SENATE BILL NO. 308 "An Act relating to certain passenger vessels operating in the marine waters of the state." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Parnell moved to adopt CS SB 308, 1-LS1617\D as a workdraft. There was no objection and the committee substitute was ADOPTED. JOE GELDHOF, Juneau Attorney, retained by the legislature to advise on constitutional issues relating to a tax on the cruise ship industry, explained the committee substitute. Mr. Geldhof told the Committee a proposed tax is contained in Section 1 of the committee substitute. He said this tax is simple and strait forward on passengers who come to Alaska in commercial cruise ships. Mr. Geldhof noted there are some legal concerns, such as an equal protection issue related to an exemption for vessels that have less than 50 berths. However, in his opinion, there is no problem with equal protection. He stated this is because the legislature has discretion to set certain standards and that this exemption is well within that constitutional authority. Mr. Geldhof explained the liability for payment of this tax falls on the vessels that are engaged in commercial activities within Alaskan waters. In that sense, he surmised this is a self-executing tax the operators collect on behalf or from the passengers and pay to the Department of Revenue. Mr. Geldhof pointed out that this legislation avoids some of the difficulties under the "nearly archaic and perhaps almost dead" tonnage clause in the US Constitution, since the tax is not related to the length or the weight of a vessel. He explained that under the clause, any revenues generated under a tonnage tax must be used to fund services, such as fireboats, that are directly related to the marine trade. Mr. Geldhof described how revenues generated by the tax proposed in this bill would be deposited into the general fund and would pre-empt municipalities and other local governments from engaging in other passenger head taxes. In this sense, he said, the state tax is rationalized because the industry is not subject to multiple tax schemes at different rates. Mr. Geldhof continued that this bill provides that the Department of Revenue directs a portion of the collected taxes to the affected communities where the cruise ships visited. Co-Chair Torgerson clarified that of the total tax collected for each passenger, $5 is given to the first five ports of call. Mr. Geldhof affirmed and emphasized that this legislation also places a prohibition on local levies. Co-Chair Torgerson wanted to know if the municipalities are also blocked from imposing a wharfing or docking fee. Mr. Geldhof answered the bill would not restrict municipal fees for those activities relating to providing a service, such as delivering water. Co-Chair Torgerson asked if this legislation would prohibit a municipality from charging a disembarking tax. Mr. Geldhof responded that there are a variety of different ways to describe this type of charge, such as fees, taxes, embarkation, disembarkation, etc. but that "a tax is a tax." He stated that this legislation creates the state tax and prohibits municipalities from imposing a similar charge although a portion of the revenues would be shared with those municipalities. Mr. Geldhof next addressed the definitions prescribed in the bill. He said the intent is to enact this legislation directed at the large cruise ships that travel in Alaska. He noted that the language specifically exempts dayboats and the small vessels that have 50 berths or less. Mr. Geldhof shared that an argument could be made that the vessel size stipulations violate the US Commerce clause, but countered that no violation is committed so long as favor is not granted to local commerce. He commented that legislatures repeatedly get into trouble when they try to favor local commerce over businesses from other states. Co-Chair Torgerson said the remainder of the bill, beginning on page three, addresses environmental concerns and provide record keeping requirements and emissions. Mr. Geldhof affirmed but stated that he was not knowledgeable on this portion of the bill. Senator Phillips asked how much revenue this tax would generate. Mr. Geldhof responded that although a fiscal note had not yet been prepared, he knew that approximately 600,000 passengers passed through Juneau, which is the largest port of call in the state. Senator Phillips asked if $30 million was the approximate amount that this tax would collect. Mr. Geldhof replied that amount is a useful approximate figure. Co-Chair Torgerson clarified that the legislation imposes a $50 fee per passenger per voyage. He continued that the first five ports the vessel visits would receive $5 each from the $50. Mr. Geldhof affirmed. Co-Chair Torgerson asked if some vessels visited less than five ports would the tax remain $50. Mr. Geldhof said the tax would be the same amount regardless of the number of stops a vessel makes. He explained this bill puts an excise tax on the commodity of Alaska. He stressed that the cruise ship is responsible to pay the $50 tax even if the vessel begins its voyage in Canada, travels directly to Glacier Bay without making any ports of call. However, he noted that no municipality would receive a $5 portion of that fee. He explained that the state is still "selling the water." Amendment #1: This amendment makes the following changes to the committee substitute. Page 1, line 4 Insert new bill sections to read: Sec. 1. AS 43.20 is amended to read: Sec. 43.20.021. Internal Revenue Code adopted by reference. (a) Sections 26 U.S.C. 1 - 1399 and 6001 - 7872 (Internal Revenue Code) as amended, are adopted by reference as part of this chapter. These portions of the Internal Revenue Code have full force and effect under this chapter unless excepted to or modified by other provisions of this chapter. (However, nothing in this chapter or in AS 43.19 {multistate tax compact} may be construed as an exception to or modification of 26 U.S.C. 883.) Sec. 43.20.074. All business income of a taxpayer engaged in the cruise ship industry derived from gambling operations and activities as allowed by federal law in the State Of Alaska shall be taxed at the rate of 2% of the gross revenues of the gambling operations and activities conducted in Alaska. Renumber following sections accordingly. Senator Adams moved for adoption. Co-Chair Torgerson objected. Senator Adams explained this amendment allows the cruise ship industry an opportunity to provide an "entertainment donation" by imposing a tax on the proceeds of gambling operations conducted on board ships. He spoke to the well- defined restrictions on gambling in Alaska except for the unknown amount of gambling done aboard cruise ships traveling in state waters. He told the Committee how the US Congress allowed gambling in Alaska waters at the request of the cruise ship industry. He was concerned about the federal government's interjection on this matter saying it raises issues about state sovereignty since congress authorized an activity that the state does not endorse. He thought it important that the state extract a small portion of the wealth generated by gambling within the state's waters that otherwise goes to foreign-owned corporations. Senator Adams continued that funds collected could be used for future cleanup of oil spills or other pollution damage or perhaps to fund ports and harbor facilities. He reminded the Committee that this issue was considered in 1998 at which time it was estimated this tax would generate between $3 to $8.5 million. However, he pointed out that with the increase in cruise ship activity the minimum amount collected would be $8.5 million. A roll call was taken on the motion. IN FAVOR: Senator Phillips, Senator Leman, Senator Adams, OPPOSED: Senator Wilken, Senator P. Kelly, Senator Green, Co-Chair Parnell and Co-Chair Torgerson ABSENT: Senator Donley The motion FAILED (3-5-1) The amendment FAILED to be adopted. Amendment #2: This amendment changes the title of the committee substitute and adds a new bill section as follows. Page 1, line 1 Delete: "An Act relating to certain passenger vessels operating in the marine waters of the state." Insert: "An Act relating to certain vessels operating in the marine waters of the state." Page 1, line 4 Insert a new bill section to read: Section 1. AS 46.03 is amended by adding a new section to read: Sec. 46.03.072. Exception for certain United States Navy vessels from state marine water quality standards applicable to the discharge of hydrocarbons. (a) Until September 1, 2010 the state's water quality standards, adopted as regulations under authority of AS 46.03.020(10) to effectuate the purposes of this chapter and under authority of other sections of this chapter, establishing limits on the total aqueous hydrocarbons and total aromatic hydrocarbons permissible in the marine water column that are more stringent than the requirements of comparable water quality standards set out in federal law or adopted in federal regulation do not apply to a vessel of the United States Navy operating in the marine waters of the state if the vessel uses a seawater compensation system. (b) Notwithstanding the exemption provided by (a) of this section, a vessel of the United States Navy operating in the marine waters of the state that uses a seawater compensation system may not discharge oil into state waters in violation of 33 U.S.C. 1321 (sec. 311, Federal Water Pollution Control Act, as amended) and regulations adopted under authority of that section. Senator Leman moved for adoption. Co-Chair Torgerson objected for an explanation. Senator Leman explained that current Department of Environmental Conservation regulations require that discharged sea water used by marine vessels for stability contain less than 15 parts per billion hydrocarbons. He stated that this standard is significantly more stringent than federal law, which dictate that no vessel may leave a visible sheen. He said that in recent years, the US Navy has curtailed operations in Alaska because of the strict regulations. He listed the three classes of Navel vessels equipped with seawater compensating systems and saying that this amendment is an opportunity to invite the Navy back to the state. In response to the department's concerns with this amendment, Senator Leman said he found part of the argument compelling. Senator Leman moved to amend the amendment to change the sunset date of the exemption from "2010" to "2005". He said this would provide ample opportunity to conduct the necessary scientific studies to determine if a further extension would be necessary. Without objection the amendment was AMENDED. There was no objection and the amended amendment was ADOPTED. Amendment #3: This amendment adds a new subsection to the committee substitute as follows. Page 2, line 6 Insert: (a) The proceeds from the tax on travel on commercial passenger vessels providing overnight accommodations in the state's marine water shall be deposited in a special commercial vessel passenger tax account in the general fund. The legislature may appropriate money from this account for the purposes described in (b) of this section and for state-owned port and harbor facilities. (b) Senator Phillips moved for adoption and stated this issue is commonly called "a white picket fence approach." He explained it isn't exactly a dedicated fund but does indicate to future legislatures that the money may be appropriated for the purposes of state-owned ports and harbor facilities. He expressed that because the tax is derived from vessels, it is appropriate to use the funds for facilities the vessels use. Co-Chair Parnell asked if this amendment applies only to the portion of the head tax retained by the state and if it in any way circumvents the local government's portion. Senator Phillips surmised that the amendment would not utilize the local portion of the tax because of the word "may" in the language. The amendment was ADOPTED without objection. Amendment #4: This amendment adds an effective date of July 1, 2000 to the legislation. Co-Chair Parnell moved for adoption. Co-Chair Torgerson explained this amendment establishes the effective date of the bill. There was no objection and the amendment was ADOPTED. ROBERT REGIUS, Attorney, spoke in favor of the bill on behalf of the non-profit organization, Cruise Control. He told of his 15 years practicing environmental and natural resources law. He stated that he is pleased with Section 1 and that the state is "stepping up to the plate" to get fair market value for Alaskans of the "experience of a lifetime" that is sold to the hundreds of thousands of visitors. Mr. Regius next addressed Section 2 of the committee substitute emphasizing it is intended to ensure that non- Alaskans take as good of care of the state as local citizens do. He spoke of the other industries, including mining, oil development, municipal water supply, etc, that must provide information about the wastes produced by their operations. He stressed that this section of the bill does not impose performance standards. Co-Chair Parnell offered a motion to report from Committee, CS SB 308, 1-LS1617\D as amended. Senator Adams objected. He stated that he did not know the impact this legislation would have on tourism, and that no fiscal note was presented to show the revenues the tax would generate. A roll call was taken on the motion. IN FAVOR: Senator Green, Senator Phillips, Senator Leman, Senator Wilken, Co-Chair Parnell and Co-Chair Torgerson OPPOSED: Senator Adams, Senator P. Kelly and Senator Donley The motion PASSED (6-3) The bill MOVED from Committee. Senator Phillips asked if a fiscal note would be prepared for this bill. Co-Chair Torgerson answered a fiscal note would be available before the Senate body hears the bill. AT EASE 10:21 PM / 10:22 PM