Legislature(2015 - 2016)HOUSE FINANCE 519
03/24/2016 09:30 AM FINANCE
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HOUSE BILL NO. 247 "An Act relating to confidential information status and public record status of information in the possession of the Department of Revenue; relating to interest applicable to delinquent tax; relating to disclosure of oil and gas production tax credit information; relating to refunds for the gas storage facility tax credit, the liquefied natural gas storage facility tax credit, and the qualified in-state oil refinery infrastructure expenditures tax credit; relating to the minimum tax for certain oil and gas production; relating to the minimum tax calculation for monthly installment payments of estimated tax; relating to interest on monthly installment payments of estimated tax; relating to limitations for the application of tax credits; relating to oil and gas production tax credits for certain losses and expenditures; relating to limitations for nontransferable oil and gas production tax credits based on oil production and the alternative tax credit for oil and gas exploration; relating to purchase of tax credit certificates from the oil and gas tax credit fund; relating to a minimum for gross value at the point of production; relating to lease expenditures and tax credits for municipal entities; adding a definition for "qualified capital expenditure"; adding a definition for "outstanding liability to the state"; repealing oil and gas exploration incentive credits; repealing the limitation on the application of credits against tax liability for lease expenditures incurred before January 1, 2011; repealing provisions related to the monthly installment payments for estimated tax for oil and gas produced before January 1, 2014; repealing the oil and gas production tax credit for qualified capital expenditures and certain well expenditures; repealing the calculation for certain lease expenditures applicable before January 1, 2011; making conforming amendments; and providing for an effective date." Co-Chair Thompson indicated that Commissioner Hoffbeck and Mr. Alper would be providing a 30 thousand foot overview of oil and gas tax credits. The committee would not be hearing the bill sectional in the current meeting. There would be an overview of issues that generated the legislation. He offered that there would be several meetings on the bill at which time there would several opportunities to discuss the bill and to ask questions at future meetings. 10:36:38 AM RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE, provided a PowerPoint presentation titled "Oil and Gas Tax Credit Reform: HB 247" dated March 24, 2016 (copy on file). He began by providing a couple of brief opening statements. He opined that HB 247 was a critical piece of the governor's overall fiscal plan for the current year and into the future. The administration saw a sustainable oil and gas tax credit program as vital for the State of Alaska. He pointed out that the key word was "sustainable." The plan would have to be sustainable going forward. He reported that when the bill was first introduced in House Resources Committee it was presented primarily as a budget issue. The House Resources Committee found the bill to be much more of an oil and gas tax policy issue. Commissioner Hoffbeck reported that the hearing focused on both budget issues and oil and gas tax policy issues. The administration saw that both needed to be dealt with. The state could not offer any certainty to the industry on the tax credit program if the credits were paid at a level that the state could not sustain or afford. He thought there had to be a balance between the credits the industry desired or needed and what the state was capable of paying. He mentioned the overview of the preliminary spring revenue forecast presented earlier in the current week. He highlighted that the department was looking at oil prices that were essentially range-bound somewhere between $35 and $60 per barrel. He remarked that if prices dropped below $35 per barrel drilling would essentially cease. Oil would likely come off the market and oil prices would eventually rebound. If the price of oil were to reach much beyond $60 per barrel a significant amount of oil would hit the market causing a brief spike. Eventually the supply would overwhelm demand causing the price to drop again. He suggested that it was pretty consistent with the thinking across the board as far as what people saw in the oil industry. In terms of talking about a rebound and hoping to get $100 per barrel it did not appear to be in the future. He added that the state's credit program was being paid out at a level more consistent with $100 per barrel to $110 per barrel oil. The governor felt that it was a critical thing to deal with if the state were to have some kind of certainty within the oil and gas tax credit program. What he put forward in the bill was to reduce the state's annual outlay. He wanted to protect the net operating loss credit program within the bill which he added was the most critical piece of the credit program. It was a field leveler between the legacy producers and the newcomers. He furthered that the state needed to have a way to limit the amount of repurchases in any given year in order to control the state's outlay. 10:40:30 AM Commissioner Hoffbeck explained that the state needed to strengthen the minimum tax because in the current price environment Alaska was essentially a 4 percent gross tax state. The price of oil needed to be above $80 per barrel before that would change. The administration did not see the price increasing above $80 per barrel any time in the future. The minimum tax really became "the" tax. He mentioned that the administration sought more transparency in the credit program to facilitate more dynamic discussions. The credits were a large outlay and he thought it was important for the people of Alaska to know where their money was being spent and what returns were being received. Lastly, due to the repercussions of the governor's veto from the previous year, the department thought it was very important the state had some kind of visible commitment to paying the existing credits. The state wanted to avoid any uncertainty in the financial markets that the credits that had been earned would be paid. He concluded that he had highlighted the underlying components of the decision making process in crafting the legislation currently before the committee. The administration hoped the final version reflected these components once it went through the legislative process. KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, introduced the PowerPoint presentation: "Oil and Gas Tax Credit Reform: CS HB247 (RES)." He indicated he would only be focusing on the highlights of the bill in the current meeting. He hoped there would be additional opportunities to delve into the deep details of the bill in another meeting. 10:42:36 AM Mr. Apler advanced to slide 2: "History of Oil and Gas Production Tax Credits": FY 2007 thru 2015, $7.4 Billion in Credits North Slope · $4.3 billion credits against tax liability · Major producers; mostly 20% capital credit in ACES and per-taxable-barrel credit in SB21 · $2.1 billion refunded credits · New producers and explorers developing new fields Non-North Slope (Cook Inlet & Middle Earth) · $100 million credits against tax liability · Another $500 to $800 million Cook Inlet tax reductions (through 2013) due to the tax cap still tied to ELF · $900 million refunded credits (most since 2013) Mr. Alper explained that Alaska had been in the business of paying tax credits by statute since 2007. In the time period between FY 07 and the end of the previous fiscal year  about $7.4 billion worth of oil and gas tax credits had been paid or paid through reduced taxation by the State of Alaska. The largest share was from the North Slope where the bulk of the production and value was, with the majority used against tax liability, about $4.3 billion. He explained that the major producers were able to subtract certain credits against their tax payments before writing any checks to the state. Previously under the era of Alaska's Clear and Equitable Share (ACES) it was primarily the 20 percent capital expenditure credit. Since the transition to SB 21 [Short Title: OIL AND GAS PRODUCTION TAX - legislation passed in 2013] it had been the per taxable barrel credit, a sliding scale credit between zero and $8 dollars. Mr. Alper also pointed out a very large number on the North slope of $2.1 billion that had been refunded (the state wrote checks and the legislature appropriated money every year to repurchase tax credits primarily going to new players in the field - the new producers and the explorers that were looking for and developing new oil). Mr. Alper continued to the non-North Slope area which included Cook Inlet and Middle Earth (Interior Alaska). There was no current production in Interior Alaska but there was some exploration. However, the number of players and the numbers of credits were too small to be released without violating confidentiality law which accounted for lumping all of the non-North Slope together. He reported that only $100 million had been used against tax liability because of less work and because there were statutory caps (maximum taxes in the Cook Inlet that were put into place in 2006 as part of the PPT bill). There was not a significant amount of tax liability in the first place, therefore there was not to offset. He furthered that about $900 million through the previous year had been refunded - repurchased in tax credits in the previous several years. 10:45:00 AM Mr. Alper pointed to the graph on slide 3: "History of Oil and Gas Production Tax Credits: Refunded Tax Credits by Region." He explained that the most obvious feature in the graph was the growing red wedge representing the Cook Inlet and other non-North Slope areas. It used to be relatively small but had started growing in 2012 or 2013. It was a response to the additional work that had been done since the passage of the Cook Inlet Recovery Act and related legislation in 2010. He reported a large ramping up of work some of which resulted in resolving some of the supply uncertainty that South central was experiencing at the time. It had grown to where, of the money the state spent in the previous year, over 60 percent was outside the North Slope in terms of refundable tax credits. The state was seeing similar numbers were seen for FY 16. Mr. Alper turned to slide 4: "Forecast of O&G Revenue and Tax Credits." He explained that the first of the three bars was all unrestricted oil and gas revenue prior to any credits. The number was theoretical. The middle bar represented in dark green was the actual money received by the state, the difference between the two was the money taken as credits against tax liability. The red bar reflected the revenue after subtracting the repayment checks for tax credits. Suddenly in FY 15 the oil revenue, which had decreased from $2.3 billion before credits against liability to $1.7 billion, was only about $1.0 billion. He was only talking about unrestricted oil and gas revenues which included royalties, corporate income tax, property tax, and the production tax. He thought the graph made it look like FY 15 was a good year and did not reflect back far enough. If a person were to look at FY 12 the state had about $8 billion to $9 billion worth of oil revenue. The reduction was a major shift of consciousness for the state forming a budget, while switching to a climate of structural deficits. Going down from FY 15 to the present things were getting even worse, likely tied to the further reduction in the price of oil and the growth in the tax credit program. The forecasted tax credit number for FY 17 was about $825 million. He reported that for the first time the amount was a larger number than all of the state's unrestricted oil and gas tax revenues. The state would be functionally negative on oil and gas in FY 17 for the first time ever. 10:48:10 AM Mr. Alper advanced to slide 5: "Work Done Since Last Session": · Governor's line-item veto capped FY16 spending at $500 million · Temporary liquidity crisis; many meetings with industry and others to help reassure lenders · Multiple presentations with history, current practice, and possible changes · Joint Resources in Kenai, June 17 · Three "regional" presentations to Senate Working Group September through November · All presentations on BASIS; we're prepared to go through similar information for the committee · Development of reform legislation including plan for transition from current system Mr. Alper explained that the results of the governor's line item veto limiting spending to $500 million helped to cover everything that was in the cue at the time. The governor's primary mission was to start a conversation. He was aware that it was a big issue that needed addressing. He did something dramatic in order to put a process in place that lead to legislation in the 2016 session. He relayed that the administration was taken by surprise by the degree the industry reacted, stopping lending because of a fear of even greater cutbacks and spending in future years. The commissioner of DOR and other senior members of the administration had met with industry assuring repayment of the state's obligations. He stated that there could possibly be slight delays during the transition period. However, the state was working towards a system that would keep everyone whole. Any changes to the statutes would be forward looking rather than retroactive. He mentioned the liquidity crisis being resolved. Loans were being made again and everyone was going about their business. Meanwhile, through the previous interim there were several meetings and presentations. The first one was a Joint Resources Meeting in Kenai in June where the Department of Revenue made a major presentation. Senator Giessel put together a working group of Senators and members of industry. The group had a series of hearings in the previous fall providing very detailed presentations on the credit structure on the North Slope, Cook Inlet, and in the middle earth area. Each of the presentations were on BASIS through the Senate tax credit working group. He encouraged members of the committee to review them. He relayed that they could be brought before the committee as well. They provided a significant amount of detail. He furthered that out of the hearings and discussions with the administration a reform package in the form of legislation that included the plan for transition from the current system to ensure enough money would be available to keep the system whole through that time. The legislation had been introduced at the beginning of session as HB 247 (Short Title: TAX; CREDITS; INTEREST; REFUNDS; O & G). 10:50:37 AM Mr. Alper moved on to slide 6: "Major Bill Themes": 1. Reduce the state's annual cash outlay 2. Protect Net Operating Loss credits as a playing field leveler between legacy producers and newcomers 3. Limit repurchases 4. Strengthen the minimum tax 5. Be more open and transparent 6. Honor and pay credits earned to date and through any transition period Mr. Alper indicated that the slide reflected the commissioner's introduction which outlined the themes the governor hoped to accomplish through a tax credit reform package. He read the list. 10:51:06 AM Mr. Alper turned to slide 7: "Major Bill Concepts in Governor's Proposal": 1. Exploration Credits- sunset and transition 2. Cook Inlet Drilling Credits- phase out while retaining operating loss credits 3. Repurchase Limits- limit cash outlay 4. Remove Exceptions / Loopholes 5. Strengthen Minimum Tax- prevent certain credits from going below the floor, plus increase to 5% 6. Other Provisions- technical cleanup, transparency, interest rate reform Mr. Alper explained that the slide went into greater detail of the concepts that were in HB 247. He would not drill down into the details in the current hearing. There would be time to discuss them in other hearings. He reviewed the list. He explained that many of the exploration credits were nearing sunset. The intent would be to allow them to sunset and transition away from direct support of exploration. The Cook Inlet drilling credits were very large and were created to resolve the Cook Inlet supply crisis. The proposal included phasing those out while retaining the operating loss credits. The proposal also included placing some sort of caps on the physical repurchases, specifically dollar values per company. He furthered that there were a number of exceptions and loopholes in the statutes that became apparent in a low- price environment that needed to be cleaned up. Mr. Alper continued that the proposal included strengthening the minimum tax. However, it was discovered that, although the 4 percent floor governed tax payments by the major producers, as the state got into a period of a sustained low prices there were other circumstances where tax payments could go below the 4 percent number. The most prominent one began in January 2016: If a major producer had an operating loss they could use their operating loss credits to reduce their payments below the floor all the way to zero. The legislation was looking to strengthen the minimum tax and to bump up the minimum tax rate from 4 percent to 5 percent. He relayed that there were a number of other provisions in the legislation including technical cleanup of existing law, the concept of transparency, and reform to the interest rate structure for delinquent taxes. He concluded that he had presented the guts of the bill. Mr. Alper scrolled to slide 8: "Content of Future Presentations": · We provided five different presentations to the prior committee; all are on BASIS · History and development of our credit system · History and application of the minimum tax · Various credits and how they have been used, which ones haven't been, and what is sun setting · Detailed forecasts and scenario analysis · Details and modeling of specific provisions · Explanation of changes made in prior committee · Life cycle modeling of typical new projects, with impact of legislation Mr. Alper mentioned that the House Resources Committee had met 24 times on the subject of HB 247 over a period of 6 to 7 weeks. The Department of Revenue provided the committee with five different presentations all of which were available on BASIS. He wanted to be working with legislators and staff to determine the appropriate information and the order in which it should be brought before the House Finance Committee. Some of the larger concepts in the previous presentations included the history and development of Alaska's credit system going back to the early 2000's, how the minimum tax evolved over the years going back to the 1970's during the Economic Limit Factor (ELF) era, how the various credits worked, how the credits had been used, which credits were never used, and what credits would sunset. Additional content included looking at scenario analysis and what might happen if certain changes were made. He elaborated that DOR had done a significant amount of modeling of specific and more mathematically complicated provisions of the bill. He also informed committee members that he would be reviewing the changes made by the House Resource Committee which were reflected in the committee substitute and how the bill had evolved. Mr. Alper reported that DOR had developed a new model called a "Life Cycle" model that looked at individual fields. He cited the example of a new player coming to town wanting to develop a 50 million barrel field with an assumption for capital spending, a certain timing, and a certain set of credits. He wondered if the state's cash flow could be determined. He was interested to know what the state's cash flow would look like and what the cash flow of the producers would look like. He also wanted to know how the changes in the current legislation affect the profitability and the state's cash flow. The department was capable of generating new scenarios at the request of the committee. Mr. Alper concluded his presentation and made himself available for questions. HB 247 was HEARD and HELD in committee for further consideration. Co-Chair Thompson indicated the committee would have several additional meetings in order to dig into the details of the bill. He reviewed the agenda for the afternoon.