SB 164-SALMON PRODUCT DEVELOPMENT TAX CREDIT  CHAIR THOMAS WAGONER announced SB 164 to be up for consideration. TIM BARRY, staff to Senator Stedman, read the sponsor statement. SB 164 extends the deadline for salmon processors in Alaska to receive a salmon product development tax credit. Under the state's current law, processors can claim the credit only for property first placed into service by the end of this calendar year. This bill would give processors three additional years, until December 31, 2008, to claim the credit. This legislation also clarifies what types of items are eligible for the tax credit to more effectively achieve the legislature's goal of encouraging Alaska seafood processors to develop innovative value-added salmon products. He recalled that the legislature passed legislation allowing processors to claim a tax credit on new equipment they purchased to add value to salmon-using innovative processing techniques. The bill, HB 90, that became this law had been proposed by the Joint Legislative Salmon Industry Task Force and was part of an effort by Alaska's elected leaders and the fishing industry to create incentives for the industry to take investment risks and produce new salmon products and it has worked. This legislation was drafted in consultation with the Tax Division of the Department of Revenue. 3:40:45 PM SENATOR BERT STEDMAN, sponsor of SB 164, said the intent came from the Joint Legislative Salmon Industry Task Force and was intended to move industry away from the canned market and into other value-added markets. 3:41:45 PM SENATOR BEN STEVENS joined the committee. 3:42:16 PM SENATOR STEDMAN explained: Again, we're trying to stimulate the industry for jobs and value creation.... It takes a while for the industry to respond and the tax credit being 50 percent to go against their fisheries tax - sometimes they may have a carry forward and the carry-forward will last up to three years. 3:43:55 PM CHAIR WAGONER asked if insulated fish totes and ice machines were covered under the exemption. SENATOR STEDMAN said he thought those were excluded. 3:44:40 PM SENATOR RALPH SEEKINS asked how much the tax credits amount to each year. SENATOR STEDMAN replied that credits totaled $1.5 million in each of the three years 2006 through 2008. 3:46:12 PM SENATOR GUESS asked when the task force first made this recommendation, was it their intent to revisit the issue in three-year extensions or was it just a one-time shot. SENATOR STEDMAN replied that he didn't recall. 3:47:52 PM SENATOR BEN STEVENS said recalled that the task force wanted to give the industry a period of time to make the decision to invest and wanted to give them an extended period of time to recoup the credit. It also did not want the credit to be open- ended and wanted to reassess it. 3:50:16 PM SENATOR SEEKINS asked which fisheries were benefiting from the credit. CHUCK HARLAMERT, Tax Division, Department of Revenue, said that this credit is limited to salmon processing. 3:51:57 PM SENATOR STEDMAN said he thought it would be more concentrated in places where fish are delivered. 3:52:50 PM CHAIR WAGONER asked if there is a pre-approval process. MR. HARLAMERT replied that there is no pre-approval process. Processors file a claim form for this credit with their tax returns. Part of the reason for the additional language in the bill is because of a lack of a pre-approval process and a 50 percent credit rate. Some taxpayers can easily read the statute too optimistically - perhaps a little too broadly... particularly if they have borrowed heavily to invest. Unknowingly, they may be accruing 11 percent interest. He said the new element discussed by the Salmon Task Force was the exclusion of canneries, but the remainder of this bill adds clarifications to try to prevent the process of folks claiming and not paying their tax and ending up with liabilities they weren't aware of. CHAIR WAGONER said he would feel much more comfortable with pre- approval for the credit and asked if the department had a list of what is approvable. MR. HARLAMERT replied that this statute doesn't have a list of qualifying equipment, but requires it to be processing equipment as opposed to supporting equipment for transportation or storage. It also requires that the predominant product of that equipment be a value-added salmon product. He said the more sophisticated taxpayers have called the department to validate whether their plans fell within the credit or not and, "Any taxpayer is welcome to do that." 3:57:00 PM SENATOR ELTON asked if the net effect of the immediate effective date would be an immediate limitation to the kinds of equipment that could be used for the tax credit. MR. HARLAMERT replied no. The additional language basically fleshes out and makes clearer what is meant. There is one new condition in the clarifying language - it prohibits a credit for canning equipment. 3:58:56 PM DUNCAN FIELDS, Vice President, Kodiak Salmon Packers, liked the tax credit, but thought it needs to include onshore ice machines. He explained that his is a single-plant salmon processor and it is struggling to survive through the downturn in the salmon industry. He was able to take advantage of the tax credit and appreciated the legislature's support of the industry that is trying to rapidly move toward the value-added processes. As a small processor, he has to take smaller steps than the larger folks in the industry. MR. FIELDS related that last year he borrowed a fillet line to see how it would work before actually investing in one and the first thing he realized is that it takes a huge amount of ice to move the fillets, because the salmon has to relax for 24 to 48 hours before running it through the line. You have a whole series of totes and all the ice. I would say it takes probably twice as much ice to run fish through the filleter. So, ice machines, ice equipment, it seems would be an important component to encouraging the industry, particularly the processors like us to move forward towards value-added. Perhaps it's included in the language - again I would defer to help from the Department of Revenue, but I would think something in that top line on page 2 on processing, packaging, cooling or product finishing function would make it explicit and give me a little higher comfort level. 4:01:39 PM He supported the idea of not supporting old technology, but was concerned about losing opportunities if new technology like pop- tops and can-type containers were excluded as traditional processing equipment. STEPHANIE MADSEN, Vice President, Pacific Seafood Processors Association, said she represents salmon and whitefish processors from around the state and supported SB 164. She related how the credit is working for her members saying one member invested about $500,000 this year, which represents about two new fillet lines and two other members have fully utilized their 50 percent tax credit. I believe that's a demonstration that the program is working. So, we would appreciate the extension. I think one of the reasons that the request for the extension is because it was difficult for the processors to get up to speed and to get those investments immediately.... 4:06:06 PM She recommended not completely eliminating canned salmon products from being available for the tax credit. While she understands their not wanting to replace the current equipment, canned salmon would always have role in many of the fisheries and there is a strong canned salmon market for sockeye and pink salmon. It depends on the volume and when the timing of that run comes. That will kind of move you toward the importance of canned. We do support examination or possibility of use for these tax credits to move us towards value-added canned salmon and that is the pop- top.... Exactly what does that mean? Well, you have to get a new seamer, because it's a different top. And, as you know, the canned salmon and the seaming is very critical.... There would probably have to be modifications to the tracking line that sends the tops down to the main machine as well as modification to the retort system. Because of the different top, you're going to have to insure that that retort system is compatible with the new can. So, that's the need for equipment as far as the use for pop-tops.... One other thought for consideration is the exclusion of used equipment. Certainly we don't want shenanigans as far as one company selling used equipment to another, but in the food business there are many opportunities to bring used equipment to the state that are used either by other food industries or by other non-salmon producers. For example, the fillet machines that are used in salmon are also the same Baader machines that are used in the whitefish industry. So, there is a possibility that getting used equipment will not only save the processor money, but it will save the state some money from the tax credit perspective. If you pay less for that equipment, your tax credit is going to be limited or less, but the benefit is the same. 4:08:53 PM SENATOR STEDMAN said those two suggestion were explored with the Department of Revenue, but it was decided that the intent is to help the industry move beyond cans and used equipment and he did not think they were stimulating the status quo by doing that. If a company wants to stay there, that's okay. MS. MADSEN reiterated and emphasized that canned salmon is becoming more consumer-friendly and is used globally and clarified that used equipment would be used for value-added business, not recycling. 4:12:12 PM CHAIR WAGONER said the issue is that a business will lease a new machine and bring it to Alaska. If they like it, they might negotiate a purchase and he asked if that type of transaction would be disallowed under this legislation. MR. HARLAMERT replied that technically it would be considered a used product and would not be able to be purchased under this statute. He suggested that the business could negotiate a lease- purchase contract and then back out of it as opposed to just leasing it first. SENATOR SEEKINS agreed with Ms. Madsen that used equipment has its place with value-added businesses and asked if there was a mechanism to transfer credits to a downstream purchaser of equipment. MR. HARLAMERT replied no. SENATOR SEEKINS said that would make it difficult for him to take the risk and therefore he thought it would be counterproductive to their goal saying: If there was a perfectly useable system or piece of equipment in the state that could bring some other processor toward the goal that you're trying to get to that you would preclude it from being allowed in the program. He said that a lease purchase agreement is just a conditional sales agreement. Very few of them give someone the option to be able to determine later on whether or not they want to buy it and then for tax purposes call it a lease at the beginning and later on turn it in to a straight line depreciation. MR. HARLAMERT responded that it was not his place to elaborate on legislative intent here. He clarified that the federal tax credit was at no time allowed for used property. He explained: It is a fact with credits especially when you get in the range of 50 percent that they are highly subject to abuse. And, normally, if you have a credit, you're trying to stimulate something that does not have its own economic justification. You're trying to tip the scales to establish that economic justification, but recognizing that in doing that the economic justification of doing something else is always there. If the credit is written too loosely to allow the taxpayer to get the same credit for something just a little off your target, that's what's going to happen. And so, it's generally a good idea to err on the side of caution with credits and be more narrow than you'd like to be if you want to be the most effective in achieving your goal. That's just a general observation. SENATOR SEEKINS still thought the credit was too restrictive and he thought it was an impediment to the goal of the bill. 4:19:01 PM CHAIR WAGONER gave him an example of a guy who paid over $80,000 for a pinball machine that wound up not working and another guy who bought a reconditioned one that worked three times better than the one that was brand new. "That's why I brought this up in the first place for discussion. These are some of the things you run into in processing equipment. 4:19:41 PM SENATOR STEDMAN clarified if a person purchases a piece of equipment that does qualify, you don't have to file for the tax credit if you don't want to. He would entertain discussion about pop-tops, although he didn't want to stimulate the canned market. SENATOR ELTON said it was something to think about, but he also didn't want to give tax credits to produce the same old product packaged in the same old way. Maybe the canned issue could be dealt with by using a term of art saying this tax credit is not available for the same old same old. 4:23:08 PM KRIS NORRIS, Government Affairs, Icicle Seafoods, supported SB 164. She said Icicle Seafoods purchases and processes a wide variety of seafood throughout Alaska. She explained that in 2003 Icicle used the salmon product development tax credit to purchase equipment to make new products with salmon roe (Ikura) - that prevented oxidation and bacterial growth from happening prolonging shelf life. In 2004, it used the salmon utilization tax credit to install new equipment that was more technologically advanced in their salmon meal plant in Seward. As a direct result of that upgrade, Icicle has been able to run a lot more pounds of salmon through their facility and with few exceptions can utilize 100 percent of an entire salmon including the guts. Icicle Seafoods made saleable products from salmon parts that normally would have been part of the waste stream - a huge improvement. They have also improved the quality of the products they are producing, most notably the oil. New technology allows them to extract a lot more of the water and grit. It is now being used as a supplement for cattle feed and animal treats. The other thing it has allowed them to do is to be a lot more aggressive in purchasing of salmon. It's opened up opportunities that weren't there before. "So, when we can be more aggressive, there's a lot of beneficiaries - our fleet, our employees are getting more work, we're buying more fish, so there's more taxes generated. That kicks back to the City of Seward and certainly to the state of Alaska.... I feel like the incentives that were provided to us from the State of Alaska really helped us with economic development that had some spin offs beyond just our own company.... I also want to say that the Department of Revenue has been good to work with.... We certainly run our ideas past Mr. Harlamert before we proceed with them to make sure that it is a project that is going to be eligible for a tax credit.... In our business the margins are pretty small and in some years there aren't any.... MS. NORRIS said Icicle Seafoods is very interested in having the opportunity to have some tax credits applied for additional meal and oil plants. Its new technology in the Seward plant has only operated one year and management is convinced it will have even better results this year because they know a lot more about the equipment and are considering investing more money into some of their other locations. She said, "If it hadn't of been for the tax incentive provided by the state, we probably wouldn't have made that investment...." and thought the spin offs would be very big. 4:28:41 PM SENATOR SEEKINS asked how she felt about a tax credit pre- purchase approval system with the Department of Revenue. MS. NORRIS replied that has been her practice - to call the Department of Revenue first to make sure their idea would fly with them. She was told no about her pop-top idea. "It kept us from doing the project." 4:29:48 PM SENATOR SEEKINS asked if she had been able to get approval for a pop-top system, would it have meant incremental business or just a transfer in what they do. MS. NORRIS replied that she thought it would bring in new customers. 4:30:27 PM REED STOOPS, Ocean Beauty Seafoods, supported SB 164. Ocean Beauty is one of the larger salmon producers in Alaska and the tax credit program was the determining factor in its purchasing new equipment for its Excursion Inlet (in Southeast) and Alatak plants (in Kodiak). It increased the number of employees in both plants, expanded the number of fish they purchased and extended the season at both ends. All this enabled them to find a market for lower-value fish products. SENATOR STEDMAN asked under what circumstances Ocean Beauty purchased their plant at Excursion Inlet. MR. STOOPS explained that Ward Cove decided to close all of its seafood plants in Southeast and Bristol Bay and at that point there was a risk of there being no major processor in this part of Southeast to buy salmon. The governor and some other business people who were dependent on that business looked for seafood processors who could take Ward Cove's place. Ocean Beauty agreed to buy the Excursion Inlet and Alatak plants. A lot of the employees were hired back and then Ocean Beauty focused on updating the equipment. Last year, because of the tax credit, they purchased some new equipment and now they want to purchase more equipment of the same nature or expand the number of plants that have the value-added capability. 4:33:12 PM He said, "This legislation means the difference between doing more in Alaska rather than just doing the same thing on a continuing basis." 4:35:23 PM SENATOR STEDMAN put forth a conceptual amendment to include conversion or installation of pop-tops in language that excludes all cans. SENATOR ELTON thanked the sponsor for that amendment and said he is comfortable with him offering it in the Finance Committee where he has a seat. 4:37:02 PM SENATOR BEN STEVENS asked Ms. Norris if Icicle Seafoods is going to invest in another plant. MS. NORRIS replied affirmatively. While she understood there were abuses of that particular credit, she thought an argument could be made that including those kinds of operations directly helped Icicle add value to guts, viscera, frames, carcasses and skins that would normally not have been utilized. SENATOR BEN STEVENS recalled that the evolution of the utilization actually came from trying to help a situation the Department of Environmental Conservation (DEC) had with discharge issues. He asked Mr. Stoops if that plant installed utilization equipment as well. REED STOOPS replied yes that they put in new equipment for full utilization. SENATOR BEN STEVENS asked the department how much money was used to purchase new utilization-of-waste equipment versus the other portion of the bill that caused them problems. 4:41:06 PM MR. HARLAMERT said he couldn't disclose the exact amount of the credit, but a majority of the waste credit went for utilization- of-waste property. But, that was not true in 2003 when it was almost nil. In 2004, more than half of all the credit claimed for waste was investment in property to utilize salmon waste and to create products from it. 4:42:49 PM SENATOR STEDMAN moved to pass SB 164 from committee with individual recommendations and attached fiscal notes. There were no objections and it was so ordered.