Legislature(2013 - 2014)

2013-01-16 Senate Journal

Full Journal pdf

2013-01-16                     Senate Journal                      Page 0032
SB 21                                                                                                                         
SENATE BILL NO. 21 BY THE SENATE RULES COMMITTEE                                                                                
BY REQUEST OF THE GOVERNOR, entitled:                                                                                           
          "An Act relating to appropriations from taxes paid                                                                    
          under the Alaska Net Income Tax Act; relating to the                                                                  
          oil and gas production tax rate; relating to gas used in                                                              
          the state; relating to monthly installment payments of                                                                
          the oil and gas production tax; relating to oil and gas                                                               
          production tax credits for certain losses and                                                                         
          expenditures; relating to oil and gas production tax                                                                  
          credit certificates; relating to nontransferable tax                                                                  
          credits based on production; relating to the oil and                                                                  
          gas tax credit fund; relating to annual statements by                                                                 

2013-01-16                     Senate Journal                      Page 0033
          producers and explorers; relating to the determination                                                                
          of annual oil and gas production tax values including                                                                 
          adjustments based on a percentage of gross value at                                                                   
          the point of production from certain leases or                                                                        
          properties; making conforming amendments; and                                                                         
          providing for an effective date."                                                                                     
was read the first time and referred to the Senate Special Committee                                                            
on Trans Alaska Pipeline System Throughput, Resources and Finance                                                               
The following fiscal information was published today:                                                                           
 Fiscal Note No. 1, indeterminate, Department of Revenue                                                                        
 Fiscal Note No. 2, indeterminate, Department of Natural                                                                        
Governor's transmittal letter dated January 15:                                                                                 
Dear President Huggins,                                                                                                         
To create more economic opportunity for Alaskans, we must                                                                       
proactively choose a future of more oil production. Therefore, under                                                            
the authority of Article III, Section 18 of the Alaska Constitution, I am                                                       
transmitting a bill relating to oil production taxation.                                                                        
Alaska's oil belongs to Alaskans, and increased oil production will                                                             
mean increased private sector opportunity for Alaskans. Alaska                                                                  
engineers, contractors, and maintenance personnel earn their                                                                    
livelihoods from oil production; indirectly so do business owners,                                                              
retailers, and working men and women of all trades. Oil production                                                              
also provides revenue and drives public sector opportunities for                                                                
schools, public safety, roads and ferries, energy infrastructure, and                                                           
many other services for Alaskans.                                                                                               
Need for Legislation                                                                                                        
Alaskans are well aware that oil production from legacy fields is                                                               
declining. Not because we are running out of oil, but because we are                                                            
running behind the competition. Alaska's North Slope has billions of                                                            
proven barrels of oil, but we do not have a tax system designed to                                                              
attract new investment for more production. At high oil prices, the                                                             

2013-01-16                     Senate Journal                      Page 0034
current progressive tax rate structure creates highly variable tax rates                                                        
and takes far more profit from investors than other competing                                                                   
jurisdictions. Investors take their money where they get a greater                                                              
return, and they are investing new capital elsewhere. Legislation is                                                            
necessary to drive new investment to create new Alaska production                                                               
and new opportunities for Alaskans.                                                                                             
Under current law, the generous tax credits for capital expenditures                                                            
support company spending now, but on spending not necessarily                                                                   
targeted for new production. Consequently, the State experiences the                                                            
short-term risk of writing large checks from the treasury for those                                                             
credits with no corresponding increase in production. Legislation is                                                            
necessary to mitigate this risk, and focus company investment on long-                                                          
term, new Alaska production.                                                                                                    
Guiding Principles                                                                                                          
Tax policy must be fair to Alaskans. Any changes to oil taxes should,                                                           
when taken together, be geared to foster new production. Changes                                                                
should result in a more simple tax system and restore balance to our                                                            
fiscal system. And, tax policy must make Alaska competitive for the                                                             
long-term. If these guiding principles are met, I believe we will more                                                          
fully maximize the benefit of Alaskans' oil resources for Alaskans.                                                             
Legislation Summary                                                                                                         
The bill maintains a 25 percent base tax rate with a 20 percent gross                                                           
revenue exclusion for new oil. It eliminates the progressivity                                                                  
calculation, and eliminates the qualified capital expenditure credits for                                                       
North Slope expenditures. The bill reforms the remaining credits so                                                             
that they are taken when there is production.                                                                                   
Fair to Alaskans and Fosters New Production                                                                                 
The legislation provides more downside price protection for Alaskans                                                            
in exchange for more upside price revenue to the companies. Under                                                               
the current tax system, State revenues depend primarily on the price of                                                         
oil, but the current qualified capital expenditure credits depend on the                                                        
level of company spending. If prices fall, State revenues are reduced                                                           
but the State retains the obligation to pay credits. Further, if additional                                                     
development occurs, under the current system, the credit obligation                                                             
could grow substantially. Given the State's other obligations like                                                              
public safety and schools, this imbalance exposes the State to                                                                  

2013-01-16                     Senate Journal                      Page 0035
substantial financial risks. By reforming the credit system, this bill                                                          
rebalances the current tax structure to ensure revenues to the State in                                                         
low price environments.                                                                                                         
The legislation targets new Alaska production rather than just                                                                  
company spending, thus unlocking more of Alaskans' oil for more                                                                 
Alaskan private sector and public sector opportunities. This goal is                                                            
accomplished by eliminating the current 20 percent tax credit under                                                             
AS 43.55.023(a) for qualified capital expenditures incurred after                                                               
December 31, 2013, to explore for, develop, or produce oil and gas                                                              
deposits located on the North Slope. The bill would amend the 25                                                                
percent tax credit issued under AS 43.55.023(b) for a carried-forward                                                           
annual loss based on expenditures incurred after December 31, 2013,                                                             
to explore for, develop, or produce oil and gas deposits located on the                                                         
North Slope by limiting the transferability and monetization of the tax                                                         
credit. The amendment to AS 43.55.023(b) will encourage investment                                                              
aimed at production by requiring a producer or explorer to carry the                                                            
credit forward to offset future tax liabilities. Additionally, the bill                                                         
extends the small producer tax credit available under AS 43.55.024(c).                                                          
The small producer tax credit is nontransferable.                                                                               
The bill creates additional incentives for new production on the North                                                          
Slope by providing for a 20 percent revenue exclusion based on the                                                              
gross value at the point of production of oil and gas produced from a                                                           
lease or property that was not, as of January 1, 2003, within a unit. It                                                        
also proposes the same 20 percent revenue exclusion for oil and gas                                                             
production from new participating areas in units that were formed                                                               
before January 1, 2003. Similar to the new North Slope carried-                                                                 
forward annual loss tax credit and the extended tax credit for small                                                            
producers, these incentives only would apply to a company when it                                                               
has production.                                                                                                                 
More Simple, Restores Balance                                                                                               
The bill simplifies the oil and gas production tax by repealing the                                                             
progressive tax rate structure in Alaska's current tax system by levying                                                        
a flat rate tax of 25 percent on oil and gas production statewide,                                                              
subject to current tax ceilings on certain oil and gas, for production                                                          
beginning January 1, 2014. The repeal of the progressive tax rate                                                               
structure in this bill encourages the type of long-term planning and                                                            
investment needed to promote new investment in new production in                                                                

2013-01-16                     Senate Journal                      Page 0036
Long-Term Competitiveness                                                                                                   
By shifting the incentives away from spending and towards new                                                                   
production we assure these tax changes are for the long run. Producers                                                          
get the benefit of tax changes later - after they produce new oil when                                                          
they can offset earlier liabilities against new production. Additionally,                                                       
by giving back more of the high side at high oil prices (while better                                                           
protecting Alaskans against the downside of lower oil prices), we                                                               
assure companies will make their investments for the long haul                                                                  
because they are more likely to take short-term risk with capital if they                                                       
are assured greater return over time at higher prices.                                                                          
In summary, this bill provides a path to more Alaskan opportunity                                                               
through more Alaskan oil production. I urge your prompt and                                                                     
favorable action on this measure.                                                                                               
Sean Parnell