Legislature(2005 - 2006)

08/02/2006 07:28 PM House FIN


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07:28:32 PM Start
07:28:44 PM HB3001
08:27:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SUMMARY                                                                                                                       
                                                                                                                                
HB 3001   An Act  relating to the  production tax on  oil and                                                                   
          gas   and  to  conservation   surcharges   on  oil;                                                                   
          relating   to  criminal  penalties   for  violating                                                                   
          conditions   governing   access  to   and  use   of                                                                   
          confidential    information    relating   to    the                                                                   
          production  tax; amending  the definition  of 'gas'                                                                   
          as that  definition applies in the  Alaska Stranded                                                                   
          Gas Development Act;  making conforming amendments;                                                                   
          and providing for an effective date.                                                                                  
                                                                                                                                
          HB 3001 was heard and HELD in Committee for                                                                           
          further consideration.                                                                                                
                                                                                                                                
7:28:44 PM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 3001                                                                                                           
                                                                                                                                
     An Act  relating to  the production tax  on oil  and gas                                                                   
     and  to  conservation  surcharges  on oil;  relating  to                                                                   
     criminal  penalties for  violating conditions  governing                                                                   
     access to  and use of confidential  information relating                                                                   
     to the production tax; amending  the definition of 'gas'                                                                   
     as that  definition applies  in the Alaska  Stranded Gas                                                                   
     Development  Act;  making   conforming  amendments;  and                                                                   
     providing for an effective date.                                                                                           
                                                                                                                                
Co-Chair Chenault  stated his  intent to consider  amendments                                                                   
to CSHB  3001 (FIN), 24-GH2096\I  Bullock 8/1/06  (adopted by                                                                   
the Committee on  8/1). He noted that the bill  would be held                                                                   
in Committee to allow members to review any changes.                                                                            
                                                                                                                                
Co-Chair   Chenault  MOVED   to   adopt   Amendment  1,   24-                                                                   
GH2096\I.11, Bullock,  8/1/06 (copy on file.)  Representative                                                                   
Stoltze OBJECTED.                                                                                                               
                                                                                                                                
Co-Chair   Chenault   explained   that  Amendment   1   makes                                                                   
grammatical and  sentence structure corrections  suggested by                                                                   
Legislative Legal Services.                                                                                                     
                                                                                                                                
7:31:40 PM                                                                                                                    
                                                                                                                                
ROBYN  WILSON,  DIRECTOR,  DIVISION  OF  TAX,  DEPARTMENT  OF                                                                   
REVENUE,   reviewed   grammatical  and   sentence   structure                                                                   
corrections  in  Amendment  1.  She  observed  that  language                                                                   
changes were made to be consistent with regulations.                                                                            
                                                                                                                                
7:34:16 PM                                                                                                                    
                                                                                                                                
Ms. Wilson  gave an  explanation of  the changes proposed  in                                                                   
Amendment 1:                                                                                                                    
                                                                                                                                
   · As 43.55.020(A), lines 29 removes "under" and replaces                                                                     
     "in  the  manner provided  in".    AS 43.55.160  is  not                                                                   
     exactly  on point but  it provides  the manner  in which                                                                   
     that will be calculated, hence the language changes.                                                                       
                                                                                                                                
   · Page 9, the amendment deletes Line 6 & 7 completely and                                                                    
     also deletes  the items "IP=" on Line 4.   With adoption                                                                   
     of the amendment it would read "12 x (MP-1/12 x BP)"                                                                       
                                                                                                                                
7:35:51 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson  went  on to  describe  deletion  of  duplicative                                                                   
language.  Other changes outline were:                                                                                          
                                                                                                                                
   · The change of later to "latest".                                                                                           
   · "Certificate" deleted - doesn't change anything, just                                                                      
     corrects language. There is no such thing as a "cash                                                                       
     refund certificate".                                                                                                       
   · "That ends" was deleted for clarity.                                                                                       
                                                                                                                                
7:37:52 PM                                                                                                                    
                                                                                                                                
Ms. Wilson reviewed  Section 13, which amends  43.55.024; the                                                                   
new area development  credit is the only credit  remaining in                                                                   
this section.                                                                                                                   
                                                                                                                                
She  explained  other  changes   made  in  order  to  clarify                                                                   
language:                                                                                                                       
                                                                                                                                
   · "South" is deleted and replaced with "no part of which                                                                     
     is north".                                                                                                                 
   · Deletes "month" and inserts "calendar year" where                                                                          
     appropriate.  This is a language clarification to                                                                          
     reflect the change to calendar year payments.                                                                              
                                                                                                                                
Ms. Wilson explained  the clarification on page  24, line 19-                                                                   
26:                                                                                                                             
                                                                                                                                
   · "Oil and gas leased or property" would be replaced with                                                                    
     "leases or properties to the state".                                                                                       
   · "Includes" would become "include"                                                                                          
   · Instead of "that lease or property" it would say "those                                                                    
     leases or properties"  as it would on line 25.   The way                                                                   
     the language  is presently suggests that  the production                                                                   
     tax value  had to  be calculated  lease by lease  rather                                                                   
     than on a slope-wide basis.                                                                                                
                                                                                                                                
7:43:06 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson explained  that subsections  (c)  and (d),  which                                                                   
refer to  Cook Inlet  oil and gas  were not changed;  because                                                                   
the  tax ceiling  is an  ELF based  system  it is  calculated                                                                   
lease by lease.                                                                                                                 
                                                                                                                                
7:45:22 PM                                                                                                                    
                                                                                                                                
Ms. Wilson reviewed  the definition of heating  value on Page                                                                   
37, line 27.  The drafter suggested  "evolved" be deleted and                                                                   
be replaced with "released" for general clarity.                                                                                
                                                                                                                                
Representative  Stoltze WITHDREW  his  OBJECTION to  adopting                                                                   
Amendment 1.                                                                                                                    
                                                                                                                                
AT EASE:       7:46:19 PM                                                                                                     
RECONVENED:    7:48:41 PM                                                                                                     
                                                                                                                                
Co-Chair  Meyer OBJECTED  in order  to  disclose a  potential                                                                   
conflict  of interest.  He noted  that he is  an employee  of                                                                   
ConocoPhillips,  which would be  affected by the  legislation                                                                   
and asked to be excused from voting.                                                                                            
                                                                                                                                
Representative Stoltze OBJECTED.  Co-Chair Chenault noted the                                                                   
objection  and  observed  that   Vice-Chair  Meyer  would  be                                                                   
required to vote.                                                                                                               
                                                                                                                                
7:50:19 PM                                                                                                                    
                                                                                                                                
Representative Hawker  declared the existence of  a potential                                                                   
conflict  of  interest because  a  member  of his  family  is                                                                   
employed in  the oil  industry. He asked  to be excused  from                                                                   
the proceedings.                                                                                                                
                                                                                                                                
Representative Stoltze OBJECTED.   He opined that he it would                                                                   
be unfair to preclude district 32 from representation.                                                                          
                                                                                                                                
Co-Chair  Chenault  noted  the objection  and  observed  that                                                                   
Representative Hawker would be required to vote.                                                                                
.                                                                                                                               
                                                                                                                                
7:51:26 PM                                                                                                                    
                                                                                                                                
Co-Chair  Chenault  also  declared a  potential  conflict  of                                                                   
interest.                                                                                                                       
                                                                                                                                
Representative Stoltze OBJECTED.                                                                                                
                                                                                                                                
Co-Chair Chenault noted that he would be required to vote.                                                                      
                                                                                                                                
7:53:11 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  WITHDREW  his   OBJECTION.  There  being  no                                                                   
further objections, Amendment 1 was adopted.                                                                                    
                                                                                                                                
Co-Chair  Chenault MOVED  to  ADOPT Conceptual  Amendment  2A                                                                   
(copy on file.) Representative Stoltze OBJECTED.                                                                                
                                                                                                                                
7:54:25 PM                                                                                                                    
                                                                                                                                
DAN  DICKINSON,  CONSULTANT,   TAX  DIVISION,  DEPARTMENT  OF                                                                   
REVENUE, provided members with  a handout containing a number                                                                   
of  tables  [L1](copy on  file.)    He   explained  that  the                                                                   
amendment utilizes  a variable tax  rate rather than  a fixed                                                                   
tax rate.  The  tax rate  would vary  between 20  - 25%.   He                                                                   
pointed out that it would not affect progressivity.                                                                             
                                                                                                                                
7:56:19 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson drew attention to  the first table, "Dollar Per                                                                   
barrel investment", which calculated  the tax rate on the per                                                                   
barrel investment.  He explained  that if investment  is less                                                                   
than a dollar per  barrel, the tax rate is 25  percent.  A $7                                                                   
per barrel investment  shows a tax rate of 20  percent.  This                                                                   
illustrates the  ability of a  company to drive down  the tax                                                                   
rate by investing.                                                                                                              
                                                                                                                                
7:59:09 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson  referred to  page 2  of the handout:  "Capital                                                                   
Spending on the  North Slope, 2002-2006".  He  focused on the                                                                   
bottom  box, which  showed  the  average dollar  per  barrel,                                                                   
investment, and  volume. He noted  that the volume  metric is                                                                   
taken from the Department of Revenue.   The actual investment                                                                   
figures are taken from a handout  provided by ConocoPhillips.                                                                   
He pointed  out that  the highest investments  are in  the $4                                                                   
range.                                                                                                                          
                                                                                                                                
8:01:42 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson went  on to explain Subsections  1, 2 & 3 [L2]of                                                                  
Amendment 2.A.  He reviewed the  table: "Millions  of Dollars                                                                   
of Annual Investment"  and noted that it provides  a sense of                                                                   
ranges and  a mechanical  set of operations[L3]. He explained                                                                   
that,  generally,   as  volumes   decline,  investment   also                                                                   
declines.  [L4]The purpose of  the variable  tax  rate is  to                                                                   
reverse  this trend  and  encourage investment,  through  the                                                                   
lowering of  the tax rate.   The higher levels  of investment                                                                   
generally occur at prices above  $6 per barrel. At the $6 per                                                                   
barrel investment  the tax rate would be at  its lowest point                                                                   
of 20%; the tax rate would not drop below this point.                                                                           
                                                                                                                                
Subsection (2)  calculates investments across the  state into                                                                   
a single BTU.                                                                                                                   
                                                                                                                                
In response  to earlier comments regarding  gold-plating, Mr.                                                                   
Dickinson explained the formula  contained in Subsection (3):                                                                   
                                                                                                                                
     A producer's  tax rate for a calendar year  shall be the                                                                   
     higher  of  the rate  determined  in  (1) and  the  rate                                                                   
     represented  by  "R" in  the following  formula,  except                                                                   
     that  the rate  may not be  greater than  25 percent  or                                                                   
     less than 20 percent:                                                                                                      
                                                                                                                                
     [{(R x QC) + (.2 x QC) + [(.25 - R) x PT]} x (1 - IR)]                                                                     
     + (QC x IR)  = .75 x QC where:                                                                                             
                                                                                                                                
          QC   =      the   producer's    qualified   capital                                                                   
          expenditures incurred during the calendar year;                                                                       
                                                                                                                                
          PT    =     the total  annual production  tax value                                                                   
          calculated under AS  43.55.160(a)(1) of taxable oil                                                                   
          and  gas produced  by the producer  from leases  or                                                                   
          properties  in the state during the  calendar year;                                                                   
          and                                                                                                                   
                                                                                                                                
          IR    =    the highest percentage  tax rate imposed                                                                   
          on  the  taxable  income  of a  corporation  by  26                                                                   
          U.S.C.  11  (Internal  Revenue Code),  as  amended,                                                                   
          without  regard  to any  additional  amount of  tax                                                                   
          provided under  that section in form  of the lesser                                                                   
          of  a dollar amount  or a  percentage of  income in                                                                   
          excess of a stated minimum.                                                                                           
                                                                                                                                
Mr. Dickinson  went on to  say, investments must  be rational                                                                   
investments  that lead  to  production.   He  noted that  the                                                                   
result of the  formula used in the conceptual  amendment 2.A.                                                                   
is that tax benefits are capped at 75%.                                                                                         
                                                                                                                                
8:10:25 PM                                                                                                                    
                                                                                                                                
Representative  Joule asked about  page 2 of Mr.  Dickinson's                                                                   
handout.   He asked  if the investments  are a reflection  of                                                                   
investments  for oil.   He  also noted  that if  this is  the                                                                   
case, the increase in gas investments  would put the industry                                                                   
tax rate at  20%. Mr. Dickinson agreed.  Representative Joule                                                                   
concluded that investment dollars  would be related to gas in                                                                   
the future and that would result  in industry getting the 20%                                                                   
tax rate.                                                                                                                       
                                                                                                                                
Mr.  Dickinson observed  that  the investments  depicted  are                                                                   
only related to production. He  made two points: that much of                                                                   
the  investments   related  to  gas  would   not  qualify  as                                                                   
investment  dollars;  and  only  upstream  investments  would                                                                   
qualify as investment dollars.   He gave specific examples of                                                                   
investment that would and would not qualify.                                                                                    
                                                                                                                                
8:14:05 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked  if the upstream  expenditures                                                                   
set  the  rate.   Mr.  Dickinson  affirmed.    Representative                                                                   
Kerttula  noted  that  would  take  care  of  decline.    Mr.                                                                   
Dickinson agreed  that a big part of arresting  decline would                                                                   
be upstream  investment.  Representative Kerttula  asked what                                                                   
it would  cost to keep  up with the  decline.  Mr.  Dickinson                                                                   
reported  that there had  not been  specific calculations  to                                                                   
determine the cost to halt decline.                                                                                             
                                                                                                                                
8:16:45 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula  thought it  would  be difficult  to                                                                   
determine  the  amount  companies   would  be  spending.  She                                                                   
further  questioned if  what the  companies  needed to  spend                                                                   
could be  determined theoretically.    Mr. Dickinson  felt it                                                                   
would be  difficult due  to all  the variables involved  when                                                                   
making investment  decisions.  Representative  Kerttula asked                                                                   
how often  the tax  rate would  be determined. Mr.  Dickinson                                                                   
replied that it would be calculated on a yearly basis.                                                                          
                                                                                                                                
8:20:00 PM                                                                                                                    
                                                                                                                                
Ms.  Wilson continued  to explain  Conceptual Amendment  2.A:                                                                   
Where  there  were  blanks  in   the  bill  with  regards  to                                                                   
progressivity the following changes were made:                                                                                  
                                                                                                                                
   · Insert ".25" (denotes the slope of the progressivity                                                                       
     curve); "25" (represents the maximum rate of                                                                               
     progressivity)    and   "40"   (the    trigger   point),                                                                   
     respectively.                                                                                                              
                                                                                                                                
8:21:07 PM                                                                                                                    
                                                                                                                                
Ms. Wilson  went on  to say  the next  part of the  amendment                                                                   
deals with the  base allowance credit.  Wording  changes made                                                                   
are simply conforming language.  She explained that "2005 or"                                                                   
was deleted since it was irrelevant  under the investment tax                                                                   
scenario.                                                                                                                       
                                                                                                                                
8:23:51 PM                                                                                                                    
                                                                                                                                
Ms. Wilson further specified changes  representing conforming                                                                   
language adjusting from a production  scheme to an investment                                                                   
scheme, which allows  the producer to know what  the rate is.                                                                   
The drafter  took out  Section 43.55.024  and reinserted  it,                                                                   
without  change. She  summarized that  the remaining  changes                                                                   
were   technical,   grammatical    or   conforming   language                                                                   
accommodating the investment approach.                                                                                          
                                                                                                                                
8:26:02 PM                                                                                                                    
                                                                                                                                
Co-Chair  Chenault said  it was  not his intent  to not  move                                                                   
Amendment 2 tonight.                                                                                                            

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