HRES - 03/17/95 HB 197 - MINERAL EXPLORATION INCENTIVE CREDITS Number 576 REPRESENTATIVE RICHARD FOSTER, PRIME SPONSOR, said HB 197 offers an incentive to the mining industry to not only continue their exploration but also possibly expand it. He stated under HB 197, exploration dollars invested in development of a producing mine would be eligible for credit against taxes due as a result of production revenues. If the prospect never advances to the production phase, no credits are released. He explained without tax incentives, current trends will most certainly continue. He added HB 197 is priority one for the Alaska Minerals Commission. He noted HB 197 is the same bill he introduced two years ago, which made its way through the House and Senate and got lost in the last five minutes of adjournment. Number 600 JOHN WALSH, AIDE, REPRESENTATIVE RICHARD FOSTER, stated a variety of issues raised at the last hearing on HB 197 have been reviewed, but the sponsor feels confident in the original bill. He encouraged the committee's endorsement on passing the bill out to the next committee of referral. REPRESENTATIVE VEZEY, CO-SPONSOR, said the purpose of HB 197 is to recognize that mining is a very risky and capital intensive endeavor. He stated the purpose of HB 197 is to recognize there is a need to change the state policy to one where the state does not try to collect revenue off of those who are willing to take risks, explore, and attempt to develop. With HB 197, the state will move its desire to collect revenues over into the production phase and will take risks with entrepreneurs, trying to encourage them to risk their capital and expertise to develop Alaska's resources. Number 619 CO-CHAIRMAN GREEN noted there is a fiscal note from the Department of Natural Resources (DNR) attached to HB 197 for a modest amount out of the general fund. He said the concept of HB 197 is that unless the mine actually becomes a productive entity to the state, there will not be any granting of anything the state would not otherwise have. He expressed concern that a fiscal note is attached to HB 197 which many might view as a deterrent because it is general fund spending in an atmosphere of a desire to cut costs. He wondered if there should be more mention made that what HB 197 provides would significantly more than offset costs if the mine proves up. REPRESENTATIVE VEZEY stated he had not seen the DNR fiscal note previously. He said it is highly speculative. There may be a little disruption in the cash flow for a year or two while the system is being changed. He stressed the idea in HB 197 is to increase revenues to the state, not to decrease revenues or raise the costs of running state government. MR. WALSH stated there are two fiscal notes attached to HB 197--one from DNR and one from the Department of Revenue (DOR). He noted the fiscal note from DNR has a $62,000 personal services cost which is projected out for the next five years. He pointed out that beginning in fiscal year 1999, DNR estimates a beginning of a loss of revenue would occur but he stressed that is speculative, it assumes there is a producing mine in place and the state is getting less revenue than it would have if that mine had not been there. He added hopefully, the incentive is what caused the mining company to come to the state in the first place. MR. WALSH said the actual costs of the DNR staff is an interpretation on their part as to how to mechanically implement the program. He stated there are two schools of thought. A company could go exploring and not tell the state, discover the ore body, work with the private land holder, get the mine going and then come to the state to talk about the credit, showing records from the exploration history. In the meantime, there would be no need for DNR staff. He explained the other option is what the DNR suggests. Annually, those who are exploring should be checking in with DNR and DNR would be tracking them in the event they ever do come in and ask for a production credit. In that case, the department suggests they would have a staff and a fiscal impact. MR. WALSH recalled that Steve Borell, Executive Director, Alaska Mining Association, stated in a hearing last week that the process would be much simpler and the burden should come to the one requesting the credit, and to the satisfaction of the commissioner, those credits would be applied at the time they actually come in. He said it may be that a person never comes back with a producing mine and did not spend a lot of time in the bureaucracy, talking about potential credits and potential production. That person might rather spend time pursuing the ore body, develop it and then if it goes into production, reduce their tax impacts by going back and recouping the credits. TAPE 95-35, SIDE B Number 000 CO-CHAIRMAN GREEN thought there was a requirement that on land granted for mining, there has to be an annual showing of a minimum of expenditure to maintain the lease. MR. WALSH responded if the land is state or federal lands, assessment work has to be completed, or in the state situation, by paying an annual rental. He added if the land is private sector land, there is no obligation to do an annual assessment. Number 025 REPRESENTATIVE VEZEY noted that Alaska's corporate income tax had not entered into the discussion. He said since the majority of mining exploration and development is very capital intensive, it is usually done by corporations. He stressed should a corporation ever become profitable, the state collects a 9.5 percent income tax. CO-CHAIRMAN GREEN clarified what is contained in HB 197 will be available to a mom and pop operation also. MR. WALSH replied yes. He added a mom and pop operation would have to define when exploration stopped and when the production began. He noted that most mom and pop operations are producing at the same time they are exploring. He said practically speaking, HB 197 pertains to large...where the ore body has to be defined, which involves very high costs, or there is significant scientific exploration ongoing prior to anyone talking about building a road to the port, etc. He felt in the industry, there is a clear separation between exploration and actual production. MR. WALSH stressed the credit can go against corporate income taxes as does the oil and gas incentive bill passed recently by the legislature. He noted there are numerous support letters in committee member folders from industry and Native corporations who have massive land holdings but have limited geologic expertise on staff and do not have the ability to launch into major exploration. The sponsor feels HB 197 will be a significant incentive for partnership arrangements with multi-national companies who can then bring in the expertise and develop properties which are otherwise dormant, helping the state to get off its dependence on oil. Number 096 REPRESENTATIVE DAVIES felt it will be incumbent upon the department, should HB 197 pass, to promulgate some very clear regulations as to what a mom and pop operation has to do in order to eventually qualify for these credits. He said it is important to make it very clear so the state does not get embroiled in a bunch of lawsuits later on. He agreed that the burden needs to be on the person making the claim to keep adequate records, but the state needs to tell that person up-front what adequate means. He noted to that extent, it is reasonable the department would have some expense in the first year to develop those regulations and get them through the process. REPRESENTATIVE VEZEY said he has observed over and over again in state government, the duplication of efforts of other agencies, particularly the federal government. He stated mining has been subject to income taxes since 1913 and noted there are pages and pages of Internal Revenue Service regulations governing mining--how to handle exploration expenses, how to handle development expenses, how to handle production expenses. He stressed for the state to reinvent that wheel would be ludicrous and would be grounds to take some state bureaucrat and remove him from office. Number 144 REPRESENTATIVE DAVIES maintained that even if all those regulations exist in some federal register, it still is going to require that someone take a significant amount of time to select those regulations the state wants to apply, modify them in the way desired to apply to the state of Alaska and then to go through the public process of implementing those regulations. He felt a little money spent up-front to do that process right will save the state a lot of money downstream in having arguments about what the state meant and did not mean. CO-CHAIRMAN GREEN asked if company A spends X number of dollars that would qualify for a credit and does not formulate an existing mine and company B comes along, either in the same mine or a different mine and buys up those credits, is there anything in that vein in view. MR. WALSH replied the credit can be transferred with the property. He pointed out that on page 3, line 15, number (2) mentions for the purposes described in AS 27.30.010(b), the credits may be assigned to the applicant's successor. CO-CHAIRMAN GREEN noted in some cases where tax credits are sold, there is no intent for that either now or in the future. MR. WALSH clarified he was asking about separating the credit from the property. CO-CHAIRMAN GREEN said yes. MR. WALSH stated he did not believe that is the intent of HB 197. REPRESENTATIVE VEZEY said although he could be wrong about the interpretation, if a person invested capital in exploration and perhaps in development, and then sold that work, they would have income. They could choose to use their credit against that income or they could choose to sell the investment credit which went with it and turn their rights over. He noted when there is a transfer of property right, there is income to one person and an investment by the other. Number 199 CO-CHAIRMAN GREEN said company A invests $1 million in an area and sells that area to company B for $500,000 and then takes that credit against what they spent on a tax purpose basis. He asked does that amount of costs track with the property, so company B does not get another $1 million, but gets the balance between $1 million and what was taken by company A. DAVID ROGERS, REPRESENTATIVE, COUNCIL OF ALASKA PRODUCERS, responded that point is not clear. He said the transfer has to be related to the site so the successor in interest who purchased the credit can only use the credit if the credit is used against production from that site. He noted the specific language is "may be assigned by the qualified applicant to the applicant's successor in interest for the site at which the exploration activities occur..." MR. ROGERS stated in terms of how much of the credit a person gets, he believed the only credit which applies, and it is not clear in HB 197, is the credit which was accrued, not any additional premium paid for purchasing the credits. For example, if person A spends $100,000 and sells that credit to person B, person B gets a credit for $100,000. If person A sells the credit for $150,000, person B still only gets a credit for $100,000. REPRESENTATIVE DAVIES clarified if $100,000 is spent, the person only gets $50,000 credit. MR. ROGERS responded no, the person gets the full credit but can only take one-half of the credit per year. He said the credit is limited to 50 percent of a person's combined tax royalty obligations per year, but that person gets 100 percent of the expenditure. CO-CHAIRMAN GREEN said, "the question is though if in that case you gave, you then get money from me and that is reportable income that you take a credit against this money which was spent or does that all track to the new purchaser?" MR. ROGERS responded he does not get the credit anymore, the new guy gets the credit. He noted a separate question is how his receipt of the income for that credit relates to his income tax obligations. He stated the credit transfers to the next guy who then takes it against taxes and royalties relating to production from the site. MR. ROGERS clarified a person is not going to be able to use the credit until he has income from the site. For example, person A does exploration, sells person B the credit, person B goes into production and takes that credit off his tax obligation. MR. ROGERS said in regard to the individual who sells the credit, that is income to that person and has to be reported as such. CO-CHAIRMAN GREEN clarified that person cannot use the credit. MR. ROGERS responded no. MR. WALSH stated the transfer of the title of the property would be the extinguishing of access to a credit. He said the buyer would buy that property with an element of credit in it. He stressed there has to be production and income in order to receive the credit. He pointed out that much of the money spent may not turn into a credit but the money will be spent in the economy and will provide jobs. MR. ROGERS added that in talking with people in other states, it is felt HB 197 just might work. Number 268 CO-CHAIRMAN GREEN wondered if company A spends a lot of money acquiring permits, will those costs be deductible. MR. ROGERS responded it is not clear and that still is an issue. He felt that to the extent the money was spent towards getting permits necessary for exploration activities, it would qualify for a credit.