SB 3002-TAX: MOTOR FUEL, CORP. INCOME, O&G  3:39:46 PM CHAIR JOSH REVAK announced the consideration of SENATE BILL NO. 3002 "An Act establishing an income tax on certain entities in the state; relating to the motor fuel tax; relating to nontransferable tax credits against the oil and gas production tax; and providing for an effective date." 3:41:02 PM SENATOR TOM BEGICH, Alaska State Legislature, Juneau, Alaska, stated that SB 3002 seeks to establish an income tax on certain entities relating to a motor fuels tax and a nontransferable tax credit against the oil and gas production tax. He stated that the Fiscal Plan Working Group of 2021 was historic because two members from the House Majority, House Minority, Senate Majority, and Senate Minority worked together to create a bipartisan revenue plan. The plan received widespread support from the public, administration, and legislators. SB 3002 addressed a portion of the working group's revenue plan by increasing revenue from three sources. He expressed a desire for SB 3002 to move to the next committee of referral since the Senate previously heard or passed the proposals in the bill. 3:44:30 PM Using the estimates assumed by the working group, SB 3002 would increase revenue by $195 million; $110 million would come from the change to the per barrel tax credit structure, $18 million from the motor fuel tax adjustment, and $67 million from the expansion of corporate income tax structure to capture excluded entities. 3:45:06 PM SENATOR BEGICH opined there is a need for a revenue bill to advance to the finance committee for exploration. He said the oil and gas industry will object to SB 3002 claiming lack of competition and that additional taxation will be harmful. Yet, Alaskan citizens have contributed $2 billion a year of expected permanent fund dividend income over the past five years. SENATOR STEVENS asked how much revenue would come from taxing S corporations. SENATOR BEGICH answered $67 million in the first year. 3:47:21 PM MERCEDES COLBERT, Staff, Senator Tom Begich, Alaska State Legislature, Juneau, Alaska, presented the sectional analysis for SB 3002 on behalf of the sponsor: Section 1: Adds a new section to the Alaska Net Income Tax Act. This section establishes a new tax of 9.4 percent for certain corporations earning at least $4 million on qualified net taxable income. This tax applies to sole proprietorships, partnerships, or federally defined S and C corporations, not publicly traded. SENATOR BEGICH interjected that a company with net income of $4.1 million would pay 9.4 percent tax on the amount above $4 million, which would be $100,000. SENATOR REVAK asked how the $4 million threshold was determined. SENATOR BEGICH responded that the $4 million cut-off came from proposed legislation from Senator Wielechowski. MS. COLBERT added that the legislation set the $4 million amount with a specific entity in mind. SENATOR VON IMHOF questioned why the percentage rate jumped from 0 to 9.4 percent. 3:49:58 PM SENATOR BEGICH responded that 9.4 percent mirrors existing legislation for corporate income tax, which stair-steps up to 9.4 percent for companies earning over $220,000 in net profits. The threshold is set at $4 million for S corporations to avoid hurting mom-and-pop businesses. Some corporations chose to be S corporations and avoid Alaska's state corporate tax. SENATOR BEGICH stated that British Petroleum divested itself of assets in Alaska to an S corporation. Previous legislation tried to recapture the lost $40 million in corporate income tax revenue and remedy the loophole. SB 3002 would begin taxing S corporations only on net profits exceeding $4 million. 3:52:19 PM SENATOR STEVENS asked if individuals who own S corporations pay income tax instead of corporate state tax and what the rate is. SENATOR BEGICH replied that owners of S corporations pay income tax if the state has an income tax. An S corporation owner does not pay individual state income tax in Alaska. SENATOR STEVENS commented that the $40 million in lost revenue is truly a loss. SENATOR BEGICH replied, correct. 3:53:47 PM SENATOR VON IMHOF expressed concern that a particular company is being targeted for taxable revenue. She asked for the definition of the term "qualified taxable income in Section 1(c). SENATOR BEGICH responded that Emily Nauman would answer the question. He commented that the loss of $40 million highlighted a flaw in Alaska's revenue system. When drafting SB 3002 with Legislative Legal Services (Leg Legal), the goal was to close the loophole without destroying mom-and-pop businesses; that threshold was $4 million. He opined that upstanding corporate companies willingly contribute to the state's corporate infrastructure. 3:55:48 PM SENATOR REVAK requested that questions for [Leg Legal] be held until after the presentation. He asked the sponsor to confirm that the tax applies to S corporations, LLCs, partnerships, and other entities making over $4 million in net income. SENATOR BEGICH replied, correct. It also includes sole proprietors. 3:56:34 PM MS. COLBERT resumed reading the sectional analysis Section 2: Increases the surcharge from $0.0095 per gallon to $0.015 per gallon on refined fuel sold, transferred, or used in Alaska. Section 3: Increases the tax on motor fuel sold or transferred within the state from $0.08 to $0.16 per gallon. This section also increases motor fuel sold and transferred for the use in and on watercraft from $0.05 cents to $0.10 per gallon. Section 4: Increases the tax on motor fuel consumed from $0.08 to $0.16 per gallon. This section also increases the tax on motor fuel consumed for the use in and on watercraft from $0.05 cents to $0.10 per gallon. Section 5: Amends AS 43.40.030(a), relating to the refund of the motor fuel tax for non-highway use, by increasing the fuel tax refund from $0.06 to $0.12 per gallon for internal combustion engines. Adds a $0.05 per gallon refund eligibility for commercial fishing watercraft. 3:58:04 PM SENATOR MICCICHE stated that with the increased use of electric vehicles (EV) nationwide, there has been an increase in tax legislation aimed at capturing revenue from EV use to pay for highway maintenance. He asked if that was considered in SB 3002. SENATOR BEGICH answered that tax on EVs was considered in the original motor fuels bill. It is not included in SB 3002 because Leg Legal advised it might lead to a single subject rule violation. He said he is willing to support standalone legislation on an EV tax but does not want to risk the integrity of SB 3002 by including it. SENATOR REVAK asked why there is an exemption for commercial fishing vessels and how much it would be. 4:00:13 PM SENATOR BEGICH stated that Leg Legal might be able to provide the amount of the exemption. He said commercial fishing vessels were exempted because they were exempted in the bill from which it was drafted. The motor fuels tax portion of SB 3002 is taken from the final House version of Senate Bill 115. 4:00:58 PM MS. COLBERT continued reading the sectional analysis: Section 6: Amends AS 43.55.024(j), relating to nontransferable oil production tax credits. This section repeals the $8, $7, and $6 per barrel tax credits, effectively capping the per barrel tax credit at $5 per barrel if the average gross value at the point of production for the month is less than $110 per barrel. Section 7: Applies the new corporate income tax established in section 1 of this bill to the tax year beginning on or after January 1, 2022. 32-LS1152/B| 9.9.2021 | 2 Section 8: Transition language for the Department of Revenue to adopt regulations necessary to implement this bill if passed into law. Regulations may not take effect before January 1, 2022. Section 9: Immediate effective date for the Department of Revenue to begin work on regulations as authorized under Section 8. Section 10: Except for Section 9, this bill takes effect January 1, 2022 4:02:06 PM SENATOR BEGICH added that his hope is that the finance committee makes passage of SB 3002 contingent upon legislation relating to a change in the dividend statute. CHAIR REVAK asked if the purpose of SB 3002 is to increase the permanent fund dividend. SENATOR BEGICH replied that the purpose of SB 3002 is to ensure the state has an acceptable comprehensive fiscal plan. The fiscal plan working group identified that a plan must include a constitutional percent of market value, finality to the dividend question, revenue for a balanced budget, and spending review. SB 3002 addresses two elements suggested by the working group. Legislators must be willing to make painful changes if they are serious about establishing a state fiscal plan. 4:04:03 PM SENATOR MICCICHE asked if the surcharge increase from $0.95 per gallon to $1.05 in Section 2 was calculated to capture the Spill Prevention and Response (SPAR) funding gap and if the Department of Environmental Conservation (DEC)supports it. SENATOR BEGICH answered that it does meet the amount discussed in the DEC subcommittee meeting. He does not know DEC's position but his belief is that the department was in support of the increase. SENATOR KIEHL commented that it seems counterintuitive that Section 6 proposes deleting the per barrel tax credit at lower net oil prices but keeps them at higher net oil prices. He asked why this approach was taken and if he would be receptive to the existing approach. SENATOR BEGICH stated he is amenable to change and explained that the approach in SB 3002 was selected because it seemed less damaging to the oil industry. Garnering less opposition from the oil industry is favorable to the state. The proposal was an attempt to compromise. He stated his preference for a property tax on oil company land use because it would net more revenue and be stable. However, the idea of a property tax met opposition from the oil industry. He stated his desire for the legislature to find the least painful means to compromise. SENATOR VON IMHOF asked what evaluation was done to determine that the oil tax credit proposal in SB 3002 would be less damaging to the oil industry, aside from comparing it to Senator Wielechowski's bill, which eliminates all tax credits. 4:07:33 PM SENATOR BEGICH replied that Senator Wielechowski's bill was the comparison. It is more damaging to the oil industry to provide zero tax credits than some tax credits. The goal of SB 3002 is to initiate solutions to state revenue needs. Any bill that adds an industrial tax burden will be viewed unfavorably by the industry. Likewise, a reduction in the dividend check will damage the individual. The comprehensive fiscal plan was designed in the spirit of compromise to get the legislature discussing revenue. When discussing an overall fiscal plan, there must be a revenue element, or it is not a fiscal plan. If legislators are serious about doing a comprehensive plan, it must have revenue. SB 3002 was designed to get members into a discussion on revenue. He said he is hopeful members will move SB 3002 to the finance committee for further analysis. 4:09:25 PM SENATOR VON IMHOF surmised that SB 3002 was not economically evaluated to determine its potential effect on Alaska's investment in the North Slope, which is the largest employer in the state and provides competitive jobs. She opined that revenue would not be addressed until the permanent dividend issue was solved. The state needs to know how revenue will be spent in order to have a comprehensive fiscal plan. Large dividends should not be paid at the exclusion of Alaska's needs. 4:10:51 PM SENATOR BEGICH responded that passing SB 3002 is contingent upon the dividend statute being changed. All measures need to be considered simultaneously. He opined that an overall fiscal plan could not be achieved if revenue discussions on industry continue to be delayed. He agreed that the oil industry is critically important to the state; however, the fishing industry is the largest employer. The next largest is the State of Alaska, followed by local government. The largest single private employer may be the oil industry regarding salaries earned. Yet, many employees do not live in Alaska, which results in uncaptured revenue. A state income tax would not necessarily capture this revenue if passed. He reiterated that SB 3002 is trying to balance resources and interests for individuals and industries. It is an all-inclusive bill where everyone pays something. He stated that the issues of revenue and dividend change had been discussed and debated. There will be no definitive answer if the legislature does not address them simultaneously. He recognized that members want to defend their interests. Still, he implored them to consider revenue alongside dividend change to achieve a comprehensive fiscal plan for the benefit of the state. 4:13:35 PM CHAIR REVAK commented that the $4 million threshold is not difficult to achieve for many businesses. He asked if industries or businesses other than fishing were considered for exemption. 4:14:21 PM SENATOR BEGICH replied that members could adjust the $4 million threshold, although constituents expressed concern about taxes affecting small businesses. He reiterated that the tax is on net income above $4 million, not gross income. He stated the portion of SB 3002 dealing with a motor fuel tax is the same language used in a bill that passed the Senate and stood a good chance of passing the House but for the interruption caused by COVID. SENATOR BEGICH called SB 3002 a plagiarist's bill since it is comprised of previously heard bills that had broad consensus. 4:16:55 PM MS. COLBERT began the presentation on slide 3 that shows the legislative history on corporate tax. She noted that many of the concepts have been discussed in the last four or five years. Some bills applied only to S or C corporations, others applied to both, and some applied only to oil and gas companies. Since 2017, five bills have been introduced regarding the S and C corporate income tax loophole. None of the recent bills that are listed have received hearings. She displayed slide 4 of the more recent history of motor fuel taxes. SB 3002 reflects a bill currently in House finance. She noted that Senate Bill 115 was the only motor fuel tax bill st heard during the 31 Legislature. It passed the Senate and came close to passing in the House but was a casualty of COVID-19. th During the 30 Legislature, two bills were heard but did not st make it to the floor. They were introduced during the 1 Special th Session but were not heard. In the 29 Legislature in 2015 and 2016, several bills were heard; House Bill 4001 and Senate Bill th 4001 were omnibus tax bills introduced in the 4 Special Session that included taxes on a number of industries. She related that the purpose for listing these bills is to show that taxes have been discussed on the record. 4:19:42 PM MS. COLBERT turned to slide 5 that lays out the recent legislative history of the per barrel oil production tax credits. She stated that a bill aimed at the per barrel oil tax nd heard. This morning, the House Ways and Means Committee held its first hearing on a bill similar to SB 3002. Senate Bill 129 was st introduced in the 31 Legislature but not heard. Changes were th passed into law in the 30 Legislature, but per barrel credits were unchanged. A subsequent bill considered changes to per barrel tax credits but did not pass out of House finance. During th the 29 Legislature, House Bill 247 considered changes to the per barrel tax credit. Although it passed, the changes were not made. House Bill 326 was referred to House Resources and House Finance but received no hearing. She added that this provides an overview, not a comprehensive bill history. 4:21:13 PM MS. COLBERT reiterated that SB 3002 uses language from bills introduced in the recent past. It would impose a 9.4 percent net income tax to sole proprietorships, partnerships, S corporations, and C corporations that make at least $4 million in profits. MS. COLBERT said that the State of Alaska has not changed motor fuel taxes since 1970. She read slide 7: • When enacted in 1970, $0.08 tax on motor fuel would be worth $0.54 today. • The average cost of a gallon of gas in the US was $0.36 per gallon in 1970. As of 2021, it is $2.94 per gallon. • Alaska's fuel tax has lost 85 percent of its purchasing power to help pay for highway, ferry, and harbor maintenance. MS. COLBERT stated that slide 8 provides a brief history of the motor fuels tax. In 1945 Alaska levied its first motor fuel tax at $0.01 per gallon. In 1970 it established the current rate of $0.08. In 1977 the marine fuel tax was increased to its present value of $0.05 per gallon. In 1994 the aviation tax was changed to $0.047 per gallon, which SB 3002 does not change. In 2015 a surcharge for the oil spill prevention and response (SPAR) fund was established. 4:23:16 PM MS. COLBERT moved to slide 9 that compares Alaska's motor fuels tax to other states and read: • Alaska ranks 50th in the nation for highway and marine fuel tax rates. • Passage of this bill would move Alaska up to 43rd in the nation for highway fuel taxes and remain at 50th for marine fuel taxes. • The national average for State motor fuel taxes is nearly 26 cents per gallon. • This bill does not impact aviation fuel. Alaska remains competitive among the lowest in the nation for aviation and jet fuel tax rates. MS. COLBERT said an outcry occurred when a tax on jet fuel was considered because Anchorage was the fourth or fifth busiest cargo airport. The aviation fuel tax was not considered in SB 3002 to keep Alaska competitive. 4:24:04 PM MS. COLBERT stated that estimates indicate that Highway fuel revenue would be $29.7 million to $31.4. It would be used to maintain roads and is an account that receives matching federal dollars. Marine fuel would go to the watercraft fuel tax account that is used for water and harbor facilities maintenance, which would be about $5.5 million per year. The refined fuel surcharge goes to the SPAR fund and is about $3.5 million a year. As currently drafted, the total annual increase would be upwards of $40 million a year. SENATOR BEGICH interjected that total annual revenue would increase from $38.5 million to $40.7 million. MS. COLBERT said the legislature has discussed AS 43.55.024(j) at length over the past decade. It establishes nontransferable oil production tax credits. SB 3002 would remove the credit caps of $8, $7, and $6 listed in AS 43.55.024(j) (1-4). The established new credit cap will be at $5 per barrel if the average gross value at the point of production (GVPP) for the month is less than $110 per barrel. 4:26:10 PM MS. COLBERT turned to slide 12 and said the oil tax credit, motor fuels tax, and expanded corporate income tax are estimated to bring in $195 million by fiscal year 2022. That amount is predicted to increase to over $500 million per year by fiscal year 2030. These amounts were determined by the fiscal plan working group who extrapolated figures from the fiscal notes of previous bills. 4:26:47 PM SENATOR BEGICH asked if there were any questions about the presentation. SENATOR STEVENS asked what happened to the lost revenue following the passage of Senate Bill 21 in 2013. MS. COLBERT replied that the Department of Revenue (DOR) would address that question. CHAIR REVAK requested Leg Legal address questions from the meeting. 4:27:50 PM EMILY NAUMAN, Attorney, Legislative Legal Services, Legislative Affairs Agency, Alaska State Legislature, Juneau, Alaska, stated her understanding that in Section 1 subsection(c) was designed to avoid gaming subsection (a) that puts a tax on entities having taxable income of $4 million. That subsection was designed to give the Department of Revenue the authority to combine the income of entities that appear to be splitting into smaller units to avoid reaching the $4 million cap. MS. NAUMAN stated that a low to moderate single subject risk was the reason for not including an electric vehicle (EV) fee in SB 3002. If included, the bill adjoins taxes and fees. In general, fees go to the department they originated from, while taxes are broadly collected and serve the general fund. SB 3002 was drafted to be bulletproof. The entire bill would fail if it fails the single subject test. 4:29:36 PM SENATOR MICCICHE stated the motor fuels tax bill passed the Senate and advanced partially through the House. The EV portion of that bill was segmented into SB 3002. He asked why there is a single subject issue with SB 3002 but not the bill from which it was drafted. MS. NAUMAN replied that all sections of the other bill were related to motor vehicles. SB 3002 has provisions about taxes, so the single subject of the bill has changed from motor vehicles to taxes. 4:30:42 PM CHAIR REVAK recognized that Representative Cronk was in the audience. 4:30:54 PM SENATOR KIEHL stated he does not recall a distinction in the constitution between taxes and fees. He used the Division of Motor Vehicles as an example of raising more revenue through fees than it uses, which presents the argument that all fees are taxes. He asked if Alaska courts have opined on this distinction and its importance to the single subject rule. MS. NAUMAN answered that the courts have not opined on that specific distinction. It has been discussed between attorneys and the Leg Legal office. It was omitted from SB 3002 to achieve zero risk of violating the single subject issue. SENATOR BEGICH stated the intent of excluding an EV tax was to remove the risk of having SB 3002 struck down after passing. He relied on the advice of Leg Legal to avoid the risk. He does not object to changes but cautioned against having a bill struck down for invalidation reasons. He said he supports standalone legislation on EVs. SENATOR KIEHL commented that it seems unlikely SB 3002 would be struck down under the single subject rule for inclusion of EV fees. 4:33:15 PM SENATOR BISHOP stated the genesis behind the motor fuels tax has not changed. Roads need to be maintained, but maintenance stations have closed due to a lack of funds. He stated his support of the motor fuels tax has not changed. SENATOR VON IMHOF stated that fairness seems to be lacking in SB 3002. Entities are excluded from the motor fuels tax, S corporation tax, and per barrel credit rollback. She opined that a lower broad-based tax bill would be better and asked why exemptions were put forward instead. 4:36:16 PM SENATOR BEGICH stated he favored a state income tax and introduced a broad-based income tax bill that also captures out- of-state income. He welcomes all members to co-sponsor it. However, the governor indicated he would not support an income tax. SENATOR BEGICH said he would support a broad-based sales tax that exempted clothing and food, but it has not been proposed. Therefore, three previously heard bipartisan bills were combined into one in an attempt to pass the Senate and House with a simple majority. Combining the bills appeared to be the easiest way to obtain passage of a revenue bill and bring resolution to the dividend formula issue. SENATOR BEGICH reiterated that SB 3002 was not designed to single out any entity. To the extent that it does is a result of the legislative process. He encouraged members to change SB 3002 or present a broad-based bill that can garner enough support to be passed because time is of the essence. He stated his desire for SB 3002 to receive a fair hearing and be moved to the next committee to receive adjustments. 4:39:30 PM SENATOR VON IMHOF said the state budget is balanced before paying a dividend. New revenue is only needed to pay a dividend. Therefore, she is opposed to new revenue being paid towards a dividend until the dividend calculation is solved. Alaska has many needs and the assignment of tax revenues should be determinable. The cart is being put before the horse. She stated her belief that the dividend issue needs to be resolved first, and then the needs of the state assessed before discussions about taxes happen. She opined that SB 3002 is premature, unfair, targeted, and would have significant unintended economic consequences. She is not interested in dissecting or amending a bill where the appropriation of revenue is unknown. 4:41:41 PM SENATOR BEGICH stated his motivations are purely to solve the problems presented by the fiscal plan working group. CHAIR REVAK warned against impugning any member's motives. 4:42:28 PM SENATOR MICCICHE stated he has talked about a tax plan that is low, broad, and as temporary as possible to address Alaska's fiscal situation. He opined that the approach to closing the fiscal gap should be all-inclusive. He acknowledged the intent of SB 3002 as a conversation starter for creating a comprehensive fiscal plan. He stated his belief that the fuel tax is unfair. Commercial fishers receive a $0.05 per gallon holiday on fuel, and aviation is exempt even though Alaska has many airports to maintain. He asked why electric vehicles, the fishing industry, and the aircraft industry were excluded from the motor fuels section of SB 3002. 4:45:24 PM SENATOR BEGICH explained that SB 3002 was derived from the last version of the motor fuels tax bill. Aviation fuel was excluded from the original version because, in 2017, there was testimony presented to the House Resources Committee on the direct impact the tax would have on the ability of the Fairbanks and Anchorage airports to be competitive in the world market. Despite fairness, he reminded members that SB 3002 includes the motor fuels tax bill as it passed in 2020. He does not know what compromises occurred before it reached the Senate floor. There were elements that Senators believed should have been included that were not. He welcomed changes to SB 3002 but cautioned that additions could make the bill less likely to pass. He said he would like the bill to be discussed so that it can be moved. 4:47:32 PM SENATOR MICCICHE stated he would research competition and its relevance to the aviation fuel tax and other areas of the economy that may be overlooked. He uses state services as a commercial fisherman and is unaware of a reason to be excluded from the tax. He concluded that low, broad, and as temporary as possible is the approach to use in the development of a fiscal plan. He opined that taxes should be temporary until the growth of the permanent fund improves Alaska's fiscal situation. He added that a motor fuel tax was unlikely to be temporary. 4:49:20 PM CHAIR REVAK asked if there is research indicating how industries would be affected by imposing the $4 million net income tax threshold. SENATOR BEGICH replied he is not aware of any studies, but there could have been answers if Senator Wielechowski's bills had been heard. He reiterated that the $4 million threshold is a presupposed number that can be raised. He appreciates members hearing SB 3002. 4:51:26 PM CHAIR REVAK stated it is important for resource committee members to know a bill's impact on resources. 4:52:01 PM SENATOR KIEHL commented that the idiom, putting the cart before the horse, does not reflect the process of finding a solution to Alaska's fiscal problem. He opined that the legislature is "nailing together a cart while stitching a harness and teaching the horse to take a bit." He appreciates that members are working to figure out a fiscal solution. He mentioned S corporations and said he perceives a fairness discrepancy in the oil industry tax structure of SB 3002 because two companies that produce the same resource from the same basin, under the same lease terms, and the same workforce structure pay materially higher taxes than one other company in particular. He asked if that is a fairness issue that needs addressing. 4:53:22 PM SENATOR BEGICH answered yes. There is an unfair competitive advantage because the income tax requirement is not the same. This scenario applies to any S or C corporation with net profits of $4 million that circumvents its corporate tax obligation. He quipped that Alaska could have all S corporations and a $200 million fiscal gap. 4:54:25 PM CHAIR REVAK held SB 3002 in committee.