CS FOR SENATE BILL NO. 112(TRA) "An Act increasing the motor fuel tax; repealing the special tax rates on blended fuels; removing the motor fuel tax exemption of the Alaska Railroad; relating to tax refunds for government agency purchases of fuel; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken informed that the Department of Revenue would be presenting testimony on this legislation on behalf of the Governor. He communicated that this legislation would increase the State's highway motor fuel tax from eight cents a gallon to twenty cents a gallon and would eliminate the motor fuel tax currently charged for gasohol. He explained that the version before the Committee, CS SB 112 (TRA), Version 23-GS1118\, contains the language submitted by the Governor as well as additional language pertaining to the Alaska Railroad. LANDA BAILY, Special Assistant and Legislative Liaison, Office of the Commissioner, Department of Revenue verified that Version "U" includes language that would exempt the Alaska Railroad from the motor fuel tax. She communicated that Governor Frank Murkowski and Commissioner Bill Corbus of the Department of Revenue support this legislation. SFC 03 # 80, Side B 06:08 PM Ms. Baily explained that this legislation would increase the motor fuel tax from the current eight cents per gallon to 20-cents per gallon. She continued that, even with this increase, Alaska would rank below the national average of 23-cents for excise tax rates on highway motor fuel. She stated that twenty-two states have tax rates exceeding this amount and that thirty-five states have combined state and local tax rates that range from 21 to 38.70 cents per gallon. She shared that the Governor urges the Committee "to agree with him" that this tax increase "would be a viable method of generating critically needed, re-occurring revenue." She commented that the Department of Revenue estimates that this legislation would provide $41.16 million in additional State revenue per fiscal year. She clarified that rather than $41.16 million, it is estimated that the additional revenue collected in FY 04 would be approximately $37.7 million "because taxes are paid one month after sales." She further explained that although the tax might be effective as of July 1, 2003, the tax collected in July would be for the status quo tax rate on June 2003 sales. Ms. Baily continued that the off-highway motor fuel tax would increase from six-cents to 18-cents per gallon. She reminded the Committee that this is the first adjustment to this tax rate since it was enacted in 1970. She stressed that the Department of Revenue could efficiently administer the increased motor fuel tax. On behalf of the Governor and the Department of Revenue, she urged the Committee to adopt this legislation. Senator Bunde stated that there has been discussion regarding a phased implementation of this tax. Other than a reduction in the estimated level of additional revenue, he asked what ramifications a phased-in tax increase might incur. Ms. Baily replied that a phased in program would create a problem in that the Governor has requested the enactment of this legislation in order to assist the State in addressing its fiscal gap. Senator Hoffman asked when the aviation fuel tax was last adjusted. Ms. Baily stated that this information would be supplied to the Committee. JOHN MACKINNON, Deputy Commissioner of Highways & Public Facilities, Department of Transportation and Public Facilities conveyed that the Department "is in full support" of this legislation. He shared that, currently, the Department spends approximately $60 million in general funds to address statewide highway and airport maintenance needs. He specified that the current tax generates $28 million annually toward highway maintenance and that the 12-cents per gallon increase would generate an additional $41 million annually. He noted that, while the total exceeds the current maintenance expenditures, the amount in excess of current expenditures would be used to address "the long list of deferred maintenance projects" that currently amounts to $50 million. Senator Bunde asked the amount of funds that would be specifically designated for highway maintenance needs as opposed to the total projected amount that includes both highway and airport maintenance. Mr. MacKinnon specified that the amount that would be spent on airport maintenance would be: four million dollars in the Northern Region; three million dollars in the Central Region; and approximately one million dollars in the Southeast Region. He noted that these amounts do not include international airport funding. Co-Chair Wilken noted that the Alaska Railroad taxation issue is addressed in Sec. 4, subsection (a) on page 4, lines 19-21 and in Sec 7, subsection (G) on page 5, lines 25 and 26. He referred the Committee to accompanying information provided by the Alaska Railroad Corporation titled "Reasons Against Taxing Alaska's State Railroad," [copy on file] as well as a Memorandum dated May 6, 2003 from Kathryn Kurtz, Legislative Counsel to Senator John Cowdery [copy on file]. JOHN BINKLEY, Chairman of the Board, Alaska Railroad Corporation, Department of Community and Economic Development, testified via teleconference from an offnet site in Fairbanks, to voice concern regarding a provision in the Senate Transportation Committee committee substitute that would include "the Alaska Railroad into the same category as the highway motor fuel users" by implementing the twenty cent per gallon fuel tax "on all of the rolling stock of the Alaska Railroad." He voiced concern about the resulting legal and policy issues that might result. Mr. Binkley stated that language in this bill could invoke a legal challenge by violating the federal Railroad Revitalization and Regulatory Reform Act, referred to as the 4-R Act that was established in 1976. He explained that this Act prohibits a state from imposing a tax relating to competitive fuel taxes "that discriminates against a railroad." In addition, he stated that a federal provision in the Alaska Railroad Transfer Act, that was enacted when the federally owned railroad was transferred to the State, mandates that the State maintain a viable railroad transportation system to ensure that it would be available for military and other uses. He stated that this provision prohibits the State from taking money away from the railroad as opposed to allowing the railroad to utilize its revenues for railroad operations. Mr. Binkley furthered that "on the policy standpoint, the State should not tax itself," as he attested the railroad is owned by the people of the State. He voiced that "the lifeblood of the Alaska Railroad" is to utilize railroad capital to expand its lines. He stated that the source of the railroad's capital is its net earnings, and he advised, "if you don't invest capital back into the asset, you don't exist." Mr. Binkley referred to separate legislation being considered that would provide for expansion of the railroad. He attested that, while the Alaska Railroad supports expansion of its service areas, it would be "extremely costly." He asserted that, were the Alaska Railroad's net earnings to lower, the railroad would not be able to expand. He noted that the Fairbanks North Star Borough Assembly is on record in opposition to the taxation language in the bill regarding the Alaska Railroad. Senator Bunde voiced understanding of the Railroad's concern about taxation on its rolling stock. He asked for further information regarding the Alaska Railroad's motor fleet, specifically whether the motor fleet fuel is purchased from a private entity and is subject to the highway motor fuel tax. Mr. Binkley replied that the Alaska Railroad does pay the motor fuel tax for its vehicles using the State's highway system. Furthermore, he noted that while the Alaska Railroad could request a refund of that current highway motor fuel tax that it pays, it has declined to do so. Co-Chair Wilken voiced the intent to hold this bill in order to entertain a committee substitute that would exclude the Railroad from taxation. However, he voiced support for the establishment of a dividend program whereby the Alaska Railroad would contribute funding to the State to support its expansion plans. He voiced the belief that this could be implemented without damaging the Alaska Railroad. He suggested that implementation of a ten-dollar user fee could fund the contribution, which he calculated could amount to approximately four million dollars based on current ridership numbers. He encouraged the Alaska Railroad to address instituting a dividend program, as he asserted, "it is the right thing to do and it could be done without damaging our Railroad." Mr. Binkley voiced that this is a legitimate public policy issue, and he asked that the legislature provide the Railroad "with the forum" to address the Dividend issue. Co-Chair Green asked whether the original bill, SB 112, Version 23- GS1118\A, would adequately address some of the concerns raised by the Version 23-GS1118\U committee substitute. KEVIN JARDELL, Assistant Commissioner, Department of Administration, communicated that, in addition to eliminating the motor fuel tax exemption for the Alaska Railroad, the Version "U" committee substitute would authorize the "recoupement of fees" through the use of a State credit card system. Senator Taylor asked whether use of the State credit card would be limited to the Department of Transportation and Public Facilities. Mr. Jardell clarified that primarily the Department of Transportation and Public Facilities employees would use the credit card for fuel purchases. He explained that the credit card would enable a State employee to purchase fuel, including the motor fuel tax, from a retailer. He continued that the credit card company would compute the amount paid toward fuel tax fees and request the State to reimburse them that amount. Mr. Jardell qualified that currently a fuel retailer is required to pay the motor fuel tax to the wholesaler at the time of purchase, and in turn, the wholesaler pays the State. He continued that one of two things currently occurs at the time a State employee purchases fuel from the retailer: one, they can pay the motor fuel tax; or, two, if a contract is in effect with the retailer, no tax is collected. In that latter case, he explained, the retailer must submit a statement to the Department of Revenue asking that the tax paid to the wholesaler be returned. He stated that current statute designates that a retailer could only recoup the paid tax. He stated that the amendment adopted in the Senate Transportation committee substitute, Version "U" would allow the credit card company to be able to recoup the sales tax paid for the fuel, but for which the State would not pay them. Senator Taylor stated therefore that the amendment would allow the State to reimburse either a retailer or the credit card company for the motor fuel tax paid. Mr. Jardell concurred. He stated that the credit card could be used at any retailer. Co-chair Wilken ordered the bill to be HELD in Committee.