HOUSE BILL NO. 4005 "An Act relating to the mining license tax; relating to the exploration incentive credit; relating to mining license application, renewal, and fees; and providing for an effective date." 4:00:27 PM Co-Chair Thompson noted there had initially been an Amendment 1, but he had determined it to be out of order due to ongoing litigation. Representative Wilson MOVED to ADOPT Amendment 2, 29- GH2457\A.5 (Glover/Nauman, 5/28/16) (copy on file): Page 4, line 1: Delete "2" Insert "8" Co-Chair Thompson OBJECTED for discussion. 4:01:16 PM AT EASE 4:01:51 PM RECONVENED Representative Wilson explained Amendment 2. She discussed the committee had heard plenty of testimony from the mining community, which was willing to do its part, but felt a 29 percent increase in taxes was too high. The amendment would decrease the 9 percent back to the 8 percent multiple committees had discussed. She remarked the increase would still not be a good thing and its impact was unknown. She hoped reducing the number to 8 percent would have a reduced impact on the community. She believed everyone needed to take part in making sure they were paying for what was going forward. Co-Chair Thompson remarked that "dueling amendments" had been submitted - one would increase the tax and the other would reduce it. Vice-Chair Saddler relayed that he had previously chaired the House Resources Committee. He knew mining provided numerous benefits to rural Alaska including jobs, infrastructure, income, tax-base, a way to keep people anchored to their lands, and other. He was concerned he had not seen analysis of what the governor's proposed 9 percent tax would do to the benefits of mining in rural Alaska. In absence of the analysis he could not help but be cautious, which meant supporting the amendment. Representative Gara spoke in opposition to the amendment. He stated that at some none of the bills under discussion would be worth passing. Currently there was a profits-based mining tax that had not been changed in approximately 60 years. Companies were given exploration credits to help develop a mine. Additionally, taxes only came in when profits were made. Lastly, the tax only applied to income levels above $100,000 per year. He discussed that at profits above $100,000 to roll back $3.5 million in tax revenue that was needed in a state with a $3.2 billion to $3.7 billion deficit. He continued that every time someone said no to a tax on a profitable industry the money would have to come from somewhere else. He reasoned if it was in the budget the money had to come from somewhere - at times it had come from schools, the university, municipal revenue sharing, seniors, or other. He stated the money would have to come from somewhere if it they did not determine a way to raise it. Alternatively, there were other revenue raising options, which would need to be increased (e.g. a larger Permanent Fund Dividend cut or a larger income tax). At higher profits he believed it was fair to adjust the tax. He furthered that companies were coming to Alaska for its valuable ore. He reiterated the tax only applied if a business was making over $100,000 in profits. 4:06:45 PM Co-Chair Neuman did not believe the state paid mining companies. He detailed there was a "tax holiday" for the first two or three years on new mines. Vice-Chair Saddler stated that in the mining industry he did not believe $100,000 in profits was substantial relative to the investment. He referenced various types of capital investment mining companies made in order to operate. He referred to much discussion about the need to diversify the state's economy away from mining and gas. He reasoned mining was a way to increase diversification. He believed the state needed to do what it could to support the mining industry in Alaska and not use it as a "cash cow." He elaborated mining already provided benefits to the state well in excess of the amount the state spent to regulate it. He did not believe it was the proper place to try to get revenue. 4:08:07 PM Representative Edgmon spoke against the amendment. He stated that if there was ad hoc feel to all of the taxes, all of the criticism the legislature directed at the administration for bringing them forward with not enough analysis, he could equally say there was an ad hoc feel to the amendments being offered. He discussed the net taxable income in 2014 for the six major mines paying 95 percent of the mining taxes was $570 million in total. He reasoned the proposed 9 percent tax would be $7 million - when divided amongst 6 major multi-national companies was not a significant amount of money. Additionally, the companies were able to deduct the state taxes from federal taxes; therefore, they were able to further reduce the $7 million. He addressed the amendment which would reduce the tax from 9 percent to 8 percent, which left him questioning why the committee was "messing around with the tax in the first place." He stated if every tax the state levied was going to be counter to industry investing in Alaska, it should not be levying any increases on the resource-based companies. He reiterated many of the companies were very large. He furthered that as much as his enthusiasm for the previous version of taxes had been dampened (if it ever had been called enthusiasm), he was uncertain he could support the measures if the committee kept chipping away at all of the proposed taxes. He explained the impact of the proposed taxes would go from marginal to negligible. He wondered what the committee was doing messing around with the taxes for the amount of political dust the issues were kicking up. He referred to discussion about the cause and effect relationship between the original taxes the governor had proposed. When the committee decided whether it would report the bills out of committee he would have to look at the issue from an equity standpoint. He currently did not see it. He did not believe there was an analysis to support the amendment, which he believed undermined the whole intentions in the first place. 4:11:20 PM Representative Munoz supported the amendment for a number of reasons. One of her concerns that during the administration's presentation on the bill comparisons had been made with other states, but the states did not have similar hard rock mining operations. She detailed Arizona, Nevada, and Alaska, had similar operations and Alaska was the highest taxing jurisdiction. She discussed that Juneau had two of Alaska's large mines - the Kensington Mine had taken over 20 years to begin operation. She continued that mining was a capital intensive industry and added hundreds of jobs to the state's economy. She believed additional analysis was necessary on what a tax increase from 7 percent to 9 percent would do. 4:12:43 PM Representative Guttenberg spoke in opposition to the amendment. He reported that based on information in the committee packet, the tax had not changed since 1955. He stated it was possible to say it was a 25 percent increase, but it was also a 2 percent increase. In 2014 there were only 14 taxpayers in the bracket (5 of which were the very large mines and the remaining 9 were small and very profitable). He reasoned the tax was profit-based, which companies only paid when profitable. He furthered "mom and pop" companies would only pay an annual license fee if their company earned less than $100,000. He thought increasing the tax by 1 percent after 55 years would do nothing at all. He reasoned that some of the mines were very profitable and he believed it was completely appropriate to implement a 2 percent increase. Representative Wilson countered that it was not a 2 percent tax, but a 29 percent increase. She addressed the state cut. She had asked the Fort Knox mine (in her district) what it paid; the mine had paid $7.6 million to the borough and over $47 million in revenue over the past 10 years - it was the largest property tax payer in the borough. Additionally, the mine had paid $17.1 million in taxes and fees to the state in 2014; $7.3 million in mining license taxes (which accounted for 31 percent of the mining license tax revenue collected by the state); $9.8 million in payments to Alaska Mental Health Trust Authority, the Department of Environmental Conservation, and others; and in 2016 it would pay $8.4 million to the borough. She stressed the amounts were not even part of the discussion. Co-Chair Thompson asked how much the increase would be if the bill was implemented. Representative Wilson answered there would be a 29 percent increase in taxes if the tax was increased from 7 percent to 9 percent. She read from a prepared statement: We've heard from the mining industry this increase would result in deterring new investment in Alaska and will shorten the lives of existing mines. Representative Wilson continued that the 8 percent tax proposal had been vetted in another committee with all the mines participating. She discussed the legislation would impact the industry, but the impact was not known because the legislature had not received a complete analysis. She stressed that any tax increase would have a detrimental impact on the mining industry and would place future investment, jobs, and significant local economic impacts at risk. She emphasized the issue was about more than the state, it was about the state's communities. She was frustrated the committee had not received information about how much state resources were put in. She believed they were merely trying to fill the state's coffers with profits made by the various industries. Co-Chair Thompson WITHDREW his OBJECTION. Vice-Chair Saddler asked to be a cosponsor of Amendment 2 and Amendment 3. 4:17:16 PM AT EASE 4:17:38 PM RECONVENED Representative Guttenberg OBJECTED. A roll call vote was taken on the motion. IN FAVOR: Gattis, Munoz, Pruitt, Saddler, Wilson OPPOSED: Gara, Guttenberg, Kawasaki, Edgmon, Thompson, Neuman The MOTION to adopt Amendment 2 FAILED (5/6). 4:18:30 PM Representative Wilson MOVED to ADOPT Amendment 3, 29- GH2457\A.6 (Glover/Nauman, 5/28/16) (copy on file): Page 3, lines 19 - 23: Delete all material. Renumber the following bill sections accordingly. Page 4, lines 13 - 14: Delete all material. Reletter the following subsection accordingly. Page 4, line 15: Delete "sec. 6" Insert "sec. 5" Page 4, line 17: Delete "sec. 6" Insert "sec. 5" Page 4, line 30: Delete "Section 10" Insert "Section 9" Page 4, line 31: Delete "sec. 11" Insert "sec. 10" Co-Chair Thompson OBJECTED for discussion. Representative Wilson addressed the amendment. She noted a significant amount had been heard related to the issue. She read from a prepared statement: The exemption for new mines is critical as projects look to recoup their investments as quickly as possible and work towards positive cash flow. The more mines that we have open, the faster it will fill our deficit. Representative Gara asked if the amendment gave companies a 3.5-year tax holiday as opposed to the 2-year tax holiday in the bill. Co-Chair Thompson and Representative Wilson answered in the affirmative. Representative Gara opposed the amendment. He stressed the mining tax only applied when profits were made. Additionally, the state offered tax credits to help companies pay for exploration and development (operating and capital costs). Companies received the benefit of state help during development. He added it was not one of the more outrageous tax credits the state had on its books. Co-Chair Thompson asked Representative Gara to clarify what he meant by state help. He explained it had taken Kensington Mine 20 years [to begin operations]. He asked if the state had funded the mine during the entire 20-year period. Representative Gara answered the state paid an exploration credit up to $20 million companies could deduct after they became profitable. The credits could be deducted as long as it took to earn enough profits to the deductions (companies could deduct up to half their profits). After the mine began operations companies were allowed to deduct the costs. 4:21:08 PM Co-Chair Neuman requested to hear from DOR. Mr. Burnett deferred the question to Mr. Spanos. Mr. Spanos asked Co-Chair Neuman to repeat his question. Co-Chair Neuman asked Mr. Spanos to explain the mining tax credits. Mr. Spanos answered that mines were given exploration tax credits of up to $20 million. He detailed that expenses incurred during exploration could be taken over a 15 year-period after a mine began production. Co-Chair Neuman provided a hypothetical situation in which a mine took 10 years to become operational. He asked for verification the mine could deduct up to $20 million over the first 15 years. Mr. Spanos answered that no matter how long a company took to incur the costs (such as 20 years) it had 15 years after production began to take the credit. Co-Chair Thompson asked how the 2-year or 3.5-year tax holiday fit into the 15-year credit deduction process. Mr. Spanos explained that the 3.5-year exemption was currently in statute. He asked if the question pertained to how the tax holiday fit with the 15-year credit deduction period as well. Co-Chair Thompson replied in the affirmative. Mr. Spanos believed companies had 15 years of taxes due. He would have to follow up on the question. Co-Chair Thompson surmised companies would receive a 3-year tax holiday followed by a 15-year period during which they could use their credit deductions. He asked for verification it was a total of 18 years. Mr. Spanos replied that he believed it was how the system worked. He would have to double check, but he believed it included the first 3.5 years. Representative Gara asked for verification that currently larger mines received a 3.5-year tax holiday even if they were making profits. The amendment would maintain the 3.5- year tax holiday, whereas the bill would decrease the tax holiday to a 2-year period. He observed it would not be possible for a company to deduct credits when it was not asked to pay a profits tax. He provided an example where a company started paying for profits in its fourth year of operation and made $40 million. He asked for verification the company could take all $20 million in credits in the first year. Mr. Spanos replied that the credit was limited to one half of a company's net income. He referred to the gross profits tax [Note: audio quality poor]. 4:25:57 PM Representative Gara asked for verification that a company could use the entire $20 million in deductions during its first taxable year if it made $40 million in profits. Mr. Spanos answered in the affirmative. Representative Gara spoke to his opposition to the amendment. He stressed that the tax was profits-based; companies that were not making profits were not taxed. Additionally, under the legislation the state gave companies a 2-year tax holiday even when profitable. He believed it made sense to not tax companies when they were not profitable. He did not support extending the tax holiday to 3.5 years, which he believed was excessive. He wished he received the tax holiday on his income taxes. He thought the 2-year period seemed fair to generous. He stated that the bill raised $7 million and he did not support continuing to whittle away at the amount. He believed the public would have a hard time swallowing that individual Alaskans had to pay for the deficit, while companies received tax holidays. Vice-Chair Saddler spoke in support of the amendment. He reasoned that in order to become profitable, it sometimes took a mineral development company 20 to 30 years. He stated the presumption a company could open up a mine and begin making profits within a year was false. He stated it took many years and significant expense for a company to reach profitability. He stressed that Alaska was built on mining and he believed the land underneath the building may be built on mine tailings [Bill Ray Center, Juneau, Alaska]. He underscored a mine could last for decades when properly built with infrastructure investment. He referred to mines that triggered infrastructure like airports, mills, and other facilities. He believed it was cost-effective to make the investment to find more ore (e.g. Red Dog Mine and others). He opined that shortening the tax holiday was nonsensical. He furthered that shortening the tax holiday to a 2-year period would be like penalizing "a child for not being able to do the work of a grown man." He believed restoring the tax holiday to the 3.5-year period was appropriate. 4:30:20 PM Representative Wilson provided closing remarks on Amendment 3. She read from a prepared statement: The State of Alaska has very few incentives to track mining investment to the state and doing away with this one would tell the industry that we are not open for business. Investment capital is globally in short supply and retaining this exemption will help us remain competitive. If we kill our industry or we have investors go somewhere else, what truly have we gained? Representative Wilson wondered what would happen with every investor who chose to invest in another location besides Alaska. She referred to questions about why the state did not lower some costs because investors were going other places. She stressed the state was rich in resources. She reasoned that it was necessary to ask why investors were not coming. She believed the state should be incentivizing investment. She underscored that the issue was about the state's long-term future. She believed the discussion should be about what the state would look like if industry decided to invest elsewhere. She concluded the state would still receive profits by maintaining the current 3.5-year tax holiday. She hoped the state would stay open for business and would not discourage industry from investing in Alaska. Co-Chair Thompson MAINTAINED his OBJECTION. A roll call vote was taken on the motion to adopt Amendment 3. IN FAVOR: Munoz, Saddler, Wilson OPPOSED: Gara, Guttenberg, Kawasaki, Edgmon, Thompson, Neuman, Pruitt Representative Gattis was absent from the vote. The MOTION to adopt Amendment 3 FAILED (3/7). [Note: The committee later rescinded action on Amendment 3 and re- voted; the amendment passed at that time. See approximately 5:14 p.m. for detail.] 4:33:17 PM AT EASE 4:46:05 PM RECONVENED Representative Gara MOVED to ADOPT Amendment 4, 29- GH2457\A.l (Martin/Nauman, 5/27/16) (copy on file): Page 3, lines 21 - 23: Delete "All new mining operations are exempt from the tax levied by this chapter for two [THREE AND ONE-HALF] years after production begins" Insert "A new mining operation with a net income under (c) of this section of (1) not more than $100,000 is exempt from the tax levied by this chapter for two years after production begins; (2) more than $100,000 shall pay half of the license tax on mining provided in (c) of this section for two [ALL NEW MINING OPERATIONS ARE EXEMPT FROM THE TAX LEVIED BY THIS CHAPTER FOR THREE and ONE-HALF] years after production begins" Co-Chair Thompson OBJECTED for discussion. Representative Gara explained the amendment. He addressed that the mining tax was profits-based. He did not believe anyone wanted to increase taxes on small "mom and pop" mining operations. The amendment would maintain the 2-year tax holiday for businesses making less than $100,000 in profits per year. While businesses making over $100,000 would only pay half the tax rate during the first two years. He thought the state should receive some revenue when companies were profitable. He believed the proposed tax rate in the bill was around 9 percent; the amendment would reduce the tax to around 4.5 percent for profitable companies earning over $100,000 per year. 4:49:02 PM Co-Chair Thompson MAINTAINED his OBJECTION. A roll call vote was taken on the motion. IN FAVOR: Guttenberg, Kawasaki, Gara OPPOSED: Munoz, Pruitt, Saddler, Wilson, Edgmon, Gattis, Neuman, Thompson The MOTION to adopt Amendment 4 FAILED (3/8). 4:49:52 PM Representative Kawasaki MOVED to ADOPT Amendment 5, 29- GH2457\A.3 (Martin/Nauman, 5/27/16) (copy on file): Page 3, line 24, through page 4, line 1: Delete all material and insert: "*Sec. 6. AS 43.65.0lO(c) is repealed and reenacted to read: (c) The license tax on mining is imposed on the net income of the taxpayer from the property in the state, computed with allowable depletion, plus royalty received in connection with mining property in the state. The tax rates applicable to the amount of a taxpayer's net income are as follows: · over $100,000 and not over $250,000: five percent · over $250,000 and not over $500,000: $7,500 plus seven percent of the excess over $250,000 · over $500,000 and not over $1,000,000: $25,000 plus nine percent of the excess over $500,000 · over $1,000,000: $70,000 plus 11 percent of the excess over $1,000,000." Page 4, line 15: Delete "amended" Insert "repealed and reenacted" Co-Chair Thompson OBJECTED for discussion. Representative Kawasaki explained that the amendment sought to change the brackets [related to the tax rates applicable to the amount of a taxpayer's net income]. He detailed the brackets had been established during territorial days (prior to statehood) in 1955 as a way to fairly distribute the burden on mining operations within Alaska. He referenced Section 6, page 3 of the legislation, which showed the original brackets still in statute. He specified that mining companies earning less than $40,000 in profits did not pay a license tax. Mines making between $50,000 and $100,000 paid an assessment of 5 percent and $1,500. He noted the next bracket was for companies earning over $100,000. He reiterated that the brackets had been in place for 60 years. Representative Kawasaki furthered amendment was an attempt to make the brackets fair by adjusting for inflation. The amendment would exempt small mining companies earning below $100,000. The first bracket would apply to companies earning between $100,000 and $250,000; the second bracket applied to companies earning over $250,000 to $500,000; the third bracket applied to companies earning over $500,000 to $1,000,000; and the fourth bracket applied to companies earning $1,000,000 and above. There were roughly two or three mines within each of the first three brackets (the exact number was unknown due to taxpayer confidentiality) and there were 5 mines making over $1,000,000. He believed the amendment was very fair; it removed the unfair burden off small miners and addressed the issue of inflation. 4:52:42 PM Co-Chair Thompson MAINTAINED his OBJECTION to Amendment 5. A roll call vote was taken on the motion. IN FAVOR: Gara, Guttenberg, Kawasaki OPPOSED: Munoz, Pruitt, Saddler, Wilson, Edgmon, Gattis, Thompson, Neuman The MOTION to adopt Amendment 5 FAILED (3/8). Representative Gara MOVED to ADOPT Amendment 6, 29- GH2457\A.2 (Martin/Nauman, 5/27/16) (copy on file): Page 3, line 31, following "$100,000": Insert "and not over $250,000" Page 4, line 1, following "$100,000": Insert new material to read: · over $250,000: $6,000 plus 11 percent of the excess over $250,000 Co-Chair Thompson OBJECTED for discussion. Representative Gara explained the amendment that applied to companies earning over $250,000 per year. He stated it was the kind of money most Alaskans would never see in any year of their lives. The amendment would increase the profits tax rate from 9 percent to 11 percent for companies earning over $250,000. He detailed that the $7 million in projected revenue in DOR's fiscal note primarily came from the large mines making above $250,000 per year. The amendment was likely to raise around $7 million. He noted his business tax for the restaurant he owned appeared in his income tax; he paid a 25 percent tax. He continued a company coming to Alaska to explore for minerals would do so with the exploration credit provided by the state. He did not believe increasing the number to 11 percent would change a company's decision to invest in Alaska if they were profitable. He reasoned the company would get to keep the remaining 89 to 91 percent of their profits. He understood the companies would pay other taxes. He believed the amendment was fair in the time of a fiscal crisis and also when companies paid taxes based on profits. He added he would not propose the amendment on a mining tax if the tax was not profits-based and was imposed on companies losing money. 4:56:42 PM Co-Chair Thompson had heard significant discussion during the current meeting that the mining tax was profits-based. He had heard statements that it was a gross tax and other statements that it was a net tax. He asked for clarification. Mr. Burnett answered that the mining tax was a tax on the margin created by a mining operation, which contributed to the profits of a company. The companies may have other operations; therefore, the tax was not based on the net income of the company, but on the net margin remaining after deducting the costs of mining operation. The tax was based on the margin because it was not profit until other items such as corporate overhead were included. Co-Chair Thompson expressed confusion about the issue. He elaborated that his business of 35 years paid tax on the net profit, which deducted his expenses. Mr. Burnett clarified that the mining tax was based on profit from mining operations after deducting costs of the mining operation. He detailed it was different than the total business profit because a company may have other businesses; it was a subset of a company's business. He explained oil and gas taxes were based on cash flow (money going into and out of a company on an annual basis). Co-Chair Thompson asked what the tax would be called if a company had only one mine. Mr. Burnett answered that it would be a net profits tax. He added the company would pay other local and corporate income taxes. Mr. Alper elaborated that if the company that owned the mine was a corporate tax payer, the state's mining license tax was a deduction from the formula that went into the state corporate income tax. He specified the mining license tax was considered an expense. 4:59:42 PM Representative Gara asked for clarification on the department's testimony. He asked for verification the profits were the profits of an operation, but if parts of the company related to other business aspects (e.g. a second mine in Utah) those pieces of the business were not included in the tax. He surmised the tax aimed to contain the profitability at the specific mine site in Alaska. Mr. Burnett answered in the affirmative. Vice-Chair Saddler asked if the amendment sponsor had any analysis showing the higher tax bracket would not harm the mines in that bracket. Representative Gara replied that logic was the answer. The amendment only applied to companies making profits exceeding $250,000 per year. He did not believe a company would leave Alaska when making over $250,000 because of a 2 percent change in a profits tax. He believed a company would not go to the expense of investing in Alaska unless it found the ore valuable. Vice-Chair Saddler wondered if there was an analysis on the percentage of the net proceeds would amount to. He asked if the logic was based on the idea that it was appropriate to begin taxing a company when it earned profits slightly over the breakeven point. He asked whether $250,000 was a large or small profit for a mining company. Representative Gara answered that he was trying to avoid impacting small mining operations on the margins that may go out of business if taxes were increased. He believed profits of $250,000 or more represented a significant amount of money. He thought if a company was making over $250,000 per year it had the means to contribute to the state's budget deficit with a slight increase in the tax. Otherwise, the revenue would have to come from people with less money, which he was not in favor of. Vice-Chair Saddler remarked that the scale of costs and investments required for a large mine in Alaska was significantly larger than costs for a restaurant in Anchorage. 5:04:03 PM AT EASE 5:04:28 PM RECONVENED Representative Gara countered that restaurants required a significant amount of money to run. Co-Chair Thompson MAINTAINED his OBJECTION to Amendment 6. A roll call vote was taken on the motion. IN FAVOR: Kawasaki, Guttenberg, Gara OPPOSED: Munoz, Pruitt, Saddler, Wilson, Edgmon, Gattis, Neuman, Thompson The MOTION to adopt Amendment 6 FAILED (3/8). 5:05:25 PM Co-Chair Thompson MOVED to ADOPT Amendment 7 29-GH2457\A.4 (Martin/Nauman, 5/28/16) (copy on file): Page 1, line 1, following "credit": Insert "and royalty payments" Page 3, following line 18: Insert a new bill section to read: "*Sec. 5. AS 38.05.150(d) is amended to read: (d) For the privilege of mining or extracting the coal in the land covered by the lease, the lessee (1) shall pay to the state the royalties specified in the lease; the royalties shall be fixed before offering the lease, and shall be effective for a period of not more than 20 years; the royalties shall be not less than five cents a ton of 2,000 pounds; [THE ROYALTY PAYMENT IS SUBJECT TO THE EXPLORATION INCENTIVE CREDIT AUTHORIZED BY AS 27.30;] (2) shall also pay an annual rental, payable at the date of the lease and annually thereafter, on the land or coal deposits covered by the lease, at a rate fixed by the commissioner before offering the lease; the annual rental shall be effective for a period of not more than 20 years; the annual rental shall be not less than 25 cents an acre for the first year of the lease, not less than 50 cents an acre for the second year, third year, fourth year and fifth year, and not less than $1 an acre for each year thereafter during the continuance of the lease; the rental for each year shall be credited against the royalties as they accrue for that year; each lease shall provide that the annual rental payment is subject to adjustment at intervals of not [NO] more than 20 years and adjustments shall be based on the current rates for properties similarly situated." Renumber the following bill sections accordingly. Page 4, following line 5: Insert a new bill section to read: "*Sec. 9. AS 27.30.080 and AS 38.05.212(b)(2) are repealed." Renumber the following bill sections accordingly. Page 4, line 10: Delete "and" Page 4, line 11, following "Act,": Insert "AS 38.05.150(d), as amended by sec. 5 of this Act, and the repeal of AS 27.30.080 and AS 28.05.212(b)(2) by sec. 9 of this Act," Page 4, line 13: Delete "sec. 5" Insert "sec. 6" Page 4, line 14: Delete "sec. 5" Insert "sec. 6" Page 4, line 15: Delete "sec. 6" Insert "sec. 7" Page 4, line 17: Delete "sec. 6" Insert "sec. 7" Page 4, line 30: Delete "Section 10" Insert "Section 12" Page 4, line 31: Delete "sec. 11" Insert "sec. 13" Representative Gara OBJECTED. Co-Chair Thompson explained that the amendment included necessary conforming changes identified by the Department of Labor and Workforce Development. He detailed that AS 27.30.080 should have been repealed because the statute provided that the amount due to the Permanent Fund was to be calculated prior to the application of the credit. The changes in the committee substitute (CS) provided that the credit was no longer applicable against royalty payments. He continued the statute was now inapplicable that the credit could only be applied to tax since only royalty payments went to the Permanent Fund. He continued that the royalty payment subject to the exploration incentive credit authorized under AS 27.30 needed to be deleted from AS 38.05.150(d)(1). Lastly, AS 38.05.212(b)(2) needed to be repealed. He asked members if they wanted to hear from the administration. Representative Gara requested to hear from the administration. Mr. Alper affirmed that Co-Chair Thompson's explanation was accurate. He discussed that the exploration credits could be used to offset the tax, but under current law the credits could also be used to offset royalties. He specified most mines did not pay royalties to the state - mines only paid royalties to the state if they were operating on state land (just like with oil and gas). Under the specific circumstance a mine could use any of the exploration credits to offset their royalties as well. During the regular legislative session there had been an amendment in the House Resources Committee that made the change. He explained the change had been in a standalone bill - the idea the tax credit could no longer be used against royalties. He explained DOR's attorneys had realized there were a couple of loose ends, which were addressed in the amendment. The amendment cleaned up statutory references to the credits and how they interacted with royalties, which maintained the underlying idea that it should not be possible to use the credits against royalty. Representative Wilson pointed to AS 27.30.080, which addressed that amounts due to the Permanent Fund under AS 37.13.010 were to be calculated before the application of a credit extended. She wondered what the amendment had to do with the Permanent Fund. Mr. Alper answered that the Permanent Fund received 25 percent of the royalties for all minerals. He provided a scenario where the state received a royalty from a mine. He explained that if the mine used a credit it needed to be subtracted prior to the calculation of the share that would go to the Permanent Fund. He clarified the section was no longer necessary because the credit was being eliminated. Representative Wilson asked how the amendment would impact the Permanent Fund. Mr. Alper replied with an example. He hypothesized if the state was receiving $1,000 in royalties from a small mine on state land, $250 would go to the Permanent Fund. If the company used an exploration credit that was used to offset its taxes and half its royalty (bringing the royalty down to $500), under current statute the company could pay one- quarter of the $500, which would mean only $125 would go to the Permanent Fund [Note: Mr. Alper subsequently clarified his explanation was incorrect]. The amendment would mean a company would no longer have the ability to subtract a credit from the royalty and would therefore have to pay the percentage of the full $1,000; therefore, the Permanent Fund would receive the full $250. He added if anything, the change would slightly increase the money going into the Permanent Fund principal, but in many circumstances there would be no impact. Co-Chair Neuman asked for verification the Permanent Fund would receive payments before credits were taken off of any taxes due. Mr. Alper asked Representative Wilson to reread the statutory reference she had provided. Representative Wilson read from statute: AS 27.30.080. Relationship to Other Funds. Amounts due the permanent fund under AS 37.13.010 shall be calculated before the application of a credit extended under this chapter. Mr. Alper replied to the question by Co-Chair Neuman. He explained the Permanent Fund received its money first. He detailed that under current law, the Permanent Fund received the 25 percent of the total regardless. He noted his prior example was incorrect. The amendment made a conforming change because there was no longer a circumstance in which there would be a credit to subtract from the royalty. 5:11:52 PM Co-Chair Neuman recapped that the Permanent Fund received its share of the royalty first under current statute. He asked for verification that any credits were applied after the Permanent Fund received its share. Mr. Alper answered in the affirmative. Representative Gara WITHDREW his OBJECTION. There being NO further OBJECTION, Amendment 7 was ADOPTED. Representative Pruitt MOVED to RESCIND the committee's action on Amendment 3. He requested a revote. He relayed he had been absent for the discussion on the amendment and had been confused about which amendment the committee was addressing when he voted earlier. Co-Chair Neuman asked members to be present during the meeting. He stated that if a person missed the vote they missed the vote. Co-Chair Thompson addressed Amendment 3 that would remove the governor's proposal to reduce the existing 3.5-year tax holiday to 2 years. A roll call vote was taken on the motion. IN FAVOR: Munoz, Pruitt, Saddler, Wilson, Gattis, Thompson OPPOSED: Edgmon, Gara, Guttenberg, Kawasaki, Neuman The MOTION to adopt Amendment 3 PASSED (6/5). There being NO further OBJECTION, Amendment 3 was ADOPTED. Representative Wilson understood that Amendment 1 had not been heard because it had been deemed out of place. She understood there was currently a lawsuit related to severance tax, but she hoped that the issue could be considered at another time. She believed it was a major issue that could impact mines throughout the state. Co-Chair Thompson hoped the issue would be settled in the coming year so the committee could address it during the next session. Representative Gara remarked that one committee member had been missing and upon his return the vote had changed by two votes. He was [somewhat facetiously] tempted to ask for a revote on his amendments. HB 4005 was HEARD and HELD in committee for further consideration.