold in Alaska supermarkets. He asked why salmon was not marketed as pre- spiced. He discussed that New Zealand sold a variety of spiced tuna (e.g. curry, lemon, garlic, and other) that was easy and convenient to eat. He wondered about doing something similar with canned salmon. He wondered if the issues were worth looking into. He noted that canned pink and red salmon would bring in a limited amount of money. Mr. O'Shea answered that he was not a marketing or promotional person. He pointed to frozen salmon burgers sold at a local retail store that were made with spiced pink and keta salmon. He believed the product was cheaper than hamburgers. He would be happy to get back with the committee about the food ready pouch products the company was making. He stated that an overall trend existed to move from canned products to fresh/frozen fillets. The shelf- life of canned salmon was terrific. He believed the advice to look for a variety of product forms was good. 2:51:20 PM Representative Guttenberg had traveled to Japan in the past and had visited a fish market in Tokyo. He recalled that all parts of the fish were marketed there. He asked if the association was receiving any pushback on wild Alaska salmon related to the Fukushima nuclear disaster. Mr. O'Shea replied in the negative. He believed the issue was on ASMI's radar related to protecting the Alaska brand. He remarked on the difficulty of the question because it related to how hard to push back or how much to continue the story depending on credibility. He detailed that from a science standpoint the evidence was clear that the disaster did not have an effect on Alaskan products. He was confident that ASMI was watching Japanese and other foreign markets to ensure the Alaska brand remained respected for its high quality. 2:53:17 PM Co-Chair Austerman believed some Alaskan salmon fishing industry 101 was needed to ensure everyone was on the same page. He discussed various ways salmon had been handled historically. He detailed that in 2003 and 2004 the industry had been bleak in Alaska; the state had been doing nothing but cans due to the marketplace. He stated that many different products existed. There was significant research underway by major processors to find the right niche for salmon products. He listed various products including salmon burgers, pouched spiced salmon, and dried salmon. TOM SUNDERLAND, VICE PRESIDENT OF MARKETING, OCEAN BEAUTY SEAFOODS (via teleconference), provided a market perspective on the legislation. He believed the most important measure was the gauge of effectiveness. He discussed the success of the tax credit program and pointed to testimony related to the much improved price of fish. He discussed that the fishing industry in Alaska needed to determine a way to defend its gains. Currently the industry products were facing severe market price pressure. The pressure was distressing because maximum value should be returned to Alaska; however, some customers were relaying that the product price points were not sustainable. He addressed different ways to approach the problem. For example, the bill gave the ability to reduce the size of the can. He noted that other industries used the strategy when prices rose. He continued that consumers bought packaged goods by shelf price, not by the pound as they did a side of salmon or other commodities. He provided cereal boxes as an example. He detailed that the tuna industry had reduced the size of cans almost exclusively to 5 ounces; other locations such as Australia sold tuna in 3.3 ounce cans. He continued that it was more difficult for Alaska fisheries due to the seasonal and remote nature of the processing. Mr. Sunderland continued that the reduction in can size would enable the industry to respond to the issue of absolute price. He stated that it was unreasonable to expect consumers to always accept a higher price for a product. He shared that a tall Bumblebee tuna can cost $10.39 in a Seattle, Washington supermarket ($11.28 per pound). He believed a can of tuna that size for the cost would not sell easily. He stressed that without the ability to reduce can size the company would have a severe problem maintaining the value of its product. He discussed fishery byproduct utilization. Currently when product was canned or filleted much of the fish was ground and dumped for no value. 2:59:18 PM Mr. Sunderland communicated that value would increase by turning the portion of the fish that was not used into saleable product. There were some small operations running related to fish oil; however, there was a tremendous untapped resource. Both of the items [reduction in can size and byproduct usage] had a significant impact on the ability to protect gains made over the past 10 years. He discussed the EPA's plan to change regulations related to remote discharge of fish waste. He believed it could be beneficial to show the EPA that the industry in Alaska was working to eliminate waste. He summarized that the company was facing severe market pressure to act on the items he had discussed. He relayed that the bill would enable the company to act on the items in ways that were responsible to the fishermen and coastal communities of Alaska while maintaining product value. Co-Chair Stoltze recognized that Ocean Beauty Seafoods was a great Alaskan company. 3:00:53 PM Representative Edgmon thanked Mr. Sunderland for hosting a seafood event in Juneau over recent years. He believed the event helped to educate legislators on the commercial fishing industry and its contributions. He asked about value-added products including sauces, spices, and other. Mr. Sunderland answered that there had been considerable growth of the sauces and spices product type. Most of the products were done by retailers under their own private label products. He listed various retailers with their own brand including Whole Foods, Trader Joe's, Kroger, Safeway, and other. He added that Ocean Beauty Seafoods made many of the products. However, plain portioned product always sold better than flavored product. He communicated that globally the bestselling products tended to include sauces, pasta, or vegetables; however, the products almost universally failed to succeed in the U.S. He noted that there had been some successes including a pouched product from Thailand. He pointed to more success related to flavored and sauced frozen products. Co-Chair Stoltze asked if the company was involved in financially supporting a law suit involving the United Cook Inlet Drift Association and the Cook Inlet Fishermen's Fund. Mr. Sunderland did not believe so but would double check. 3:04:06 PM Vice-Chair Neuman rephrased his prior question. He pointed to Section 5 of the legislation and wondered how the credits were claimed each year. He observed that the credits decreased from year to year. He thought the bill would enable a processing facility to replace almost all of its equipment. He mentioned the inclusion of both salmon and herring. TIM COTTONGIM, FISH GROUP, TAX DIVISION, DEPARTMENT OF REVENUE, replied that the credit would allow a facility to replace old equipment as long as the qualifications were met. Vice-Chair Neuman asked if the state would pay up to 50 percent of the costs or 100 percent in the first year. Mr. Cottongim explained that 50 percent of an investment qualified for a credit. Under the legislation the credit was limited annually to 50 percent of the tax on salmon and herring. The remaining credit could be carried forward three additional years to be offset against the taxes on salmon and herring. Vice-Chair Neuman asked for verification that the credits were not transferrable. Mr. Cottongim replied in the affirmative. 3:08:03 PM Representative Gara was supportive of the concept. He was interested in the state's total gross tax on fish and what the state was left with after tax credits were factored in for the prior fiscal year. He surmised that if every industry got to use its industry tax there would be no funding left for education and other state services. Co-Chair Stoltze asked for the FY 14 and FY 15 fisheries business and fisheries resource landing taxes. Co-Chair Austerman remarked that the Department of Commerce, Community and Economic Development could provide the answers. Co-Chair Stoltze communicated that for FY 14 the fisheries business and fisheries resource landing taxes totaled $27.4 million. He remarked that there was a better chance of receiving revenue from tobacco taxes, insurance, and mining; the items were substantially bigger than money available for items mentioned by Representative Gara. He believed there was a façade that fisheries fueled the state treasury. He stressed that the amount was de minimis in the state's budget. He stated that far more was spent on commercial fisheries research; the state was funding $30 million over the next three years for salmon research. The industry did provide jobs, but commercial fishing taxes were not a part of the state's economic future. 3:11:12 PM Representative Thompson referred to the bill's provision that would enable eligible parties to replace their freezers and equipment. He shared that he had received a new business tax credit to purchase a $96,000 crank grinder for his machine shop business. He was expected to profit from the crank grinder so he could purchase one on his own in 10 years' time. He believed profitable businesses should have a replacement plan for aging equipment. He wondered why the state would buy the company replacement equipment if the business was profitable. Mr. Cottongim replied that he did not have the expertise to answer the question. Co-Chair Austerman asked for verification that there were certain criteria a business had to meet in order to replace equipment. He pointed to a recent Ocean Beauty Seafoods can; less than 50 percent of its new equipment had been used to produce cans and had not met the department's criteria. He explained that the credit did not provide a blank check to businesses; a set of criteria existed. ANNA KIM, TAX DIVISION, DEPARTMENT OF REVENUE, agreed. JOHANNA BALES, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE (via teleconference), agreed with Co-Chair Austerman's statement. She explained that the salmon product development tax credit was for equipment that would produce value added salmon or herring. The concept was that the credit would enable the production of potentially new types of products to allow Alaska's seafood industry to compete worldwide. She noted that the credit was 50 percent; therefore businesses were required to come up with money for the equipment as well. The intent was to make Alaskan seafood products (specifically salmon and herring) more marketable. 3:15:41 PM Vice-Chair Neuman asked for verification that the credit only applied to production of new product that was not currently on the market. Ms. Bales answered that the credit was directed at new products in addition to existing value- added product. She detailed that the processing would need to enhance the product value. Over time there had been an increase in the price of Alaskan salmon due to the types of activities undertaken by the seafood industry and in which the state had offered a credit to assist. Vice-Chair Neuman surmised that filleting or canning salmon alone added value. Ms. Bales replied that the bill was more specific; in order to qualify for the credit further processing was required beyond heading or gutting a salmon. Vice-Chair Neuman asked about the creation of a powdered product. He asked whether a company could continue to get credit for equipment used on an unsuccessful product. He provided an example about deboning equipment that had failed. Ms. Bales answered that it would be possible; however, she found it hard to imagine that a company would be willing to pay 50 percent of the equipment price if there was absolutely no market for the product. 3:18:32 PM Vice-Chair Neuman clarified that he was referring to unsuccessful equipment, not unsuccessful product. Ms. Bales answered that he was correct; however, a provision included on page 2 (lines 24 through 31) required that a company recapture the credit. She explained that a business would be required to repay the state if it stopped using the new equipment; if the equipment was taken out of service in the first year the company would have to pay back the entire credit; if the equipment was used for two years the company would be required to repay 75 percent of the credit; and if the equipment was used for three years it would be required to repay 50 percent. The company would be required to keep the equipment in service for a minimum of three years to receive the credit in its entirety. Co-Chair Austerman directed attention to Section 8 of the legislation that included a program definition. He pointed to a list of qualified and disqualified equipment from Department of Revenue titled "SPDC Equipment" (copy on file). Representative Guttenberg asked if the credits were stackable with any other incentive or tax credit program. Mr. Cottongim replied in the affirmative. He elaborated that other credits could be claimed against the fisheries business tax including education credits (e.g. Winn Brindle scholarship). Representative Guttenberg asked for a list of the available credits and asked if credits were currently stackable. Mr. Cottongim replied in the affirmative. Ms. Bales asked for clarification on stackable. Representative Guttenberg wondered if there were additional tax credits that could be used for one piece of equipment. Ms. Bales replied in the negative. She expounded that it was not possible to use expenses for the equipment to claim a credit in any other tax program. HB 204 was HEARD and HELD in committee for further consideration. [Note: This meeting was recessed at 3:30 p.m. until 9:30 a.m. on February 28, 2014; CSSSHB 204(FIN) reported out of committee at that time. See February 28, 2014, 9:26 a.m. minutes for detail.] 3:23:13 PM AT EASE 3:24:31 PM RECONVENED