Splitting the difference
Resource committee proposes small mining tax hike; sends bill on its way
Last updated 4/10/2016 at Noon
Alaska's mining sector is the target of a potential tax hike as lawmakers look for new revenues to help close the state's nearly US$4 billion budget deficit. For perspective, this fiscal gap is roughly 35 percent larger than the worth of all the zinc, gold, silver and lead mined in Alaska during 2015.
The proposed mining tax increase is part of Gov. Bill Walker's larger budget balancing plan that includes cutting state spending, restructuring the Alaska Permanent Fund, and implementing a broad-based tax, along with targeted industry and sin tax increases.
For the mining sector, Walker proposed raising the tax rate on mines netting more than US$100,000 from 7 to 9 percent. This roughly 29 percent tax hike, along with other proposed changes to Alaska's mining tax law are outlined in House Bill 253.
Mining leaders say this added load could not come at a worse time for an industry that is already being taxed by falling metals prices and dismal equity markets.
"The global mining industry is in a prolonged downturn, as are the vendor and contracting sectors that depend on its activity," Alaska Miners Association Executive Director Deantha Crockett testified before the House Resources Committee, the first stop for HB 253.
Together, Alaska's mines produced roughly US$2.76 billion of precious and base metals during 2015, down 12.3 percent from 2014, according to early estimations by the Alaska Division of Geological & Geophysical Surveys.
Crockett told the lawmakers that Alaska's miners are not against paying taxes and contributing to the state's fiscal solution but questions whether increasing taxes or encouraging sector growth is the best approach to increasing the flow of cash from mines to state coffers.
"Alaska is home to over a dozen advanced exploration mining projects, and just a single one of them going into production will bring the state of Alaska substantially more revenue than what is being proposed by this legislation," Crockett testified.
Splitting the difference
Members of the House Resource Committee took the helm of weighing the potential benefits and liabilities of boosting the Alaska mining tax in February.
According to the Alaska Department of Revenue, the 2 percent mining tax rate hike would net the state roughly an extra US$6 million next year. For lawmakers trying to close a multibillion-dollar gap, this is a drop in the proverbial bucket.
Council of Alaska Producers - a trade organization that represents five mines that would be immediately affected by a tax increase and another five projects hoping to be taxable mines in the near future - agrees with many of the governor's proposals to balance Alaska's budget but worries that this increase to Alaska's mining tax rate could do more harm than good.
"To achieve fiscal sustainability and a stable investment climate, we support strategic reductions in the cost of government, use of the Permanent Fund earnings and broad-based revenue measures to fill the remaining gap. However, CAP believes that targeting one or a few resource industries for tax increases is divisive, discourages investment and does little to balance the budget," Karen Mathias, managing consultant, Council of Alaska Producers, informed members of the House Resources Committee.
"Just one new large metal mine would bring more revenue to the state than this proposed increase," she added.
Donlin Gold - projected to produce more than 1 million ounces of gold per year, more gold than all of the rest of the mines in the state combined - is the nearest of Alaska's future mines to gaining the permits needed for development.
Reflecting on the enormous size of the proposed Donlin Gold Mine, Rep. Andy Josephson, D-Anchorage, "I am still looking for some comfort that when that (gold) gets removed and severed from Alaska that Alaskans are getting their fair share."
Josephson's concern is shared by many Alaska lawmakers trying to determine a mining tax rate that would maximize cash flow to Alaska coffers without discouraging further investment in the state.
In the end, resource committee members split the difference between the governor's proposal and the status quo - sending HB 253 to the House Finance Committee April 1 with a proposed 8 percent tax rate on Alaska mines netting more than US$100,000.
In addition to raising the tax rate on mining, lawmakers considered the idea of doing away with a 3.5-year exemption of the tax for new mines, an idea that was frowned upon by Alaska's mining leaders.
"Since no new large mines have received permits to start construction, it is clear that this change will not result in any new revenue in the near term. On the contrary, it sends a negative message to potential investors and possibly tips the scale for economic feasibility of some developing projects so it could actually have a negative impact on future state revenue," Mathias argued.
Again, the resource committee found a compromise, this time weighted in favor of the industry.
Instead of eliminating the tax credit altogether, the committee members shaved six months off the grace period.
Crockett told Mining News that she was "pleased" this exemption designed to encourage companies to develop new mines in Alaska was put back in the bill.
"There is not any direct benefit to state revenue by getting rid of that exemption, yet it exists as an incentive to bring new mines online," she explained.
Before HB 253 was sent to the House Finance Committee, Rep. Paul Seaton, R-Homer, added an amendment to establish a legislative working group to study the tax structure for mining.
Crockett is optimistic that such a review would give Alaska lawmakers better insight into what is a fair mining tax rate for a mineral rich but remote state like Alaska.
"I am hopeful that the intent on that is to have more time to sufficiently review the mining tax structure," Crockett said.
With five more stops in the House and Senate, it is unclear whether HB 253 will make it to the governor's desk before the April 17 end of the legislative session.