Legislature(2017 - 2018)SENATE FINANCE 532
05/05/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
relating to carried-forward lease expenditures based
on losses and limiting those lease expenditures to an
amount equal to the gross value at the point of
production of oil and gas produced from the lease or
property where the lease expenditure was incurred;
relating to information concerning tax credits, lease
expenditures, and oil and gas taxes; relating to the
disclosure of that information to the public; relating
to an adjustment in the gross value at the point of
production; and relating to a legislative working
group."
9:08:54 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, introduced himself.
9:09:28 AM
AT EASE
9:10:20 AM
RECONVENED
Co-Chair MacKinnon announced that the presentation would be
a continuation of the presentation from the prior day.
9:10:50 AM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
highlighted slide 21, "Fiscal Analysis" of the presentation
titled, "DOR Senate Finance Presentation" (copy on file):
Fiscal Note Summary- Tax
• Senate bill makes no material changes to SB21
provisions
• Loosening of existing minimum tax protection against
small producer and GVR credits results in ~$20-40
million less revenue per year through FY24
• Senate Resources bill provides certain limited
"hardening" of the minimum tax floor to NOLs, since
these are no longer "credits."
o Provision has no fiscal impact at forecast
prices
o Modeling indicates a tax increase in the
alternative price scenarios at $40 oil when major
producers would be expected to have operating
losses
9:14:05 AM
Co-Chair MacKinnon wondered whether the most recent version
of the bill would "pierce" the minimum credit, or was it
existing for small producers. Mr. Alper replied that the
small producer credit could not be used to go below the
floor should the company used sliding scale per barrel
credits under current law. He relayed that the bill stated
that the small producer credit, and the five-dollar per
barrel credit, could be used below the floor.
Co-Chair MacKinnon wondered whether the idea contributed to
the confusion about the comparison with the house bill and
the advisory bulletin. She remarked that tax payers had
previously ordered credits differently than the advisory
bulletin. She stressed that she was referencing the most
recent version of the bill, versus the house version of the
bill. She stated that the advisory report changed some of
the language. Mr. Alper responded that the house bill did
not have a similar provision.
Senator Hughes stressed that the structure affected the
activity of the company. She noted the second bullet in the
slide, and wondered whether there was a consideration of
the policy change and how it might impact the activity of
the company. Mr. Alper replied he did not make any
assumptions about changes in behavior. The fiscal note
tables were based on the assumptions for spending and
production. He stated that any change in company behavior
would result in a change in the numbers.
9:20:20 AM
Mr. Alper addressed slide 22, "Fiscal Analysis":
Fiscal Note Summary- Budget
• Additional impact due to near-total elimination of
cash payments for tax credits (reduced spending)
o Long term forecast for cash credits is $150
million / year; reduced to essentially zero
o Most of the associated projects don't come into
production during the fiscal note period
• $1.325 billion in reimbursable credit
obligation removed over the 10-year fiscal note
period
o Resulting "carried forward" balance, with
uplift, is $1.785 billion in 2027 that can offset
future taxes
o Of this, about $460 million is accrued "uplift"
In response to a question from Co-Chair MacKinnon, Mr.
Alper explained that the governor wanted the state to leave
the business of buying cash credits.
Co-Chair MacKinnon wondered whether the administration
believed that the funds were owed to the tax payer. Mr.
Alper wondered whether the question was prospective or the
held tax credit certificates.
Co-Chair MacKinnon stated that her question referred to
reflective action. She remarked that the bill set up a
system that required the state to owe money, and she hoped
that the state's "word was good going forward" as it
carried forward the losses. Mr. Alper agreed that they were
an obligation to the state. He remarked that, if the
credits were held until the company began production, it
became a reduction from the paid tax.
Co-Chair MacKinnon surmised that there was no term limit.
Mr. Alper replied that it depended on policy.
9:25:32 AM
Senator Micciche wondered whether there was an improvement
from the prior system with the current or similar
legislation. Mr. Alper replied that the strength of the
"ring fence" provisions in the bill were important. He
stated that it was possible that a bankrupt company could
be bought by a major producer, and the carried forward
losses would be purchased that could be used to offset
taxes from another field. He stated that it was a concern
over the current structure of the bill. He stated that the
house bill had a stronger "ring fence", that said that the
carry-forwards could only be used against the production
from the associated fields at the point of original
spending.
Senator Micciche wondered whether there was a greater
benefit leading to a greater probability of production
using the method, versus incentivizing spending as opposed
to productive spending. Mr. Alper could not speak to the
likelihood of what would lead to production. He shared that
the advantage of a cash credit based system would make it
easier for new entrants to come into the world, but they
may not be able to bring production.
Mr. Alper looked at slide 23, "Impact of Advisory
Bulletin":
Many of the circumstances that show as a tax
"decrease" are due to exceptions to the 3/31/17
advisory bulletin on ordering of credits
• For the most part, if the interpretation that many
held prior to 3/31 was the actual legal status, this
bill would be revenue neutral (no tax increase or
decrease)
• Advisory bulletin tends to "push" certain cashable
credits into future years, as companies can't use them
in the year incurred. In the absence of the bulletin,
it's likely that the "budget impact" (change in cash
credit demand) of SCS CSHB111(RES) would be slightly
higher in the near term and lower in the later years
Co-Chair MacKinnon noted that there was some disconnect
between the economists and the auditors. She remarked that
the auditors were basing support of the advisory opinion on
two minutes of conversation about an amendment. She
wondered how a previous bill impacted the issue. She
appreciated that the bill was net neutral. Mr. Alper
replied that the advisory bulletin was not informed by two
minutes of testimony at 1:30am on April 4, 2013. He stated
that the drafting of the regulation was informed by that
conversation. The regulation was written to interpret the
perceived intent of the maker of that amendment. He
stressed that the regulatory process was extensive and
controlled with drafts, public review, legal review, and
publication. He stressed that the language was the same
throughout the process without comment. He stated that the
advisory bulletin clarified what was already in regulation.
Co-Chair MacKinnon felt that from the legislature's
perspective, Department of Revenue (DOR) may have had the
wrong interpretation of the regulation. She queried the
statute that provided that authority. She assumed that
there was a bill that allowed tax payers to decide how to
use their credits to advantage their tax position to
increase production. Mr. Alper replied that he gave
incorrect information to the committee. He stated that he
was not a career tax administrator, and those in DOR
corrected the record. The statutory direction was in AS
43.55.024(j), which was the sliding scale credit. The
statute said that the credit could not be used to reduce
taxes below the minimum tax. He stated that the previous
regulations from the beginning of credits talked about the
ability of companies to order their credits in the sequence
to their own best advantage. He stated the addition in 2013
was new language that bundling meant you cannot go below
the floor.
Co-Chair MacKinnon felt that the tax payer would address
the interpretation. Mr. Alper stated that there were many
that knew the statutes better than him.
9:36:24 AM
Mr. Alper highlighted slide 24, "Fiscal Analysis-impact of
forecast prices." He stated that the table outlined the
fiscal note. He remarked that the light blue colors were
subtotal lines. He stated that all the lines above the blue
lines were changes in taxes based on various provisions of
the bill.
Co-Chair MacKinnon looked at "Total Revenue Impact." She
stated that the negative number represented a loss of
revenue to the state. She remarked that the advisory
bulletin indicated that loss. Mr. Alper stated that the
largest component of the negative numbers was on line 3,
and he would address lines 1 and 2.
Co-Chair MacKinnon stressed that negative numbers were
normally a "good thing." She noted that the negative number
was indicative of the state receiving less. Mr. Alper
agreed.
Co-Chair MacKinnon wondered whether the issue was standard
in the oil and gas industry. Mr. Alper replied in the
affirmative.
9:41:40 AM
Mr. Alper continued to discuss slide 24. He stated that
line 2 was the ability added by the legislation of certain
tax payers being allowed to offset their cash credits with
corporate income tax. He noted that the number was
approximately $5 million to $10 million of lower revenue.
He stressed that the number was not related to the advisory
bulletin, but would be considered reduced corporate income
tax revenue. He stated that line 3 opened up the ability to
use certain credits below the floor, specifically the five
dollar per barrel credit and the small producer credit. He
stated that the small producer credit was in the process of
a long sunset, and the numbers were not material after
three or four years.
Co-Chair MacKinnon surmised that line 3 represented the
impact of the advisory bulletin. Mr. Alper agreed
Mr. Alper continued to discuss slide 24. He shared that the
budget portion referred to appropriations. He stated that
the biggest change was the elimination of North Slope
operating loss credits.
9:45:03 AM
Co-Chair MacKinnon surmised that similar language could be
used to describe the costs for leases that were applied to
the production tax. Mr. Alper replied that there was a time
difference in that analysis. He explained that a lease
expenditure would see a shift in a number of years. He
stated that the bill found a corporate income tax to offset
in real time to be seen in the same fiscal year.
Mr. Alper finished discussing slide 24. He noted that the
total impact was approximately $150 million per year over
the long-term. He stated that the total fiscal impact was
the sum of the budget and fiscal impact. He stated that
last component dealt with the value of the carry-forward
lease expenditures, which were aggregate numbers that
changed over time.
Senator Micciche asked about the total shift in total state
spending associated with the bill. Mr. Alper shared that
there was a forecast of approximately $3.8 billion to be
spent in the time period. He stated that, under current
law, the $3.8 billion would be spent by companies that were
eligible for cash credits. He shared that the $3.8 billion
would turn into approximately $1.3 billion of credits, that
current law required the state to pay. He stated that the
legislation allowed that money to accumulate to track
company carry-forwards to be used against future taxes.
9:50:42 AM
Senator Micciche surmised that the total fiscal impact line
was reflecting the uplift going forward. Mr. Alper replied
that the total fiscal impact reflected that the state was
no longer buying the credits and small tax changes. The
impact of the carry forwards did not show up before 2027,
because they were a future obligation.
Senator Micciche stressed that the discussion was related
to only production taxes. Mr. Alper responded that there
was no anticipated change in royalty within the fiscal
note.
Senator Micciche felt that there was an attempt to not pay
cash credit, with the hope that the credit would be paid by
producing companies in the future. He remarked that
removing the number in 2027 resulted in nearly the same
number of tax credits paid in the future by the producing
entity. Mr. Alper agreed.
Senator Micciche hoped to have further discussions about
the North Slope infrastructure. He noted that there would
be a subtraction of that outstanding yearend balance
associated with additional royalty and property taxes. Mr.
Alper replied that the state's obligation did not come to
fruition until the oil production occurred resulting in
taxes and royalties to the state.
Co-Chair MacKinnon restated that it was an "accurate
statement." Mr. Alper agreed.
9:55:13 AM
Co-Chair MacKinnon noted that the plan was based on a
decade of projections and assumptions by the Department of
Natural Resources (DNR). Mr. Alper replied that one of the
components of the underlying revenue estimate was the
forecast of production from DNR.
Co-Chair MacKinnon surmised that the slide was ten years of
forecasting for the price of oil. She remarked that there
could be some dramatic changes based on price. Mr. Alper
agreed, and stated that the following slide addressed that
issue.
9:56:36 AM
Mr. Alper discussed slide 25, "Fiscal Analysis-Impact at
Range of Prices." He stated that the chart showed the
impact at different price points.
Senator Hughes looked at slide 24. She wondered how the
advisory bulletin would have impacted the number in the
bottom right corner. She remarked that there may be the
same number without the change of policy, but remarked that
there would be a change with inflation. Mr. Alper replied
that he would provide that analysis. He noted that the
credits that could go below the floor, referenced in line 3
were credits that were not generally cashable.
Mr. Alper continued to discuss slide 25.
10:04:01 AM
Co-Chair MacKinnon remarked that the state did not need to
protect itself from additional losses, because there was
current production. Mr. Alper stated that the oil prices
were extremely low at the time of the previous discussion.
Co-Chair MacKinnon stressed that the government could not
always predict how the private sector would respond, when
they were in a negative position. Mr. Alper agreed.
Co-Chair MacKinnon stated that there was reason for
optimism. Mr. Alper agreed.
10:07:20 AM
Mr. Alper highlighted slide 26, "Impact of Carried Forward
Liability":
It is hard to capture the future impact of carried
forward losses that don't have associated production
during the fiscal note period
• The $1.785 billion represents about $3.8 billion in
carried forward losses ($1.325 billion at 35 percent)
plus uplift
• None of these totals include the not-yet-committed
spending that would be required for any of the large
announced discoveries
Co-Chair MacKinnon wondered if the outline reflected
worldwide behavior. Mr. Alper replied in the affirmative.
Mr. Alper addressed slide 27, "Fiscal Analysis":
Preliminary Life Cycle Analysis
• DOR's model looks at total state and producer cash
flow over 40 years for a large North Slope new field
development
o 750 million barrels recovered, maximum
production of
120,000 bbl/ day
• Senate Resources Bill reduces producer cash
flow by
$165 million and reduces IRR by 0.3 percent
o Production tax is zero for three years (GVR)
and minimum tax for seven years after due to use
of carryforwards.
Full production tax begins in year 11
o This assumes the interpretation that the use of
carryforwards allows for the loss of per-barrel
credits. If this were rewritten, the minimum tax
would be in place due to more years of carry-
forward use
10:14:25 AM
Co-Chair MacKinnon queried the amount of royalties the
state would receive in the timeframe with the analysis. Mr.
Alper replied that, presuming the statutory tax at a point
of relatively high production layered with the royalties at
forecasted prices, there would be nearly $1 billion in
state revenue from that large field.
Co-Chair MacKinnon noted that the number was mostly
impacted by the advisory bulletin. Mr. Alper replied that
the advisory bulletin was the presumptive status quo, so he
did not know whether it had material impact.
CSHB 111(FIN)(efd fld) was HEARD and HELD in committee for
further consideration.
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