HB 197 MINERAL EXPLORATION INCENTIVE CREDITS  NEAL MACKINNON, Minerals Commissioner, said he supported HB 197. He said his company makes its living by exploring for properties and then finding another company to come in with the big money it takes to drill and carry it beyond the basic exploration part. Not only do they deal with properties in Alaska, they compete in a world market. They are finding that big companies who have a lot of capital to expend in exploration are going to see more fertile fields in South America. There is some perception that Alaska is not "open for business" and not friendly to mining. HB 197 would have a good psychological affect. This is the critical money, because it is high risk. Another advantage the state would get in return for the credit is data that is developed from the exploration projects, MR. MACKINNON said. KARL HANNEMAN testified on geophysical, geological, aerial mapping recommendations. He said the 1991 Alaska Minerals Commission Report recommended for the first time that the state undertake this geological and geophysical mapping program, because Alaska was recognized as being the least geologically mapped of the 50 states. To market Alaska as an exciting frontier for mineral exploration, a complete and accurate geologic and geophysical data base would send a positive signal to the mining industry that Alaska favors mineral development. Two objectives were outlined, then, he said. The first short-term objective was to attract exploration dollars that would result in private sector economic activity in Alaska - often in rural Alaska. The second objective was to find mines. He said the state has developed a competent staff and a critical amount of work needs to be done each year in order to make an efficient program. SENATOR TAYLOR said he thought if we could increase funding to attract tourists to Alaska by $1 million this year, we should be able to increase the funding by which we determine what mineralization we have here to attract anyone to look at. HB 197 MINERAL EXPLORATION INCENTIVE CREDITS SENATOR LEMAN announced HB 197 to be up for consideration. JOHN WALSH, Legislative Aide to Representative Richard Foster, said HB 197 helps make Alaska as attractive as possible for investment dollars to come in and help us develop our resource potential. Native corporations are going to need to partner-in with professional mining companies and this is a positive way to keep them going. SENATOR LEMAN asked if HB 197 was fairly consistent with the credits. MR. WALSH said that was correct and added that these are the same credits that were in the bill last year, although there is another provision for corporate income tax in the current bill. DEBRA VOGT, Deputy Commissioner, Department of Revenue, said they do have some concerns with HB 197, primarily in the income tax area. She explained that regarding mining, there are two taxes - corporate income tax and the mining license tax. Both taxes are net income taxes, neither tax will tax an activity until it shows a profit. Additionally, the natural resource extraction calculation accounts for exploration costs by bringing those costs forward until the beginning of production and allowing them to be amortized and depleted against income. So every expense that is addressed by this legislation is already deductible under both the mining license tax and the corporate income tax. She agreed with Mr. Walsh that the mining license tax has a three and one-half year tax exemption. The Department of Revenue believes the tax structure for the mining industry in Alaska is pretty fair. Number 260 Any perception that Alaska is not welcoming to the mining industry is just that - a perception. Mining taxes and corporate income tax paid by mining companies in this past year totaled about $300,000. The state is not collecting a lot of money from the mining industry, she said. One of the largest problems the department has with the legislation is with the way it works vis-a-vis the income tax. We have an income tax system that a lot of states use that does not tax based on what you might consider to be your own business sense of profit and loss in this state. When a corporation does business in more than one state, a method has to be found for determining how much of that income was earned in Alaska and how much was earned someplace else. The mining license tax does look only at Alaska activities. The corporate income tax taxes a part of income based on a formula looking at your nationwide activities. It's called the water's edge reporting method which looks at the percentage of sales in Alaska and compares it to the sales everywhere else in the states that you do business. That fraction is then added to the percentage of your property that's in Alaska vs. the property in other states and your payroll in Alaska vs. your payroll everywhere. Those three fractions are added and divided by three; that answer is averaged to come up with one fraction that is applied against your overall United States income to determine the amount of income we say you earned in Alaska for tax purposes. This is not a method used by taxpayers to look at themselves; it is used by taxing authorities and almost every state uses it, because it's a lot simpler than trying to untangle intercorporate affairs of multi-state taxpayers and using separate accounting (which is used with only oil companies). This technique bears no relationship to the concepts presented in HB 197. The bill twice asks the department to relate the income generated by the mining activity to the site of the mine and the idea is that incentives are accumulated for a particular site. Formula apportionment isn't going to tell you how much money the site made. The Knowles Administration is opposed to the legislation, primarily because of the inclusion of AS 43.20 at all and basically the double deduction of being able to deduct the exploration expenses and then later getting a credit for the same expense. The taxpayer will make money from the state for each dollar. SENATOR LEMAN asked her if she had any suggestions that might help accomplish what the prime sponsor wants accomplished. MS. VOGT said she hadn't discussed specific amendments, but certainly taking AS 43.20 out of the legislation would be a great improvement. She said it would also be simple to draft an amendment that would not permit a deduction for the same expenses that were used for a credit. The difficulty is that the deduction part applies to the taxes, not to the royalty and rent parts. The legislation lumps together all the taxes and allows you to take half of the amount against any of liabilities. Number 160 SENATOR LEMAN asked if any mining companies in Alaska were paying corporate income taxes. MS. VOGT said she thought so. She added that the mining definition includes sand and gravel. SENATOR LEMAN asked how Alaska compared with other states for the mining business. MS. VOGT said she didn't know that and offered to bring that information back to him. SENATOR TAYLOR said there are other factors at play, not just tax issues, to make a reputation. He said incentives were given years and years ago. MR. BORREL strongly supported HB 197 as it reads. He thought it would encourage international mining companies. He said they have been working hard to change the perception that Alaska is a difficult place to do business and he thought this would go a long way toward that. He noted that only exploration expenses were addressed in this bill and that there are many other costs involved. Also, he noted that these credits could not be used unless the project goes into production. Part of the reason the State of Alaska has such little income from the mining industry is because there's effectively no mining in the state. The credits are applied against new revenue streams and don't touch existing production. Another aspect is that by far most projects will never become an operating mine, and therefore, most of those expenditures that have been certified will never actually appear as a credit against a project. Another measure of how few projects would have already benefited from this is that there are only three mines in the state that are year-round operating mines that could have qualified for this had it been in place at the time of exploration. MR. BORREL said he thought it was correct that the oil exploration incentives bill that was passed last year has exactly the same language regarding state income tax as this bill has. TAPE 95-46, SIDE A Number 001 MS. VOGT responded that the tax in Title 41 is a tax credit for oil exploration activities and is applicable against AS 43.20, the income tax, but it is not related to the site. It is simply a tax credit up to a cap which is a very specific dollar amount - a total of $5 million per project and a total of $30 million per company taken anywhere. Jules Tileston, Director, Mining and Water Management, said there are two distinct elements of the bill, one dealing with the income tax and the other dealing with rents and royalties. His comments deal only with the rents and royalties. He said the bill has addressed most of his areas of concern on its way through the legislature. The coal industry now pays a 5% adjusted gross value royalty and a $3 per acre rental. Cost for transportation from the mine mouth to the point of sale and for benefication costs are already deductible from the contract sales prices. A mechanism for royalty reduction is available if the coal operation is unprofitable. For that reason, they believe coal should not be included. MR. TILESTON said clarification was needed on page 3, line 9 which addresses a series of things you must do. One of the items is a definite advantage to industry and the public when the credit is actually applied for and implemented that the data used for credit be made available. He recommended after the word, "consultant" on line 9 add "and exploration activity data that will in the future be made available under Section 2(a)" so there is a clear linkage between the provision of the data and the application of the credit. There were additions in the bill that have already been made that provide for identifying the data on an annual basis so there is no confusion of what is available. Their second concern is that the Division operates largely on program receipts from rentals. They are concerned that as the present levels of funding go down, particularly from oil and gas, that deductions may affect their ability to provide continued service at the level they are providing now to the industry. Therefore, they propose that the rental offset not apply for those elements only. Their last concern was with the definition of a site. Most mining companies hold numerous 40-acre mining claims. Some mining leases are also 40-acres in size, but may range up to several thousand acres in size. The rentals change according to whether the claim has been located for five or ten years. The bill should make it clear that it's the area of operation which is only defined at the permit time and that only those exploration credits which have previously been approved that go to that site are the ones that can be used. MR. TILESTON said there was definitely a glimmer of hope from DNR's perspective on this legislation. SENATOR LEMAN asked MS. VOGT if there might be some hope from the Department of Revenue if they put in a cap and deal with the income taxes. MS. VOGT answered there would be from DOR, but she couldn't say about Governor Knowles. SENATOR LEMAN said they would set HB 197 aside for now.