Legislature(2009 - 2010)HOUSE FINANCE 519

04/01/2010 01:30 PM House FINANCE

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Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 344                                                                                                              
     "An Act relating to the  salmon product development tax                                                                    
     credit;  and   providing  for  an  effective   date  by                                                                    
     amending  an effective  date  in sec.  7,  ch. 57,  SLA                                                                    
     2003, as  amended by sec.  4, ch.  3, SLA 2006,  and by                                                                    
     sec. 4, ch. 8, SLA 2008."                                                                                                  
2:57:05 PM                                                                                                                    
PETER ECKLUND, STAFF, REPRESENTATIVE BILL THOMAS, SPONSOR,                                                                      
Vice-Chair Thomas delivered the sponsor statement.                                                                              
     House  Bill   344  extends  the  deadline   for  salmon                                                                    
     processors  in  Alaska  to  receive  a  salmon  product                                                                    
     development tax credit.   The program allows applicants                                                                    
     to claim  a credit  on their annual  fisheries business                                                                    
     tax  for   50%  of  the  purchase   costs  of  eligible                                                                    
     equipment.   Credits received may  not exceed 50%  of a                                                                    
     taxpayer's annual  tax liability.   Under  current law,                                                                    
     processors can claim the credit  for the property first                                                                    
     placed into  service by December  31, 2011.   This bill                                                                    
     would extend the program's sunset  date to December 31,                                                                    
     2015, allowing processors ample  time to continue their                                                                    
     long-range investment planning.                                                                                            
     The  salmon product  development tax  credit was  a key                                                                    
     recommendation   of   the  Joint   Legislative   Salmon                                                                    
     Industry  Task  Force.   First  enacted  in  2003,  the                                                                    
     credit  was  part  of an  effort  by  Alaska's  elected                                                                    
     leaders and the fishing  industry to develop innovative                                                                    
     value-added  salmon  products.     Since  then  it  has                                                                    
     stimulated   some   important   changes   in   Alaska's                                                                    
     commercial fishing industry.   New processing equipment                                                                    
     eligible  for   the  tax credit  enables businesses  to                                                                    
     offer  a  more  diverse  complement  of  Alaska  salmon                                                                    
     products   which   helps  increase   overall   customer                                                                    
     acceptance.    Modern  equipment  also  helps  increase                                                                    
     efficiency  of   processing  operations   and  improves                                                                    
     output, meaning  that quality has  improved.   This tax                                                                    
     credit  also  encourages  in-state  processing  of  our                                                                    
     salmon resource  which is critical to  job creation and                                                                    
     retention in fishing communities.                                                                                          
     Although  Alaska's  salmon  industry  is  beginning  to                                                                    
     recover  from years  of low  values  caused by  factors                                                                    
     such  as competition  from fish  farming, the  industry                                                                    
     continues  to  be  challenged by  the  recent  economic                                                                    
     depression, changes in  the marketplace, and increasing                                                                    
     labor  and  energy costs.    Extending  the tax  credit                                                                    
     beyond  its current  sunset date  of December  31, 2011                                                                    
     will allow  the industry to continue  the progress that                                                                    
     is  being  made  in  developing  and  producing  salmon                                                                    
     products that will  keep Alaska's fisheries competitive                                                                    
     in  world  markets.    The  state  should  continue  to                                                                    
     support one  of our most important  basic industries by                                                                    
     extending  the salmon  product  development tax  credit                                                                    
     thought passage of HB 344.                                                                                                 
Vice-Chair Thomas  MOVED to  ADOPT Work  Draft (26-LS1473\E,                                                                    
Kane,  3/11/10)  as  a working  document.  Co-Chair  Stoltze                                                                    
Mr.  Ecklund  noted  that   the  fisheries  committee  added                                                                    
qualified ice-making systems to  the initial legislation. He                                                                    
stated that he  worked with Department of  Revenue (DOR) who                                                                    
administers the program to  clarify that ice-making machines                                                                    
would qualify for the tax credit.                                                                                               
3:01:32 PM                                                                                                                    
Co-Chair  Stoltze   queried  how   ice  machines   fit  into                                                                    
technological advances.  Mr. Ecklund responded  that chilled                                                                    
fish  are  required  to  produce   a  quality  product.  The                                                                    
fisheries committee believed  that encouraging investment in                                                                    
ice  machines would  help  preserve the  value  of the  base                                                                    
Co-Chair  Stoltze   commented  on   the  necessity   of  the                                                                    
Vice-Chair  Thomas responded  that  ice-making products  are                                                                    
lacking in  the state. The  demand for quality  fish demands                                                                    
additional ice.  He added that  Bristol Bay has  been behind                                                                    
the times  in this area. The  need to keep the  fish chilled                                                                    
for   value-added  products   is   high.  Co-Chair   Stoltze                                                                    
clarified  that  he  did  not   feel  negatively  about  the                                                                    
legislation, but encouraged open-mindedness.                                                                                    
Representative Doogan  clarified that the state  would cover                                                                    
a portion of  the cost through tax credits,  with the theory                                                                    
that better fish would be  the result. He asked who benefits                                                                    
from the  higher quality  fish. Vice-Chair  Thomas responded                                                                    
that the  ice machines are  located at  the cannery or  on a                                                                    
barge. The boats  visit the cannery or barge  to collect the                                                                    
ice, two  tons at a  time. He stated that  everyone benefits                                                                    
from the ice and the higher quality fish.                                                                                       
3:07:54 PM                                                                                                                    
Representative  Doogan  asked  about  the size  of  the  ice                                                                    
machines. Vice-Chair Thomas responded  that the ice machines                                                                    
create 25-30 tons  of ice per day. Many  canneries require a                                                                    
large amount of ice.  Representative Doogan guessed that the                                                                    
commercial ice  machines were much larger  than those needed                                                                    
for personal use. Vice-Chair Thomas agreed.                                                                                     
Representative  Austerman clarified  that  the fishing  boat                                                                    
does not receive  credit for the ice  machine. The incentive                                                                    
was for  the processing industry  to allow the  fishermen to                                                                    
get a better price for the  fish and allows for greater flow                                                                    
of  money through  the state.  The processing  industry paid                                                                    
the fishery business tax that received the credit.                                                                              
Co-Chair Stoltze  asked if an  industry standard  exists for                                                                    
the cost of the ice.                                                                                                            
Vice-Chair  Thomas  responded  that the  policy  depends  on                                                                    
whether the  boats are employed  by the  processing company.                                                                    
He added  that the ice  is normally given away.  Language in                                                                    
the bill prohibits  the industry from selling  ice for three                                                                    
Co-Chair  Stoltze   requested  further   clarification.  Mr.                                                                    
Ecklund responded that the issue  of selling the ice was not                                                                    
as important as tracking of  the value of the fish processed                                                                    
with  the ice  from the  said ice  machines. If  a processor                                                                    
receives a credit  from an ice machine, the ice  can only be                                                                    
given or sold to employed fishermen.                                                                                            
Vice-Chair Thomas  pointed out  that two  pounds of  ice are                                                                    
required to chill one pound of fish.                                                                                            
3:11:28 PM                                                                                                                    
Mr. Ecklund opined  that the current tax  credit is working.                                                                    
He  commented on  the Alaska  Tax Division  Report (copy  on                                                                    
file) for FY  2007-2009 showing that the  total tax received                                                                    
by the state has increased from  $29 to $42 million. The tax                                                                    
credit is  not responsible for  the entire increase,  but it                                                                    
Representative Salmon  asked why the ice  contributes to the                                                                    
added-value label  for the fish. Mr.  Ecklund responded that                                                                    
there is a list of  qualified and non qualified expenditures                                                                    
that  explain  changes  in   the  industry,  primarily  with                                                                    
incentivizing value-added products.                                                                                             
Vice-Chair Thomas  added the incentive of  retaining jobs in                                                                    
Alaska versus exporting them.                                                                                                   
Co-Chair Stoltze  pointed out that  the discussion  is based                                                                    
on a  policy issue  and the  CS has yet  to be  adopted. Mr.                                                                    
Ecklund  agreed  and noted  that  the  prior committee  felt                                                                    
strongly about ice machines.                                                                                                    
Representative Fairclough pointed out  that the revenue book                                                                    
does not match the provided data.                                                                                               
Mr. Ecklund requested testimony from DOR.                                                                                       
3:15:05 PM                                                                                                                    
PAUL DICK, CHIEF OF OPERATIONS,  TAX DIVISION, DEPARTMENT OF                                                                    
REVENUE addressed the technical question.                                                                                       
Representative  Fairclough restated  her question  from page                                                                    
51  of  the  2009  Revenue Sources  Book  which  illustrates                                                                    
numbers  that  vary  from  the   document  provided  in  the                                                                    
committee packet.                                                                                                               
Mr. Dick  explained that the  Revenue Source Book  lists all                                                                    
taxes  on   fisheries,  including  salmon   enhancement  tax                                                                    
revenue, diving,  and other types  of seafood  marketing. He                                                                    
offered to  provide the required breakdown  from the Revenue                                                                    
Sources Book.                                                                                                                   
Representative Fairclough  explained her process  in finding                                                                    
the   information   and   asked  if   the   percentage   was                                                                    
proportional  to  the  municipal  share.  Vice-Chair  Thomas                                                                    
stated that  the municipal  share was  50 percent.  Mr. Dick                                                                    
Figure  added that  the Revenue  Sources Book  does show  50                                                                    
percent of the tax.                                                                                                             
Representative Fairclough  agreed to  review the  data later                                                                    
with Mr. Dick.                                                                                                                  
Representative  Doogan  asked  about the  inclusion  of  ice                                                                    
machines.  Mr. Dick  responded that  the ice  machines would                                                                    
provide benefits to  industry, but he was  unable to comment                                                                    
on the policy call.                                                                                                             
3:19:23 PM                                                                                                                    
Representative  Doogan added  that ice  machines used  to be                                                                    
specifically excluded  and he wondered  about the  change in                                                                    
circumstances that  altered the decision. Mr.  Dick believed                                                                    
that  the  fisheries  committee  suggested  adding  the  ice                                                                    
Co-Chair   Stoltze   asked   about   departmental   concerns                                                                    
regarding  the  ice  machines. Mr.  Dick  replied  that  the                                                                    
concerns  were  with  the technical  changes  regarding  the                                                                    
definition of  qualified investment.  The ice  machines were                                                                    
included with processing equipment  and the ice machine does                                                                    
not in fact "process."                                                                                                          
Representative Salmon  asked if the committee  was including                                                                    
"added-value" products to the  list. Co-Chair Stoltze opined                                                                    
that the committee is "doing it because we can."                                                                                
Vice-Chair Thomas suggested  that the list is  an older one.                                                                    
He repeated  that covering the  fish with ice  increases the                                                                    
value  and  allows Alaska  to  compete  on an  international                                                                    
level. He stated  that he did not know why  the ice machines                                                                    
were  not a  priority before.  The trend  in Bristol  Bay is                                                                    
moving toward iced fish.                                                                                                        
3:23:32 PM                                                                                                                    
Co-Chair  Stoltze  suggested  that the  processors  in  Cook                                                                    
Inlet and in Southeast Alaska already had ice machines.                                                                         
Representative Austerman added that  farmed fish entered the                                                                    
market place a few years  ago. Icing allowed the farmed fish                                                                    
to arrive  with a longer  shelf life.  If fish is  not iced,                                                                    
then one to two days of  shelf life are lost. He pointed out                                                                    
that the  value is in the  freshness of the fish.  As Alaska                                                                    
began to compete with farmed  fish the ice helped. Ten years                                                                    
ago,  ice  machines  were  not the  issue.  He  agreed  that                                                                    
Bristol Bay was  a difficult place to fish  and ice machines                                                                    
were necessary.                                                                                                                 
Representative  Fairclough agreed  that  the  case was  well                                                                    
made for  ice machines; she supported  the underlying issue.                                                                    
She  wished to  ensure  that the  fiscal  note reflects  the                                                                    
added  ice machines.  Mr. Dick  responded that  DOR had  not                                                                    
considered  the work  draft in  the creation  of the  fiscal                                                                    
Co-Chair  Stoltze asked  if the  change in  the fiscal  note                                                                    
will  be  substantive.  Mr.  Dick did  not  believe  so.  He                                                                    
explained that the department observed  the last three years                                                                    
of  credits to  create an  average of  $2.4 million.  He was                                                                    
unaware  of   the  exact  fluctuation  of   investments.  He                                                                    
anticipated a continued $2.4 million.                                                                                           
Co-Chair  Stoltze  asked  if  the  ice  machines  will  then                                                                    
compete with  the other technological investments.  Mr. Dick                                                                    
responded yes.                                                                                                                  
Representative  Fairclough asked  for the  average cost  and                                                                    
life  expectancy  of  an ice  machine  intended  for  heavy-                                                                    
3:27:27 PM                                                                                                                    
MARY  MCDOWELL, VICE  PRESIDENT, PACIFIC  SEAFOOD PROCESSORS                                                                    
ASSOCIATION  spoke  strongly  in  support  of  HB  344.  She                                                                    
stressed  that the  tax credit  will allow  the industry  to                                                                    
keep pace with consumer demands  on tough world markets. She                                                                    
referred  to letters  in the  packet regarding  the targeted                                                                    
program.   She  stated   that  companies   are  faced   with                                                                    
challenges  and those  in rural  areas are  faced with  high                                                                    
energy and transportation costs.  She declared that this was                                                                    
an important time for Alaska  to support the investment with                                                                    
the additional  economic incentive. The tax  credit pays for                                                                    
a small portion of the required product investment.                                                                             
Ms.  McDowell continued  that fine  market niches  raise the                                                                    
value   of  the   salmon   which   benefit  the   fishermen,                                                                    
communities, the processors and the state coffers.                                                                              
Co-Chair  Stoltze  asked  if there  was  concern  about  the                                                                    
amendment and  the ice machines.  Ms. McDowell  answered no.                                                                    
She thought the  amendment served as a good  addition to the                                                                    
bill. She agreed  that icing fish allows for  a high quality                                                                    
item to smoke or can.                                                                                                           
Co-Chair Stoltze  asked about ice  machines and the  cost of                                                                    
diesel  to power  the  machine.  He asked  if  the fuel  was                                                                    
covered in the tax credit. Ms. McDowell responded no.                                                                           
Representative Doogan asked why  companies are not investing                                                                    
in ice  machines if they  are a good  deal both in  terms of                                                                    
product and income derived.                                                                                                     
3:32:58 PM                                                                                                                    
GREG  FISK,  BRISTOL  BAY ECONOMIC  DEVELOPMENT  CORPORATION                                                                    
stated that  the installed  cost per  production ton  of ice                                                                    
machines is approximately $12,000  to $18,000. A ten-ton ice                                                                    
machine costs  approximately $180 thousand. He  responded to                                                                    
the  question   about  the  timing  of   policy  change.  He                                                                    
explained that the tax credit  was helpful for those wishing                                                                    
to make  investments in value-added equipment.  The findings                                                                    
were that  high quality fish are  not available particularly                                                                    
in Bristol  Bay. The state  incentivized the  purchases, but                                                                    
full  value  is  not  achieved  without  enough  number  one                                                                    
quality fish.                                                                                                                   
MARK   PALMER,  PRESIDENT,   OCEAN   BEAUTY  SEAFOODS   (via                                                                    
teleconference),  spoke in  support of  the legislation.  He                                                                    
explained  that Ocean  Beauty Seafoods  has  added a  value-                                                                    
added  line, increasing  employment and  production capacity                                                                    
as a result of the  legislation. Often the freezing capacity                                                                    
of a facility  can act as a bottleneck.  The legislation has                                                                    
accelerated investment due to the tax incentive.                                                                                
Representative Fairclough asked the  amount of fish tax paid                                                                    
by Ocean Beauty Seafoods.                                                                                                       
Mr. Palmer responded  that the company's fish  tax totals an                                                                    
average  around   $1.2  million.   The  company   has  taken                                                                    
advantage  of $600  thousand of  the value  added processing                                                                    
tax credit. He offered to provide more detail.                                                                                  
Representative Fairclough stated that  she was interested in                                                                    
the percentage of the credit  that the company utilized. She                                                                    
understood  that 50  percent of  the company's  liability to                                                                    
the state  is returned  in the form  of credits.  Mr. Palmer                                                                    
replied  that 50  percent is  the maximum  amount available.                                                                    
The bill allows for carry-over of the credit.                                                                                   
Representative  Fairclough asked  if  the carry-over  option                                                                    
was a new addition to the bill.                                                                                                 
3:39:26 PM                                                                                                                    
Mr. Palmer  responded no, the  company has a  certain period                                                                    
of time following the investment to carry-over.                                                                                 
Mr. Palmer  pointed out that  shore plants are not  the only                                                                    
ones  that lack  ice capacity.  The fleet  is widespread  in                                                                    
Bristol  Bay.  Some  of  the ice  capacity  would  exist  on                                                                    
tenders. Ice  is occasionally transported a  great distance.                                                                    
A   thousand   permits   exist  in   Bristol   Bay   without                                                                    
refrigeration  capacity   on  board  their   vessels.  Local                                                                    
fishermen can  only participate in premium  programs if they                                                                    
have the ability to chill the fish.                                                                                             
3:42:19 PM                                                                                                                    
Representative  Austerman  asked  for  an  estimate  of  the                                                                    
amount  invested in  value-added  fisheries  over past  five                                                                    
years  and how  much was  based on  tax credit  ability. Mr.                                                                    
Palmer responded that  the company invested in  excess of $2                                                                    
million each  season in  increasing capabilities  for value-                                                                    
added products.                                                                                                                 
Co-Chair Stoltze  disclosed that  he served with  Mr. Palmer                                                                    
as  a  member  of  the Alaska  Seafood  Marketing  Institute                                                                    
helping  to   advance  the   marketing  of   Alaska  Seafood                                                                    
BOB  WALDROP,  EXECUTIVE   DIRECTOR,  BRISTOL  BAY  REGIONAL                                                                    
SEAFOOD DEVELOPMENT ASSOCIATION  (via teleconference), spoke                                                                    
strongly  in support  of HB  344.  He stated  that the  most                                                                    
valuable  salmon fishery  in the  world  is rising  sharply.                                                                    
Filet  production  in  Bristol  Bay  increased  by  over  18                                                                    
percent  between 2008  and  2009 to  21  million pounds.  He                                                                    
expected to  see the trend continue  as a result of  the tax                                                                    
credit. He  expressed hope that the  committee would approve                                                                    
the  modest  expansion of  the  tax  credit to  include  ice                                                                    
making.  Ice  is  a necessary  condition  for  higher  value                                                                    
products. Higher  value products lead to  higher prices upon                                                                    
which the  fishery's business tax and  fishermen's income is                                                                    
based. He mentioned the suffering market in Chile.                                                                              
3:47:20 PM                                                                                                                    
Representative Doogan  asked about the change  in philosophy                                                                    
regarding the qualification of  ice machines as expenditures                                                                    
when  in   the  past  they  were   considered  non-qualified                                                                    
expenditures.  Mr.  Waldrop  believed that  the  tax  credit                                                                    
stimulated the growth of value-added equipment.                                                                                 
Representative  Doogan   referred  to  long  list   of  non-                                                                    
qualified expenditures including ice  machines. He asked how                                                                    
many  other   things  not  currently  listed   as  qualified                                                                    
expenditures will get  moved to qualified list  as time goes                                                                    
Representative  Doogan asked  whether  additional pieces  of                                                                    
equipment  will  be moved  over  to  the list  of  qualified                                                                    
expenditures, which will ultimately  increase the expense to                                                                    
the state.  Mr. Waldrop did  not believe that  the inclusion                                                                    
of the  ice machines qualified  as "mission creep"  but that                                                                    
the original mission of the  legislation was too narrow. The                                                                    
Bristol  Bay Regional  Seafood  Development Association  has                                                                    
invested $300,000 to $400,000 into ice making equipment.                                                                        
3:51:51 PM                                                                                                                    
Representative Austerman  noted that  the equipment  list is                                                                    
ten years old  and he did not think one  change in ten years                                                                    
signaled  danger. He  emphasized  that the  benefits of  ice                                                                    
machines had been discussed in committee for years.                                                                             
KRIS   NORORSZ,   GOVERNMENT   AFFAIRS,   ICICLE   SEAFOODS,                                                                    
PETERSBURG  (via teleconference),  testified  in support  of                                                                    
the  bill.  She explained  that  her  company purchased  and                                                                    
processed  salmon  throughout  Alaska. Icicle  Seafoods  has                                                                    
utilized  the  tax  credit to  purchase  equipment,  further                                                                    
diversify  the product  line,  improve  quality and  prolong                                                                    
product  viability.  She  described  the  various  equipment                                                                    
purchased that prolong the shelf life of the salmon.                                                                            
Vice-Chair  Thomas closed  public  testimony.  He asked  DOR                                                                    
about the  fiscal note. Mr.  Dick responded that  the fiscal                                                                    
note would not change with the added amendments.                                                                                
Representative  Fairclough   asked  if  the   credits  carry                                                                    
forward. Mr. Dick answered that  the provision to carry-over                                                                    
for three  years after  the tax year  has always  existed in                                                                    
the legislation.  He added  that HB  344 simply  extends the                                                                    
carry over provision end-date.                                                                                                  
Representative Fairclough  asked for more  information about                                                                    
the carry-over. She asked how  the carry-over functions if a                                                                    
person purchases a piece of  equipment for $1 million and is                                                                    
able  to declare  up to  $500 thousand.  Mr. Dick  responded                                                                    
that the with a $100,000  tax liability, a company could use                                                                    
$50,000 and  carry over the  remainder of the  investment to                                                                    
the subsequent tax years, for four years.                                                                                       
Representative  Fairclough  clarified   that  the  provision                                                                    
existed in the current legislation. Mr. Dick responded yes.                                                                     
Representative Fairclough asked about  the life-cycle of new                                                                    
equipment provided  for as  a credit.  She requested  a cost                                                                    
analysis regarding  the payment schedule for  the equipment.                                                                    
Mr. Dick deferred to the industry for an answer.                                                                                
Mr. Fisk  answered that the  typical life expectancy  for an                                                                    
ice plant was approximately 20-30 years.                                                                                        
3:58:20 PM                                                                                                                    
Representative  Foster stated  support for  the legislation.                                                                    
He  believed   that  help  for   the  rural,   western,  and                                                                    
impoverished  communities was  always  a step  in the  right                                                                    
HB  344  was  HEARD  and   HELD  in  Committee  for  further                                                                    
3:59:37 PM                                                                                                                    

Document Name Date/Time Subjects
HB357 Letters.pdf HFIN 4/1/2010 1:30:00 PM
HB 357
HB344 PSPA support.pdf HFIN 4/1/2010 1:30:00 PM
HB 344
HB 344--Alaska Tax Division 2009 Detail[1].pdf HFIN 4/1/2010 1:30:00 PM
HB 344
HB 344N Pac Seafood support.pdf HFIN 4/1/2010 1:30:00 PM
HB 344
HB 344--Qualified and Non-qualified Expenditures[1].pdf HFIN 4/1/2010 1:30:00 PM
HB 344
peter pan Letter HB 344.pdf HFIN 4/1/2010 1:30:00 PM
HB 344
PSPA support.pdf HFIN 4/1/2010 1:30:00 PM
ss Hb 344 Sponsor Statement.doc HFIN 4/1/2010 1:30:00 PM
HB 344
HB 344 CS WORKDRAFT 26-LS1473 E Version.pdf HFIN 4/1/2010 1:30:00 PM
HB 344
HB 344 Letter Icicle Seafoods.pdf HFIN 4/1/2010 1:30:00 PM
HB 344