SB 52 FISHERIES BUSINESS TAX CREDITS CHAIRMAN HALFORD called the Senate Resources Committee meeting to order at 5:00 p.m. and announced SB 52 to be up for consideration. SENATOR MACKIE, sponsor, said he introduced SB 52 to bring some economic stability and growth to Alaska's commercial fisheries industry through developing incentives that increase operational efficiencies, improve product quality, or bring new products to market. Business tax credits of up to 50% of a company's tax liability for any capital investments for shore based facilities can achieve these goals. He said his bill is modeled after a similar program that was in effect from 1986 to 1991 and was largely responsible for large investments in processing quality control in facilities throughout the State. It is also credited with stimulating Alaskan participation and expansion into the harvesting, processing, and marketing of new bottom fisheries. The Alaskan fisheries industry needs a boost to improve the marketability of its traditional fishery products and to introduce new, value added products that appeal to consumers worldwide. This will require large investments in new and better equipment. He felt that the tax incentive program is the way to accomplish these improvements in the most direct and efficient manner. The benefits will accrue to both resident commercial fishermen as well as the processing labor force through increased fishing opportunities and increased processing jobs. SENATOR MACKIE said in recent years they had done incentives for the mining industry and oil industry and now is an opportune time for the legislature to step up to the plate and do something for the commercial fishing industry which is the State's largest employer. He said he thought the salmon industry is the one that needs the most help to try to diversify, but it costs money. Number 151 SENATOR TAYLOR said he had a proposed CS to SB 52 to discuss. He explained that the only change is that they propose the inclusion of the emerging fisheries and the removal of 1% tax on the emerging fisheries. This would last only so long as they are classed as such and when the Commissioner of ADF&G made the determination that they were no longer an emerging commercial fishery, they would fall within the 3% tax. He said the loss of revenue would be about $50,000 per year. SENATOR MACKIE said he didn't object to what Senator Taylor is trying to achieve as their districts are currently receiving the benefits of the sea urchin fishery which would be classified as an emerging fishery. He said this fishery alone has produced about 400 jobs, although seasonal, which helps the 500 lost in timber. SENATOR TAYLOR added that there is also a geoduck and squid fishery. There was even experimental work done on octopus. SENATOR TAYLOR moved to adopt the CS to SB 52. CHAIRMAN HALFORD said he objected beause they just got it. He wanted to leave it on the table for discussion. Number 151 MR. JEFF BUSH, Deputy Commissioner, Department of Commerce, said they support SB 52, but would prefer that the tax credit be more limited because they see the problem in the salmon sector of the industry. He said they totally concur that the first go-round on this type of tax credit several years ago was quite successful creating a great ground fish industry in western Alaska. However, that industry is arguably overcapitalized already. Recognizing the fiscal difficulties of a bill like this, they recommend it be more limited. Number 189 MR. BUSH said the Department of Law has indicated that there's a legal issue with this bill. He said he thought that if any tax credit granted to the fisheries business tax to be constitutional, it also has to be granted to the landing tax. Without granting it to the landing tax raises constitutional questions related to interstate commerce. SENATOR MACKIE said he didn't necessarily recommend limiting the scope because he knows the salmon industry needs help right now, but there are other species out there that are developing in the bottom fish industry as well, like the arrow tooth flounder. He understands that there is new technology that's needed to make that particular fishery real viable. SENATOR MACKIE said they were made aware earlier about the problem the Department of Law has and he has chosen not to deal with it right now because it deals with off shore processors. His bill deals with shore based as he is trying to encourage incentives and find opportunities for our shore based facilities that generate local tax revenues in many different forms and employment in our local communities. He thought they could get away from the landing tax by doing it with a business tax credit. SENATOR TAYLOR said that he was informed yesterday by the American Factory Trawlers Association that they are in the process of dismissing the suit the bill was based upon. SENATOR LINCOLN asked what the Department of Law opinion was based upon. MR. BOB BARTHOLOMEW, Division of Income and Excise Audit, responded to the legal question saying when the landing tax was passed in 1994, the basis of that tax was to be a complimentary tax to the fishery business. The off shore fleet was receiving the benefits of the State of Alaska and it was determined by the legislature that they should be paying tax to Alaska also. Last year the legislature passed a bill that helped in the litigation which was to mirror the two programs. The Department of Law is merely saying that if you are going to change the program for the fishery business tax, you need to be consistent. They are basically a complimentary tax trying to tax the same business activity. CHAIRMAN HALFORD asked if he meant regardless of whether we are in court at any given time, we are vulnerable to attack if we create a credit for the people we like unless we give the credit to the people we don't like as much. MR. BARTHOLOMEW responded that they have to treat everybody equally. SENATOR MACKIE responded that they pass things all the time that people are telling them they are going to get sued over. This is a business tax credit for our shore based facilities that are providing jobs and economics to the communities. He voted for the landing tax so the factory trawlers would have to pay for some of their impacts, but for us to have to pay them back money so they can fix up their factory trawlers and hire more out of State people and take off and run with the money is not something he wants. He wants to find a way they can do this and not figure out how we have to cave in to them. MR. BARTHOLOMEW said from a fiscal stand point currently the tax generates about $38 million per year and is projected to drop to close to $30 million in the next two years because of the impact on salmon, primarily. Fifty percent of the tax is shared. This legislation would not affect the sharing provisions and would just focus on the State's revenue. He said the fiscal note shows a projected potential revenue loss of $7 - $14 millon. He explained that with tax credits you are generally trying to change behavior and the more specific you can be with your objectives or what you are offering credits for, the more likely you are to have a successful program. He thought they should consider narrowing the application to species of salmon as in the Governor's bill. It also narrows the type of expenditures that qualified to specific activities to value added processing. SENATOR TAYLOR asked if he objected to deletion of the 1% developing fisheries species tax during the period of time it was a developing fishery. MR. BARTHOLOMEW replied that the fiscal impact is small, around $50,000 - $80,000. He added that when the legislature passed the developing fisheries species, they originally recognized the need for an incentive. That is why the current rate is set at 1% instead of the on shore rate of 3% or the off shore rate of five percent. So there is an incentive now and that's why the revenue is small. There are other individuals looking at revenues from the developing species to fund management to expand them. This might affect those by not producing any revenue. SENATOR MACKIE said this is not as wide open as it might sound. An agreement has to be negotiated about what is going to be accomplished and details have to be in effect in advance of any action. In terms of the potential impact, if there's going to be $30 million in tax receipts, then the potential maximum would be $15 million; but that was if every single dollar that was eligible took advantage of it. Traditionally there's been half or less of what was potentially available that were actually utilized. So he thought they were getting down to $5 or $6 million. He also thought the overall impact to the State was totally dependent on fish prices. Number 375 CHAIRMAN HALFORD asked what the department's estimate of the range of cost was over the period of the bill. Is it $36 million - $72 million? MR. BARTHOLOMEW answered that is correct. He said that Senator Mackie's analysis is accurate also assuming this year it's $30 million and last year it was $40 million in taxes. Number 411 MR. RICH LAUBER, Pacific Seafood Processors Association, said he had underestimated the benefit to the State of the last fisheries tax credit they passed. It probably contributed substantially to the ground fish industry we have today. MR. LAUBER said the argument against a tax credit is that you are giving a tax credit to someone who would build something anyway. This may be true in some cases, but today he thought that argument fails completely because his assessment of the industry is that there's virtually no money available for the development of new plants, new facilities, or value added product forms, etc. Both processors and fishermen are in serious financial difficulties. This bill has the benefit of allowing the industry the flexibility of placing the tax credit in the area in which they think it would be most beneficial which would result, hopefully, in higher prices to fishermen, higher taxes to the State of Alaska and to municipalities. He thought there is little likelihood that it would be spent on things that would be done anyhow. MR. LAUBER said he didn't object to the CS. He thought there was only a very few harvestable species that are left that would benefit from the tax credit and the reason they are still out there is because they are costly to harvest, process, and market, and probably deserve every opportunity they have to get going. On the legal issue he said, the landing tax does not mirror the fisheries business tax. On shore floaters are subject to the fisheries business tax of 5%, factory trawlers are taxed on a landing tax for the amount of product that they land (they don't land even half of the product that they catch), and canned salmon is taxed at the fisheries business tax at 4 1/2%. So there's not an equal tax now, and if taxes have to mirror, the current fisheries business tax is unconstitutional because it doesn't mirror the landing tax of the factory trawlers. MR. LAUBER said if they have to legally give the factory trawlers a credit to pass this bill, he thought they should do the same thing the landing tax did before and it said something like we will give you, Mr. In shore floater, a tax credit, but you must spend that tax credit on shore. Number 512 MR. DAVE WOODRUFF, Alaska Fresh Seafood, said he was representing all the locally owned processors in Kodiak. He said he helped work on the original fisheries tax credit which was so successful. He said a lot of their equipment is not specific to one species and was bought with tax dollars gained from the first bill. He supported SB 52. He said right now the whole industry, not just salmon, is in dire straights and could use some help. SENATOR MACKIE asked how many people he employees in his plant and what types of investment did he foresee if he had the opportunity to have the State match his dollars. MR. WOODRUFF replied that he is the smallest producer in town and he employs about 45 people and uses about 15 or 16 boats in all the different fisheries. He'll look at items like scan graders (multiple species) and added freezing capacity. He said there's new innovative fin bone removal machines that he would like to use for value added salmon fillets. Number 570 CHAIRMAN HALFORD stated that they will keep this bill on the table along with the CS and adjourned the meeting at 5:45 p.m.