HOUSE TRANSPORTATION STANDING COMMITTEE February 17, 1997 1:15 p.m. MEMBERS PRESENT Representative Bill Williams, Chairman Representative Jerry Sanders Representative Kim Elton Representative Al Kookesh Representative Bill Hudson MEMBERS ABSENT Representative Beverly Masek, Vice Chairman Representative John Cowdery COMMITTEE CALENDAR HOUSE BILL NO. 63 "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; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 55 "An Act relating to the fiscal operations of the Alaska Railroad Corporation and to land acquired by the State of Alaska under the Alaska Railroad Transfer Act of 1982 or otherwise acquired for railroad purposes; and providing for an effective date." - SCHEDULED BUT NOT HEARD (* First public hearing) PREVIOUS ACTION BILL: HB 63 SHORT TITLE: AVIATION FUEL TAX EXEMPTION SPONSOR(S): REPRESENTATIVE(S) THERRIAULT, Davies, Kelly JRN-DATE JRN-PG ACTION 01/13/97 48 (H) READ THE FIRST TIME - REFERRAL(S) 01/13/97 48 (H) TRANSPORTATION, FINANCE 01/22/97 126 (H) COSPONSOR(S): DAVIES 02/12/97 (H) TRA AT 1:00 PM CAPITOL 17 02/12/97 (H) MINUTE(TRA) 02/12/97 325 (H) COSPONSOR(S): KELLY 02/17/97 (H) TRA AT 1:00 PM CAPITOL 17 BILL: HB 55 SHORT TITLE: ALASKA RR BUDGET AND LAND SPONSOR(S): RULES BY REQUEST OF LEGISLATIVE BUDGET AND AUDIT JRN-DATE JRN-PG ACTION 01/13/97 42 (H) READ THE FIRST TIME - REFERRAL(S) 01/13/97 42 (H) TRANSPORTATION, FINANCE 01/15/97 78 (H) STA REFERRAL ADDED 02/05/97 (H) TRA AT 1:00 PM CAPITOL 17 02/05/97 (H) MINUTE(TRA) 02/10/97 (H) TRA AT 1:00 PM CAPITOL 17 02/10/97 (H) MINUTE(TRA) 02/17/97 (H) TRA AT 1:00 PM CAPITOL 17 WITNESS REGISTER PAM LABOLLE, President Alaska State Chamber of Commerce 217 Seward Street, Number 201 Juneau, Alaska 99801 Telephone: (907) 586-2323 POSITION STATEMENT: Testified in support of HB 63. KURT PARKAN, Deputy Commissioner Department of Transportation and Public Facilities 3132 Channel Drive Juneau, Alaska 99801-7898 Telephone: (907) 465-6977 POSITION STATEMENT: Testified in support of HB 63. BOB BARTHOLOMEW, Deputy Director Income & Excise Audit Division Department of Revenue P.O. Box 110420 Juneau, Alaska 99811-0420 Telephone: (907) 465-2320 POSITION STATEMENT: Testified in support of HB 63. RANDY S. WELKER, Legislative Auditor Legislative Audit Division Legislative Agencies and Offices P.O. Box 113300 Juneau, Alaska 99811-3300 Telephone: (907) 465-3830 POSITION STATEMENT: Testified on HB 63. MARK NECESSARY, Senior Vice President of Refining Tesoro Alaska P.O. Box 3369 Kenai, Alaska 99611 Telephone: (907) 776-8191 POSITION STATEMENT: Testified in support of HB 63. JEFF COOK, Vice President External Affairs MAPCO Alaska Petroleum 3201 C Street, Suite 700 Anchorage, Alaska 99503-3960 Telephone: (907) 273-3339 POSITION STATEMENT: Testified in support of HB 63. KIM ROSS, Executive Director Alaska Air Carriers Association 1117 East 35th Avenue, Suite 102 Anchorage, Alaska 99508 Telephone: (907) 277-0071 POSITION STATEMENT: Testified on HB 63. ACTION NARRATIVE TAPE 97-8, SIDE A Number 001 CHAIRMAN BILL WILLIAMS called the House Transportation Standing Committee to order at 1:15 p.m. Members present at the call to order were Representatives Kookesh, Elton, Sanders and Williams. Members absent were Representative Masek and Cowdery. HB 63 - AVIATION FUEL TAX EXEMPTION Number 050 CHAIRMAN WILLIAMS announced the committee would hear HB 63, "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; and providing for an effective date." He noted the sponsor wasn't in Juneau. He said he would take public testimony. Number 240 PAM LABOLLE, President, Alaska State Chamber of Commerce, came before the committee to testify in support of the bill. She referred to testimony that was given the previous week and said some points that came to her mind was that last year when similar legislation was discussed there was debate that there had been one tanker load of jet fuel that had come into the Foreign Trade Zone (FTZ). This had some impact on our in-state refiners. She said the purpose of the FTZ is to take some value added product and use it through the FTZ. This year we had ten loads of foreign refined jet fuel and we're not receiving any of the tax money from that. She stated that if we had our local refiners providing this jet fuel, we'd be increasing our economy of jobs, transportation, and shipping on the Alaska Railroad as it comes from, for example, Mapco into Anchorage. Ms. LaBolle said the fact that we have Alaska businesses, Alaska workers, Alaska royalty crude, paying state corporate taxes and other fees, and transporting it on in- state transportation facilities is reason enough to do everything we can to be sure they have a level playing field. She said the argument last year was, "Can we afford to lose the tax?" She stated that we're not getting the tax on all those loads of jet fuel coming in by tanker and so that is a moot question. Ms. LaBolle urged the committee to support the bill. Number 458 REPRESENTATIVE JERRY SANDERS asked what the impact would have been if Mapco or any other refinery had done these ten loads in Alaska. He said in talking to representatives from Mapco they have about 430 people working for them, but they don't work at the refinery. Representative Sanders said he wonders how much difference it would have made at the refinery if that had happened. He said there has to be an economic impact when something comes through the FTZ. It pulls into the port and pays money to the Port of Anchorage. Somebody works at getting fuel in and out of the tanks. He said it is not a total loss when the fuel comes in on the ships. Number 540 MS. LABOLLE responded that she couldn't give an answer as to what kind of impact it has on the number of employees. However, there was testimony offered the previous week by Jeff Cook of Mapco that this was an impact on the amount of business they had and what they could project for the future. As refiners talk about expanding their operations, if they see a market they currently have is being eroded that does not bode well for plans of expansion. Ms. Labolle stated that the ten loads of fuel that did not come out our refineries has to have had some impact on the actual business operation of the in-state refineries and their plans for the future. Number 628 REPRESENTATIVE KIM ELTON said it seems that there are two ways of dealing with the situation. One is to eliminate the tax that applies to the Mapco fuel, the second to eliminate the FTZ. He asked if anyone has ever quantified the economic benefits of the FTZ. He said there is an economic disincentive because we stand to lose over $4 million of revenue to the state general fund. He asked if somebody could explain what we're gaining with the FTZ. Number 689 MS. LABOLLE indicated she couldn't answer that question. She explained one of the objectives in promoting the business of fueling jets at Alaska's FTZ is to promote Alaskan business. She stated that if we're not promoting Alaskan business, and if it isn't Alaskan jet fuel then why do we care where they fuel the jets. She said we need to do whatever we can to make sure that it is Alaskan business that is being promoted. Number 771 KURT PARKAN, Deputy Commissioner, Department of Transportation and Public Facilities (DOT/PF), was next to come before the committee. He noted he didn't have anything in writing in response to the Air Carrier Association's comments as he had promised. He is in the process of putting that information together and would get the response to the committee the following day. CHAIRMAN WILLIAMS said he would appreciate receiving those written comments the following day. Number 838 REPRESENTATIVE ELTON said the committee discussed what the affect to the treasury is as a result of the FTZ. There was an expectation that the revenue that we had been getting will diminish significantly, perhaps close to zero. If that has been the case, he would assume that the economic benefit is significantly greater than what we're giving up through the tax revenues. He asked Mr. Parkan if he would discuss the benefits to the private and the public sector. Number 884 MR. PARKAN responded that it is very difficult to quantify when you don't have much of a history. He said there hasn't been much use of the FTZ since it was created at Anchorage a few years ago, with the exception of some french perfume and alcohol that has come through. It's been minuscule until recently when the fuel started coming through. Mr. Parkan said the department noticed more and more tankers were bringing the foreign fuel and saw a potential loss in tax revenue as a result of that. The department tried to deal with it last year by looking at modification of the FTZ to make fuel an exemption. There were problems with making fuel an exemption, so they have chosen to support the bill. Mr. Parkan said the department's opinion has always been for a level playing field and they felt they were unsuccessful in creating that level playing field by putting an exemption on the tax, so they support level playing field by eliminating the tax. He added that the custom bonded warehouse fuel issue came up as an alternative to the FTZ. He stated that even if they were able to stop the use of the FTZ for the purposes of bringing in fuel, the shippers and suppliers could still use bonded warehouse fuel as an alternative. Mr. Parkan said in terms of quantifying the benefits, it is hard to say. He said there hasn't been an analysis done clearly by promoting Alaskan based refiners, there is a benefit in potential for expansion in using our resources versus foreign fuel coming into the state. Number 1037 REPRESENTATIVE ELTON indicated confusion. He said, "If we didn't have the FTZ, that the foreign fuel is able to come in under the auspices of the FTZ that those people would be able to bring fuel in using bonded warehouses and still not pay the tax." MR. PARKAN said the answer is yes. He noted there is a little extra paperwork involved, but they can effectively do the same thing through the bonded warehouses that they do through the FTZ. Number 1075 REPRESENTATIVE SANDERS asked if there are any value added provisions to the FTZ. He said they obviously aren't adding any value to perfume, alcohol or fuel. Number 1090 MR. PARKAN said he believes that when the state and municipality were putting together the application, that is what was stated as the intent. He said he doesn't think that there is a specific clause or requirement that it take place. He noted with regard to fuel, there is no value added. Number 1124 REPRESENTATIVE BILL HUDSON asked if there was a link to the tax collected on Alaska produced fuels for the operations of the rural airports. He noted Ms. Ross said that the $4.5 million that was currently collected from the taxes on our domestic produced fuels were funds that were earmarked for the operations and maintenance of our rural airports. Representative Hudson asked if there was any indication of the collection of those taxes for that purpose, or are they just general fund monies that they are appropriated out. He asked if federal money can be used, for example, for the operations and maintenance of our airports in addition to the construction and reconstruction of them. Number 1189 MR. PARKAN referred to Representative Hudson's last question and said the FAA has recently allowed airports to use a small portion of capital funds, the Airport Improvement Program (AIP) dollars, for runway maintenance, specifically cracked sealing and minor repairs to extend the longevity of the runways. He said in this year's capital budget there is a small amount identified for that purpose. That is the only area where there is a crossover between capital construction operating for federal dollars. He stated that in the budget there is reference to the aviation tax fuel account. He read from a previous operating budget, "Include within the general fund, fund amounts appropriated in this act. The following amounts are from the unreserved special accounts in the general fund." It lists the highway fuel tax account and the aviation fuel tax account. Those are two accounts that are part of the general fund. He stated that for the purpose of their budget and the short forms there is no reference to a funding source other than the general fund. Federal funds, interagency receipts and the program receipts are receipts that they do receive from the rural airports which amounts to about $2.8 million. Their budget for operating the rural airports is between $20 million and $22 million. Mr. Parkan stated that in addition to the $2.8 million in program receipts they also receive $17.2 million in general fund. Number 1336 REPRESENTATIVE HUDSON asked if the $4.5 million currently being received on taxes from domestic produced fuels flows into the general fund. Number 1340 MR. PARKAN confirmed that it is general fund dollars. That it is a subaccount like any other subaccount to the general fund. He stated that when they put their budget together they look at the total need of the airports and clearly the revenues derived from program receipts does not cover what it costs to operate the airports. Number 1375 BOB BARTHOLOMEW, Deputy Director, Income and Excise Audit Division, Department of Revenue, commented in response to information that Ms. Ross provided. Mr. Bartholomew stated that Ms. Ross has been waiting for a year for an answer and that the Department of Revenue provided their position on this issue and they don't know of any state that has legally taxed fuel flown into an FTZ so on that issue the Department of Revenue had no additional action. Mr. Bartholomew referred to a letter to committee members which stated the above. Mr. Bartholomew stated that two tankers arrived to deliver FTZ fuel in calendar year 1995. In 1996, there were five tankers as reported to them by the Municipality of Anchorage. Number 1489 RANDY S. WELKER, Legislative Auditor, Legislative Audit Division, Legislative Agencies and Offices, referred to an audit completed last year which listed options from taxing no flights to taxing all flights. Mr. Welker said he missed the discussion at last meeting concerning problems DOT/PF encountered in trying to modify the FTZ regulations of getting the fuel exempted. He stated that option three on page 11 of the audit is to define a foreign flight exemption in statute which this bill does. House Bill 63 is the closest to option three presented by Legislative Audit Division. Number 1612 REPRESENTATIVE ELTON asked if the auditors looked at the bonded warehouse option. MR. WELKER responded that because it appeared there were greater economic disadvantages to the bonded fuel versus the FTZ, they concentrated their efforts on the FTZ. Number 1660 MARK NECESSARY, Senior Vice President of Refining, Tesoro Alaska, testified via teleconference from Kenai. Mr. Necessary explained that Tesoro employs 160 full-time employees at the Kenai refinery. Tesoro employs 550 employees in Alaska which includes their retail marketing segment as well as Fairbanks and Anchorage petroleum terminals. Mr. Necessary stated that Tesoro supports the bill as well as a lot of the testimony given by Mr. Cook the previous day. Mr. Necessary stated his disbelief that outside refineries could have a 3.2 cents per gallon advantage over instate refineries. Tesoro announced today a $50 million investment in Alaska over next 12 months to improve or increase production of jet fuel. He stated that more than 25 percent of the jet fuel used in Alaska comes from refineries on the West Coast, Korea and Far East. These refineries are large, sophisticated and well funded operations. Number 1785 REPRESENTATIVE HUDSON asked about value in restraining costs for fuel that would be purchased and used for local purposes. For example, if you lose out to the foreign import and assuming your costs are somewhat based on your total production, do you then pass those costs on to rural airports, or domestic flights or other instate consumptive uses. Number 1822 MR. NECESSARY responded that the costs would be passed on to the customers. Number 1843 CHAIRMAN WILLIAMS stated that the bill will be taken up again and that it will be changed by the plan to add bunker fuel exemptions at the request of himself and the sponsor. Chairman Williams stated that they will work with the sponsor's office to come up with a committee substitute. Number 1878 JEFF COOK, Vice President, External Affairs, MAPCO Alaska Petroleum, testified via teleconference from Anchorage. Mr. Cook stated Mapco has about 150 employees based in the refinery, marketing and distribution and 300 employees or more in retail. Payroll dollars are higher with the 150 employees because of the quality of personnel. He stated that with their gasoline expansion, Mapco hired a lot of new people in 1996. Mr. Cook said, "Also as to the Port of Anchorage and the economic impact there, we do pay a fee to transport our fuel on the pipeline from the port area to the spaghetti farm on the pipeline or the airport. We are paying a fee, so it comes in by tanker and they have to pay a fee to get it over there but that then displaces potentially, fuel that we would send over." He stated that most of the benefits to the FTZ would potentially accrue to the municipality. The only action in the FTZ is this fuel issue and Mapco has activated their own tanks to take advantage of FTZ when they could be expanding their production, however this tax does make that a better option at this time. Mr. Cook said he believes the Municipality of Anchorage is supporting this bill as part of wanting to expand action at the airport. The foreign tradesman will be able to do some value added activity with this new protocol that lets trade be unbuttled and repackaged. He stated that this would be the kind of activity MAPCO would want an FTZ to do. Mr. Cook stated without the bill we will disadvantage the in-state refiners and employees of Mapco, Tesoro, Petrostar, the railroad and others. Number 1976 KIM ROSS, Executive Director, Alaska Air Carriers Association, testified via teleconference from Anchorage. Ms. Ross reported she did not receive a response or any additional documentation from DOT/PF or from Mapco since the last hearing February 12, 1997. She stated that on Wednesday, Representative Sanders asked Deputy Commissioner Parkan whether the $4 million in aviation fuel taxes comes from the general fund. Representative Sanders also asked whether the $4 million would be in addition to the $60 million the legislature must cut from next year's operating budget. Mr. Parkan stated, on the record, that the $4 million does come from the general fund and then he said, "no tie no link between fuel tax revenues and the DOT/PF's budget". Ms. Ross referred the committee members to AS 43.40.010(e), effective July 1, 1994, "... proceeds of the taxes on aviation fuel shall be paid into a special aviation fuel tax account in the state general fund. The legislature may appropriate funds from this account for aviation facilities." Ms. Ross then quoted the preamble to the 1994 amendment raising the fuel tax 3.2 cents which read as follows: "The purpose of this Act is to increase the tax on aviation gasoline in an amount substantially comparable to the amount that would be derived from the DOT/PF reimposition of landing fees of rural state-owned airports and to leave this increased tax in place only so long as the commissioner of Transportation of Public Facilities does not before January 1, 2000, impose landing fees at those airports at a higher rate than was in effect on January 1, 1994." Ms. Ross stated that the legislative intent of the bill was to find an alternative funding source in lieu of the proposed landing fee program as the cost for administering the program was approximately 40 cents on the dollar. Ms. Ross considered this much more effective to use the fuel tax increase than the landing fee program. "The link between aviation fuel taxes and rural airport maintenance and operations budgets is there in black and white, written into our own statutes. As additional proof of this tie-in, I would like to refer you to your packets and the 1994 DOT/PF flowchart, which was used as justification for the 1994 fuel tax hike. The flowchart depicts fuel taxes, aviation fuel taxes versus the DOT rural airport maintenance and operations overall budget. Last year, HB 362 was introduced and the refineries argued their support for the tax exemption centered around an `unlevel playing field'. Their competition was able to provide non-taxable foreign fuel." Ms. Ross further stated that the total fuel through the FTZ in 1996 was 38 million gallons, which was approximately 6 percent of the total fuel consumed in Anchorage. The increase from 1995 to 1996 was 2 percent. Ms. Ross stated that MAPCO must import many times this amount each year in order to meet their needs. Ms. Ross then said, "Jeff Cook says that might be a silly option but we know the refineries can't produced enough local fuel to meet the demands so they too are importing non-taxable foreign fuel. Last Wednesday Jeff Cook from Mapco was asked `What will you do with the 3.2 cents' and Mr. Cook replied `There will be no additional revenues from 3.2 cents to his company'. He further stated the refineries wanted the exemption as an incentive to expand their facilities which would generate new jobs and additional corporate taxes. Well, this maybe someday expansion for some undefined project is not enough justification for a subsidy giveaway. Mr. Chairman and members of the committee, the refineries of this state don't want a level playing field, they simply want a subsidy. The justifications they give us don't make sense and for more than a year now they have continued to refuse to answer some pretty simple questions." Ms. Ross offered herself and her association's assistance in finding ways to develop solutions. Number 2256 REPRESENTATIVE HUDSON asked about the growth of the importation of foreign produced fuel, the impact on local sales and the impact on reduced funds from locally produced fuels that are currently used in rural Alaska. Representative Hudson stated that if the foreign refineries continue with these activities, there will be more untaxed fuel used in the international trade airways. He stated his concern about having less monies to put into maintenance and operations of runways in rural Alaska and asked Ms. Ross to look at ways to offset or find solutions and address this issue. Number 2302 MS. ROSS responded that the Department of Revenue stated there were two tankers in 1995 and in 1996 there were five tankers. The Port of Anchorage received $25,000 in revenue as each ship came in. Number 2329 REPRESENTATIVE SANDERS requested clarification about the increase from 1995 to 1996 being 2 percent since figures used earlier in the meeting were different. Number 2353 MS. ROSS responded, 4 percent to 6 percent in 1996 came from figures Representative Therriault talked about. She stated that the figures were 20.7 million gallons of tax exempt foreign produced fuel in 1995, and in 1996, just under 38 million gallons. She further stated that the total amount of fuel used in 1996 increased over that used in 1995 from 4 percent to 6 percent. Number 2394 MR. BARTHOLOMEW stated to further clarify Ms. Ross' statement, he believes she was quoting, when she said it went from 4 percent in 1995 to 6 percent in 1996, was total consumption of jet fuel provided by FTZ. The increase was from 20 million gallons to 38 million gallons, so the percentage increase of the FTZ import was much bigger than 6 percent. It was almost double, almost 100 percent. He said he thinks when she quotes 4 percent and 6 percent, that is what percentage the FTZ is of the total consumption of jet fuel at Anchorage and Fairbanks international airports. Mr. Bartholomew said the total consumption went up by 45 million gallons at Anchorage and Fairbanks international airports in 1996. Number 2432 MR. PARKAN referred to comments by Ms. Ross regarding the dedication of the fuel tax and link between the tax and the budget and said he just received a copy of the chart he thought she was referring to. He said it looks like it might have been prepared at a time when there was discussion about having dedicated funds. TAPE 97-8, SIDE B Number 001 MR. PARKAN indicated he isn't sure how to respond to the subsidy questions Ms. Ross had. He said clearly the bulk of the fuel tax and the bulk of the fees paid at the international airports are borne by the large cargo carriers. They're currently paying more than their share in terms of the tax as well as the landing fees. He said he would try to include information concerning Ms. Ross' comments that will be forwarded to the committee the following day. CHAIRMAN WILLIAMS stated the bill would be brought back before the committee on Monday, February 24, 1997. ADJOURNMENT Number 040 CHAIRMAN WILLIAMS adjourned the House Transportation Standing Committee meeting at 2:00 p.m.