Legislature(2013 - 2014)
2013-01-16 Senate Journal
Full Journal pdf2013-01-16 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 Committees. The following fiscal information was published today: Fiscal Note No. 1, indeterminate, Department of Revenue Fiscal Note No. 2, indeterminate, Department of Natural Resources 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 Alaska. 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. Sincerely, /s/ Sean Parnell Governor