Legislature(2005 - 2006)HOUSE FINANCE 519

04/15/2005 01:30 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 147 INSURANCE TELECONFERENCED
Moved CSHB 147(FIN) Out of Committee
+ HB 144 ADVISORY VOTE ON COMMUNITY DIVIDEND TELECONFERENCED
<Bill Hearing Canceled>
Bills Previously Heard/Scheduled
+ HB 33 EFFECT OF REGULATIONS ON SMALL BUSINESSES TELECONFERENCED
Moved CSHB 33(FIN) Out of Committee
+= HB 71 AK PENINSULA OIL & GAS LEASE SALE; TAXES TELECONFERENCED
Moved CSHB 71(FIN) Out of Committee
HOUSE BILL NO. 71                                                                                                             
                                                                                                                                
     "An  Act relating  to a credit  for certain  exploration                                                                   
     expenses  against  oil  and  gas  properties  production                                                                   
     taxes on oil  and gas produced from a  lease or property                                                                   
     in  the state;  relating  to  the deadline  for  certain                                                                   
     exploration   expenditures  used   as  credits   against                                                                   
     production tax  on oil and gas produced from  a lease or                                                                   
     property  in the  Alaska Peninsula  competitive oil  and                                                                   
     gas area  wide lease sale  area after July 1,  2004; and                                                                   
     providing for an effective date."                                                                                          
                                                                                                                                
SUZANNE  CUNNINGHAM, STAFF,  CO-CHAIR  MEYER, explained  that                                                                   
the new  CS, version P addresses  concerns about  the ability                                                                   
to potentially collect 80 percent  of incentives.  The new CS                                                                   
clarifies  incentives   in  Section  1,  page   1,  where  it                                                                   
discusses 20  percent of  the total exploration  expenditures                                                                   
that qualify  only under (c)  of this section.   Subparagraph                                                                   
(2)  deals   with  20  percent   of  the  total   exploration                                                                   
expenditures  that qualify  only under  (d) of this  section.                                                                   
Subparagraph   (3)  addressed   40  percent   of  the   total                                                                   
exploration  expenditures   that qualify  under both  (c) and                                                                   
(d) of this section.                                                                                                            
                                                                                                                                
Co-Chair Chenault  MOVED to  adopt the work  draft to  HB 71,                                                                   
version  24-GH1040\P,  Chenoweth, 4/15/05.    There being  NO                                                                   
OBJECTION, it was so ordered.                                                                                                   
                                                                                                                                
1:49:31 PM                                                                                                                    
                                                                                                                                
Ms.  Cunningham continued  to explain  that subparagraph  (4)                                                                   
deals with 40  percent of the total exploration  expenditures                                                                   
that qualify  only under (e) of  this section and  pertain to                                                                   
seismic exploration.   This  prohibits layering  and reaching                                                                   
80 percent.   The  new CS  also incorporates  the Cook  Inlet                                                                   
area for work performed on or  after July 1, 2005, and before                                                                   
July 1, 2010.  The House Resources  version of the bill added                                                                   
Nenana  Basin,  and there  was  discussion about  adding  the                                                                   
Healy  and Red  Dog areas.   Areas  south of  68 degrees,  15                                                                   
minutes  are  eligible  for incentives  for  exploration  and                                                                   
production,  which takes  the North  Slope and  ANWR off  the                                                                   
table.                                                                                                                          
                                                                                                                                
Co-Chair Meyer clarified that it includes the Red Dog area.                                                                     
                                                                                                                                
1:51:37 PM                                                                                                                    
                                                                                                                                
STEVE  PORTER, DEPUTY  COMMISSIONER,  DEPARTMENT OF  REVENUE,                                                                   
addressed principles of the tax  credit.  Tax credits look at                                                                   
reservoirs  that  need assistance.  For  those  that are  not                                                                   
getting good exploration in a  particular area, but there are                                                                   
decent  prospects, an  incentive  may be  appropriate.   That                                                                   
decision  should   happen  in   the  Department   of  Natural                                                                   
Resources.  Once that discussion  occurs, then the Department                                                                   
of Revenue determines the level  of incentive to provide.  It                                                                   
is designed  to benefit the taxpayer.   There is  currently a                                                                   
discussion as to  whether or not to incentivize  new areas in                                                                   
the North  Slope.  He suggested  working with  the Department                                                                   
of Revenue  to decide, and  he encouraged exploration  there.                                                                   
He  also suggested  that  the  committee get  an  exploration                                                                   
manager to  tell them what  kind of benefit those  incentives                                                                   
are to exploration programs.                                                                                                    
                                                                                                                                
1:54:58 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer expressed  confusion  because HB  71 was  the                                                                   
governor's bill and it dealt with  the Bristol Bay area.  Now                                                                   
other areas  have been added.   From a policy  standpoint the                                                                   
committee wants to encourage exploration  and production.  He                                                                   
related that he  does not know what areas to add  to the bill                                                                   
and has to rely  on the department and the  governor's office                                                                   
for advice.                                                                                                                     
                                                                                                                                
Mr. Porter responded that from  Department of Revenue's point                                                                   
of  view,   the  expansion   is  a   policy  call   based  on                                                                   
conversations with  the Department of Natural  Resources.  He                                                                   
agreed if incentives are needed,  then it is fine to go ahead                                                                   
with the expansion.                                                                                                             
                                                                                                                                
1:56:58 PM                                                                                                                    
                                                                                                                                
JERRY BURNETT,  LEGISLATIVE LIAISON,  DEPARTMENT OF  REVENUE,                                                                   
clarified that Section  8 in the new CS says  that provisions                                                                   
of this section  do not apply to taxes applicable  under this                                                                   
chapter,  attributable   to  production  from   oil  and  gas                                                                   
produced from  an oil and gas  lease, or gas produced  from a                                                                   
gas  only lease,  located north  of 68  degrees, 15  minutes,                                                                   
North latitude, or  on the ANWR.  He asked if  the intent for                                                                   
this section  is to take away  credit immediately, or  if the                                                                   
credit is meant to be for exploration  or production.  This a                                                                   
major change in how the tax incentive works.                                                                                    
                                                                                                                                
Co-Chair Chenault  replied that it is not the  intent to take                                                                   
away from any tax credit currently  available.  The intent is                                                                   
to provide for  credit in a specific area.                                                                                      
                                                                                                                                
1:59:08 PM                                                                                                                    
                                                                                                                                
Ms. Cunningham  said that is correct.   The intent is  not to                                                                   
adversely impact  areas that would have incentives  expire in                                                                   
2007.   It is  to extend the  areas south  of 68 degrees,  15                                                                   
minutes, to 2010.  She suggested  that a conceptual amendment                                                                   
would be in order.                                                                                                              
                                                                                                                                
2:00:05 PM                                                                                                                    
                                                                                                                                
DAN  DICKINSON,   DIRECTOR,  TAX   DIVISION,  DEPARTMENT   OF                                                                   
REVENUE,  ANCHORAGE,  (via  teleconference)  said  the  point                                                                   
raised  is  correct.   It  will  not  apply  to north  of  68                                                                   
degrees.  He agreed that a conceptual  amendment is in order.                                                                   
He  asked   if  the  discussion   is  about  exploration   or                                                                   
production in this area.                                                                                                        
                                                                                                                                
2:01:19 PM                                                                                                                    
                                                                                                                                
Representative   Croft  requested   clarification  from   Mr.                                                                   
Dickinson  regarding  Section 8.    He inquired  if  anything                                                                   
North  of  68 degrees,  15  minutes  expires  in 2007.    Mr.                                                                   
Dickinson  replied yes  and suggested  that there needn't  be                                                                   
any limitation on  exploration.  The only way  the credit can                                                                   
be  modified  is by  selling  to  someone  who does  not  pay                                                                   
production tax.  He stressed focusing on exploration.                                                                           
                                                                                                                                
Co-Chair  Meyer asked  how it  impacts  the production  side.                                                                   
Mr. Dickinson  replied that  it does not  need to  impact the                                                                   
production  side.   He  explained that  the  credit could  be                                                                   
taken by someone who has production  tax and is producing, or                                                                   
by  someone  who   is  not  producing  or   lacks  sufficient                                                                   
production tax.   There is no  intent to restrict  the market                                                                   
for selling the credit.                                                                                                         
                                                                                                                                
2:04:26 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  noted that  the  committee would  return  to                                                                   
Section 8 to make the necessary amendments.                                                                                     
                                                                                                                                
Co-Chair Chenault informed the  committee about provisions in                                                                   
the new CS for Cook Inlet oil  and gas credit.  The dates for                                                                   
the  Cook Inlet  Basin incentive  credits  would be  extended                                                                   
from  2003 until  2010.   It  provides  language that  allows                                                                   
exploration wells  in the Cook Inlet to be  within the 3-mile                                                                   
limit, subject  to review and  approval by the  commissioner.                                                                   
That  would  provide  a  20  percent  credit.    It  provides                                                                   
language  that decreases  the  25-mile boundary  limit to  10                                                                   
miles, which also provides a 20 percent credit.                                                                                 
                                                                                                                                
2:06:15 PM                                                                                                                    
                                                                                                                                
Mr. Dickinson  added that  there is a  $20 million  limit for                                                                   
the amount of  credits granted in the Cook  Inlet under these                                                                   
rules.                                                                                                                          
                                                                                                                                
Co-Chair Meyer set HB 71 aside.                                                                                                 
                                                                                                                                
Representative  Kelly asked  how requirements  in Cook  Inlet                                                                   
were lessened.   Co-Chair Chenault responded  that the 3-mile                                                                   
limit is  one area that the  commissioner would look  at, and                                                                   
the 10-mile limit would be statutory.                                                                                           
                                                                                                                                
2:08:38 PM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 71                                                                                                             
                                                                                                                                
     "An  Act relating  to a credit  for certain  exploration                                                                   
     expenses  against  oil  and  gas  properties  production                                                                   
     taxes on oil  and gas produced from a  lease or property                                                                   
     in  the state;  relating  to  the deadline  for  certain                                                                   
     exploration   expenditures  used   as  credits   against                                                                   
     production tax  on oil and gas produced from  a lease or                                                                   
     property  in the  Alaska Peninsula  competitive oil  and                                                                   
     gas area  wide lease sale  area after July 1,  2004; and                                                                   
     providing for an effective date."                                                                                          
                                                                                                                                
SUZANNE CUNNINGHAM, STAFF, REPRESENTATIVE KEVIN MEYER, noted                                                                    
that two amendments have been drafted to HB 71.  Amendment 1                                                                    
is to page 2, Lines 13-17.                                                                                                      
                                                                                                                                
Co-Chair Meyer MOVED to ADOPT Amendment 1:                                                                                      
                                                                                                                                
     Page 2, lines 13-17                                                                                                      
     Delete All Material                                                                                                      
     Insert New Material                                                                                                      
     (b) To qualify  for the production tax  credit under (a)                                                                   
     of  this section,  an  exploration  expenditure must  be                                                                   
     incurred for  work performed on  or after July  1, 2003,                                                                   
     and  before July  1, 2007,  except  that an  exploration                                                                   
     expenditure, in  whole or in part, south  of 68 degrees,                                                                   
     15  minutes, North  latitude must  be incurred  for work                                                                   
     performed  before  July  1,  2010, and  except  that  an                                                                   
     exploration expenditure  for a Cook Inlet  prospect must                                                                   
     be  incurred for  work  performed on  or  after July  1,                                                                   
     2005, and before July 1, 2010, and                                                                                         
                                                                                                                                
     Page 6, line 12                                                                                                          
     Following: "do not apply to"                                                                                             
     Delete:   "taxes    applicable   under    this   chapter                                                                 
     attributable  to production  from oil  and gas  produced                                                                   
     from an  oil and gas  lease, or  to gas produced  from a                                                                   
     gas  only  lease,  located   north  of  68  degrees,  15                                                                   
     minutes, North latitude or on"                                                                                             
                                                                                                                                
Representative Hawker OBJECTED.                                                                                                 
                                                                                                                                
Ms. Cunningham explained the two parts of Amendment 1.                                                                          
                                                                                                                                
Co-Chair Meyer  inquired about  the reference to  68 degrees,                                                                   
15 minutes.   Ms.  Cunningham clarified that  it is  south of                                                                   
the Brooks Range.                                                                                                               
                                                                                                                                
3:27:28 PM                                                                                                                    
                                                                                                                                
Representative Hawker questioned  the wording on page 6, line                                                                   
12 "the  provisions of this  section do  not apply to".   Ms.                                                                   
Cunningham clarified that the language is correct.                                                                              
                                                                                                                                
Co-Chair Chenault  referenced lines 13-17 on page  2, the new                                                                   
language in Amendment 1.  He voiced  concerned that the added                                                                   
language   would   allow   credits   for   work   from   2003                                                                   
retroactively.    He  questioned  if that  would  change  the                                                                   
legislation  from  the  25-mile  to  the  10-mile,  and  also                                                                   
possibly   within  the   3-mile,   with  the   commissioner's                                                                   
approval.  He emphasized that  it was not the original intent                                                                   
for work already performed to be included.                                                                                      
                                                                                                                                
3:30:08 PM                                                                                                                    
                                                                                                                                
Ms.  Cunningham  replied  that  there  would need  to  be  an                                                                   
exemption for Cook Inlet for July 1, 2005 to 2010.                                                                              
                                                                                                                                
DAN  DICKINSON,   DIRECTOR,  TAX   DIVISION,  DEPARTMENT   OF                                                                   
REVENUE,  ANCHORAGE,   (via  teleconference)  spoke   to  the                                                                   
proposed change.   The current  language existing on  page 2,                                                                   
after  the 2010  date, should  be  there.   The new  language                                                                   
should  only change lines  13-15.   Ms. Cunningham  responded                                                                   
that on line  15, 2010 should be deleted because  the current                                                                   
program goes until 2007.                                                                                                        
                                                                                                                                
Mr. Dickinson  explained that if  the amendment were  used to                                                                   
replace all  the language, through  and including  2010, then                                                                   
the clause  that starts  with "except"  would accomplish  the                                                                   
intent.                                                                                                                         
                                                                                                                                
Representative  Croft asked what  would happen  on page  6 if                                                                   
the  provisions  do  not apply.    He  suggested  eliminating                                                                   
Section 8.   Ms. Cunningham replied that the  rewrite on page                                                                   
6,  would   not  apply   to  ANWR.     Representative   Croft                                                                   
acknowledged his mistake.                                                                                                       
                                                                                                                                
3:34:16 PM                                                                                                                    
                                                                                                                                
Co-Chair   Chenault   restated   the   potential   conceptual                                                                   
amendment.   Representative Kelly noted that  the termination                                                                   
date would change.                                                                                                              
                                                                                                                                
3:35:00 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  MOVED to ADOPT  a Conceptual  Amendment to                                                                   
Amendment  1 that  adds  back  the language  that  expiration                                                                   
expenditures  for Cook  Inlet prospect  must be incurred  for                                                                   
work performed on  or after July 1, 2005, and  before July 1,                                                                   
2010.                                                                                                                           
                                                                                                                                
Representative  Hawker   WITHDREW  his  OBJECTION   to  adopt                                                                   
Amendment 1, as  amended.  There being no  further OBJECTION,                                                                   
Amendment 1 was adopted.                                                                                                        
                                                                                                                                
3:35:54 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer MOVED to ADOPT Amendment 2:                                                                                      
                                                                                                                                
Page 2, lines 1, 3, and 9                                                                                                     
Following: "under"                                                                                                              
Delete" [(b) AND]                                                                                                               
Insert: (b) and                                                                                                                 
                                                                                                                                
Page 2, line 7                                                                                                                
Following: "under"                                                                                                              
Insert: (b),                                                                                                                    
                                                                                                                                
Representative Hawker OBJECTED for discussion purposes.                                                                         
                                                                                                                                
Ms.  Cunningham   explained  that  the  amendment   reinserts                                                                   
subsections (b)  and (c) and clarifies  that in order  to get                                                                   
the credit,  a company has  to meet the qualifications  under                                                                   
(b)  which sets  out  the  timeframes that  exploration  work                                                                   
occurs and (c), which is the 3-mile limit.                                                                                      
                                                                                                                                
Representative Croft  noted that it  is not the  40/80 issue;                                                                   
it  is  a timing  issue.    Ms. Cunningham  replied  that  is                                                                   
correct.  She elaborated on the timeframe.                                                                                      
                                                                                                                                
3:38:21 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   WITHDREW  his  OBJECTION   to  adopt                                                                   
Amendment  2.   There  being NO  OBJECTION,  Amendment 2  was                                                                   
adopted.                                                                                                                        
                                                                                                                                
3:39:13 PM                                                                                                                    
                                                                                                                                
Representative Kelly asked for  an opinion from Department of                                                                   
Revenue.                                                                                                                        
                                                                                                                                
3:39:40 PM                                                                                                                    
                                                                                                                                
JERRY BURNETT,  LEGISLATIVE LIAISON,  DEPARTMENT OF  REVENUE,                                                                   
stated that the bill preserves the intent of the statute.                                                                       
                                                                                                                                
Co-Chair  Meyer declared  a potential  conflict of  interest.                                                                   
Representatives Kelly and Hawker objected.                                                                                      
                                                                                                                                
3:41:25 PM                                                                                                                    
                                                                                                                                
Representative Hawker  also declared a conflict  of interest.                                                                   
Representative Kelly objected.                                                                                                  
                                                                                                                                
3:42:05 PM                                                                                                                    
                                                                                                                                
Representative  Foster  MOVED   to  report  CSHB  71  out  of                                                                   
Committee   with    individual   recommendations    and   the                                                                   
accompanying fiscal notes.  There  being NO OBJECTION, it was                                                                   
so ordered.                                                                                                                     
                                                                                                                                
CSHB 71 (FIN) was REPORTED out  of Committee with a "do pass"                                                                   
recommendation  and with  a zero  fiscal impact  note by  the                                                                   
Department  of Revenue  and with a  new indeterminate  fiscal                                                                   
impact note by the Department of Natural Resources.                                                                             
                                                                                                                                
3:44:19 PM                                                                                                                    
                                                                                                                                

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