SB 277-DEFINITIONS OF FISHERIES BUSINESSES    CHAIRMAN TORGERSON announced SB 277 to be up for consideration. MR. IAN FISK, staff to Senator Austerman, sponsor, said that both the original and the committee substitute address an inequity in state taxation for the Bering Sea pollock fishery. He said: This bill seeks to ensure that all pollock processors are assessed at the same rate. The American Fisheries Act (AFA), which was passed by Congress in 1998 to rationalize the Bering Sea pollock industry, divided the industry into three sectors, those being the factory trawlers, which both harvest and process their catch at sea, mother ships, which process catches harvested by other vessels at sea and the inshore sector. The AFA limits participation in the pollock industry to these sectors and specifically leaves out entities, which are allowed to process pollock. The tax inequity that we have here in the industry is that floating processors were included with the inshore sector in AFA, but [is] the only sector of the industry to be taxed at 5% by the state, whereas the other sectors are taxed at 3%. The first draft of this bill intended to accomplish tax equity by changing the definition of 'shore based processor' in order to accommodate pollock floating processors. This approach created a fiscal note that was somewhat larger than anticipated and it also raised some concern that floating processors and other fisheries could be affected and that is certainly not the intent of the sponsor. MR. FISK said that the committee substitute reduces the fiscal note and focuses the bill specifically on the pollock fishery by specifying a 3% rate for floating processors, which would level the tax situation, thus providing equity for all sectors of the Bering Sea pollock industry. He explained that the fiscal note before the committee actually applies to the first version of the bill. The estimated fiscal note for the committee substitute will be even less. He said: It is important to note that the general fund impact in this case will actually be half of the fiscal note that the department presents to you, because half of the income is shared back with municipalities. CHAIRMAN TORGERSON asked which municipalities. MR. FISK replied a number of municipalities in the Aleutian's east borough and southwestern Alaska. Unalaska would be affected. SENATOR TAYLOR moved to adopt the proposed committee substitute to SB 277, labeled Version F, as the working document of the committee. There were no objections and it was so ordered. SENATOR LINCOLN referred to a letter from the City of Unalaska saying they were concerned about the language in the bill, "due to the loss of business, fish tax, and revenues" and asked him how much that amounts to. She said, "The fiscal note that you allude to suggests that the communities could lose approximately 50% of their share of the state revenue loss, which they are saying is $217,000." She wanted to know if he was cutting the $217,000 in half again and asked him to comment on the loss of revenue to the communities. MR. FISK replied that in terms of revenue sharing, the Department of Revenue said that data is confidential. He explained: As far as loss of income to the communities, on a community by community basis, it will not be a very large number, especially in light of the revenue that's already generated by this industry and is shared back to these communities…As far as the $217,000, it will actually be slightly less than that, because as I indicated we had some confusion with the department over the fiscal note [which will be less]. SENATOR HALFORD asked what level factory trawlers are presently taxed at. MR. FISK replied that they are taxed at 3% under the Fisheries Resource Landing Tax; but, under AFA, the pollock industry is taxed at 5%. SENATOR HALFORD asked about mother ships. MR. FISK replied that they are taxed at 3%. SENATOR HALFORD asked, "Why, if we're going to take floating processors down to 3% from 5%, why don't we put factory trawlers and mother ships up to the 5% and regain the revenue?" MR. FISK replied that the industry is already paying a significant amount of tax, and because of the general state of the industry, higher taxes would not be warranted. SENATOR HALFORD commented, "Factory trawlers' total contribution to the state is 3% and the mother ships are the same thing?" MR. FISK said that is correct. SENATOR HALFORD explained that the principal was to try and help on-shore and Alaska-based operations. And yet you have those two categories that have the most preferential of any tax treatment available, the same as if they were essentially based onshore in Alaska. I wonder why you don't make both adjustments at the same time and [indisc] your goal with a positive fiscal note instead of a negative one? MR. FISK replied that he thought taxation through the AFA is another issue that would have to be addressed through modification to the American Fisheries Act, which is a much more complicated process than what is before them today. SENATOR HALFORD said he thought that was set at the state level. MR. FISK replied that he was less familiar with the American Fisheries Act. MR. KRIS NORRIS, Manager, Icicle Seafood, said Icicle is a U.S. corporation started in Petersburg in 1965. She supported CSSB 277 (RES) because the intention of this bill is to seek a level playing field. She reminded the committee that twice in the last eight years the State of Alaska has argued that both the onshore and offshore sectors should be treated the same with regard to taxation. She maintained: When the Fisheries Resource Landing Tax was originally enacted in 1994 and contested by the offshore sector, it was settled in '96 and the argument that the state used was that those two sectors should be treated the same. That reasoning was used again in 1998, when the state was negotiating in Washington D.C. with the passage of the American Fisheries Act. It was our U.S. Senator Stevens' desire to help the State of Alaska and ensure that everyone that's doing business with the resources in our water and near them would contribute to the state's economy. That's why the mother ships were also brought under the Fishery Resource Landing Tax. The argument made was that the offshore and the onshore sectors needed to be treated the same. What's happened under state statute enacted several decades ago is that the floating processors were assessed at a different rate and I don't have a problem with that when it comes to species like salmon and herring and some of our traditional species, because anyone can get into the processing end of that business. But what the American Fisheries Act did when it was passed in 1998, is it limited who was qualified to process pollock. Under current state statute coupled with the American Fisheries Act, we're in a situation where not everyone is treated equal, yet we're all competing with each other in the same market place. So, what we have is a situation where we have two qualified floating processors that are assessed at a rate of 5% while all their competitors, regardless of what sector they're in or how they operate, are assessed at a 3% rate.[END OF TAPE] TAPE 02-3, SIDE A  MS. NORRIS continued: The only thing they do on board is to process the fish. They don't catch it. They have other boats bring the fish to them and then they process it. The difference is where they operate. One is considered part of the onshore sector, which operates within three miles in state waters. The mother ship sector operates outside of that three miles. But operationally speaking they're the same. I think because of that, all the sectors need to be treated the same when it comes to taxation. SENATOR HALFORD said Ms. Norris wants to change the system that was the rule until now, but she is not willing to change the rule to go in reverse. He asked if this bill passed, would anyone be left paying the 5% rate. MS. NORRIS replied that this would equalize the rate paid on pollock only. For other species, floating processors would still pay the 5% rate and she didn't have a problem with that. SENATOR HALFORD noted that the differentials would still be there. MS. NORRIS replied yes. SENATOR HALFORD asked if they had the authority to apply the differential in reverse under the American Fisheries Act. MS. NORRIS replied, "The American Fisheries Act isn't tying the hands of the State of Alaska in how they can apply a taxation rate. What it's doing is determining who is included to be subject to a tax." MR. CHUCK HARLAMERT, Department of Revenue, said he would answer questions. CHAIRMAN TORGERSON asked what the committee substitute did to the fiscal note. MR. HARLAMERT replied that they did a fiscal note on the same law last year based on 2000 data. They had to estimate a range because the taxpayer population is so low, they had to guard confidentiality. He remembered that the fiscal note said they would lose $333,000 to $400,000 to bring pollock down from 5% to 3% for floaters. SENATOR ELTON explained that loss would be shared equally between local communities and the State of Alaska. Mr. Harlamert agreed. SENATOR HALFORD asked him if they reverse the tax with regard to mother ships and factory trawlers, what income that would generate. MR. HARLAMERT responded with some background on the Fisheries Land Tax: When we adopted it, we had a choice between assessing it at 5% or 3% and that's within the state's prerogative. The Department of Revenue recommended using 3% because 5% would put them too much at risk of discriminating against interstate commerce. Essentially we have free reign to tax any activity that occurs within Alaska within our waters and we have no ability to tax on our own activities that occurs outside our waters. If we were to impose a discriminatory tax rate on fishing agencies who merely landed fish in the state, there's a possibility that it might not stand. It is our recommendation at the time to not move to 5% as we do with instate floating processors, but to stay with the base 3%. The 5% rate is in part aimed at drawing a form of equity between floating processors and onshore processors based upon local taxation… MR. HARLAMERT said if they were to move ahead and tax the offshore pollock fleet at 5% on their landings, the entire tax base would need to change to tax everybody at 5%, even shore based processors, and allow a credit against the state tax for local taxes paid. SENATOR HALFORD said that would achieve the same differential. MR. HARLAMERT agreed with that. SENATOR LINCOLN said the City of Unalaska was concerned about the loss of the fish tax and revenue to their community. She asked if he knew how many communities would be affected by this and what the range of the impact would be to a given community. MR. HARLAMERT said he couldn't do that because the population of taxpayers they are talking about is so small that if they were to go further into detail and talk about the communities, their department's confidentiality requirements would be violated. SENATOR LINCOLN said she didn't have any idea if they were talking about $10,000 or $100,000 and that makes it hard for her to know what the impacts would be. CHAIRMAN TORGERSON said he thought since they only got one letter and the area was so small that it couldn't be disclosed, so Unalaska is taking the brunt of this. SENATOR WILKEN asked if he understood correctly that the proximity of the processor to the municipality was the determinant as to whether the tax is 3% or 5%. MR. HARLAMERT said that outside of three miles the state doesn't have taxing jurisdiction. The state can only tax the offshore fleet when it lands fish in the state or, under the American Fisheries Act, the "feds" do it for us. SENATOR WILKEN asked if he had a floating offshore ship he would pay 5% but if he brought it in and hooked it up to the dock, he would pay 3%. MR. HARLAMERT replied yes, if it is hooked up permanently. SENATOR WILKEN said this bill takes the ship that's three miles offshore and can move from fishery to fishery and makes it a 3%. MR. HARLAMERT said it does that for one species - pollock. SENATOR ELTON asked if he could tell them the total revenues that would be lost for pollock. MR. HARLAMERT replied that he wasn't prepared for the committee substitute, but he could get that data. SENATOR HALFORD asked how much the 3% tax generates annually on the factory trawlers and mother ships. MR. HARLAMERT replied about $7 million and this figure is published under the fisheries landing tax in their annual report. SENATOR TAYLOR moved to pass CSSB 277(RES) from committee with individual recommendations. There were no objections and it was so ordered.