Legislature(2013 - 2014)HOUSE FINANCE 519

04/07/2013 01:30 PM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 4:00 p.m. Today --
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+= HB 129 OIL & GAS EXPLORATION/DEVELOPMENT AREAS TELECONFERENCED
Moved CSHB 129(FIN) Out of Committee
+ HB 76 UNEMPLOYMENT; ELEC. FILING OF LABOR INFO TELECONFERENCED
Heard & Held
+ HB 193 MUNICIPAL TAXATION OF TOBACCO PRODUCTS TELECONFERENCED
Moved CSHB 193(FIN) Out of Committee
+= SB 18 BUDGET: CAPITAL TELECONFERENCED
Scheduled But Not Heard
<Pending Referral>
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)                                                                                    
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     providing a  tax credit against the  corporation income                                                                    
     tax  for   qualified  oil  and  gas   service  industry                                                                    
     expenditures; relating  to the  oil and  gas production                                                                    
     tax rate; relating  to gas used in  the state; relating                                                                    
     to  monthly installment  payments  of the  oil and  gas                                                                    
     production tax; relating to oil  and gas production tax                                                                    
     credits for  certain losses and  expenditures; relating                                                                    
     to  oil and  gas  production  tax credit  certificates;                                                                    
     relating  to  nontransferable   tax  credits  based  on                                                                    
     production;  relating to  the  oil and  gas tax  credit                                                                    
     fund; relating  to annual  statements by  producers and                                                                    
     explorers;    establishing    the     Oil    and    Gas                                                                    
     Competitiveness  Review  Board; and  making  conforming                                                                    
     amendments."                                                                                                               
                                                                                                                                
1:34:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze discussed the meeting agenda.                                                                                  
                                                                                                                                
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT    OF   REVENUE,    presented   the    PowerPoint                                                                    
presentation: "Fiscal  Impact HCS  CSSB 21(RES)."   He noted                                                                    
that  the analysis  focused on  a long-term  policy goal  to                                                                    
increase oil production in Alaska  in the near-term and into                                                                    
the future.                                                                                                                     
                                                                                                                                
DAN  STICKEL,  ASSISTANT   CHIEF  ECONOMIST,  DEPARTMENT  OF                                                                    
REVENUE, communicated that the  department had identified 15                                                                    
areas included in its fiscal  analysis. The department would                                                                    
provide  information  about  each  of the  areas  and  would                                                                    
conclude  with  a summary  table  showing  the total  fiscal                                                                    
impact of  the bill  over the upcoming  6 years  compared to                                                                    
the fall  2012 forecast. He  added that the fiscal  note did                                                                    
not consider  potential additional production that  could be                                                                    
incentivized  by  the  legislation. The  presentation  would                                                                    
also look  at revenue  sensitivity under Alaska's  Clear and                                                                    
Equitable  Share  (ACES)  and  various  versions  of  SB  21                                                                    
specifically for FY 15.                                                                                                         
                                                                                                                                
Mr.  Stickel pointed  to slide  3:  "1. Repeals  Progressive                                                                    
Surcharge."   Under  the current  ACES system  the surcharge                                                                    
was the additional tax that  applied when the production tax                                                                    
value was in excess of $30  per barrel. The fiscal impact of                                                                    
the repeal ranged up to $1.8 billion per year.                                                                                  
                                                                                                                                
1:40:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Stoltze asked  what the price of oil  had been when                                                                    
ACES  was implemented.  Mr. Stickel  believed the  price had                                                                    
been in the $60 range.                                                                                                          
                                                                                                                                
Representative  Gara   asked  Mr.  Stickel  to   repeat  his                                                                    
comments   about   the   impact  of   the   elimination   of                                                                    
progressivity.  Mr.  Stickel  replied  that  the  repeal  of                                                                    
progressivity would  have an  impact of  up to  $1.8 billion                                                                    
per year.                                                                                                                       
                                                                                                                                
Mr.  Stickel  moved  to  slide  4:  "Impact  of  Progressive                                                                    
Surcharge."  The  slide showed  revenues  from  the ACES  25                                                                    
percent base tax and on  the progressive tax portion from FY                                                                    
08  to  FY  19.  He  pointed  out  that  going  forward  the                                                                    
progressivity  revenue  was  in  the $1.8  billion  to  $1.5                                                                    
billion range between  FY 13 and FY 19. He  noted that under                                                                    
the current rates the  department forecasted larger revenues                                                                    
from the base tax than from the progressive tax.                                                                                
                                                                                                                                
Mr. Stickel  turned slide 5: "Increases  Base Production Tax                                                                    
Rate."  He explained  that under  the  legislation the  base                                                                    
rate  would  increase  from  25 percent  to  33  percent  (a                                                                    
decrease  from 35  percent was  included in  the prior  bill                                                                    
version CSSB 21). He elaborated  that the change would bring                                                                    
a revenue  increase to the state  of up to $875  million per                                                                    
year. He  noted that the  difference between the  33 percent                                                                    
and 35 percent  base rates would be between  $200 million to                                                                    
$250 million annually.                                                                                                          
                                                                                                                                
1:42:21 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Neuman   wondered   how  the   elimination   of                                                                    
progressivity would  mean that  oil and  gas would  be taxed                                                                    
separately.   He  had   been  told   that  removing   a  BTU                                                                    
equivalency  section  of  the current  law  and  eliminating                                                                    
progressivity  would have  a  decoupling  effect. He  stated                                                                    
that progressivity was a multiplication  function on the tax                                                                    
and  the BTU  equivalency functioned  to ensure  that a  tax                                                                    
rate  was  followed  for   the  producer's  average  monthly                                                                    
production tax.                                                                                                                 
                                                                                                                                
Mr.  Stickel  responded  that  under  the  ACES  system  the                                                                    
progressivity  surcharge factored  in  oil and  gas and  was                                                                    
brought down by the lower  gas value. He expounded that when                                                                    
a  producer  had  different   commodity  values  there  were                                                                    
varying  impacts  on the  surcharge.  He  explained that  by                                                                    
eliminating  progressivity and  taxing at  a flat  rate, gas                                                                    
production would  no longer change  the tax rate.  Under HCS                                                                    
CSSB 21(RES)  the base  production tax  would be  33 percent                                                                    
for gas and 33 percent for oil.                                                                                                 
                                                                                                                                
1:44:56 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman  stated  that  under  ACES  there  was  a                                                                    
standard  allowable  deduction   on  capital  and  operating                                                                    
expenses at the  wellhead value. He clarified  that the flat                                                                    
rate   under  the   legislation  would   include  the   same                                                                    
components.  Mr.   Stickel  agreed   and  stated   that  the                                                                    
underlying calculation  of the production tax  value was not                                                                    
changed in the legislation.                                                                                                     
                                                                                                                                
Co-Chair  Austerman  asked  the  department  to  review  the                                                                    
material as clearly  and simply as possible  for the benefit                                                                    
of  the  committee  and  the   public.  He  pointed  to  the                                                                    
information on slide 3 stating  that the fiscal impact would                                                                    
be  up to  $1.8 billion.  He  asked what  the fiscal  impact                                                                    
pertained to.                                                                                                                   
                                                                                                                                
Co-Chair Stoltze  requested simplicity  and asked  for other                                                                    
department staff to augment with detail on slides as well.                                                                      
                                                                                                                                
1:47:29 PM                                                                                                                    
                                                                                                                                
Mr.  Pawlowski explained  that  the progressivity  surcharge                                                                    
was a  tax that was added  to the 25 percent  base tax rate;                                                                    
its elimination  would have a  revenue impact on  the state.                                                                    
The  department endeavored  to look  at  each revenue  piece                                                                    
separately given  that some provisions had  fiscal impact to                                                                    
the state whereas others did  not. He referenced slide 4 and                                                                    
stated  that  while  progressivity  was  a  large  piece  of                                                                    
revenue  generated  under  ACES,  the  base  tax  rate  also                                                                    
generated significant revenue. For  example, under the FY 14                                                                    
forecast the base tax rate  was estimated to generate $2.775                                                                    
billion and  progressivity was  estimated at  $1.55 billion.                                                                    
He clarified  that the  slide showed  the impact  of revenue                                                                    
raised prior to the application of credits.                                                                                     
                                                                                                                                
Representative Wilson  asked whether  $1.8 billion  would be                                                                    
subtracted  [potential loss  related to  the elimination  of                                                                    
progressivity] and $875  million would be added  as a result                                                                    
of  the base  tax rate  increase from  25 percent  up to  33                                                                    
percent (slide 5).                                                                                                              
                                                                                                                                
Mr. Pawlowski answered in the affirmative.                                                                                      
                                                                                                                                
Mr.  Stickel  expounded  that the  presentation  included  a                                                                    
summary table  showing the collective  fiscal impact  of the                                                                    
provisions.                                                                                                                     
                                                                                                                                
1:50:31 PM                                                                                                                    
                                                                                                                                
Representative  Gara looked  at high  revenues earned  under                                                                    
ACES in FY 08 and FY 12 (slide  4). He wondered if FY 12 was                                                                    
the  year   that  oil  reached   $140  per  barrel   and  if                                                                    
retroactive taxes had caused the high number in FY 08.                                                                          
                                                                                                                                
Mr. Stickel  replied that  oil prices  had reached  $140 per                                                                    
barrel in  FY 08. He  detailed that  the state had  taken in                                                                    
close to $1 billion in a specific month in FY 08.                                                                               
                                                                                                                                
Co-Chair  Stoltze  believed  the retroactive  provision  had                                                                    
expired after two or three years.                                                                                               
                                                                                                                                
Representative Gara asked  if the high revenue in  FY 12 was                                                                    
a result of high oil prices  as well. Mr. Stickel replied in                                                                    
the  affirmative; prices  had consistently  been above  $100                                                                    
per barrel throughout FY 12.                                                                                                    
                                                                                                                                
Co-Chair  Austerman  pointed  to   slide  5  and  asked  for                                                                    
verification that  the state's revenue would  increase up to                                                                    
$875 million annually [due to  an increase in the production                                                                    
tax rate].                                                                                                                      
                                                                                                                                
Mr. Stickel  responded that the $875  million revenue growth                                                                    
referred to  an increase in  the base production  tax (based                                                                    
on the  fall 2012  forecast), which would  vary by  year. He                                                                    
elaborated that the  $875 million reflected a  change in the                                                                    
FY 16  forecast due to an  increase in the base  tax from 25                                                                    
percent up to 33 percent.                                                                                                       
                                                                                                                                
1:52:55 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski moved forward to  slide 21: "Provisions in HCS                                                                    
CSSB 21(RES)  and Their Estimated Fiscal  Impact as Compared                                                                    
to Fall 2012 Forecast ($millions)."  He noted that the slide                                                                    
showed  revenue  impacts  without a  change  in  production.                                                                    
Provisions in HCS CSSB 21(RES)  were numbered on the left of                                                                    
the slide.  He believed it was  pertinent to focus on  FY 15                                                                    
as it  would be the first  full fiscal year impacted  by the                                                                    
legislation.                                                                                                                    
                                                                                                                                
Co-Chair Austerman  noted that  slide 21 showed  a reduction                                                                    
in $875 million; whereas slide  5 showed an increase in $875                                                                    
million. He assumed the numbers were not the same.                                                                              
                                                                                                                                
Mr.  Pawlowski  replied  that  the number  on  slide  5  was                                                                    
related to  the upper maximum in  the table on slide  21. He                                                                    
elaborated that the elimination  of progressivity would mean                                                                    
a maximum  loss in revenue  per year of $1.8  billion (shown                                                                    
in  the  FY  17  forecast); the  revenue  increase  of  $875                                                                    
million was shown on line 2 in FY 16 (slide 21).                                                                                
                                                                                                                                
Co-Chair  Austerman  asked  for clarification  on  the  $1.8                                                                    
billion impact shown  on slide 3. He wondered  if the impact                                                                    
was a  gain or loss in  revenue to the state.  He reiterated                                                                    
his earlier comment about providing clarity for the public.                                                                     
                                                                                                                                
1:55:28 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski answered that the  overall fiscal impact would                                                                    
be best described by the  FY 15 analysis (tax was determined                                                                    
in a calendar year). He pointed  to slide 21, line 1 showing                                                                    
that  the elimination  of progressivity  would  result in  a                                                                    
loss  of $1.5  billion  in  FY 15  based  on  the fall  2012                                                                    
forecast. Line  2 showed  that an increase  in the  base tax                                                                    
rate to 33 percent would  increase income by $850 million in                                                                    
FY  15. Line  3  included  an increase  of  $700 million  in                                                                    
revenue  as  a  result  of the  limitation  on  credits  for                                                                    
qualified  capital  expenditures  for the  North  Slope  (20                                                                    
percent  spending  credit).  He   noted  that  line  3  only                                                                    
pertained to  taxpayers who directly took  credits to offset                                                                    
their  production tax  liability.  Line 4  showed a  minimal                                                                    
revenue  impact  for the  net  operating  loss (NOL)  credit                                                                    
increase from  25 percent  to 33  percent. He  detailed that                                                                    
the NOL  credit was  available to  small explorers  who were                                                                    
spending  more than  they were  earning through  production;                                                                    
the change  would impact the operating  budget where credits                                                                    
would go through the credit fund.                                                                                               
                                                                                                                                
Mr.  Pawlowski moved  to line  5 that  showed a  $25 million                                                                    
decrease  in FY  15  revenue related  to  the gross  revenue                                                                    
exclusion  for  oil  production  in new  units  and  new  or                                                                    
expanded participating areas.  The provision eliminating the                                                                    
requirement for  credits to  be taken  over two  years would                                                                    
only have a  fiscal impact in FY 14, which  was projected at                                                                    
an  increased $250  million (reflecting  credits that  would                                                                    
have normally  been taken in  FY 15). He explained  that the                                                                    
fiscal impact was  limited to FY 14  because the obligations                                                                    
created by companies spending in  calendar year 2013 were an                                                                    
obligation to  the state. He  furthered that when  a company                                                                    
made  a qualified  capital expenditure  it  earned a  credit                                                                    
based on  20 percent of  the expenditure; under  current law                                                                    
the  company  had  to  divide the  credit  over  a  two-year                                                                    
period. He expounded that the  intent of the legislation was                                                                    
to close out the fiscal obligation to the state.                                                                                
                                                                                                                                
Mr.  Pawlowski continued  on  slide 21,  line  7 showing  no                                                                    
fiscal  impact  of an  amendment  to  the community  revenue                                                                    
sharing fund.  He detailed that  the item was linked  to the                                                                    
corporate income tax receipts  under the legislation, but it                                                                    
did  not  change  the  functioning of  the  program  or  the                                                                    
legislature's authority to appropriate.  Line 8 pertained to                                                                    
a  $5 per  taxable barrel  sliding scale  credit, which  was                                                                    
based on  the price  of oil.  The change  would result  in a                                                                    
reduction in  state revenue of up  to $825 million in  FY 15                                                                    
based  on   the  forecast  production.  He   noted  that  if                                                                    
production was  higher the credit rate  would increase. Line                                                                    
9  showed the  qualified  oil and  gas industry  expenditure                                                                    
credit,  which  was  a  corporate   income  tax  credit  for                                                                    
manufacturing or modification  of tangible personal property                                                                    
(e.g. modules, truck and pipe  improvements, and other). The                                                                    
impact of  the credit  was indeterminate,  but had  an upper                                                                    
range  of $25  million  per year  in  decreased revenue.  He                                                                    
detailed that the credit was  limited to a company that paid                                                                    
tax  and  could  only  be   used  to  reduce  the  company's                                                                    
individual tax liability.                                                                                                       
                                                                                                                                
Mr. Pawlowski addressed slide 21,  line 10 pertaining to the                                                                    
reduced interest  rate for late payments  and assessments on                                                                    
most taxes; it showed an  indeterminate fiscal impact with a                                                                    
possible  $25 million  loss  in revenue  per  year. Line  11                                                                    
showed zero fiscal impact resulting  from the removal of the                                                                    
3-mile requirement  for the Frontier  Basin tax  credit (the                                                                    
change had been  made in the House  Resources Committee). He                                                                    
communicated  that  the  change   showed  no  fiscal  impact                                                                    
because  the  Middle  Earth  [Interior  Alaska]  exploration                                                                    
credit was  included in the department's  current production                                                                    
forecast. Line 12  addressed the extension of  the fixed $12                                                                    
million small  producer credit to  2022; the  credit applied                                                                    
to  companies  producing  less   than  100,000  barrels  BTU                                                                    
equivalent  per  day. He  noted  that  there was  no  fiscal                                                                    
impact in the near-term; in FY  17 through FY 19 there was a                                                                    
loss  in revenue  projected as  a result  of new  production                                                                    
from new qualifying  entities. Line 13 referred  to the 2016                                                                    
required report  to the legislature from  the department. He                                                                    
remarked  that the  report requirement  was in  lieu of  the                                                                    
competitive review board. The  report requirement cost would                                                                    
be  absorbed  by  the department  and  would  generate  zero                                                                    
additional cost to the state.                                                                                                   
                                                                                                                                
Mr. Pawlowski moved  to line 14 related to  a requirement to                                                                    
consider joint  interest billings in the  audit process. The                                                                    
fiscal impact  of the requirement was  indeterminate; it was                                                                    
challenging  for   the  department  to  determine   how  the                                                                    
requirement worked  through the current audit  process. Line                                                                    
15  showed   zero  fiscal   impact  for   Alaska  Industrial                                                                    
Development and  Export Authority (AIDEA)  bonding authority                                                                    
to   finance  oil   and   gas   processing  facilities.   He                                                                    
communicated  that the  total revenue  impact  to the  state                                                                    
including  all 15  items was  projected  at a  loss of  $800                                                                    
million to $850 million per year.                                                                                               
                                                                                                                                
2:04:06 PM                                                                                                                    
                                                                                                                                
Representative Costello  referred to prior testimony  that a                                                                    
tremendous  amount of  revenue  was brought  in through  the                                                                    
progressivity  feature under  ACES  and  that a  significant                                                                    
portion of  the revenue was distributed  in capital credits.                                                                    
She  had  been  told   the  number  was  approximately  $850                                                                    
million.  She wondered  where the  amount  was reflected  on                                                                    
slide 21 and noted the numbers seemed lower on the slide.                                                                       
                                                                                                                                
Mr. Pawlowski replied that there  were two tiers in relation                                                                    
to companies eligible for  the qualified capital expenditure                                                                    
credit.  One tier  included companies  with a  tax liability                                                                    
that used  the credit to  reduce their liability.  The other                                                                    
tier included  companies without  a tax liability  that were                                                                    
issued  a  credit;  the  credit  came  through  the  state's                                                                    
operating  budget  via the  oil  and  gas credit  fund.  The                                                                    
impact on  the operating budget  was $150 million in  FY 15;                                                                    
whereas the  combination of the  two tiers equaled  the $850                                                                    
million.                                                                                                                        
                                                                                                                                
2:05:37 PM                                                                                                                    
                                                                                                                                
Representative  Gara stated  that the  base tax  rate of  33                                                                    
percent  was misleading.  He pointed  to lines  2 and  8 and                                                                    
surmised  that a  33 percent  tax rate  would generate  $450                                                                    
million more  than a 25  percent tax  rate, but with  the $5                                                                    
sliding deduction $425  million out of the  $450 million was                                                                    
lost.                                                                                                                           
                                                                                                                                
Mr. Pawlowski  pointed out  that the  state would  also gain                                                                    
$300 million  from the capital credit  elimination. He noted                                                                    
the numbers pertained to FY  14 (slide 21). He detailed that                                                                    
when  comparing  the  progressivity  between  the  two,  the                                                                    
number would be a negative $525 million.                                                                                        
                                                                                                                                
Representative Gara  asked if  the department  could provide                                                                    
different  variations  of  the  data on  slide  21  assuming                                                                    
various oil  prices. Mr. Pawlowski  directed attention  to a                                                                    
chart  on  slide 30:  "Production  Tax  Revenue, Less  North                                                                    
Slope  Refunded  and   Carried-Forward  Credits."  The  data                                                                    
pertained to  FY 15 only, given  that it would be  the first                                                                    
full  year  the legislation  would  impact.  The impact  was                                                                    
shown  across  a range  of  prices  ($50  to $150)  and  for                                                                    
various  versions of  the legislation  (from left  to right:                                                                    
ACES  was shown  in  blue,  SB 21  was  shown  in red,  CSSB
21(FIN) was shown in yellow,  and HCS CSSB 21(RES) was shown                                                                    
in purple).                                                                                                                     
                                                                                                                                
Representative  Gara  spoke  to a  ConocoPhillips  projected                                                                    
production decline of 3 percent  for legacy fields beginning                                                                    
in FY  17. He stated  that the  DOR forecast used  a steeper                                                                    
rate  of  decline  and  requested data  using  a  3  percent                                                                    
decline from  FY 17 going  forward. Mr. Pawlowski  was happy                                                                    
to work with  the committee on forecasted  decline. He noted                                                                    
that Conoco's 3  percent decline rate was  limited to legacy                                                                    
fields under  its operation (the Colville  River and Kuparuk                                                                    
River units).                                                                                                                   
                                                                                                                                
Representative Gara  responded that  an article using  the 3                                                                    
percent  decline beginning  in  FY 17  included  all of  the                                                                    
legacy fields  operated by Conoco,  BP, and Exxon.  He noted                                                                    
that Conoco  estimated that its  decline rate would  be less                                                                    
than  3 percent  beginning  in  FY 17  given  its other  oil                                                                    
fields.                                                                                                                         
                                                                                                                                
Co-Chair Stoltze  relayed that  ConocoPhillips would  have a                                                                    
chance to present to the committee in the future.                                                                               
                                                                                                                                
2:10:35 PM                                                                                                                    
                                                                                                                                
Co-Chair Austerman looked at slide  21, line 2, which showed                                                                    
the 33  percent base tax. He  pointed to FY 15  and asked if                                                                    
the $850  million was representative  of the 33  percent tax                                                                    
and what  the number would  be under the current  25 percent                                                                    
rate.                                                                                                                           
                                                                                                                                
Mr.  Pawlowski  replied  that  the   $850  million  was  the                                                                    
difference  between a  25 percent  and 33  percent base  tax                                                                    
rates.                                                                                                                          
                                                                                                                                
Representative   Munoz  followed   up  on   a  question   by                                                                    
Representative  Costello related  to how  companies received                                                                    
the capital expenditure credit.  She wondered why the entire                                                                    
amount was not reflected on slide 21.                                                                                           
                                                                                                                                
Mr. Pawlowski replied that only  looking at revenues brought                                                                    
in by tax  payers would have ignored  the obligation created                                                                    
by credits paid through  the operating budget; therefore the                                                                    
items had been broken out  to clarify the expenditure by the                                                                    
state. The total revenue impact  (only factoring in revenue)                                                                    
would be  underestimating the bill's  fiscal impact  by $150                                                                    
million. He remarked that it  was difficult to represent the                                                                    
two items in the fiscal note.                                                                                                   
                                                                                                                                
2:13:01 PM                                                                                                                    
                                                                                                                                
Representative Munoz  asked for verification that  there was                                                                    
an additional $400 million or  $450 million not reflected in                                                                    
bill's  bottom  line  impact to  the  state.  Mr.  Pawlowski                                                                    
replied that the  total revenue impact was  shown below line                                                                    
15  on slide  21. The  impact  on the  operating budget  was                                                                    
shown below  and included  in the  bottom line  total fiscal                                                                    
impact on slide 21.                                                                                                             
                                                                                                                                
Representative  Gara  pointed  to   slide  21,  line  8  and                                                                    
observed that the tax rate  would not reach 33 percent until                                                                    
oil  reached  a  price  of  $150 to  $160  per  barrel.  Mr.                                                                    
Pawlowski agreed  that the impact  on line 8 did  reflect an                                                                    
offset against the increase.                                                                                                    
                                                                                                                                
Vice-Chair Neuman asked  what the cost of  the gross revenue                                                                    
exclusion (GRE) would be to  the state. He wondered what the                                                                    
cost  to  the state  would  be  under the  current  standard                                                                    
allowable deduction system.                                                                                                     
                                                                                                                                
Mr. Pawlowski  replied that the  GRE impact  was represented                                                                    
on  slide 21,  line 5.  The estimated  impact in  FY 15  was                                                                    
approximately   $25  million.   He  noted   that  qualifying                                                                    
production had  been strictly  limited to  new oil  that had                                                                    
not been forecasted at present.                                                                                                 
                                                                                                                                
Representative Costello  observed that the fiscal  impact of                                                                    
the GRE was  projected at $50 million, but that  it was also                                                                    
listed  as indeterminate.  She wondered  how the  department                                                                    
had  approached   the  estimate  and  the   unknown  factors                                                                    
involved. She assumed the worst  case scenario had been used                                                                    
in the assumption.                                                                                                              
                                                                                                                                
2:16:58 PM                                                                                                                    
                                                                                                                                
Mr.  Stickel  replied  that  the  GRE  took  the  forecasted                                                                    
production from  the barrels and  fields that  would qualify                                                                    
for  the  new  unit  and expanded  participating  areas.  He                                                                    
believed the number was 2 percent  to 3 percent of the total                                                                    
production  for FY  15. The  department also  looked at  the                                                                    
forecasted production  tax revenue with and  without the GRE                                                                    
applied to the barrels for  the qualifying fields, which was                                                                    
how the $25  million cost had been determined for  FY 15. He                                                                    
believed $25  million for  the HCS  CSSB 21(RES)  version of                                                                    
the bill was  a good estimate; there  was little uncertainty                                                                    
about which barrels  would qualify. He noted  that the prior                                                                    
version had  included a more  liberal definition  about what                                                                    
qualified as new oil. The  uncertainty had been higher under                                                                    
the prior  version and the  department had provided  a range                                                                    
of revenue estimate.                                                                                                            
                                                                                                                                
2:18:45 PM                                                                                                                    
                                                                                                                                
Representative  Edgmon  pointed  to  slide 21,  line  7  and                                                                    
surmised that it was unlikely  the community revenue sharing                                                                    
fund would  exceed $60  million given  its tie  to corporate                                                                    
income tax unless a large uptick in activity occurred.                                                                          
                                                                                                                                
Mr.  Stickel replied  that the  total  corporate income  tax                                                                    
collections from  oil, gas, and other  corporations had been                                                                    
over  $500 million  in  each  of the  past  eight years  and                                                                    
collections  were continued  to be  forecasted at  over $500                                                                    
million  per year  for the  length  of the  fiscal note.  He                                                                    
added  that  the  $60  million  threshold  would  easily  be                                                                    
reached.                                                                                                                        
                                                                                                                                
Representative Edgmon  questioned whether  there would  be a                                                                    
decrease  to  the  current  $60   million.  He  believed  an                                                                    
additional $20 million  to $25 million added  to the revenue                                                                    
sharing  program  in  the  last  couple  of  years.  He  was                                                                    
interested in  the impact  of tying  revenue sharing  to the                                                                    
corporate income tax provision of the bill.                                                                                     
                                                                                                                                
Mr. Pawlowski  believed it was  illustrative to look  at the                                                                    
progressivity  piece  (slide  4)   because  that  was  where                                                                    
community revenue  sharing dollars were softly  dedicated to                                                                    
the revenue sharing fund. He  discussed language that was up                                                                    
to 20 percent  of the progressive portion or  $60 million to                                                                    
$180  million.  He furthered  that  given  the $500  million                                                                    
annual  corporate  income  tax revenue  the  department  was                                                                    
comfortable that  plenty of revenue  would be  available for                                                                    
the   revenue  sharing   program.  He   stressed  that   the                                                                    
legislation  did not  attempt to  change how  much would  be                                                                    
appropriated  to  the  fund.  The intent  was  to  locate  a                                                                    
revenue  stream that  would  meet the  $60  million to  $180                                                                    
million to meet the obligation under the statute.                                                                               
                                                                                                                                
2:21:38 PM                                                                                                                    
                                                                                                                                
Representative   Edgmon   relayed    that   an   interactive                                                                    
presentation  demonstrating  how   changing  numbers  around                                                                    
would  impact  the  data.  He  wanted  to  be  prepared  for                                                                    
unexpected events such as decreases  or increases in various                                                                    
areas. He referred to the importance of stress testing.                                                                         
                                                                                                                                
Co-Chair Austerman referred to  his earlier question related                                                                    
to  $850  million.  He clarified  that  the  spring  revenue                                                                    
forecast was  based on the  ACES 25 percent  production tax.                                                                    
Mr.  Stickel replied  in the  affirmative. He  detailed that                                                                    
the spring forecast  was based entirely on  the current ACES                                                                    
production  tax. He  noted that  slide 21  was based  on the                                                                    
fall forecast.                                                                                                                  
                                                                                                                                
Co-Chair  Stoltze  made  a  remark  about  tying  government                                                                    
growth to production.                                                                                                           
                                                                                                                                
Mr. Pawlowski relayed  that slide 21 was included  on page 4                                                                    
of  a  department  fiscal note  [FN10  (DOR),  4/8/13].  The                                                                    
department felt  the slide integrated the  bill's provisions                                                                    
without factoring in any changes  to production or price. He                                                                    
referred to  a presentation  by Econ  One from  the previous                                                                    
day and to the importance  of long-term decisions beyond the                                                                    
timeline shown on the fiscal note.                                                                                              
                                                                                                                                
Co-Chair Austerman  asked whether the fiscal  note reflected                                                                    
the  fall   2012  or  spring  2013   revenue  forecast.  Mr.                                                                    
Pawlowski  replied that  the note  reflected fall  data; the                                                                    
department  was  currently  working  to update  it  for  the                                                                    
spring forecast.                                                                                                                
                                                                                                                                
2:24:35 PM                                                                                                                    
                                                                                                                                
Representative Edgmon referred to  a news article discussing                                                                    
that the reduction  of oil taxes should be thought  of as an                                                                    
investment  to   increase  production.  He  wondered   if  a                                                                    
projection   of  the   potential   increase  in   production                                                                    
resulting  from the  legislation  would be  provided to  the                                                                    
committee. Mr.  Pawlowski pointed  to slide  22: "Production                                                                    
Scenarios."  He cautioned  that any  methodology looking  at                                                                    
increased   production  had   flaws.   The  department   had                                                                    
attempted  to  provide  a   scenario  method  that  examined                                                                    
different production increase profiles.                                                                                         
                                                                                                                                
     Scenario A:                                                                                                                
                                                                                                                                
        · New 50 Million barrel field developed by small                                                                        
          producer without tax liability                                                                                        
        · Peak production = 10 thousand bbls/day                                                                                
        · Development costs = $500,000,000                                                                                      
        · Qualified for GRE and NOL                                                                                             
                                                                                                                                
Mr. Pawlowski relayed  that ACES and the  legislation used a                                                                    
net  tax.  He  expounded  that  it  was  important  to  also                                                                    
consider the  cost of reaching  the production,  which would                                                                    
have a  fiscal impact.  Scenario A represented  the addition                                                                    
of one new 50 million barrel field.                                                                                             
                                                                                                                                
2:27:25 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski discussed Scenario  B on slide 23: "Production                                                                    
Scenarios." He  communicated that the scenario  provided the                                                                    
most   reasonable   expectation   for  the   near-term.   He                                                                    
emphasized  that   the  scenarios  were  not   meant  to  be                                                                    
predictive.                                                                                                                     
                                                                                                                                
     Scenario B:                                                                                                                
                                                                                                                                
        · Operators of existing units add 4 drill rigs to                                                                       
          current plans                                                                                                         
        · Each rig adds 4,000 bbls/day in new production                                                                        
          each year                                                                                                             
             o Which each then decline at 15% per year                                                                          
        · Does not qualify for GRE                                                                                              
                                                                                                                                
Mr. Pawlowski elaborated that it  was important to factor in                                                                    
a decline rate when looking  at oil production. He looked at                                                                    
Scenario C on slide 24: "Production Scenarios."                                                                                 
                                                                                                                                
     Scenario C:                                                                                                                
                                                                                                                                
        · Operator of existing legacy unit builds new drill                                                                     
          pad                                                                                                                   
        · Development cost = $5 billion                                                                                         
        · Adds 15,000 bbls/day in 2014 increasing to peak                                                                       
          rate of 90,000 bbls/day in 2018                                                                                       
        · Does not qualify for GRE                                                                                              
                                                                                                                                
Representative  Holmes  wondered   about  development  costs                                                                    
associated with Scenario B. Mr.  Pawlowski pointed to page 5                                                                    
of the  fiscal note  [FN10 (DOR),  4/8/13] and  relayed that                                                                    
the  development cost  for each  well was  estimated at  $20                                                                    
million. The figure was on the  high side of current cost on                                                                    
the  North  Slope, but  he  believed  it was  indicative  of                                                                    
future development costs.                                                                                                       
                                                                                                                                
Representative Gara expressed a  concern related to Scenario                                                                    
A  (slide  22).  He  agreed  that  incentivizing  new  field                                                                    
production  was necessary.  He asked  for verification  that                                                                    
the  GRE or  the reduction  in tax  for a  new field  was 20                                                                    
percent. Mr. Pawlowski replied in the affirmative.                                                                              
                                                                                                                                
Representative Gara  asked whether the 20  percent GRE would                                                                    
reduce  the base  tax  rate  by more  than  20 percent.  Mr.                                                                    
Stickel replied  that the  20 percent GRE  was based  on the                                                                    
gross oil  value and was  subtracted from the net  value. He                                                                    
agreed that  the impact of  subtracting 20 percent  of gross                                                                    
would be a  reduction of greater than 20 percent  of net. He                                                                    
explained  that the  exact percentage  would  depend on  the                                                                    
price of oil.                                                                                                                   
                                                                                                                                
Representative  Gara  addressed  tax  rates  of  future  new                                                                    
fields.  He stated  that at  $110 per  barrel oil  companies                                                                    
would not pay  a 33 percent tax due to  the $5 sliding scale                                                                    
[slide  21, provision  8]. He  asked  for a  rough tax  rate                                                                    
estimate for FY 15 before the GRE.                                                                                              
                                                                                                                                
Mr. Pawlowski asked for  clarification on which presentation                                                                    
Representative Gara was referencing.                                                                                            
                                                                                                                                
2:32:55 PM                                                                                                                    
                                                                                                                                
Representative  Gara   pointed  to  slide  21   of  the  DOR                                                                    
presentation. He noted that line  2 assumed a 33 percent tax                                                                    
rate,  but  the $5  per  taxable  barrel credit  meant  that                                                                    
companies would  pay less  than 33  percent. He  stated that                                                                    
based on the  chart the $5 credit would mean  a reduction of                                                                    
$825  million  from  the  $850  million  in  gained  revenue                                                                    
resulting from the base tax  rate increase to 33 percent. He                                                                    
assumed that the actual tax  rate on companies was closer to                                                                    
26 percent  or 27 percent with  the inclusion of the  $5 per                                                                    
barrel credit. He wondered if the assumption was fair.                                                                          
                                                                                                                                
Mr. Stickel replied that at  the forecast price the base tax                                                                    
increase from  25 percent to  33 percent was  roughly offset                                                                    
by  the  per  taxable  barrel credit.  He  stated  that  the                                                                    
effective  tax rate  factoring in  only  the two  provisions                                                                    
would  be  approximately 25  percent.  He  offered that  the                                                                    
department  could provide  more  specific calculations  that                                                                    
encompassed all of the components.                                                                                              
                                                                                                                                
Representative  Gara pointed  to the  GRE, which  subtracted                                                                    
roughly  35  percent  from  the  25  percent  tax  rate.  He                                                                    
surmised  that  the  tax  rate  would  be  approximately  17                                                                    
percent  when factoring  in the  GRE.  Mr. Stickel  answered                                                                    
that the amount was roughly in the ball park.                                                                                   
                                                                                                                                
Representative  Gara  understood  that companies  needed  to                                                                    
make up  for sunk  costs in the  development of  new fields,                                                                    
but he wondered  if the department had thought  about a time                                                                    
limit for the  GRE. He did not know what  the state would be                                                                    
able to  fund if  it had  to live  off of  a 17  percent tax                                                                    
rate.                                                                                                                           
                                                                                                                                
Mr. Pawlowski  responded that  a time limit  on the  GRE had                                                                    
been discussed  in multiple  committees; the  department was                                                                    
concerned  that  it  could   create  distorting  effects  on                                                                    
behavior.  Specifically,   how  investment   behavior  would                                                                    
change  if  taxes  were  increased at  the  end  or  partway                                                                    
through the useful  life of a well. The  department was more                                                                    
comfortable  with the  more narrowly  defined definition  of                                                                    
new oil in the current bill.  He elaborated that DOR did not                                                                    
see  all of  the new  oil in  the foreseeable  future coming                                                                    
from GRE  eligible barrels because  it did not apply  to the                                                                    
basic legacy  production. He relayed that  Mr. Stickel would                                                                    
speak   to  the   forecast  related   to  non-GRE   eligible                                                                    
production.                                                                                                                     
                                                                                                                                
Representative Gara  understood that  the GRE did  not apply                                                                    
to  everything. He  discussed areas  that would  qualify for                                                                    
the  GRE including  new geological  units in  legacy fields,                                                                    
Umiat, Nakiachuk, Oooguruk, CD5,  and other oil. He stressed                                                                    
that the  provision would apply  to a significant  amount of                                                                    
oil. He  wondered if the  state could fiscally sustain  a 17                                                                    
percent tax rate on the oil that would be included.                                                                             
                                                                                                                                
Mr.  Pawlowski replied  that the  department  had looked  at                                                                    
what   the  state   could  afford   to   offer  in   credits                                                                    
particularly when  it would not  receive equal  royalty into                                                                    
the future. He  believed CD5 was largely  on non-state land;                                                                    
the  state paid  through the  credits and  the deduction  in                                                                    
ACES.  He furthered  that the  state invested,  but did  not                                                                    
have  the other  components to  provide the  revenue to  pay                                                                    
back.  The  department was  concerned  about  the state  not                                                                    
receiving the  full royalty from  the production  and paying                                                                    
for  it upfront.  The  administration  was more  comfortable                                                                    
with inspiring  increased production in  a way that  did not                                                                    
have  the  state as  invested  in  the upfront  development,                                                                    
particularly  when there  was not  the full  balance of  the                                                                    
royalty to support the state.                                                                                                   
                                                                                                                                
2:38:40 PM                                                                                                                    
                                                                                                                                
Representative Gara believed that  the ACES tax system would                                                                    
be eliminated  in the near  future. He asked about  the pros                                                                    
and cons of  a significant amount of new oil  being taxed at                                                                    
a  rate of  approximately  17 percent  and approximately  25                                                                    
percent. He wondered  why a 7-year to 10-year  time limit on                                                                    
the lower tax should not be imposed.                                                                                            
                                                                                                                                
Mr.   Pawlowski  answered   that  when   incentives  changed                                                                    
behavior  also  changed.  He stated  that  the  concern  was                                                                    
related  to   how  tax  increases  would   impact  declining                                                                    
production; costs  would rise and increased  taxes may cause                                                                    
incentive to shut  in the production. The fear  was that the                                                                    
change would discourage production in the future.                                                                               
                                                                                                                                
Representative  Kawasaki asked  if the  production scenarios                                                                    
provided were likely and how  they were developed (slides 22                                                                    
through 24).                                                                                                                    
                                                                                                                                
Mr. Pawlowski replied that the  scenarios had initially been                                                                    
developed based on how something  works without trying to be                                                                    
predictive. He  stated that predicting the  magnitude of the                                                                    
change was  very difficult. He furthered  that each scenario                                                                    
was  a  realistic concept,  but  they  were intended  to  be                                                                    
illustrative.  He pointed  to Scenario  B  and relayed  that                                                                    
[operators of  existing units] adding  4 new drill  rigs was                                                                    
not necessarily  realistic. The  department wanted  to avoid                                                                    
doing  a direct  correlation between  increases in  spending                                                                    
and a direct percentage  increase in production. He remarked                                                                    
that it cost money to  develop oil, production happened, and                                                                    
then production declined; the items  needed to be built into                                                                    
a model given  a net system in order to  provide a realistic                                                                    
picture for policy makers.                                                                                                      
                                                                                                                                
Representative Kawasaki  believed there would be  more value                                                                    
to the scenarios if they  were in a current development plan                                                                    
under the Division of Oil and Gas.                                                                                              
                                                                                                                                
2:42:53 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski  replied that the  department had  worked with                                                                    
its economic research  group to go through  current DOR data                                                                    
to  get ideas  on cost,  development, and  projects and  had                                                                    
built the data  into the models. He relayed  that the models                                                                    
were not based on any individual opportunities.                                                                                 
                                                                                                                                
Representative  Kawasaki wanted  to ensure  that the  public                                                                    
understood that the scenarios were illustrative in nature.                                                                      
                                                                                                                                
Mr. Pawlowski stressed  that DOR had attempted  to move away                                                                    
from  anything  that  was  not  indicative  of  what  actual                                                                    
developments and  projects would  look like. The  intent was                                                                    
to produce  something reasonable to show  the public related                                                                    
to the types of production.                                                                                                     
                                                                                                                                
Representative  Holmes referred  to the  CD5 oil  field. She                                                                    
pointed  to the  department's  concern that  under ACES  the                                                                    
state  may  not collect  royalties  on  developments off  of                                                                    
state  land; therefore,  production  tax would  make up  the                                                                    
entire revenue for  the state on those  areas. She furthered                                                                    
that  in the  existing  system there  was  interplay of  the                                                                    
state paying credits and the way  the tax ran; she noted the                                                                    
state could end up under  water. She asked how the situation                                                                    
would look  under the proposed  legislation and  whether the                                                                    
state would be on safer ground.                                                                                                 
                                                                                                                                
Mr.  Pawlowski  replied that  the  removal  of the  buy-down                                                                    
effect had the largest impact.  He elaborated that under the                                                                    
net system  the state  support for  company spending  was at                                                                    
the 25  percent rate plus  the buy-down effect.  He remarked                                                                    
that PFC Energy and Econ  One had talked about state support                                                                    
for  a project  in the  80 percent  range. The  spending was                                                                    
different under  the current system  because it  was limited                                                                    
to the basic tax rate (33  percent in the current bill); for                                                                    
an existing company developing a  field, the state supported                                                                    
at  33  percent.  The  state would  take  a  production  tax                                                                    
equivalent to the tax rate minus  the GRE effect and the per                                                                    
barrel  future credit.  He furthered  that the  scenario was                                                                    
different than  the buy-down effect and  the capital credits                                                                    
that came out up front in  the current tax system. He stated                                                                    
that  there would  be less  potential  for the  state to  go                                                                    
negative  in the  situation than  there was  under ACES.  He                                                                    
referred to the decoupling effect  and a previous PFC Energy                                                                    
presentation.  He  detailed that  the  impact  to the  state                                                                    
could  be  negative  if  a   high  value  resource  such  as                                                                    
conventional  oil was  combined  with a  low value  resource                                                                    
like viscous  or high  cost oil;  the proposed  system would                                                                    
not create the  same effect, but it was  primarily linked to                                                                    
the buy-down effect and not  the credit structure. Under the                                                                    
current system moving  into the field, a  company would have                                                                    
the ability to write off  expenditures against its taxes and                                                                    
to receive 33  percent support. The company  would receive a                                                                    
per barrel  production credit  and the  GRE for  new fields.                                                                    
The department saw the  royalty being dramatically different                                                                    
in comparison to the current system.                                                                                            
                                                                                                                                
2:48:25 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked if the state  could continue to                                                                    
fund its budget with oil  as the main resource. She observed                                                                    
that oil is  not a renewable resource and  believed a change                                                                    
needed to be made to  stretch its production lifespan out in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Mr.  Pawlowski  focused  on  the  power  of  production.  He                                                                    
referred  to various  presentations  by departments  showing                                                                    
that  Alaska was  resource rich;  approximately 3.5  billion                                                                    
barrels  of  oil  remained  in  the  legacy  fields  and  an                                                                    
additional 3 billion barrels were  waiting to be discovered.                                                                    
He explained that roughly 10  percent of the resource needed                                                                    
to  be developed  to  continue to  drive  the revenues  seen                                                                    
under ACES with  forecasted declines. He stated  that in the                                                                    
long-term  the  issue was  about  production  being able  to                                                                    
sustain  vital   revenues  to  the   state.  He   noted  the                                                                    
importance of discussing the  relationship of state revenues                                                                    
and the value  being created. He pointed out  that the state                                                                    
received  revenues  in  multiple  ways in  addition  to  the                                                                    
production tax.  The scenarios provided in  the presentation                                                                    
looked  at production  compared  to the  current system.  He                                                                    
suggested  looking at  the scenarios  as underestimates.  He                                                                    
wanted to  focus on  what the production  could do  to drive                                                                    
the  long-term  sustainability  of   Alaska  as  opposed  to                                                                    
looking at other revenue sources.                                                                                               
                                                                                                                                
Representative Wilson  understood that Alberta  had recently                                                                    
changed its  tax structure. She  wondered if the  change had                                                                    
made  a difference.  Mr. Pawlowski  replied  that DOR  would                                                                    
provide  the committee  with  benchmarking  data from  prior                                                                    
presentations that showed a  dramatic increase in investment                                                                    
and  production  in  Alberta.  He  noted  that  Alberta  was                                                                    
currently  experiencing some  significant challenges  due to                                                                    
low oil prices caused by stranded production.                                                                                   
                                                                                                                                
Representative  Wilson remarked  that Alaska  could look  to                                                                    
other locations that had experienced  similar issues to gain                                                                    
information about outcomes.                                                                                                     
                                                                                                                                
2:51:54 PM                                                                                                                    
                                                                                                                                
Representative  Gara referred  to the  possibility that  the                                                                    
Alberta  tax  cut  had  raised the  value  to  equalize  the                                                                    
offset. He relayed  that the province was  facing $2 billion                                                                    
to $3 billion budget deficits.  He stated that when too much                                                                    
was spent on tax breaks it was possible to lose money.                                                                          
                                                                                                                                
Mr.  Pawlowski referred  to a  Wall  Street Journal  article                                                                    
from the past  December that indicated there was  oil at $50                                                                    
per barrel  if tankers  were available  to transport  it. He                                                                    
stated that there  was a significant amount  of oil produced                                                                    
in Alberta with very  little infrastructure to transport it.                                                                    
He discussed various pipeline  proposals. He understood that                                                                    
the increased production  was largely due to  the decline in                                                                    
price. He agreed that Alberta was facing a fiscal deficit.                                                                      
                                                                                                                                
Mr. Pawlowski continued  to discuss Scenario C  on slide 24:                                                                    
"Production Scenarios." The scenario  included a large drill                                                                    
pad development  with multiple wells,  increased production,                                                                    
and billions of  dollars in spending. He  furthered that the                                                                    
scenario was an aggregate of  the small field, the rigs, and                                                                    
the  addition  of the  large  pad.  He  moved to  slide  25:                                                                    
"Production  Profiles of  Production  Scenarios." The  slide                                                                    
illustrated production  numbers associated with  Scenarios A                                                                    
through C. He  pointed to FY 14 and noted  that the blue bar                                                                    
to the  left represented  forecasted production;  Scenario A                                                                    
did not  add new oil,  Scenario B increased  production from                                                                    
539 to  555 thousand  BoPD, Scenario C  increased production                                                                    
to  570 thousand  BoPD. The  chart provided  data for  FY 14                                                                    
through  FY  19  including decline  curves  with  production                                                                    
layered on top.                                                                                                                 
                                                                                                                                
Representative Gara  asked whether actual projects  had been                                                                    
identified  under  Scenario C  that  would  go online  as  a                                                                    
result  of  the  bill.  Mr.   Pawlowski  answered  that  the                                                                    
scenarios  were  hypothetical   based  on  the  department's                                                                    
understanding of the type of  spending that would occur. The                                                                    
information  was intended  to be  illustrative of  realistic                                                                    
elements that could occur.                                                                                                      
                                                                                                                                
2:55:46 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski discussed slide  26: "Projected Revenues under                                                                    
Production Scenarios  at $90/Barrel  ANS." The  slide showed                                                                    
rounded unrestricted general fund  revenue at various prices                                                                    
for  the different  production scenarios.  The  goal was  to                                                                    
present the  sensitivity level  of a  new revenue  system on                                                                    
production.  The  chart  provided  a  time  limited  (FY  14                                                                    
through  FY 19)  illustrative scenario  based on  production                                                                    
figures shown on slide 25.                                                                                                      
                                                                                                                                
Mr. Pawlowski turned to slide  27: "Projected Revenues under                                                                    
Production  Scenarios  - at  $100/Barrel  ANS."  The bar  in                                                                    
black  on  the  far  right   showed  ACES  at  the  forecast                                                                    
production (other  scenarios were shown for  comparison). He                                                                    
pointed  to  Scenario B  in  FY  16,  which showed  that  $5                                                                    
billion would be raised under  the proposal and $5.2 billion                                                                    
would be raised under ACES.                                                                                                     
                                                                                                                                
Representative Gara  recalled testimony  that it  would take                                                                    
roughly seven years  from the start to  bring new production                                                                    
online.  He wondered  why the  chart  showed new  production                                                                    
coming online within three and four years.                                                                                      
                                                                                                                                
Mr. Pawlowski  replied that adding  a new rig to  the legacy                                                                    
fields  could  offer  near-term opportunity  and  provide  a                                                                    
quick  turnaround  in  production. He  reiterated  that  the                                                                    
slides  were illustrative.  He furthered  that adding  a new                                                                    
rig  could  be  done  quickly; therefore,  it  was  not  GRE                                                                    
eligible under the analysis.                                                                                                    
                                                                                                                                
Representative Gara  asked for verification that  there were                                                                    
no  commitments from  any  company  that developments  would                                                                    
occur as a result of  the bill. Mr. Pawlowski responded that                                                                    
the  oil   industry  was  better  equipped   to  answer  the                                                                    
question.                                                                                                                       
                                                                                                                                
2:58:43 PM                                                                                                                    
                                                                                                                                
Representative Costello  observed that Scenario  C preformed                                                                    
the best.  She asked  the department  to carry  the analysis                                                                    
beyond  FY 19.  She stated  that the  bill had  a short-term                                                                    
cost  with  the hope  of  a  long-term gain.  Mr.  Pawlowski                                                                    
replied   that  there   were  various   requests  that   the                                                                    
department could work with committee  members on in order to                                                                    
provide the desired information.                                                                                                
                                                                                                                                
Mr. Pawlowski  moved to slide 29:  "Projected Revenues under                                                                    
Production  Scenarios -  at Forecast  ANS Price."  The slide                                                                    
showed how  sensitive the scenarios  were to  moderations of                                                                    
the decline curve to potentially  create revenues that could                                                                    
offset the revenue reduction under ACES.                                                                                        
                                                                                                                                
Representative  Edgmon  discussed department  comments  that                                                                    
U.S. oil  production was at  historic high levels.  He noted                                                                    
that  production   was  increasing  globally  as   well.  He                                                                    
wondered  if  a  lack  of  infrastructure  would  provide  a                                                                    
limitation on the production scenarios.                                                                                         
                                                                                                                                
Mr. Pawlowski replied with a  reference to work done by Econ                                                                    
One  related to  how much  resource needed  to be  developed                                                                    
over  the  long-term. Econ  One  had  looked at  what  would                                                                    
happen  if   Alaska  trended  along  with   its  peer  group                                                                    
following 2006; it had examined  what spending would be like                                                                    
at present  and how much  resource there would be.  Econ One                                                                    
had also looked at  the relationship between government take                                                                    
and potential drilling  and how many wells would  need to be                                                                    
developed  over what  period of  time. He  stated that  when                                                                    
considering  the longer-term,  it was  necessary to  look at                                                                    
the opportunity to exceed the  break even. He furthered that                                                                    
the  availability of  capital as  opposed to  infrastructure                                                                    
was the  bigger question; whether companies  had the capital                                                                    
to  reallocate quickly  to develop  resources in  Alaska. He                                                                    
encouraged members  to ask the industry  questions about its                                                                    
ability to reallocate capital. He  expounded that the change                                                                    
would not happen immediately, but  the attractiveness of the                                                                    
tax  system  would  make   companies  decide  to  reallocate                                                                    
capital to Alaska to be competitive.                                                                                            
                                                                                                                                
3:04:17 PM                                                                                                                    
                                                                                                                                
Representative Holmes discussed slide  21 and the difference                                                                    
between an  impact on revenue  and on the  operating budget.                                                                    
She pointed  to slides 26  through 29 that  showed projected                                                                    
revenues  under various  scenarios.  She  asked whether  the                                                                    
slides also considered the impact  of credits paid out under                                                                    
the existing system on the state's operating budget.                                                                            
                                                                                                                                
Mr. Pawlowski  believed the revenue projections  factored in                                                                    
the credits that would be paid out.                                                                                             
                                                                                                                                
Representative  Gara queried  what 5.5  stood for  in FY  19                                                                    
(slide 29). Mr. Pawlowski answered  that the figure was $5.5                                                                    
billion  in GFUR  [General Fund  Unrestricted Revenue];  the                                                                    
bars  represented   revenue  forecasts  under   the  various                                                                    
scenarios.                                                                                                                      
                                                                                                                                
Representative Gara  referred to testimony by  the major oil                                                                    
companies that  technology was preventing the  production of                                                                    
massive amounts  of heavy  oil in Alaska.  He recalled  a BP                                                                    
testifier who had said that  the issue was technological and                                                                    
not fiscal.  He stated  that Conoco had  said it  planned to                                                                    
increase  production,  which  would  decrease  its  rate  of                                                                    
decline to  approximately 3 percent.  He was  concerned that                                                                    
the department  was applying  a 17 percent  tax rate  to new                                                                    
oil, which was likely to  be produced under the current ACES                                                                    
system anyway. He was worried  the state would unnecessarily                                                                    
incentivize some items.                                                                                                         
                                                                                                                                
3:07:16 PM                                                                                                                    
                                                                                                                                
Mr. Pawlowski replied that it  was related to what the state                                                                    
assumed  would  happen.  He  agreed  that  Conoco  had  made                                                                    
comments about its specific production  and decline rate. He                                                                    
addressed the question  about new oil and  what would happen                                                                    
and looked  at projects  that were on  the horizon,  but did                                                                    
not  happen  (e.g.  Liberty).  He  surmised  that  the  root                                                                    
question  was  about  relying on  the  revenue  forecast  to                                                                    
determine  what  would actually  happen  in  the future  and                                                                    
using that to define new  versus old oil. The department was                                                                    
concerned that  much of  what was  projected to  occur under                                                                    
ACES  would not  occur.  He pointed  to  testimony from  Ken                                                                    
Thompson (of  Brooks Range Petroleum)  that the  company had                                                                    
been  to  over  200  potential investors  to  pitch  its  40                                                                    
million  barrel project  under the  current  system; it  had                                                                    
been unsuccessful  and had  asked the  state to  finance the                                                                    
project.                                                                                                                        
                                                                                                                                
BRUCE   TANGEMAN,   DEPUTY   COMMISSIONER,   TAX   DIVISION,                                                                    
DEPARTMENT  OF  REVENUE,  relayed that  the  department  had                                                                    
incorporated  information it  learned  from producers  about                                                                    
expected decline rates into its  fall revenue forecast (2012                                                                    
Fall Revenue Forecast, page 43).                                                                                                
                                                                                                                                
Co-Chair Stoltze referred  to a phrase "we're  not fine with                                                                    
decline."                                                                                                                       
                                                                                                                                
Mr.  Pawlowski agreed.  He could  provide committee  members                                                                    
with  a transcript  of the  Conoco analyst  presentation. He                                                                    
added  that  the  company  had   included  that  it  saw  an                                                                    
opportunity to  reverse the decline if  tax reform occurred.                                                                    
He pointed  to the  opportunity of  production to  provide a                                                                    
long-term sustainable base for the state.                                                                                       
                                                                                                                                
3:10:29 PM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman  referred to slide 29  and the committee's                                                                    
discussion  the prior  day on  well amortization  running at                                                                    
about five  years. He wondered  whether the  value resulting                                                                    
from  the potential  addition  of four  wells  per year  was                                                                    
included in FY 19.                                                                                                              
                                                                                                                                
Mr. Pawlowski  replied in the affirmative.  The rig drilling                                                                    
under Scenario B would cost  $20 million per year; the money                                                                    
would be  spent up  front and the  production would  come on                                                                    
and decline  within the model.  He added that  1,000 barrels                                                                    
per  day  had  been  used   based  on  the  current  average                                                                    
productivity of a well in the Prudhoe Bay unit.                                                                                 
                                                                                                                                
Mr. Pawlowski pointed to slide  30: "Production Tax Revenue,                                                                    
Less North Slope Refunded  and Carried-Forward Credits." The                                                                    
slide showed the fiscal impact  of ACES and various versions                                                                    
of the legislation on production revenue for FY 15.                                                                             
                                                                                                                                
Mr. Stickel  explained that slide  30 illustrated  the total                                                                    
impact of  ACES and various  versions of the  legislation on                                                                    
production  revenue for  FY 15  including credits  paid out.                                                                    
The amount of expected credit  refund payments for the North                                                                    
Slope  under each  of the  tax systems  had been  subtracted                                                                    
from  the total  production  tax number.  There were  carry-                                                                    
forward  credits at  $50 per  barrel  in excess  of the  tax                                                                    
liability for major producers. He  noted that the slide only                                                                    
looked at  major provisions of  the bill; an  assumption for                                                                    
the corporate income  tax and the reduced  interest rate for                                                                    
late payments  or assessments had  not been  included, which                                                                    
represented an impact ranging from $0.00 to $50 million.                                                                        
                                                                                                                                
3:13:46 PM                                                                                                                    
                                                                                                                                
Representative  Gara  asked  which   fiscal  year  slide  30                                                                    
pertained  to.   Mr.  Stickel   responded  that   the  chart                                                                    
pertained to FY 15.                                                                                                             
                                                                                                                                
Mr. Pawlowski moved to slide  31: "General Fund Unrestricted                                                                    
Revenue,  Less  North  Slope  Refunded  and  Carried-Forward                                                                    
Credits."  The  slide related  to  FY  15 and  attempted  to                                                                    
incorporate other  sources of state  revenue outside  of the                                                                    
production   tax  including   royalty,  property   tax,  and                                                                    
corporate income tax;  it included the impact  on revenue at                                                                    
oil prices ranging from $50 to $150 per barrel.                                                                                 
                                                                                                                                
3:15:16 PM                                                                                                                    
                                                                                                                                
Representative  Gara hoped  to see  the state  to receive  a                                                                    
more substantial share  of the revenue when  oil prices were                                                                    
high and  oil companies were  making record profits.  He did                                                                    
not  believe the  state would  have  sufficient revenues  to                                                                    
fund schools and  other projects over the next  10 years. He                                                                    
wondered about  an option that  would allow the  state share                                                                    
in the benefits  when oil prices were high. He  asked if DOR                                                                    
had modeled a  scenario that would provide the  state with a                                                                    
more  substantial   share  as   oil  prices   increased.  He                                                                    
suggested  an   increase  in  revenue  to   the  state  when                                                                    
companies made $50-plus per barrel  profit. He referred to a                                                                    
proposal  the   prior  year   to  include   a  stair-stepped                                                                    
progressivity  feature and  wondered  if the  administration                                                                    
had considered it as a possibility.                                                                                             
                                                                                                                                
Mr.  Pawlowski  replied  that   under  the  legislation  the                                                                    
effective tax  rate and government take  increased as prices                                                                    
rose.  He  stated  that  whether   the  bill  increased  the                                                                    
government  take to  levels preferred  by committee  members                                                                    
was a policy call the  administration was willing to work on                                                                    
with the  legislature. He furthered  that the  state's share                                                                    
increased   with   higher   prices  without   the   problems                                                                    
associated with the progressivity mechanism.                                                                                    
                                                                                                                                
Mr.  Tangeman  stated  that  if  the  current  decline  path                                                                    
continued the state would be  limited in its ability to fund                                                                    
basic services  5 to 10 years  in the future. He  pointed to                                                                    
page  43  of  the  2012  Fall  Revenue  Source  Book,  which                                                                    
projected production of 250,000 barrels  per day in 2022. He                                                                    
stressed  that  it  was  critical  to  show  an  upside  and                                                                    
potential in the  state in order to layer on  new oil to the                                                                    
legacy fields.  The department believed  it was  critical to                                                                    
turn  the  decline  rate  around  in  order  to  fund  basic                                                                    
services in 10 years.                                                                                                           
                                                                                                                                
3:20:06 PM                                                                                                                    
                                                                                                                                
Representative  Gara   communicated  that   every  committee                                                                    
member wished  to reverse  the decline  rate; he  noted that                                                                    
there  were  varying views  on  how  to  meet the  goal.  He                                                                    
understood  the  department wanted  to  move  away from  the                                                                    
current  progressivity mechanism.  He stated  that the  bill                                                                    
would  reduce  tax rates  down  between  17 percent  and  25                                                                    
percent  and would  cap out  at  33 percent  even if  prices                                                                    
reached  $200   per  barrel.  He  wondered   if  there  were                                                                    
proposals  that  would  allow  the state  to  share  in  the                                                                    
profits in  a way that  would not damage oil  production. He                                                                    
believed a 17 percent tax on new oil was low.                                                                                   
                                                                                                                                
Mr. Pawlowski  believed the administration had  been open to                                                                    
all  input from  each committee  throughout the  process. He                                                                    
agreed  that government  take was  an important  concept; at                                                                    
what point  production and economics  would not be  hurt was                                                                    
taken into  account. He stated  that the  administration was                                                                    
willing to work with the committee and its members.                                                                             
                                                                                                                                
Representative  Gara  replied  that   he  would  schedule  a                                                                    
meeting with the department.                                                                                                    
                                                                                                                                
Representative Costello  commented that she  received emails                                                                    
from constituents  who did  not want  changes made  to ACES.                                                                    
She  believed there  was  a compelling  reason  and need  to                                                                    
explain what would  happen if nothing was  done [to decrease                                                                    
the current decline rate].  She appreciated the department's                                                                    
offer to work with committee members on the bill.                                                                               
                                                                                                                                
Co-Chair Austerman pointed to slide  21. He discussed that a                                                                    
prior version of the bill  passed by the Senate had included                                                                    
a  35 percent  tax  rate. He  wondered  if the  department's                                                                    
model could insert the 35 percent  tax to show what it would                                                                    
look like. He  requested a breakout between the  flat $5 per                                                                    
barrel  and  the sliding  scale  based  on the  department's                                                                    
projections related to volume and dollar value.                                                                                 
                                                                                                                                
Mr.  Pawlowski  agreed.  He noted  that  Mr.  Stickel  could                                                                    
provide a  verbal answer related  to the  difference between                                                                    
the 33 percent and 35 percent tax rates.                                                                                        
                                                                                                                                
Co-Chair Austerman requested the  information in writing for                                                                    
all committee members.                                                                                                          
                                                                                                                                
3:24:21 PM                                                                                                                    
                                                                                                                                
Representative  Gara pointed  to  a provision  added in  the                                                                    
prior committee [House Resources  Committee] that would mean                                                                    
the  state   would  rely  on   company  and   joint  billing                                                                    
statements in  auditing companies.  He recalled that  in the                                                                    
past most  Democrats had wanted  a gross tax because  it was                                                                    
relatively  straight forward.  He  pointed  to concern  that                                                                    
under the  profits tax some companies  could overstate their                                                                    
costs, understate  revenue, or  qualify something for  a tax                                                                    
credit that  should not qualify.  He wanted DOR to  have the                                                                    
most power possible  to ensure that the  state was receiving                                                                    
its  intended  return  under the  legislation.  He  wondered                                                                    
whether  the  department  was   more  comfortable  with  the                                                                    
current  auditing  system  than  it was  with  the  proposed                                                                    
auditing provision.                                                                                                             
                                                                                                                                
Mr. Tangeman replied  that the department had  access to and                                                                    
used the  joint interest  billings; many other  "tools" were                                                                    
also available to the department.  He furthered that from an                                                                    
audit perspective it was necessary  to rely on all available                                                                    
tools in order to get a job done.                                                                                               
                                                                                                                                
Representative Gara asked whether  Mr. Tangeman would prefer                                                                    
the current  auditing system or  the one included  under the                                                                    
legislation that  was limiting.  Mr. Tangeman  answered that                                                                    
the provision had  not been in the  governor's original bill                                                                    
and had been added by the previous committee.                                                                                   
                                                                                                                                
3:27:49 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Neuman looked  at a  provision related  to lease                                                                    
expenditures  and  a  change  on pages  26  through  28.  He                                                                    
discussed past  concern related to "gold  plating" and items                                                                    
allowable under  lease expenditures. He observed  that there                                                                    
were considerable  changes in the legislation  and asked for                                                                    
an analysis from the department.                                                                                                
                                                                                                                                
Mr. Tangeman  replied that joint interest  billings could be                                                                    
very  lengthy  and were  shared  between  two companies.  He                                                                    
expounded  that  the  department  did  have  access  to  the                                                                    
billings, but they were not  used by all companies. He asked                                                                    
for clarification on the request.                                                                                               
                                                                                                                                
Vice-Chair  Neuman referred  to a  subsection (B)(3)  in the                                                                    
legislation, which  stated that  costs must be  direct costs                                                                    
for  exploring, developing,  and producing.  He stated  that                                                                    
each  producer  was   different;  current  statute  included                                                                    
direct   cost   per   individual  for   standard   allowable                                                                    
deductions  for  production  value.  He stated  that  a  new                                                                    
section  included   an  arms-length  clause  that   made  it                                                                    
possible to be owner of  the pipeline. He wondered about the                                                                    
best way to get the actual  cost to the state. He understood                                                                    
the  department  had  become  fairly  comfortable  with  the                                                                    
current system;  he wondered  how all  of the  changes would                                                                    
impact the department.                                                                                                          
                                                                                                                                
Mr.   Tangeman   answered   that    it   was   the   state's                                                                    
responsibility to have a relationship  with every tax payer;                                                                    
any  insights  provided  through the  documents  helped  the                                                                    
department do  its job. He relayed  that relying exclusively                                                                    
on   a   document   between  two   companies   limited   the                                                                    
department's  insight   into  the  information   needed.  He                                                                    
stressed  the  importance  of  the  one-to-one  relationship                                                                    
between the state and individual tax payers.                                                                                    
                                                                                                                                
3:31:54 PM                                                                                                                    
                                                                                                                                
Vice-Chair Neuman  surmised that Mr. Tangeman  preferred the                                                                    
existing system.  Mr. Tangeman answered that  the department                                                                    
had  developed  the  existing  system  over  years  and  was                                                                    
comfortable where  it was and  where it was going  under the                                                                    
net tax system.                                                                                                                 
                                                                                                                                
Co-Chair Stoltze  remarked that the related  thought process                                                                    
and conversation would be ongoing.                                                                                              
                                                                                                                                
Representative Edgmon  looked at  slide 21  and asked  for a                                                                    
ballpark sketch on  how a base tax increase  from 33 percent                                                                    
to 35  percent would  impact the  data. Mr.  Stickel replied                                                                    
that once the  tax was put in place the  difference would be                                                                    
in the $200 million to $250 million per year range.                                                                             
                                                                                                                                
Representative  Edgmon noted  he  had misunderstood  earlier                                                                    
comments and  had thought  the difference  in the  base rate                                                                    
from  25 percent  to 33  percent  was $200  million to  $250                                                                    
million.                                                                                                                        
                                                                                                                                
Co-Chair  Stoltze  asked  the   department  to  clarify  the                                                                    
information. Mr.  Stickel answered that  line 2 of  slide 21                                                                    
showed the  increase in revenue  to the state from  the base                                                                    
tax. He detailed that moving from  a base rate of 25 percent                                                                    
up to  33 percent would  increase revenue  in FY 15  by $850                                                                    
million. He furthered that moving  from a rate of 33 percent                                                                    
up  to 35  percent would  increase revenue  by approximately                                                                    
$200 million  to $250  million on top  of the  $850 million.                                                                    
The impact  of moving from a  base rate of 25  percent up to                                                                    
33 percent  would be slightly  over $1 billion  in increased                                                                    
revenue.                                                                                                                        
                                                                                                                                
Representative  Munoz understood  that a  close relationship                                                                    
existed between changes  to the base rate tax and  the $5 to                                                                    
$8 per  barrel credit. She  asked for the per  barrel credit                                                                    
impact to  be included in  the department's modeling  of the                                                                    
change between a 33 percent and 35 percent base rate.                                                                           
                                                                                                                                
SB  21  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
3:35:41 PM                                                                                                                    
RECESSED                                                                                                                        
                                                                                                                                
4:08:05 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                

Document Name Date/Time Subjects
CSHB 76 UI Tax chart.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 76 Letters of Support.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 76 NEW FN CS(L&C)-DOLWD-CO-3-20-13.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 76 NEW FN CS(L&C)-DOLWD-UI-3-20-13.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 76 Transmittal Letter 1-17-2013.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 76-CSHB 76L&C Changes.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB76 AkHLA Letter of Suppport .pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB76 Historical UI Tax Rates .pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB76 -Treasury Offset Program .pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB76 -UI STEP TVEP flow chart .pdf HFIN 4/7/2013 1:30:00 PM
HB 76
Sectional Analysis CSHB 76 (HLC) 3 20 13.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 193 Daniel Moore Testimony.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
HB 193 Letter of Support - Municipality of Anchorage.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
HB 193 Sectional Analysis.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
HB 193 Sponsor Statement.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
UI Bill FAQ 3-19.pdf HFIN 4/7/2013 1:30:00 PM
HB 76
HB 193 CS WORKDRAFT FIN U.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
HB 193 Summary of Changes.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
HB 129 CS WORKDRAFT FIN 28-GH1970_U.pdf HFIN 4/7/2013 1:30:00 PM
HB 129
NEW FN HB 193 DOR-Tax Division-4-7-13.pdf HFIN 4/7/2013 1:30:00 PM
HB 193
SB 21 DOR Handout 2013_Analyst_Meeting_transcript (2).pdf HFIN 4/7/2013 1:30:00 PM
SB 21
SB 21 DOR 13.04.06 HFIN follow ups.pdf HFIN 4/7/2013 1:30:00 PM
SB 21
SB 21 DOR 13.04.06 SB21 Comparison Chart.pdf HFIN 4/7/2013 1:30:00 PM
SB 21