Legislature(2003 - 2004)

04/03/2003 01:35 PM TRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           SB 112-MOTOR FUEL TAX:GOVT AGENCY REFUNDS                                                                        
                                                                                                                                
SENATOR WAGONER  moved to  adopt a  proposed committee  substitute                                                              
(CS) to SB 112, labeled version Q.                                                                                              
                                                                                                                                
CHAIR  COWDERY  announced  that   without  objection,  the  motion                                                              
carried.                                                                                                                        
                                                                                                                                
COMMISSIONER  BILL CORBUS,  Department  of  Revenue, told  members                                                              
that Robin Wilson,  revenue auditor in the Tax  Division, was also                                                              
available to answer questions via teleconference. He commented:                                                                 
                                                                                                                                
     Given the low  tax rate on highway motor  fuel in Alaska                                                                   
     in comparison  with other  states, I  urge you to  agree                                                                   
     that this legislation  is a viable method  of generating                                                                   
     critically  needed  revenue  in  the  short  term  until                                                                   
     Alaskans  are able  to realize  long-term revenues  from                                                                   
     resource development.                                                                                                      
                                                                                                                                
     Why  is this  legislation necessary?  SB 112  is a  very                                                                   
     necessary element  of the Governor's overall  budget and                                                                   
     investment   plan  for   fiscal   year  2004.   Governor                                                                   
     Murkowski's  primary  mission   is  to  build  a  robust                                                                   
     growing economy  and generate sufficient  state revenues                                                                   
     to fund  programs and  services that  Alaskans need  and                                                                   
     expect.  Passage of  SB 112 will  help ensure  increased                                                                   
     state  revenues  and  may  prevent  the  elimination  or                                                                   
     diminution of important programs and services.                                                                             
                                                                                                                                
     What  this legislation  will  accomplish -  SB 112  will                                                                   
     generate  approximately  37.7  million  in  fiscal  year                                                                   
     '04.  For the full  fiscal year,  this legislation  will                                                                   
     generate  41.1  million.  This  translates  to  over  $3                                                                   
     million to the  state per month. It is time  to increase                                                                   
     the  highway motor fuel  tax rate.  The current  highway                                                                   
     motor fuel tax  rate in Alaska set 33 years  ago in 1970                                                                   
     is  8 cents  per gallon.  Even  at 20  cents per  gallon                                                                   
     with  the  passage  of  this  legislation,  Alaska  will                                                                   
     still be  in the middle  nationwide in excise  tax rates                                                                   
     on highway motor  fuel. 22 other states have  excise tax                                                                   
     rates on  highway motor fuel  above 20 cents  per gallon                                                                   
     and  many of  those states  add other  taxes to  highway                                                                   
     motor fuel.  In fact, 35 states have combined  state and                                                                   
     local  motor  fuel  taxes   higher  than  20  cents  per                                                                   
     gallon, ranging  from 21 cents per gallon  to 38.7 cents                                                                   
     per gallon.                                                                                                                
                                                                                                                                
     To provide  a perspective,  according to the  Federation                                                                   
     of Tax  Administrators  of February  2002, the State  of                                                                   
     Washington  highway motor fuel  tax is approximately  23                                                                   
     cents per gallon  and the national average  of state and                                                                   
     local gasoline tax is 22.9 cents per gallon.                                                                               
                                                                                                                                
     This  legislation  will  bring  Alaska's  highway  motor                                                                   
     fuel tax closer  to the national average but  still stay                                                                   
     below  the  national  average  of nearly  23  cents  per                                                                   
     gallon.  This will  be the  first  increase in  Alaska's                                                                   
     highway  motor  fuel  tax   in  33  years.  This  is  an                                                                   
     essential  component  of  the  Governor's  spending  and                                                                   
     investment  plan for  Alaska  he recently  submitted  to                                                                   
     you for  your consideration.  The Department of  Revenue                                                                   
     can  and  will  efficiently   administer  the  increased                                                                   
     motor fuel tax  as discussed in the  department's fiscal                                                                   
     note. I  urge and appreciate your serious  consideration                                                                   
     of this legislation  and ask you to pass it  out of this                                                                   
      committee today with your support for its enactment                                                                       
     this session.                                                                                                              
                                                                                                                                
COMMISSIONER  CORBUS  then  said  that Ms.  Wilson  could  provide                                                              
technical  information pertaining  to  the  administration of  the                                                              
motor fuel tax in general and about SB 112.                                                                                     
                                                                                                                                
CHAIR  COWDERY   noted  that  Commissioner   Corbus  had   a  time                                                              
constraint  so he asked  members  to address  questions to  him at                                                              
this time.                                                                                                                      
                                                                                                                                
SENATOR OLSON said  that Commissioner Corbus stated  that this tax                                                              
is   necessary  until   revenues   are  realized   from   resource                                                              
development  and asked  if  this  is a  temporary  tax until  that                                                              
time.                                                                                                                           
                                                                                                                                
COMMISSIONER  CORBUS said  at this  juncture there  is no  plan to                                                              
reduce the tax that he is aware of. It is a permanent tax.                                                                      
                                                                                                                                
CHAIR  COWDERY  pointed out  that  the  state  did away  with  its                                                              
income tax when  it had extra revenue so hopefully  the state will                                                              
have enough revenue in the future to reduce this tax.                                                                           
                                                                                                                                
SENATOR LINCOLN  said that the reasons  given for the  increase in                                                              
the  highway  motor  fuel  tax are  highway  maintenance  and  new                                                              
highway development.  She asked how the commissioner  is proposing                                                              
to  secure this  tax  for those  purposes  since  funds cannot  be                                                              
dedicated.                                                                                                                      
                                                                                                                                
COMMISSIONER  CORBUS said  there is no  straightforward answer  to                                                              
that  question:  the  tax  revenues will  be  deposited  into  the                                                              
general  fund. The  Governor has  stated his  intent that  the tax                                                              
revenue is  to be  used to help  pay for  maintenance of  the road                                                              
system.                                                                                                                         
                                                                                                                                
SENATOR LINCOLN said  she does not want the public  to be deceived                                                              
into believing  that this tax will  go into a dedicated  fund. She                                                              
then noted  the committee  substitute will  remove the  motor fuel                                                              
tax  exemption  of  the Alaska  Railroad  Corporation  (ARRC)  and                                                              
asked the administration's position on doing that.                                                                              
                                                                                                                                
COMMISSIONER  CORBUS  said  the  administration has  not  taken  a                                                              
position on the proposal at this time.                                                                                          
                                                                                                                                
SENATOR  THERRIAULT asked  how much  revenue the  existing 8  cent                                                              
per gallon fuel tax generates.                                                                                                  
                                                                                                                                
COMMISSIONER CORBUS deferred to Ms. Wilson.                                                                                     
                                                                                                                                
MS. ROBIN  WILSON, Tax  Division Auditor,  Department of  Revenue,                                                              
replied that the  total revenue generated from the  motor fuel tax                                                              
is approximately $37  million at this time but  that also includes                                                              
aviation  fuel and  marine fuel.  She offered  to get members  the                                                              
exact number for highway vehicles after the meeting.                                                                            
                                                                                                                                
SENATOR THERRIAULT  asked what  the total  revenues would  be with                                                              
the proposed increase.                                                                                                          
                                                                                                                                
COMMISSIONER CORBUS  said for fiscal  year '04 the amount  will be                                                              
$37  million, but  for  a full  year the  increase  should be  $41                                                              
million.                                                                                                                        
                                                                                                                                
SENATOR THERRIAULT  asked what the  total current  maintenance and                                                              
operating costs are for the road system.                                                                                        
                                                                                                                                
COMMISSIONER  CORBUS   said  he  would   have  to  defer   to  the                                                              
Department  of Transportation  and Public  Facilities (DOTPF)  for                                                              
an answer.                                                                                                                      
                                                                                                                                
SENATOR  LINCOLN  asked  how,  at  eight  cents  per  gallon,  the                                                              
revenues are  $37 million;  yet increasing the  tax by  another 12                                                              
cents per gallon will bring it to $41 million.                                                                                  
                                                                                                                                
SENATOR THERRIAULT  explained that the $41 million is  from the 12                                                              
cent  per  gallon  increase  so  it is  in  addition  to  the  $37                                                              
million.                                                                                                                        
                                                                                                                                
SENATOR LINCOLN  pointed out that if  at eight cents a  gallon the                                                              
revenue is $37 million,  an increase of 1.5 times  would amount to                                                              
about $$60 million.                                                                                                             
                                                                                                                                
SENATOR THERRIAULT  explained that  a portion  of the  $37 million                                                              
collected is for  aviation and marine fuel, which will  not have a                                                              
12-cent per gallon increase.                                                                                                    
                                                                                                                                
SENATOR LINCOLN  asked how much  the additional 12-cent  tax would                                                              
raise,  if  the  $37 million  comes  from  highway,  aviation  and                                                              
marine fuel taxes.                                                                                                              
                                                                                                                                
SENATOR THERRIAULT  said that  is the $41  million. He  stated the                                                              
fuel  tax rate  increase would  not  apply to  aviation or  marine                                                              
fuel.                                                                                                                           
                                                                                                                                
COMMISSIONER  CORBUS  offered to  get  back to  committee  members                                                              
with a detailed  breakdown of the existing revenues  received from                                                              
all motor fuel taxes.                                                                                                           
                                                                                                                                
MS.  WILSON  interjected to  say  she  located those  numbers  and                                                              
stated:                                                                                                                         
                                                                                                                                
     Of the 37  million, approximately 27 million  is used on                                                                   
     the highway  and then there's  about six million  marine                                                                   
     fuel  tax and  another four  or so on  aviation. And  so                                                                   
     the numbers  that Commissioner Corbus gave you  would be                                                                   
     the increase over and above that.                                                                                          
                                                                                                                                
SENATOR  THERRIAULT  asked if  once  the tax  is  increased to  20                                                              
cents,  the  total  revenue  raised  on a  full  year's  worth  of                                                              
collections from  motor fuel for  highway vehicles will  equal $41                                                              
million plus $27 million.                                                                                                       
                                                                                                                                
COMMISSIONER CORBUS said that is his understanding.                                                                             
                                                                                                                                
CHAIR COWDERY  asked Mr.  Schmitz to explain  the changes  made in                                                              
the committee substitute.                                                                                                       
                                                                                                                                
MR. RICHARD  SCHMITZ, staff to  Senator Cowdery, told  members the                                                              
basic  change between  the original  bill  and version  Q is  that                                                              
version  Q   requires  Alaska   Railroad  Corporation   (ARRC)  to                                                              
contribute  funds into the  fuel tax.  After doing some  research,                                                              
he found  out how much  diesel fuel the  railroad uses  each year.                                                              
The railroad  has not paid tax on  fuel in the past  because it is                                                              
a government agency.  That issue is addressed on page  5, lines 15                                                              
and 16 and on page  4, lines 19 and 20. The language  in those two                                                              
places removes  the railroad from  the category of an  agency that                                                              
does not  pay fuel tax. It  also removes the exemption.  Under the                                                              
bill the  new tax  will be 20  cents per gallon  with an  18 cents                                                              
per gallon  refund for certain  situations, one example  being for                                                              
vehicles that are  not used on the highway, such  as backhoes. The                                                              
bill exempts the railroad from the 18 cents per gallon refund.                                                                  
                                                                                                                                
CHAIR  COWDERY  added  the  railroad   issue  was  raised  by  the                                                              
trucking  industry,   which  feels   it  is  competing   with  the                                                              
railroad.  Recently  Spenard Builders  shipped  a  load of  lumber                                                              
from Seward  to Anchorage and  the railroad underbid  the trucking                                                              
industry  on 200 loads.  He believes  it is  a matter of  fairness                                                              
and  introduced  that  provision.  The  revenue  raised  from  the                                                              
railroad will equal $2 million. He asked Mr. Gamble to comment.                                                                 
                                                                                                                                
SENATOR LINCOLN  noted that she  asked Commissioner Corbus  if the                                                              
administration   supports   this   bill   because   the   Governor                                                              
introduced  it. Commissioner  Corbus said  the administration  has                                                              
not taken a position  on it at this time. She  asked Chair Cowdery                                                              
if he worked with the administration.                                                                                           
                                                                                                                                
CHAIR  COWDERY  said  he  notified   the  administration  that  he                                                              
planned to include that provision in the bill.                                                                                  
                                                                                                                                
MR.  PAT GAMBLE,  President  and Chief  Operating  Officer of  the                                                              
Alaska Railroad Corporation  (ARRC), said he would  first speak to                                                              
the  diesel tax.  ARRC believes  this  bill discriminates  against                                                              
the railroad in  violation of the federal  Railroad Revitalization                                                              
and Regulatory  Reform Act of 1976  because the bill  will require                                                              
the railroad  to pay  a substantially  higher  fuel tax than  that                                                              
paid  by barges,  ships and  aircraft. Congress  adopted that  act                                                              
for the express  purpose of protecting the financial  stability of                                                              
the railroad industry  by shielding railroads  from discriminatory                                                              
taxation. Several  court case  decisions from other  jurisdictions                                                              
have upheld  that states may  not impose  a fuel tax  on railroads                                                              
that   is  greater   than   that  imposed   on   other  modes   of                                                              
transportation.                                                                                                                 
                                                                                                                                
MR. GAMBLE  said his second point  is that ARRC believes  it is an                                                              
inappropriate  application in  that AS 43.40.010  pertains  to tax                                                              
collection  for  the construction  and  maintenance  of  airports,                                                              
highways and port  facilities. ARRC, a state agency,  pays for all                                                              
construction  and maintenance  costs of the  rail bed.  Therefore,                                                              
ARRC  would  be  at a  direct  competitive  disadvantage  because,                                                              
unlike other  transportation  industries, ARRC  would have  to pay                                                              
the tax to subsidize roads and pay to maintain its own tracks.                                                                  
                                                                                                                                
CHAIR COWDERY asked if the railroad crosses roads.                                                                              
                                                                                                                                
MR. GAMBLE  said it does;  roads have been  built up and  down the                                                              
rail line  long after the  railroad was  built. He said  his third                                                              
concern is that,  as a state agency charged with  making a profit,                                                              
it is  unusual for  a state  agency to  tax another state  agency.                                                              
ARRC has  looked at  other states  and found  no other  state that                                                              
imposes  a  fuel or  ticket  tax  on a  state-owned  railroad.  By                                                              
ARRC's  count, of  the 18  state-owned passenger  railroads and  2                                                              
state owned  freight railroads,  none are  taxed by their  states.                                                              
He  said in  terms of  the financial  impact, it  is important  to                                                              
note that  ARRC receives a  considerable amount of  federal funds,                                                              
some  directly  appropriated from  the  FRA  and others  from  FTA                                                              
formula  funds. ARRC  leverages  the FTA  dollars considerably  so                                                              
that  for every  ARRC dollar,  it  receives $9.  Therefore a  $1.2                                                              
million tax,  which would  come off of  ARRC's bottom  line, would                                                              
equate  to a  $10  million  loss in  FTA  funds. Those  funds  are                                                              
authorized for every passenger-carrying railroad in the country.                                                                
                                                                                                                                
CHAIR COWDERY asked,  "On that point, Mr. Gamble, you  mean to say                                                              
that your expenses  of operation of the railroad  - whatever those                                                              
expenses - denies you some federal funds?"                                                                                      
                                                                                                                                
MR. GAMBLE  explained if he  did not have  the capital  dollars to                                                              
provide  for the  match at  the  rate of  9 percent,  he would  be                                                              
unable to pull in approximately $10 million per year.                                                                           
                                                                                                                                
CHAIR  COWDERY asked  if ARRC  made a  profit of  about $8 to  $10                                                              
million last year.                                                                                                              
                                                                                                                                
MR. GAMBLE said  it did, if the federal reimbursement  figures are                                                              
included.  He noted  if he includes  the operating  ratio  of just                                                              
the  trains  themselves  and  whether  the  train  movements  pay,                                                              
ARRC's  forecast  for  2003  is  about  $1.1  million  from  train                                                              
operations. Therefore,  a $1.2 million  tax would put ARRC  in the                                                              
red in  terms of  operating ratios  for 2003.  That will  have two                                                              
impacts.  First, it  will amount  to $10 million  less in  federal                                                              
funds than  ARRC can provide matching  funds for. ARRC  has a $300                                                              
million capital  improvement program.  If ARRC's lenders  see that                                                              
ARRC is not  making a profit  on train operations, ARRC  will have                                                              
to explain itself  to those lenders. ARRC has  debt covenants that                                                              
must be covered.   He said for a multitude of  reasons, ARRC would                                                              
have  to  question  the  legality  of  the  CS  from  the  federal                                                              
standpoint.  In addition,  the  CS  sends a  mixed  signal to  the                                                              
railroad  in terms of  what the  state wants  the railroad  to do:                                                              
does it want the  railroad to be profitable on its  own or does it                                                              
want to  tax off  that profit  as a disincentive?  He  pointed out                                                              
that ARRC uses its  profit to buy new equipment  for employees, to                                                              
offer competitive pay to employees, and to repair buildings.                                                                    
                                                                                                                                
SENATOR THERRIAULT  asked Mr. Gamble  to elaborate on  the federal                                                              
law  that prevents  a  tax  from being  levied  on  a state  owned                                                              
railroad.                                                                                                                       
                                                                                                                                
MR. GAMBLE  said the common  name of the act  is the 4R Act  or 49                                                              
U.S.C.  11501.   It  essentially   says   that  this  bill   would                                                              
discriminate  against the  railroad because  it would require  the                                                              
railroad to  pay a  higher fuel  tax at 20  cents per  gallon than                                                              
that paid  by barges  and ships  and aircraft.   He said  Congress                                                              
adopted this  statute for  the express  purpose of protecting  the                                                              
financial   stability  of   railroads  by   shielding  them   from                                                              
discriminatory  taxation of  this  type. It  would put  them at  a                                                              
competitive disadvantage with other transportation modes.                                                                       
                                                                                                                                
SENATOR THERRIAULT  pointed out the  railroad pays no tax  at this                                                              
time  while  barges,  ships  and  aircraft do.  He  asked  if  the                                                              
railroad could  be taxed at  the same level  as barges,  ships and                                                              
aircraft.                                                                                                                       
                                                                                                                                
MR. GAMBLE said  that it could, according to  his understanding of                                                              
the law.  Barges and  ships currently  pay five  cents per  gallon                                                              
while aircraft pay three cents per gallon.                                                                                      
                                                                                                                                
SENATOR  THERRIAULT asked,  if the  railroad was  taxed, how  ARRC                                                              
would consider that in its rate setting methodology.                                                                            
                                                                                                                                
MR. GAMBLE  said ARRC has not  figured that out yet.  He indicated                                                              
that  the  last  time ARRC  tried  to  set  rates  on one  of  its                                                              
passenger  services it received  quite a  response from  Talkeetna                                                              
area residents.  That service is  a money-losing  proposition that                                                              
would lose  even more money if the  tax were imposed.  Some of the                                                              
railroad's  break-even propositions  would not  be profitable  and                                                              
would add burden  on to the railroad and take up  line space. ARRC                                                              
would have to do  an analysis of all routes,  including the export                                                              
coal.  ARRC is in  negotiations  right now to  bring that  service                                                              
back  on. ARRC's  position  has  been to  assume  a  rate that  is                                                              
virtually a  break-even rate  in order to  get coal moving  out of                                                              
Alaska.                                                                                                                         
                                                                                                                                
SENATOR  THERRIAULT  asked  if  ARRC  calculated  any  numbers  to                                                              
determine the rates for the coal shipment.                                                                                      
                                                                                                                                
MR. GAMBLE  replied ARRC just  began to do  that when it  saw more                                                              
detail on the bill.                                                                                                             
                                                                                                                                
CHAIR COWDERY said  he did not enter into this  issue without some                                                              
legal  advice.   He  pointed   out  the   railroad  is   a  public                                                              
corporation of  the State of  Alaska. It  is a creature  of state,                                                              
not federal,  law and is subject  to the laws of the  state. Under                                                              
the Alaska  Constitution, the  real and  personal property  of the                                                              
state  and its  political  subdivisions  is exempt  from  taxation                                                              
except as  provided by  law. He noted  that under that  provision,                                                              
the  Legislature has  the authority  to determine  whether and  to                                                              
what  extent property  of the  state  is subject  to taxation.  He                                                              
said the federal  Alaska Railroad Transfer Act does  not appear to                                                              
place any constraint  on the ability of the state  to impose taxes                                                              
on  ARRC.  He  stated  that  under the  terms  of  that  act,  the                                                              
revenues  generated   by  the   state-owned  railroad   should  be                                                              
retained  and managed  by the  state-owned  railroad for  railroad                                                              
related  purposes.  He said,  according  to Senator  Ted  Stevens,                                                              
that  provision  was  intended   to  avoid  the  need  for  annual                                                              
appropriations  for   the  railroad  from  the  state.   He  said,                                                              
according  to  the legal  opinion  he  received, he  believes  the                                                              
state has  the right to  tax because the  railroad is now  a state                                                              
entity.  He  pointed  out  the railroad  is  in  competition  with                                                              
private  industry, which  must  pay taxes.  He  said the  railroad                                                              
would have to raise its rates if it can't compete.                                                                              
                                                                                                                                
MR. GAMBLE  commented that his legal  advisors have told  him that                                                              
the  state cannot  preempt federal  code  so the  outcome of  this                                                              
debate will most  likely have to be determined in  court. It would                                                              
be  ARRC's  responsibility   to  carry  that  forward   to  get  a                                                              
determination.                                                                                                                  
                                                                                                                                
CHAIR COWDERY agreed that is a likely outcome.                                                                                  
                                                                                                                                
SENATOR WAGONER asked  Mr. Gamble to restate his  remark about the                                                              
negotiations for the coal contract and the break-even rate.                                                                     
                                                                                                                                
MR.  GAMBLE  said he  was  using  that as  an  example  of a  case                                                              
whereby the railroad  would take on an element of  business with a                                                              
very narrow operating  margin. If ARRC had to include  the cost of                                                              
the  tax,  it  could  make  the  difference  between  a  positive,                                                              
neutral, or negative  cash flow. Therefore, ARRC would  have to do                                                              
a segment  analyses with  the addition of  the tax and  determine,                                                              
on  a  case-by-case  basis,  the  cost  for  both  passengers  and                                                              
freight. He  was using that as an  example of a segment  where the                                                              
operating ratio is very close to 1:1.                                                                                           
                                                                                                                                
SENATOR  WAGONER replied  that  is  a major  contract  for such  a                                                              
close ratio  because, in that case,  the state is  subsidizing the                                                              
cost of transferring  the coal so  that a private entity  can make                                                              
a profit. He noted he has a problem with that.                                                                                  
                                                                                                                                
SENATOR  THERRIAULT  referred  to   a  document  before  committee                                                              
members that  shows the breakdown of  the amount of fuels  used by                                                              
the railroad. He  asked if the same 4R Act speaks  to the taxation                                                              
of fuels  that the  railroad uses  in vehicles  that drive  on the                                                              
road.                                                                                                                           
                                                                                                                                
MR. GAMBLE  said that  ARRC has  about 180  vehicles ranging  from                                                              
small pick-up  trucks to large  semi-tractor trailer  trucks. ARRC                                                              
has given  an estimate of the  approximate fuel purchase  used for                                                              
those vehicles and  what the tax on them would amount  to. He said                                                              
the  4R Act  does not  apply to  those vehicles.  ARRC uses  about                                                              
225,000 gallons  for gas  and diesel  fuel each  year for  its 180                                                              
vehicles and  has estimated  a $45,000 tax  increase for  them. He                                                              
said ARRC  has never tried  to recover the  taxes it has  paid for                                                              
fuel at the gas pump.                                                                                                           
                                                                                                                                
SENATOR THERRIAULT  asked if ARRC is currently  paying the $45,000                                                              
in taxes.                                                                                                                       
                                                                                                                                
MR. GAMBLE said that is correct.                                                                                                
                                                                                                                                
SENATOR  WAGONER  asked  if  ARRC  has  published  rates  that  it                                                              
charges  for  most  of  the  commodities  that  it  transports  or                                                              
whether it negotiates each time it hauls an item.                                                                               
                                                                                                                                
MR. GAMBLE  said that ARRC  does both. It negotiates  individually                                                              
for small  contracts but  it might  sign a  contract that  lasts a                                                              
couple of years with a cruise ship company, for example.                                                                        
                                                                                                                                
SENATOR WAGONER asked if that would be for passenger travel.                                                                    
                                                                                                                                
MR. GAMBLE  said that  is correct. For  freight, ARRC  attempts to                                                              
sign longer  term contracts  but many of  them are very  short. He                                                              
indicated the Spenard  Lumber shipment was a  one-time opportunity                                                              
and is an example of a short-term contract.                                                                                     
                                                                                                                                
SENATOR WAGONER  asked if ARRC has  a published rate  for shipping                                                              
building  materials  but,  in  the example  of  Spenard  when  the                                                              
amount is large, it negotiates an individual contract.                                                                          
                                                                                                                                
MR.  GAMBLE  was   not  sure  what  members  meant   by  the  term                                                              
"published rate."                                                                                                               
                                                                                                                                
SENATOR  WAGONER indicated  that  truck companies  that  transport                                                              
freight have published rates.                                                                                                   
                                                                                                                                
MR. GAMBLE  said he would  have to check  all of ARRC's  rates and                                                              
is reluctant  to give  an answer without  doing so beforehand.  He                                                              
offered to get back  to committee members with an  answer. He said                                                              
ARRC negotiates individual  rates to a large degree  but he cannot                                                              
say there are no published rates.                                                                                               
                                                                                                                                
CHAIR COWDERY  informed Senator  Wagoner that the  Legislature has                                                              
made  attempts  in  the  past  to   put  the  railroad  under  the                                                              
Executive Budget Act  to give the Legislature the  ability to look                                                              
at its  records. He said  one of those  attempts came as  close as                                                              
one  vote but,  right  now, the  Legislature  cannot  look at  the                                                              
books.  He  asked   Mr.  Gamble  if  the  rates   are  proprietary                                                              
information.                                                                                                                    
                                                                                                                                
MR. GAMBLE said  to his understanding, the Legislative  Budget and                                                              
Audit Committee  can look at the  books and reveal  everything but                                                              
proprietary  information.  He noted,  "Of  course,  that is  their                                                              
interpretation so that's how I understand the audit process."                                                                   
                                                                                                                                
CHAIR COWDERY  asked Mr.  Gamble if he  favors placing  ARRC under                                                              
the Executive Budget Act.                                                                                                       
                                                                                                                                
MR. GAMBLE  said not under the  current rules and  directions that                                                              
have been given to the railroad for its operations.                                                                             
                                                                                                                                
CHAIR COWDERY  asked whether  Mr. Gamble  would determine  whether                                                              
to file a lawsuit if this legislation is enacted.                                                                               
                                                                                                                                
MR.  GAMBLE said  he  is speaking  to  the committee  without  any                                                              
direction from  the ARRC  Board of Directors  or the  third floor.                                                              
He said  he is  trying to  answer questions  with no knowledge  of                                                              
the politics.                                                                                                                   
                                                                                                                                
SENATOR WAGONER  asked the  cost, in fuel,  to run a  train round-                                                              
trip between Anchorage and Seward empty one way.                                                                                
                                                                                                                                
MR. GAMBLE said he would have to get that information.                                                                          
                                                                                                                                
TAPE 03-12, SIDE B                                                                                                              
2:21 p.m.                                                                                                                       
                                                                                                                                
SENATOR  THERRIAULT asked  Mr.  Gamble what  effects  a tax  might                                                              
have  on  the  extension  of the  rail  line  through  Canada  and                                                              
whether  it would  make  the rail  rates  such  that the  railroad                                                              
could not compete with barge traffic.                                                                                           
                                                                                                                                
MR. GAMBLE  said he believes the  impact on the railroad  is quite                                                              
straightforward.  That cost would  simply come  off of  the bottom                                                              
line. It is  an expense that goes  to the bottom line  that is the                                                              
function  of a  train-operating  ratio that  is close  to 1:1.  He                                                              
said the  state's charge to the  railroad is to be  profitable, as                                                              
any  private corporation.  The  state  has equipped  the  railroad                                                              
with tools  to assist that  profitability, including the  fuel tax                                                              
exemption.  He  said  this  legislation  represents  a  change  in                                                              
attitude toward  what the railroad was  designed to be.  He said a                                                              
profitable  railroad has  been of  great benefit  to the state  in                                                              
more  ways than  just the  $1 million  that would  come from  this                                                              
tax. He  repeated that  it is  quite important  to understand  the                                                              
leverage on  each dollar that ARRC  puts into its  capital program                                                              
is to  the benefit of  the State of Alaska.  He said if  ARRC gets                                                              
$10 million less  as a result of the fuel tax that  is $10 million                                                              
in  terms  of  labor  and supplies  that  will  not  go  into  the                                                              
economy.                                                                                                                        
                                                                                                                                
CHAIR  COWDERY  asked Mr.  Gamble  if  he  believes the  State  of                                                              
Alaska would benefit if the trucking industry made a profit.                                                                    
                                                                                                                                
MR.  GAMBLE said  certainly. He  said the  railroad probably  gets                                                              
along  with  the trucking  industry  better  now than  during  any                                                              
other time, one  reason being the truckers haul  what the railroad                                                              
can't and vice  versa. He said the  case of the Spenard  Lumber is                                                              
one where  some overlap  occurred but, in  general, there  is very                                                              
little overlap.                                                                                                                 
                                                                                                                                
CHAIR COWDERY  pointed out that  many of the truck  companies have                                                              
contracts with  the marine companies  to deliver vans but  have no                                                              
way to recover the cost of the fuel tax.                                                                                        
                                                                                                                                
SENATOR LINCOLN  referred to the  on-road vehicles owned  by ARRC,                                                              
and said  it gives her no  heartburn to include those  vehicles in                                                              
the  fuel tax  but that  amounts to  only $45,000.  She noted  Mr.                                                              
Gamble  said that  ARRC  has not  sought  reimbursement for  those                                                              
taxes and  ARRC is working to  eliminate fuel tanks in  areas with                                                              
retail fuel  outlets. She asked if  ARRC is an entity  rather than                                                              
a state agency.                                                                                                                 
                                                                                                                                
MR. GAMBLE  said that  is correct; ARRC  is an instrumentality  of                                                              
the state.                                                                                                                      
                                                                                                                                
SENATOR LINCOLN  referred to  language on page  5, line  16, which                                                              
reads:                                                                                                                          
                                                                                                                                
      ...for the purposes of this subparagraph, the Alaska                                                                      
         Railroad Corporation (under AS 42.40) is not a                                                                         
     federal, state, or local government agency;                                                                                
                                                                                                                                
She  said she  is bewildered  by why  the legislation  has to  say                                                              
ARRC is not  an agency if that  is already clarified in  AS 42.40.                                                              
She noted  that Mr. Gamble pointed  out, in ARRC's 2003  report to                                                              
the Legislature, the Alaska Railroad is mandated to be a self-                                                                  
sustaining corporation  required to  conduct its business  without                                                              
operating subsidies  from the state. She was  unsure the exemption                                                              
would be  considered as a subsidy  but expressed concern  that the                                                              
Legislature is considering  giving the railroad a  500 foot right-                                                              
of-way to extend  to Canada. She said on one  hand the Legislature                                                              
is pushing ARRC to  do things while on the other  it wants to take                                                              
$1.1 million of its operating budget.                                                                                           
                                                                                                                                
CHAIR COWDERY  interrupted to say  that a committee  member needed                                                              
to leave  and had  a question  of a  Department of  Transportation                                                              
and Public Facilities (DOTPF) official.                                                                                         
                                                                                                                                
MR. LEVASSEUER,  State Maintenance Engineer, DOTPF,  told members,                                                              
in response  to a previous question,  that DOTPF spends  about $57                                                              
million of  general fund  dollars on  state maintenance  annually.                                                              
DOTPF  also  spends another  $50  million  from the  general  fund                                                              
annually to match federal funds for the highway system.                                                                         
                                                                                                                                
SENATOR THERRIAULT  calculated the  state spends $107  million per                                                              
year but is raising  $27 million and said a dedicated  fund is not                                                              
necessary  to  steer  all  of that  money  into  road  maintenance                                                              
because the state is already spending that much.                                                                                
                                                                                                                                
MR. LEVASSEUER  said that is correct  and there is a  huge backlog                                                              
of deferred  maintenance projects on  the highway system.  He said                                                              
the state's  outlay is much  greater than the anticipated  revenue                                                              
from  the  increased fuel  tax.  He  then  said DOTPF  is  getting                                                              
further behind  on the  deferred maintenance  projects each  year.                                                              
He pointed  out the increase  in the fuel  tax is not  intended to                                                              
affect fuel  for snow  machine use,  motor boats,  or ATVs  in the                                                              
rural areas. He  said the Department of Revenue plans  to put into                                                              
place a mechanism  so that rural  areas not connected to  the road                                                              
system will not pay that tax.                                                                                                   
                                                                                                                                
SENATOR  THERRIAULT   asked  if  the  residents   in  those  areas                                                              
currently pay the 8 cents per gallon.                                                                                           
                                                                                                                                
MR. LEVASSEUER  said they do in  most areas but they can  get that                                                              
money refunded.                                                                                                                 
                                                                                                                                
SENATOR  THERRIAULT  asked if  the  refund is  based  on a  signed                                                              
affidavit saying the vehicle is used off road.                                                                                  
                                                                                                                                
MS.  WILSON  gave  an explanation  of  how  the  refund  structure                                                              
works.  There are two  different  types of refunds.  The first  is                                                              
for a  situation in  which the  use is  fully exempt, for  example                                                              
heating   fuel.  There  are   two  refund   mechanisms  for   that                                                              
situation.  The dealer  that  sells  the fuel  can  choose to  not                                                              
charge the  customer the tax and  the dealer can file  a claim for                                                              
a refund. The other  alternative is the dealer may  charge the tax                                                              
and the user  then applies for  a refund. There is  no requirement                                                              
that it be done  one way or the other. That is not  true with off-                                                              
road refunds,  where the entire  tax is not  refunded; 6 of  the 8                                                              
cents are. The dealer  must collect the 8 cents and  the user then                                                              
applies  for a refund  of 6  cents. She  said the  refund must  be                                                              
claimed within the year of the purchase using a simple form.                                                                    
                                                                                                                                
CHAIR  COWDERY  announced   his  intention  to  hold   SB  112  in                                                              
committee today.                                                                                                                
                                                                                                                                
2:37 p.m.                                                                                                                       
                                                                                                                                
SENATOR WAGONER  asked in which  areas of the state  residents are                                                              
eligible for the  6 cent off-road tax refund. He  asked if that is                                                              
for off-road vehicles  statewide, so that a four-wheeler  in Kenai                                                              
would be eligible.                                                                                                              
                                                                                                                                
MS. WILSON explained  the refund is available statewide  for those                                                              
types  of vehicles.  It  also applies  to any  vehicle  used on  a                                                              
highway  that is  not required  to  be licensed.  Therefore, in  a                                                              
remote area,  the state  may not require  vehicles to  be licensed                                                              
on local  roads so  a pick-up driven  on that  road would  not pay                                                              
the tax.  The department does  not have a  list of the  roads that                                                              
are not  considered to  be public. Usually  it is fairly  apparent                                                              
whether a road is  connected to "public ways" or  whether the road                                                              
is  for local  use  only. The  department  sometimes contacts  the                                                              
taxpayer or the locality for clarification.                                                                                     
                                                                                                                                
SENATOR WAGONER  said he questions why  the state does  that for 6                                                              
cents  per  gallon  and  whether   it  costs  the  state  more  to                                                              
administer than the amount reimbursed.                                                                                          
                                                                                                                                
MS.  WILSON replied,  "...I  can't really  speak  to the  thinking                                                              
historically on  that one. I know  that probably the  biggest off-                                                              
road claimants  are your construction companies,  mining companies                                                              
and  so on  that use  a lot  of what  we consider  to be  off-road                                                              
equipment."                                                                                                                     
                                                                                                                                
SENATOR  WAGONER said  he was  concerned about  the four  wheelers                                                              
and the snow machines.                                                                                                          
                                                                                                                                
MS. WILSON said  she does not know why the refund  program was set                                                              
up that way.                                                                                                                    
                                                                                                                                
SENATOR  OLSON  asked for  an  estimate of  how  much  of the  tax                                                              
collected is not refunded to eligible recipients every year.                                                                    
                                                                                                                                
MS. WILSON  said the department does  not have any way  to measure                                                              
the refunds that are not claimed.                                                                                               
                                                                                                                                
SENATOR OLSON  asked if a  100,000 gallon  tank used each  year in                                                              
Hooper Bay would generate a $6,000 refund.                                                                                      
                                                                                                                                
MS. WILSON said that is correct.                                                                                                
                                                                                                                                
MR.  LEVASSEUER noted  the current  8-cent tax  was instituted  in                                                              
1961. If it  were adjusted for the  CPI since that time,  it would                                                              
equal  about 48  cents.  At  8 cents,  Alaska's  fuel  tax is  the                                                              
lowest  in  the  nation.  He said  DOTPF  and  the  administration                                                              
strongly support passage of this bill.                                                                                          
                                                                                                                                
CHAIR  COWDERY said  he recently  saw  prices of  $2.12 and  $2.19                                                              
cents per gallon in other states.                                                                                               
                                                                                                                                
SENATOR  WAGONER   noted  that   Alaska  is  number   two  because                                                              
Georgia's tax is 7.5 cents per gallon.                                                                                          
                                                                                                                                
MR. LEVASSEUER  pointed out  that Georgia charges  a sales  tax on                                                              
top of the 7.5 cents.                                                                                                           
                                                                                                                                
SENATOR LINCOLN  reminded Chair Cowdery  that her question  to Mr.                                                              
Gamble was not yet answered.                                                                                                    
                                                                                                                                
MR.  GAMBLE said  that Senator  Lincoln  touched a  nerve and  got                                                              
right to  the heart of  the issue that  ARRC is debating.  ARRC is                                                              
currently  facing   a  number  of   initiatives  set  up   by  the                                                              
Legislature,  SB 112 being  one, to  change the original  formulas                                                              
that set up the  railroad during the transfer.  He  said it is not                                                              
his  place   to  defend  to   the  death  against   something  the                                                              
Legislature believes  is for the betterment of the  state. His job                                                              
is to  take the guidance  within statute  and make sure  that ARRC                                                              
upholds that  guidance. However, ARRC  gets caught between  a rock                                                              
and a  hard place when  some of the  developmental and  more risky                                                              
undertakings that  the railroad  might participate in  clash head-                                                              
on with what is  necessary for the railroad to  maintain a healthy                                                              
bottom  line and  the appropriate  ratios  that go  with that.  He                                                              
said if  ARRC is to do  that, it is  dependent on the  elements of                                                              
the original formula,  such as not being taxed,  being indemnified                                                              
and  being  able to  use  its  land  for revenue.  Those  are  the                                                              
reasons  the railroad  has  been  successful. If  the  Legislature                                                              
wants  to  change  those  elements,  ARRC wants  to  look  at  the                                                              
unintended consequences  carefully because ARRC's  current success                                                              
means the  original formula  was a  good one. He  said if  ARRC is                                                              
penalized for  its success by giving  away its bottom line  to the                                                              
general  fund as  opposed to  continually  allow ARRC  to put  its                                                              
profits back into  the railroad, he would caution  the alternative                                                              
plan is not as good as the original one.                                                                                        
                                                                                                                                
MR. GAMBLE  said the  weight of a  freight train directly  relates                                                              
to  the maintenance  of  that line.  ARRC  puts  its profits  into                                                              
maintaining its rail  line - no one else pays for  that. ARRC will                                                              
do  an analysis  on maintenance  to make  sure ARRC  can move  the                                                              
freight and  passengers. He  hopes if the  rail line  is extended,                                                              
that formula  would pertain as  it has for  the last 17  years. He                                                              
said his best  technical and business advice is  that the existing                                                              
formula is a good one and by:                                                                                                   
                                                                                                                                
     ...messing  with it,  we're going  to pull  a thread  on                                                                   
     this  fabric  that's  going   to  start  to  unravel.  I                                                                   
     guarantee  you that  once the thread  gets pulled,  it's                                                                   
     just simply  human nature, back  to the well and  try it                                                                   
     again  and try  it again  in  the future.  I would  just                                                                   
     simply  counsel that  it would  be  a shame  to see  the                                                                   
     railroad ultimately  become more and  more of a  ward of                                                                   
     the state  when, in fact, for  the most part,  you don't                                                                   
     have  to  worry about  us  right  now  in terms  of  our                                                                   
     health and welfare...."                                                                                                    
                                                                                                                                
SENATOR WAGONER asked  Mr. Gamble to include the  annual number of                                                              
passengers and  the costs for those  trips when he sends  the fuel                                                              
consumption information.                                                                                                        
                                                                                                                                
MR. GAMBLE agreed to do so.                                                                                                     
                                                                                                                                
SENATOR  WAGONER asked  how much  ARRC's fuel  costs increased  in                                                              
the last  year and how  it passes that  cost on to  its customers.                                                              
He pointed  out that he  owned a home  improvement center  and had                                                              
products of various  weights hauled. He said if  the truck company                                                              
had  a  fuel   cost  increase,  it  automatically   added  a  fuel                                                              
surcharge to its rates. He asked if ARRC does the same thing.                                                                   
                                                                                                                                
MR. GAMBLE  said it does  partially. For  example, it can  apply a                                                              
surcharge  to  its  maritime  traffic   that  arrives  via  barge.                                                              
However, it cannot  apply a surcharge to its  passenger operations                                                              
in which  it has contracts with  the cruise ship companies  and it                                                              
does not  apply a  surcharge when  moving petroleum products  from                                                              
the  refinery to  Anchorage. ARRC's  rates  are set  such that  it                                                              
cannot apply a surcharge in that case.                                                                                          
                                                                                                                                
SENATOR  WAGONER  asked if  ARRC  is  then eating  increased  fuel                                                              
costs.                                                                                                                          
                                                                                                                                
MR. GAMBLE  said he would  not say that,  because ARRC has  a very                                                              
complicated contract  with Williams [refinery] regarding  fuel and                                                              
fuel price  increases or  decreases that  works for both  parties.                                                              
It is a hedge.  ARRC buys futures with Williams for  fuel as well.                                                              
ARRC works  that in  an entirely  different way  than it  does for                                                              
barge traffic  for which  it simply applies  a surcharge.  He said                                                              
ARRC does not apply a surcharge for passenger traffic.                                                                          
                                                                                                                                
CHAIR COWDERY noted  that Mr. Gamble said ARRC would  be unable to                                                              
recover  a 12  cent  increase  in the  fuel  tax.  He asked,  "But                                                              
haven't fuel  prices [gone]  up at  least that  in the  last year?                                                              
And you absorbed  that somehow and it probably will  go back down,                                                              
we hope."                                                                                                                       
                                                                                                                                
MR. GAMBLE said  ARRC did absorb some of that increase,  just like                                                              
it absorbs other  cyclical expenses. He said a few  times the cost                                                              
of fuel  increased and  then decreased so  quickly ARRC  could not                                                              
even apply  a surcharge. However, to  the degree ARRC can  apply a                                                              
surcharge to a portion of its railroad business, it will.                                                                       
                                                                                                                                
CHAIR COWDERY noted  the trucking industry is faced  with the same                                                              
problem.  It has  contracts to  deliver vans  and if  this tax  is                                                              
implemented, it  cannot recover those costs until  those contracts                                                              
come up for renewal.                                                                                                            
                                                                                                                                
MR. GAMBLE  agreed and said  to the degree  all of the  fuel taxes                                                              
are pooled  and some  of it comes  back to  ARRC to help  maintain                                                              
the rail line,  ARRC could sit down  and look at that.  ARRC wears                                                              
down the rail  line with trains and  ARRC pays for it.  If none of                                                              
the tax increase  will go toward rail line maintenance,  ARRC will                                                              
have to "eat" that cost.                                                                                                        
                                                                                                                                
CHAIR COWDERY noted  that ARRC made a profit last  year while some                                                              
of  the trucking  industry did  not.  He then  announced he  would                                                              
hold the bill in committee for another hearing.                                                                                 
                                                                                                                                
MR.  GAMBLE thanked  members for  the opportunity  to testify  and                                                              
agreed  that ARRC  made a  profit last  year, but  if real  estate                                                              
revenue weren't  included,  the train operations  would have  been                                                              
very marginal.                                                                                                                  
                                                                                                                                
CHAIR COWDERY  announced he  was holding SB  112 in  committee and                                                              
then adjourned the meeting at 2:55 p.m.                                                                                         

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