HOUSE FINANCE COMMITTEE MARCH 21, 1996 1:50 P.M. TAPE HFC 96 - 83, Side 1, #000 - end. TAPE HFC 96 - 83, Side 2, #000 - end. TAPE HFC 96 - 84, Side 1, #000 - end. TAPE HFC 96 - 84, Side 2, #000 - #249. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:50. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Kohring Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Mulder was not present for the meeting. ALSO PRESENT Representative Jeannette James; Joe Perkins, Commissioner, Department of Transportation and Public Facilities; Bob Bartholomew, Deputy Director, Income & Excise Audit Division, Department of Revenue; Kevin Ritchie, Staff, Alaska Conference of Mayors, Alaska Municipal League (AML), Juneau; Kurt Parkan, Deputy Commissioner, Office of Commissioner, Department of Transportation and Public Facilities; M. Clyde Stolzfus, Special Assistant, Office of the Commissioner, Department of Transportation and Public Facilities; Pamela LaBolle, President, Alaska State Chamber of Commerce, Juneau; Richard Curtin, General Counsel, Petro Star, Anchorage; Jeff Cook, (Testified via teleconference), Vice-President, External Affairs & Administration, MAPCO Petroleum, Anchorage; Randy Welker, Legislative Auditor, Legislative Audit Division; Neil Slotnick, Assistant Attorney General, Civil Division, Department of Law; Bob Juettner, (Testified via teleconference), Anchorage; Frank Dillon, (Testified via teleconference), Executive Vice- President, Alaska Trucking Association, Anchorage; Jack Burmingham, (Testified via teleconference), Alaska Air Carriers Association, Anchorage. SUMMARY HJR 49 Proposing amendments to the Constitution of the 1 State of Alaska creating a highway fund. HJR 49 was HELD in Committee for further consideration. HB 362 An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country. HB 362 was HELD in Committee for further consideration. HOUSE JOINT RESOLUTION 49 Proposing amendments to the Constitution of the State of Alaska creating a highway fund. REPRESENTATIVE JEANNETTE JAMES testified in support of HJR 49. She stated that HJR 49 proposes amendments to the Alaska State Constitution creating a dedicated transportation fund. The amendments would be placed before the voters of Alaska at the next general election. The legislation would not address an amount of motor fuel tax increase. It would provide a mechanism for allocating the proceeds from the collection of fuel taxes. Representative James stated that the resolution has received wide support relative to the current level of fuel taxes, and that Alaska citizens will be much more likely to accept a necessary increase in their motor fuel taxes if they know the money would be utilized to address the need for improved maintenance of roads and highways. Co-Chair Hanley stated that the committee substitute would remove the portion which dedicated the marine fuel tax, leaving the gas tax portion to be dedicated to highways. Representative James voiced support for the committee substitute. Representative Parnell MOVED work draft #9-LS1178\o, Chenoweth, 3/20/96, be the version before the Committee. There being NO OBJECTION, it was so ordered. Co-Chair Hanley pointed out an additional change of the vote number from 3/5ths to 4/5ths. He stressed that a dedicated fund should not be easily entered into. JOE PERKINS, COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES (DOTPF), advised that transportation is different from many government services in that the use of 2 that system generates a distinct stream of revenue. The fuel used by motor vehicles as they travel throughout the system is taxed where it is sold. The distinct "user fee" can be dedicated for specific services, thereby, linking the services received to the cost of doing business. He provided the example of the Federal Highway Trust Fund, primarily funded by a national gas fuel tax, and the Airport Improvement Program, funded by an aircraft fuel tax and taxes on airline tickets. Commissioner Perkins noted that Alaska is the only state that does not have some sort of dedicated fund for transportation. Our program is entirely based on federal funding. Managing transportation facilities and keeping them maintained to include winter maintenance requires stable and predictable funding. He stated that the best way to guarantee stable and predictable funding would be by dedicating revenue from public use of the transportation system. Commissioner Perkins added, for a short period of time, Alaska did have dedicated revenue for transportation, which was amended in 1961 by the Legislature eliminating that fund. He pointed out that the State of Alaska does not have a State harbor program. Unfortunately, the feds do not have a dedicated fund for ports and harbors either. Consequently, the State relies on the "hit" or "miss" Corps of Engineers Program which requires specific congressional action for each project. Commissioner Perkins added that approximately $8 million dollars per year is collected by the State via a watercraft fuel tax. Of that amount, a little over $4 million dollars per year has been returned to the coastal communities for harbor work. The Corps of Engineers program is on the down turn and future funding is questionable. The Department recommends that the Committee consider dedicating the watercraft fuel tax for construction and operation of Alaskan harbors. Commissioner Perkins offered to provide Representative Parnell information regarding the 1961 legislative decision to discontinue the transportation dedicated fund. Representative Martin noted that he would not advocate road use taxes being used for boats and harbors. Co-Chair Hanley clarified that the legislation before the Committee would dedicate motor fuel tax to highways. Representative Martin pointed out language on Page 2, Line 2: "maintenance costs of roads and highways and of marine highways by the State..." 3 He suggested that language be deleted. Representative James noted that the statute definition of "highway" includes "marine highways". She pointed out that marine highways were different from ports and harbors. Commissioner Perkins added that the Alaska Marine Highway System is a portion of the national highway system as passed by Congress. Maintenance of some ferry facilities could be considered a legitimate use of the proposed dedicated fund. Representative Martin objected. He thought that issue had been addressed separately in the front section of the budget and should not be included in this fund. Discussion followed among Committee members regarding the use of the dedicated fund for the marine highway system. Representative Martin thought that when the resolution comes before the Alaska voters, that probably over 80% of the voters would not support the idea of the marine highway being included. He suggested inclusion of that portion would defeat the resolution. Representative Grussendorf countered that the State of Alaska receives a sizeable amount of revenue from the marine highway "miles". Co-Chair Hanley pointed out that a 2/3rds vote would be required to pass a resolution in order for it to be on the ballot. He thought that his constituents would be skeptical using a gasoline tax for the marine highway. Voters are willing to pay an increased tax if they believe that it will be going for the purposes that they think it should be used for. That direct link is essential. He suggested a possibility of using program receipts out of the Alaska Marine Highway System for a dedicated fund for the operation and maintenance of the marine highway system. Commissioner Perkins responded to Representative Brown's question regarding the definition of "maintenance" use in the fund. "Maintenance" would be sustaining existing facilities to a useable order. Representative Brown referenced Page 2, Line 7, suggesting that the word "balance" was not appropriate, and recommended that it be deleted. Representative Brown referenced Page 1, Line 15 - 16, inquiring how much additional money would be needed to be added to the $20 million dollars collected by the State. BOB BARTHOLOMEW, DEPUTY DIRECTOR, INCOME AND EXCISE AUDIT DIVISION, DEPARTMENT OF REVENUE, replied that the largest refunds would relate to the off highway tax. Currently, equipment or generators that operate based on motor fuel, but do not operate on the highway, pay eight cents motor fuel tax, claiming a refund from the Department of Revenue 4 (DOR) of six cents a gallon. DOR currently refunds $6.5 million dollars a year. Representative Brown asked if the language in the bill would provide for new refunds or credits on that tax. Mr. Bartholomew stated that DOR understands that language would allow what currently exists. Representative Brown pointed out another concern on Page 2, Line 10, suggesting a change to a 3/4th vote versus a 4/5th vote. She questioned the need to create a higher threshold of accessibility to this fund than that used for the Constitutional Budget Reserve (CBR). Co-Chair Hanley advised that if the fund was to be "dedicated", it should not be accessible. Discussion followed regarding the accessibility to the fund. (Tape Change HFC 96-83, Side 2). In response to a question by Representative Therriault, Commissioner Perkins replied that under the federal rules, there exists certain classification of designated roads and highways. He offered to provide that information to the Committee. KEVIN RITCHIE, STAFF, ALASKA MUNICIPAL LEAGUE (AML), ALASKA CONFERENCE OF MAYORS, JUNEAU, testified that the AML policy statement has voiced support for the increased fuel tax. AML supports HJR 49, and thinks that it would be a "good start" in establishing basic services throughout the State. The legislation recognizes the comprehensive nature of the Alaska highway system. Representative Brown pointed out that there was nothing within the contents of the legislation which would insure support to local activities or roads. Mr. Ritchie agreed that was a concern. He added that AML was interested in any supporting bill which would define how the fuel taxes could be shared. BOB JUETTNER, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE, testified in support of deleting the provision in the legislation which reference the marine fuel tax. FRANK DILLON, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE VICE-PRESIDENT, ALASKA TRUCKING ASSOCIATION, ANCHORAGE, spoke in support of the legislation before the Committee, although questioned inclusion of the marine highway. He commented that taxpayers would prefer that the intent be clearly outlined. He echoed the concerns of Representative Martin in inclusion of that language. Co-Chair Hanley responded to Representative Brown's concern, pointing out that the bill before the Committee strictly 5 dedicates the fuels that are currently flowing. It would not increase taxes. Representative Navarre questioned if an increase in fuel tax would displace general funds or would it be used to improve maintenance to the highway system. He maintained that there will be public pressure to provide for the defined use of that fund. Co-Chair Hanley agreed. Representative Martin MOVED to amend the resolution on Page 2, Line 2, deleting "and of marine highways". Representative Grussendorf OBJECTED. Representative Parnell pointed out that the definition of highways includes the definition of a ferry system. Co-Chair Hanley stated that a specific section would need to be inserted which indicates "not including the marine highway". Representative Martin suggested changing the amended language by deleting "and of" and inserting "except the". Representative Grussendorf reminded Committee members that the marine highway system is an intricate portion of the entire Alaska highway system. There are many visitors who come to Alaska via the ferry system and then move upward to Interior Alaska. This funding would only be used to help maintain the vessels. Representative Martin argued that all highways should be treated equal. The front section of the budget allocates $75 million dollars specifically for the ferry system. He reminded Committee members that all communities in Southeast Alaska would also be able to use the fund for their road systems, not their waterway systems. Representative Grussendorf reminded members that the marine ferry system is a commerce carrier between the communities in those waters. Discussion followed between Representative Grussendorf and Representative Martin regarding the proposed amendment. Representative Parnell suggested finding an agreement which would not pit the two regions of Alaska against one another. Co-Chair Hanley suggested considering the addition of a section to another resolution, which could create a dedicated fund for use of current marine highway receipts specific to that system. Co-Chair Hanley advised that this bill would be before the Committee at a later date, following a more in-depth analysis. Representative Martin WITHDREW the MOTION to AMEND. There being NO OBJECTION, it was withdrawn. HJR 49 was HELD in Committee for further consideration. HOUSE BILL 362 "An Act extending the motor fuel tax exemption for fuel sold for use in jet propulsion aircraft to fuel used in those aircraft for flights that continue from a foreign country." 6 Commissioner Perkins provided an update on the issues which were left outstanding from the previous meeting regarding the proposed legislation. The first issue concerns the management of the Foreign Trade Zone (FTZ) in Anchorage. The Municipality of Anchorage and the State of Alaska committed to a meeting to discuss the State's involvement in management issues related to State land in the FTZ. The meeting did occur and agreement was reached that the State would be included in any decision on the FTZ. Details remain to be worked out relative to the existing use of the FTZ. He provided a letter from Mayor Rick Mystrom regarding the Anchorage FTZ. [Copy on file]. The second concern addressed the availability of Custom Bonded Warehousing for the storage of AvJet fuel. That issue has been researched thoroughly, concluding that in the State's ability to tax, there would be no practical difference. He noted that either one, an FTZ or a Custom Bonded Warehouse could be used for the purpose that FTZ is used today. However, it would also clarify that a Custom Bonded Warehouse would have disadvantages that are not present with an FTZ. In a Custom Bonded Warehouse, goods must be segregated from the moment they enter the warehouse until they leave. For an FTZ, there is no such requirement. JEFF COOK, (TESTIFIED VIA TELECONFERENCE), VICE-PRESIDENT, EXTERNAL AFFAIRS & ADMINISTRATION, MAPCO PETROLEUM, ANCHORAGE, stated that the only way to provide the in-state refineries protection would be through passage of HB 362. He pointed out that Fed Ex has testified that they intend to use bonded fuel. (Tape Change, HFC 96-84, Side 1). Mr. Cook reiterated MAPCO's position of support for HB 362 which he thought would "level the playing field". In response to Representative Navarre's question, Mr. Cook stated that bonded fuel has been available since the 1930's. Representative Navarre asked if it had always been exempt from the tax, and if so why had it not eliminated the demand from the market. Mr. Cook admitted that he was not qualified to answer that query, although reiterated that Alaska does not refine enough jet fuel for the demand. Representative Navarre suggested that in-state refiners might already have a competitive advantage. He requested information on the current MAPCO profit margin. Mr. Cook stated that MAPCO competes against other refiners and was not willing to lay out their costs. He assured Committee members that shipping costs through the FTZ were cheaper 7 than what local refiners pay to ship via the Alaska Railroad from Fairbanks. Representative Navarre maintained that bonded fuel has been available and has not yet glutted the market. He believed that would not happen, emphasizing that the 3.2 cents charged by the State is not the only factor in the equation. Representative Navarre emphasized that enough information is not available to make the decision recommended. Mr. Cook agreed that the tax is not the only variable. Business has become much more competitive and the airlines definitely have interest in saving money. He emphasized that in the fourth quarter, 1995, 20 million gallons of jet fuel did come into the Alaskan market. He urged that the tax advantage for the foreign refined fuel be eliminated. Discussion continued between Representative Navarre and Mr. Cook. Representative Navarre questioned the two cent per gallon flowage fee lifted at the airport. He asked if that was a charge on all fuel pumped at the airport. KURT PARKAN, DEPUTY COMMISSIONER, OFFICE OF THE COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES (DOTPF), stated that the fuel flowage fee circulates back into the enterprise fund at the airport. Most of that is collected through an operating agreement with the air carriers. That agreement is based on a five year operating agreement during which time, the fuel flowage fees can not be increased. The fuel users within the FTZ are nearly all members of the operating agreement. Members discussed the concept of profit margin. Representative Therriault spoke to the advantages and disadvantages among private sector in determining the profit margin. Co-Chair Hanley inquired if fuel that came into Alaska had displaced any Alaska refined product. Representative Navarre suggested that it had been a balancing influence in the competitive market. Commissioner Perkins stated that DOTPF wants to "level the playing field", although he felt that enough information indicating that it was not currently level, is not available. The Department plans to proceed to work with the Municipality of Anchorage addressing the FTZ portion of the legislation. The bonding concerns should be addressed at a later date. Co-Chair Hanley asked if new facilities would need to be built for bonded fuel. Commissioner Perkins advised that the current set-up could be used, although it can not be mixed in the tanks. He added, bonded fuel did come into 8 Alaska in 1971, which was the only bonded fuel to come into Alaska until the tanker last year. He did not know of any tankers which were scheduled to come back into Alaska. Discussion followed between Representative Kelly and Commissioner Perkins as to the definition of a "level playing field". Commissioner Perkins noted that there were many considerations which would create a level playing field including the cost of transportation and the cost of product. The deciding factor is whether a business can compete and make a profit. Representative Kelly reiterated that it was not "fair" that in the free market place, one business was required to pay over and above the other, a 3.2 cent tax. Representative Navarre advised that the tax was not the only thing making the playing field not level. He stressed that it has not been proven that the bonded fuel is crippling the in-state refiners. Commissioner Perkins asked if there had been to date, enough impact on industry to remove the 3.2 cent tax, eliminating that revenue source for the State of Alaska. He noted that the Department supports in-state producers and would guarantee that if there was a lot of fuel arriving at the Anchorage harbors, the Department would then suggest that the tax be removed. Co-Chair Hanley agreed that the State would lose revenue with the removal of the tax. JACK BURMINGHAM, (TESTIFIED VIA TELECONFERENCE), ALASKA AIR CARRIERS ASSOCIATION, ANCHORAGE, testified that airlines were the ones required to pay the aviation fuel tax, not the refiners. To the extend that there is an unlevel playing field, he noted that some airlines do not pay the fuel tax and are competing with those airlines that do. He stated that there has not been specific justification for the tax give-a-way for bonded fuel. PAMELA LABOLLE, PRESIDENT, ALASKA STATE CHAMBER OF COMMERCE, JUNEAU, spoke in support of HB 362. Under present circumstances, Alaskan business' are being put at a disadvantage. She recommended the State goals be: 1. Value added resources; and 2. Economic development. Co-Chair Hanley asked if bonded fuel could be taxed. NEIL SLOTNICK, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, noted that he had checked if state tax would be preempted by federal law. There is no statute that explicitly preempts state taxation, which then leaves the State in determining if state taxation is implicitly preempted. He thought that arguments could be made on both 9 sides. The taxpayers are likely to argue that there are two cases before the U.S. Supreme Court that control that issue. The commissioner of the Department of Revenue has considered all the information, including weighing the risks of litigation costs, and has determined that it would not be in the State's best interest to assess state taxes against bonded fuel. (Tape Change, HFC 96-84, Side 2). M. CLYDE STOLZFUS, SPECIAL ASSISTANT, OFFICE OF THE COMMISSIONER, DEPARTMENT OF TRANSPORTATION AND PUBLIC FACILITIES, responded to Co-Chair Hanley's question regarding other states which tax bonded fuel. He advised that there are other jurisdictions that tax bonded fuel, although the type of taxes vary. The existence of a FTZ does not in itself, exempt taxation. Co-Chair Hanley asked if some states are taxing the fuel, why doesn't Alaska. Mr. Stolzfus responded that the situation was not fuel related. It was "other" commodities within a FTZ. Mr. Slotnick added, the difference was not in the commodities, but rather the type of tax. There are some "privilege" taxes that have been allowed on exempt commodities which are in a FTZ. Representative Kelly suggested the possibility of offering a rebate given to the local producers based on the amount that is actually brought into the State. Mr. Bartholomew stated that consideration could be a possibility. Perhaps an exemption of every gallon coming into the State of that used in excess of the capacity of the local producers. RANDY WELKER, LEGISLATIVE AUDITOR, LEGISLATIVE AUDIT DIVISION, commented that federal regulations that govern the FTZ consists of a governing board. The regulations do provide that the board, if given good cause, can exclude certain goods or property from the FTZ. He stated that there is a possibility that a resolution submitted to that Foreign Trade Zone Board could encourage the exemption of fuel from that zone. If that should occur, the fuel coming in could be taxed, which would only address that FTZ fuel and not the bonded fuel. RICHARD CURTIN, GENERAL COUNSEL, PETRO STAR, ANCHORAGE, testified that Petro Star owns the only Alaskan refinery and the smallest refinery in the State. He stressed that once the tankers are in route, it will be too late for in-state refiners. The impact will cause some refineries to go out of business. He concluded that the purchasers of jet fuel have indicated that they intend to move to bonded fuel. 10 HB 362 was HELD in Committee for further consideration. ADJOURNMENT The meeting adjourned at 4:10 P.M. 11