HB 399-CORP. TAX: REMOVE EXEMPTIONS/CREDITS  1:04:59 PM CO-CHAIR JOSEPHSON announced that the first order of business would be HOUSE BILL NO. 399, "An Act disallowing a federal tax credit as a credit against the corporate net income tax; repealing a provision allowing the exclusion of certain royalties accrued or received from foreign corporations for purposes of the corporate net income tax; repealing the reduced rate for the alternative tax on capital gains for corporations; repealing an exemption from filing a return under the corporate net income tax for a corporation engaged in a contract under the Alaska Stranded Gas Development Act; and providing for an effective date." 1:05:02 PM BRODIE ANDERSON, Staff, Representative Neal Foster, Alaska State Legislature, introduced HB 399 on behalf of Representative Foster, co-chair of the House Finance Committee, sponsor. He said HB 399 is the culmination of work to address foregone revenue and to provide the State of Alaska with the ability to potentially capture new revenue. To provide a brief history on how the bill came to be introduced, he noted that in 2014 legislation was passed that required both the Department of Revenue (DOR) and the Legislative Finance Division, Legislative Agencies and Offices, to create a report on indirect expenditures and the amount of foregone revenue not captured by the State of Alaska. The first indirect expenditure report was submitted in 2015 [entitled, "2015 Legislative Finance Indirect Expenditure Report"]. This report identified a list of indirect expenditures within the Department of Revenue that should be terminated. Last year during the fiscal year 2018 (FY18) budget process the House Finance Subcommittee for the Department of Revenue reviewed these indirect expenditures and recommended the House Finance Committee offer legislation that eliminates these indirect expenditures. MR. ANDERSON explained HB 399 would repeal certain credits and exemptions that are recommended for termination in both the 2015 indirect expenditure report and last year's FY18 budget subcommittee. He said the indirect expenditures that would be repealed in [HB] 399 were selected for repeal for the following reasons: the indirect expenditures did not meet legislative intent, had limited or no usage, or their conforming purpose has changed. The following indirect expenditures would be repealed by HB 399: federal tax credits, foreign royalty exclusions, a reduced rate for capital gains, and credit associated with the Alaska Stranded Gas Development Act. According to the fiscal note before the committee, he continued, the combined total of the potential new revenue is up to an estimated $6.9 million. 1:07:43 PM MR. ANDERSON provided a sectional analysis of HB 399. He said Section 1 would amend Alaska Statute (AS) 43.20.021(a) by amending the current section with conforming language that removes the list of federal credits as eligible items against Alaska corporate income tax liability. MR. ANDERSON stated Sections 2 and 3 would amend AS 43.20.145(c) and (d), respectively, by amending those current sections with conforming language in the Affiliated Groups section, removing the reference to the subsection on foreign royalty payments as eligible for Alaska corporate income tax liability. MR. ANDERSON explained Section 4 is the repealer section of the bill. He said this section would repeal the following statutes: AS 43.20.021(c), which is the reduced rate in capital gains; AS 43.20.21(d), which is the eligibility of federal tax credits for Alaska corporate income tax liability; AS 43.20.036(a), which is the eligibility of federal foreign tax credit for Alaska corporate income tax liability; AS 43.20.036(b), which is the eligibility of federal investment credit for Alaska corporate income tax liability; AS 43.20.042, which is the eligibility of federal special industrial incentive investment credit for Alaska corporate income tax liability; AS.43.20.144(g), which is the exemption for Alaska corporate tax liability for entities participating in contracts related to the Alaska Stranded Gas Development Act; AS 43.20.145(g), which is the Stranded Gas Act exclusion; and AS 43.20.145(b)(3), which is the foreign royalty exclusion. MR. ANDERSON said Section 5 is uncodified law, the applicability clauses. Sections 1, 2, 3, and portions of 4 would be subject to the effective date, which is Section 6, and which would add a new section making the effective date for this legislation as January 1, 2019. 1:11:46 PM REPRESENTATIVE BIRCH offered his understanding that the genesis of HB 399 is the indirect expenditure report assessment. He asked what the net result is of this in addition to getting rid of some tax credits. He further asked why [these tax credits] were had in the first place - for example, whether they were incentives or inducements for certain behavior and whether the State of Alaska will lose something by eliminating them. MR. ANDERSON replied that many of the indirect expenditures were created at the time the tax code was created. Many of them were legislative intent to create a specific behavior. Since their creation they maybe haven't lived up to the expectation of inciting that behavior for corporations within Alaska. 1:12:49 PM BRANDON SPANOS, Deputy Director, Tax Division, DOR, stated the 2015 indirect expenditure report tried to answer that specific question on each individual expenditure. The report tried to detail whether the indirect expenditure was meeting what its intent was, if DOR knew what the intent was. He explained the federal tax credits were adopted by reference and they were given a specific rate that was similar to the tax rate prior to adopting [the state's] new structure in 1970. So, basically, corporations were already getting that and [DOR] continued to adopt it. He added he hasn't gone back and listened to those hearings and therefore doesn't know if there were any other specific reasons. REPRESENTATIVE BIRCH inquired whether there has been any consultation with those who would be impacted by this and whether the feedback has been adverse. MR. ANDERSON answered that at this time the only true outreach would be the creation of the 2015 Legislative Finance Indirect Expenditure Report and discussions throughout policy committees and committees to discuss whether indirect expenditures should be removed. Regarding who is impacted, he said DOR did submit a letter. Particularly in 2016, he continued, 273 beneficiaries for a total of $1.4 million participated in claiming federal tax credits against their Alaska corporate income tax liability. 1:15:17 PM REPRESENTATIVE PARISH observed the change in revenue anticipated for the Alaska Stranded Gas Development Act is $0. He requested this be spoken to. MR. SPANOS responded the credits were sunset through statute. He said 1994 was the last date that [companies] could have an expenditure that would create a credit and [companies] could carry it forward no later than 1999. This is really just cleanup language, he continued, in that it would remove credits that no longer exist. REPRESENTATIVE PARISH surmised this part of the bill is what falls under the House Resources Standing Committee's purview. Since this part is just conforming language, he said, he would just as soon pass the bill on to the House Finance Committee. MR. ANDERSON replied that because of the Alaska Stranded Gas Development Act component in HB 399 he was not surprised the bill received a House Resources Standing Committee referral to answer that portion of the question. REPRESENTATIVE PARISH noted the intended purpose of [the foreign royalty exclusion] was to encourage foreign investment in Alaska. However, he said, this exclusion has had the unintended consequence of corporations transferring certain assets like patents to overseas subsidiaries, paying royalties for their use, and then excluding 80 percent of those expenses from income. He asked how much of the total fiscal impact of this portion would be captured by closing this troubling loophole. MR. ANDERSON drew attention to the fiscal note, page 2, change in revenue estimates, item 2 on foreign royalties, and said DOR states it could be a potential of $1.7 million. 1:18:35 PM REPRESENTATIVE PARISH inquired whether it is accurate to say that that suggests the vast majority of these monies are foregone by the state essentially to incentivize domestic companies sending assets overseas or giving them to overseas holding companies and then paying fees for their use. MR. SPANOS responded they could be legitimate royalties and not necessarily a transfer of U.S. assets to gain that benefit; it could be some other asset that was already overseas. Is a multi-national corporation, he said, the corporation pays royalties to a foreign subsidiary or a foreign parent and would receive a benefit of an exclusion of 80 percent of those royalties. It's unusual for a state to take that position, he added. REPRESENTATIVE PARISH asked whether it would be correct to say that it does create a positive incentive for sending such assets overseas. MR. SPANOS answered yes DOR has seen that happen. REPRESENTATIVE BIRCH thanked Mr. Spanos and said he found the information that Mr. Spanos referenced. 1:20:14 PM CO-CHAIR JOSEPHSON opened public testimony on HB 399. 1:20:25 PM MICHAEL WILLIAMS, Revenue Audit Supervisor, Tax Division, Department of Revenue (DOR), at the request of Co-Chair Josephson described his position at DOR. He said he specializes in corporate income tax, so he is the principle party for enforcement of these statutes as they currently exist and would be the principle party for enforcement of these statutes should they change. 1:21:27 PM CO-CHAIR JOSEPHSON closed public testimony after ascertaining no one wished to testify. CO-CHAIR JOSEPHSON held over HB 399.