Legislature(2015 - 2016)HOUSE FINANCE 519

04/01/2016 05:00 PM FINANCE


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05:30:11 PM Start
05:31:23 PM HB247
07:01:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 4/2/16 at 8:30 a.m. --
-- Delayed to 5:15 p.m. Today --
-- Please Note Time --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
enalytica
+ Bills Previously Heard/Scheduled TELECONFERENCED
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."                                                                                                                     
                                                                                                                                
5:31:23 PM                                                                                                                    
                                                                                                                                
JANAK MAYER, CHAIRMAN AND CHIEF TECHNOLOGIST, ENALYTICA,                                                                        
relayed that he had acted as an advisor to the state for                                                                        
the past several years.                                                                                                         
NIKOS TSAFOS,  PRESIDENT AND  CHIEF ANALYST,  ENALYTICA (via                                                                    
teleconference),  briefly  provided  information  about  his                                                                    
role in oil and gas advising.                                                                                                   
                                                                                                                                
Mr.  Mayer introduced  a PowerPoint  presentation, "HB  247:                                                                    
Key  Issues and  Assessment" dated  April 1,  2016 (copy  on                                                                    
file).  Headdressed  the  contents of  the  presentation  on                                                                    
Slide 2:                                                                                                                        
                                                                                                                                
     AGENDA                                                                                                                   
                                                                                                                                
        · HB 247: Summary of Key Issues                                                                                       
        · North Slope: Fiscal Regime Overview                                                                                 
       · North Slope: Changes Proposed under HB 247                                                                           
       · Cook Inlet: key issues and Proposed Changes                                                                          
        · HB 247: Summary of Key Issues                                                                                       
                                                                                                                                
     APPENDIX                                                                                                                 
                                                                                                                                
                                                                                                                                
5:33:47 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer turned  to Slide  3. He  summarized the  proposed                                                                    
changes of  the original  bill by saying  that the  bill had                                                                    
not  sought   to  fundamentally  redefine   Alaska's  fiscal                                                                    
system, but had offered a  broad series of potential changes                                                                    
that  when  taken together  would  have  a major  impact  in                                                                    
different ways on different companies.  He relayed that some                                                                    
of the  changes could  be characterized  as fixes  to things                                                                    
that  were  genuine  and debatable  problems,  such  as  the                                                                    
"hardness of  the gross minimum  tax floor" and  whether the                                                                    
state  needed  to  have limits  on  refundable  credits.  He                                                                    
stated  that  other  issues surrounded  incremental  revenue                                                                    
raising;  how   things  were  calculated   annually,  versus                                                                    
monthly, and  how things like  the gross value at  the point                                                                    
of production  were calculated. He thought  that the biggest                                                                    
concern  when having  these conversations  was to  recognize                                                                    
that stability was  the most important aspect  of any fiscal                                                                    
regime. He  expressed concern  from an  industry perspective                                                                    
for  the  changes  proposed  in  the  original  legislation,                                                                    
referring to  the tactics in  the bill as  "salami tactics."                                                                    
He explained the going about  fiscal regime change "slice by                                                                    
slice" left it unclear where the changes would end.                                                                             
                                                                                                                                
5:36:49 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  observed that  the state,  as the                                                                    
sovereign  and   partner  with   industry,  should   have  a                                                                    
fiduciary responsibility  to observe  the nature  of credits                                                                    
on a regular basis, particularly  in times of volatility. He                                                                    
stated  that it  was important  to examine  whether the  tax                                                                    
credits  were  prudent in  times  of  fiscal volatility.  He                                                                    
remarked on an earlier  statement that the legislature would                                                                    
not be looking at the credits if oil prices were higher.                                                                        
                                                                                                                                
5:38:54 PM                                                                                                                    
                                                                                                                                
Mr. Mayer did  not completely disagree with  the remarks. He                                                                    
elaborated  that in  the current  environment  no one  could                                                                    
look at the size of  the credit outlay, compared to incoming                                                                    
revenue, and not want to implement  some kind of change.  He                                                                    
felt that incremental revenue  raising, like changing things                                                                    
from annual to monthly  calculations, were tweaks that would                                                                    
not change  the fundamental regime structure,  as opposed to                                                                    
the deep  and clear-cut  policy rationale considered  in the                                                                    
legislation.                                                                                                                    
                                                                                                                                
Representative Guttenberg  noted that  the oil  industry was                                                                    
laying off contractors due to  the volatility of the market.                                                                    
He felt  that there were  parallels in the  challenges faced                                                                    
by the state and industry.                                                                                                      
                                                                                                                                
Mr. Mayer felt that it  was important to establish a balance                                                                    
between short-term help and long-term risk.                                                                                     
                                                                                                                                
Co-Chair  Thompson noted  that Representative  Craig Johnson                                                                    
was present in the committee room.                                                                                              
                                                                                                                                
Representative   Wilson  asked   whether  the   conversation                                                                    
surrounding SB 21,  and oil tax credits,  would be happening                                                                    
if the price of oil had remained high.                                                                                          
                                                                                                                                
Mr. Mayer  answered that many  things come into  sharp focus                                                                    
when money  becomes scarce.  He said that  the price  of oil                                                                    
had led  to the conversation  about Cook Inlet  Tax Credits.                                                                    
He relayed  that the  amount of  those credits  were greater                                                                    
than  they had  been  several  years ago,  and  the lack  of                                                                    
revenue  had  made  discussion   about  those  credits  more                                                                    
difficult.                                                                                                                      
                                                                                                                                
Representative  Wilson was  concerned about  the reason  for                                                                    
the conversation. She referred  to earlier comments that the                                                                    
passage of  SB 21  had been to  incentivize oil  coming down                                                                    
the  pipeline.  She  queried  the  primary  reason  for  the                                                                    
changes proposed in SB 247.                                                                                                     
                                                                                                                                
5:43:04 PM                                                                                                                    
                                                                                                                                
Mr. Mayer replied that questions  of the hardness of the tax                                                                    
floor and  limits to  refundable credits  were conversations                                                                    
that were  occurring because of  the drop in oil  prices. He                                                                    
admitted that  much less attention  would be drawn  on these                                                                    
issues were the price of oil higher.                                                                                            
                                                                                                                                
Representative Wilson was not  sure whether the $100 million                                                                    
would have been available under another regime.                                                                                 
                                                                                                                                
Representative Gara  asked whether  there was any  other oil                                                                    
producing  state  in the  U.S.  that  paid  out as  much  in                                                                    
credits  as Alaska.  He  noted  that FY  15  through FY  18,                                                                    
Alaska  paid out  more in  credits that  it had  received in                                                                    
Production Taxes.                                                                                                               
                                                                                                                                
5:45:35 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  replied  that  he  could not  think  of  a  U.S.                                                                    
comparison. He could not think of  one that had a net profit                                                                    
tax. He shared  that locations outside of the  U.S. that had                                                                    
substantial  net-profit tax  regimes  tended  to have  their                                                                    
equivalent  of  a  net-operating  loss  system  be  deferred                                                                    
liabilities of the tax system,  rather than things that were                                                                    
directly  reimbursed. He  thought  there  were reasons  that                                                                    
Alaska had made  the decisions it had, and  that there would                                                                    
be  consequences  to  try  to change  the  regime,  but  the                                                                    
question of timing  of cash flow was a  particular issue for                                                                    
the state at the  moment in a way that it  was not for other                                                                    
regimes.                                                                                                                        
                                                                                                                                
Representative   Gara  asked   whether  there   was  another                                                                    
jurisdiction in the  world where a higher  percentage of oil                                                                    
revenue was paid back to industry in oil tax credits.                                                                           
                                                                                                                                
Mr.  Mayer answered  that  Alaska had  a  unique and  hybrid                                                                    
fiscal regime, he could not think of a comparison.                                                                              
                                                                                                                                
Representative  Gara restated  his  question asking  whether                                                                    
there was  any other regime  in the  world that paid  out as                                                                    
high of a percentage in  cash payments to companies compared                                                                    
to the oil revenue that it took in.                                                                                             
Mr.  Mayer responded  that  he  did not  know.  He would  be                                                                    
surprised to  see another location  where a contrast  was as                                                                    
large as the one in Alaska.                                                                                                     
                                                                                                                                
Vice-Chair Saddler  corrected that the state  was not paying                                                                    
more in  credits than  it was receiving  in oil  revenue. He                                                                    
said  that the  production tax  was  less than  the oil  tax                                                                    
credits  that  were  paid  out,   but  that  the  royalties,                                                                    
corporate income tax, and property  taxes needed to be taken                                                                    
into account.                                                                                                                   
                                                                                                                                
5:49:20 PM                                                                                                                    
                                                                                                                                
Representative Munoz  hoped that Mr. Mayer  could advise the                                                                    
committee on the  problems with the current  tax system. She                                                                    
relayed that  potential problems  were often  not considered                                                                    
when tax systems were crafted  by the legislature. She noted                                                                    
that issues  with Alaska's Clear and  Equitable Share (ACES)                                                                    
had  not been  fully vetted  in never  anticipating $40/bbl.                                                                    
oil. She  asserted that her  intent was  not to try  and get                                                                    
more money for the state,  but to address where the problems                                                                    
were in the current tax policy.                                                                                                 
                                                                                                                                
Mr.  Mayer  agreed to  highlight  problems  with the  system                                                                    
proposed  by the  bill.  He continued  to  address Slide  3,                                                                    
which  offered the  fiscal system  feature under  the status                                                                    
quo, under the  original bill, the impact  from the proposal                                                                    
in  the original  bill, and  under the  committee substitute                                                                    
out of the House Resources Committee:                                                                                           
                                                                                                                                
     Fiscal System Feature                                                                                                  
     Per-Barrel Credit and Gross Minimum Tax                                                                                    
                                                                                                                                
     Status Quo                                                                                                             
     Tax liabilities assessed annually, smoothing impact of                                                                     
     price volatility.                                                                                                          
                                                                                                                                
     HB 247 Proposed Change                                                                                                 
     Calculate $/bbl. credit and Gross Minimum Tax                                                                              
     interaction monthly.                                                                                                       
                                                                                                                                
     Impact                                                                                                                 
     State would have netted additional ~$100mm in 2014                                                                         
     under this system.                                                                                                         
                                                                                                                                
     HRES CS HB247                                                                                                          
                                                                                                                                
     Maintain   status  quo   -  tax   liabilities  assessed                                                                    
     annually                                                                                                                   
                                                                                                                                
     Fiscal System Feature                                                                                                  
     Gross Value Reduction and Net Operating Loss                                                                               
     Credit                                                                                                                     
                                                                                                                                
     Status Quo                                                                                                             
     Gross Value  Reduction artificially  reduces Production                                                                    
     Tax Value, and  NOL credit is based on PTV,  so 35% NOL                                                                    
     credit can be given on  loss greater than actual loss -                                                                    
     effectively more than 35% support for spending.                                                                            
                                                                                                                              
     HB 247 Proposed Change                                                                                                 
     Assess NOL  credit on actual loss  (not including GVR),                                                                    
     so                                                                                                                         
     NOL is for  35% of actual loss, and  all producers have                                                                    
     35% support for spending.                                                                                                  
                                                                                                                              
     Impact                                                                                                                 
     Net impact is to reduce  state support for all spending                                                                    
     to  35%. Questions  exist about  whether >35%  spending                                                                    
     support  for  GVR  oil   was  deliberate  incentive  or                                                                    
     unintended consequence under SB21.                                                                                         
                                                                                                                              
     HRES CS HB247                                                                                                          
     Adopt proposed fix to  NOL calculation for GVR-eligible                                                                    
     production                                                                                                                 
                                                                                                                                
     Fiscal System Feature                                                                                                  
     Gross Minimum Tax                                                                                                          
                                                                                                                                
     Status Quo                                                                                                             
     4%  rate, binding  for legacy  output if  net value  is                                                                    
     positive.  If net  value is  negative,  NOL can  reduce                                                                    
     taxes below  floor. "New," GVR-eligible  production can                                                                    
     take to zero due to $5/bbl. and small producer credit                                                                      
                                                                                                                                
     HB 247 Proposed Change                                                                                                 
     Harden  floor for  all  production:  NOL credits  can't                                                                    
     take below  floor for legacy,  and NOL,  small Producer                                                                    
     and  $5/bbl. can't  take below  floor for  GVR eligible                                                                    
     production. Increase rate from 4% to 5%                                                                                    
                                                                                                                                
     Impact                                                                                                                 
     State revenues  rise at  low oil  prices. For  many new                                                                    
     fields, taxes rise from 0  to 5% at current prices. For                                                                    
     legacy production, taxes rise at time when value is                                                                        
     negative.                                                                                                                  
                                                                                                                                
     HRES CS HB247                                                                                                          
     Maintain status quo - no further floor hardening                                                                           
                                                                                                                                
5:57:44 PM                                                                                                                    
                                                                                                                                
Mr. Mayer turned to Slide  4, which continued the summary of                                                                    
fiscal  system  features under  the  status  quo, under  the                                                                    
original HB 247, and under the HRES CS HB247:                                                                                   
                                                                                                                                
     Fiscal System Feature                                                                                                  
     Net Operating Loss credit reimbursement                                                                                    
                                                                                                                                
     Status Quo                                                                                                             
     Producers with >50 mb/d production must carry NOL                                                                          
     forward, others can be reimbursed by the state                                                                             
                                                                                                                                
Representative  Gara spoke  to  the net  operating loss.  He                                                                    
asked what  was meant  by rolling  forward of  the operating                                                                    
loss.                                                                                                                           
                                                                                                                                
Mr.  Mayer answered  that  it  was the  same  as almost  any                                                                    
income based tax was carried  forward. He said that the loss                                                                    
could be applied  to the following years  taxes, and however                                                                    
many years into he future,  until there was enough liability                                                                    
to deduct  against a current  year. Expenses that  could not                                                                    
be  deducted in  a current  year  could be  deducted in  the                                                                    
future.                                                                                                                         
                                                                                                                                
Representative Gara  understood that bigger  producers could                                                                    
roll forward the net operating loss  as long as they had the                                                                    
tax  liability  and  did  not go  below  zero.  He  wondered                                                                    
whether the  net operating loss  could take a  larger fields                                                                    
tax below zero.                                                                                                                 
                                                                                                                                
Mr. Mayer  answered that anyone  producing more  than 50,000                                                                    
/bbl. could not  go below zero, but would be  forced to roll                                                                    
the credits  forward. He added  that producers  could choose                                                                    
to  be  paid  out  in  cash,  rather  than  rolling  credits                                                                    
forward.                                                                                                                        
                                                                                                                                
     HB 247 Proposed Change                                                                                                 
     $25mm per company annual limit on reimbursement.                                                                           
     Companies with annual revenues > $10bn must carry                                                                          
     forward, regardless of production level.                                                                                   
     Impact                                                                                                                 
     Limit  substantially increases  capital  needs for  new                                                                    
     developments;  and if  effective July  2016 would  have                                                                    
     major negative impact  on developments underway. Raises                                                                    
     hurdle/break-even price for projects by $5 to $15/bbl.                                                                     
                                                                                                                                
     HRES CS HB247                                                                                                          
     $200mm per company annual limit on reimbursement.                                                                          
                                                                                                                                
6:00:58 PM                                                                                                                    
                                                                                                                                
Mr. Mayer continued to address Slide 4.                                                                                         
                                                                                                                              
     Fiscal System Feature                                                                                                  
     Gross Value at Point of Production calculation                                                                             
                                                                                                                                
     Status Quo                                                                                                             
     GVPP is calculated  by subtracting transportation costs                                                                    
     from  sale  price.  If transportation  costs  for  some                                                                    
     production exceed price, GVPP is negative.                                                                                 
                                                                                                                                
     HB 247 Proposed Change                                                                                                 
     GVPP cannot go below zero                                                                                                  
                                                                                                                                
     Impact                                                                                                                 
     Could  limit  deductibility  of some  transport  costs.                                                                    
     Particularly likely  to be an  issue at  current prices                                                                    
     if applied on a per-unit or per field basis.                                                                               
                                                                                                                                
     HRES CS HB247                                                                                                          
     Maintain status quo                                                                                                        
                                                                                                                                
Mr. Mayer  discussed high  tariffs and  the underutilization                                                                    
of  pipe built  to  a certain  capacity;  this could  create                                                                    
streams  with   negative  GVPP,  and  the   costs  of  those                                                                    
pipelines would  be written off slope-wide.  How the feature                                                                    
would  be applied  of  concern, which  had  resulted in  the                                                                    
retention of  the status quo  in the current version  of the                                                                    
bill.                                                                                                                           
                                                                                                                                
6:04:12 PM                                                                                                                    
                                                                                                                                
Mr. Mayer discussed the final point on Slide 4:                                                                                 
                                                                                                                                
     Fiscal System Feature                                                                                                  
     Cook Inlet Tax Credits                                                                                                     
                                                                                                                                
     Status Quo                                                                                                             
     25  percent  Net  Operating  Loss  credit,  20  percent                                                                    
     Qualified Capital  Expenditure credit, 40  percent Well                                                                    
     Lease  Expenditure  credit;  up  to  65  percent  gov't                                                                    
     support for spending and minimal production tax                                                                            
                                                                                                                                
     HB 247 Proposed Change                                                                                                 
     Repeal  QCE  and WLS  credits  effective  July 1  2016,                                                                    
     leaving only 25 percent NOL credit                                                                                         
                                                                                                                                
     Impact                                                                                                                 
     Cook Inlet  cre4dit regime is clearly  unsustainable in                                                                    
     current environment;  repeal in  present year  may have                                                                    
     major impacts on capital  commitments already made, and                                                                    
     the  viability   of  producers  who  have   made  those                                                                    
     commitments.                                                                                                               
                                                                                                                                
Representative   Wilson   asked   why   the   credits   were                                                                    
unsustainable.                                                                                                                  
                                                                                                                                
Mr.  Mayer replied  that the  answer  would become  apparent                                                                    
when the  question of revenues and  expenditures was address                                                                    
in future slides.                                                                                                               
                                                                                                                                
Representative  Gara   asked  about  GVPP   calculation.  He                                                                    
understood that the  governor's proposal was to  not let the                                                                    
floor fall  below the  Gross Minimum  Tax Rate.  He wondered                                                                    
where the GVPP calculation entered the equation.                                                                                
                                                                                                                                
Mr. Mayer  responded reiterated that  a pipe that  was built                                                                    
for a  high capacity would  pay a high tariff  regardless of                                                                    
the value of what was  being transported through it. He said                                                                    
that, in net, across the entire  North Slope this was not an                                                                    
issue, but that  it had been agreed  that all transportation                                                                    
costs could be deducted.                                                                                                        
                                                                                                                                
                                                                                                                                
6:09:59 PM                                                                                                                    
                                                                                                                                
Representative Gara  suggested that the gross  value was the                                                                    
value of the oil, minus  minor costs. He hypothesized that a                                                                    
company  paying the  minimum tax,  whose $30  transportation                                                                    
costs  cancelled their  $30 /bbl.  gross oil,  would pay  no                                                                    
gross minimum tax.                                                                                                              
                                                                                                                                
Mr.  Mayer  responded that  the  question  was really  about                                                                    
whether or  not the transportations costs  could be deducted                                                                    
in-full.                                                                                                                        
                                                                                                                                
Representative Gara thought  that if the number  was zero, 4                                                                    
percent of zero would be zero.                                                                                                  
                                                                                                                                
Mr.  Mayer explained  that it  was a  question of  whether a                                                                    
company  would  be  able  to  deduct  in  full  all  of  its                                                                    
transportation costs, or whether  because one little segment                                                                    
was  particularly   expensive  and  could  only   be  partly                                                                    
deducted.                                                                                                                       
                                                                                                                              
     HRES CS HB247                                                                                                          
     Reduce NOL credit to 10 percent, keep 20 percent QCE                                                                       
     credit, reduce WLE credit to 20 percent by 2018.                                                                           
                                                                                                                                
Mr. Mayer turned to Slide  5, which illustrated a history of                                                                    
credit payouts.  Refunded credits reached  a new high  in FY                                                                    
15; refundable  credits in FY  15 reached $628  million, the                                                                    
highest point ever.  In both 2014 and 2015,  the majority of                                                                    
these  credits  went  to non-North  Slope  producers.  Under                                                                    
DOR's current  forecast, credits  would exceed  $1.3 billion                                                                    
across FY 16 and FY 17.                                                                                                         
                                                                                                                                
Representative Wilson  asserted that  you could not  look at                                                                    
the  tax credits  alone, and  then  say that  the state  was                                                                    
paying  too much  or  not  enough, because  all  of the  tax                                                                    
credits were connected to jobs  and other revenue that could                                                                    
not be seen.                                                                                                                    
                                                                                                                                
Mr.  Mayer answered  that on  the North  Slope credits  were                                                                    
integral  to the  way that  the tax  system worked.  He said                                                                    
that there  were credits that did  not show up in  the chart                                                                    
on the  slide, which  were credits  that were  taken against                                                                    
tax  payer liability  (the dollar  per  barrel credits).  He                                                                    
stated that the credits reflected  in the chart on the slide                                                                    
were  about the  Net  Operating Loss  Credit,  and that  the                                                                    
conversation  should  be  about  whether  the  credits  were                                                                    
deducted  against future  taxes, or  have them  paid out  in                                                                    
cash. He said  that in net, over time, the  results were the                                                                    
same; the issue was a question  of timing and how the timing                                                                    
worked. He  relayed that the  reason was to make  the impact                                                                    
of the system  the same for both large  and small companies.                                                                    
He asserted  that Cool Inlet  differed because there  was no                                                                    
profit  based production  tax there,  no tax  on oil,  and a                                                                    
minimum gross  tax on gas.  He asserted that credits  on the                                                                    
North Slope were not intended  to incentivize, but were part                                                                    
of  the way  the  overall system  worked  and operated;  the                                                                    
situation in  Cook Inlet was  the opposite. He  related that                                                                    
credits  in Cook  Inlet were  intended to  incentives, which                                                                    
posed the question of what should be incentivized.                                                                              
                                                                                                                                
6:15:25 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer moved  to Slide  6, which  discussed North  Slope                                                                    
versus Cook Inlet Credits:                                                                                                      
                                                                                                                                
   BIG DIFFERENCE BETWEEN NORTH SLOPE AND COOK INLET:                                                                         
                                                                                                                              
     · The majority of refundable credits go to Cook Inlet                                                                      
        producers                                                                                                               
     · Cook Inlet production, however, generates limited                                                                        
        direct revenue for the state                                                                                            
     · Credits on the North Slope are more limited but also                                                                     
        a far smaller fraction of total value generated                                                                         
                                                                                                                                
6:17:49 PM                                                                                                                    
                                                                                                                                
Mr. Mayer  stated that  looking back  at 2015  revealed that                                                                    
the  overall   oil  and  gas   fiscal  system   had  yielded                                                                    
substantial  revenue. The  system  had been  designed to  be                                                                    
more  about royalties,  which were  regressive,  and in  the                                                                    
current  price  environment had  provided  the  bulk of  the                                                                    
revenue.  He noted  that 2015  had  seen approximately  $1.5                                                                    
billion in  unrestricted revenue. He  said that most  of the                                                                    
revenue had  come from  the North Slope.  He pointed  out to                                                                    
the committee that the orange  represented the royalties and                                                                    
settlements  plus  federal   (restricted),  the  yellow  was                                                                    
royalties (unrestricted),  the green  was property  tax, the                                                                    
purple  was corporate  income tax,  the grey  was production                                                                    
tax, and the light grey  was credits for potential purchase.                                                                    
He  highlighted the  difference between  Cook Inlet  and the                                                                    
North Slope. He felt that  it was important to examine where                                                                    
royalties came  from, and where  the credits were  paid out,                                                                    
in order  to create reform  that would make the  system more                                                                    
sustainable  in the  future. He  offered some  background in                                                                    
the working of the North Slope oil structure.                                                                                   
                                                                                                                                
Mr. Mayer  turned to Slide  8, which discussed  gross versus                                                                    
net taxes. He spoke of  the difference between gross and net                                                                    
taxes, and the  hardening and raising of  the minimum floor.                                                                    
He stressed that  base rates were a net rate;  the 4 percent                                                                    
under the governor's proposal was  a gross rate. He asserted                                                                    
that gross  taxes were highly regressive.  He walked through                                                                    
an anecdote as to how regressive taxes worked.                                                                                  
                                                                                                                                
6:21:51 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt asked  whether any  other regime  had                                                                    
tried  to  take  advantage  of  both  gross  and  net  taxes                                                                    
combined.                                                                                                                       
                                                                                                                                
Mr. Mayer replied that most of  the U.S. was in a pure gross                                                                    
tax world,  while Norway, Australia, and  the United Kingdom                                                                    
were in a  net tax world. He relayed that  hybrid system did                                                                    
exist, but  were uncommon. He  discussed the  advantages and                                                                    
disadvantages of gross and net taxes:                                                                                           
                                                                                                                                
     Gross taxes                                                                                                            
     Less volatile, shift risk to private sector                                                                                
     Simple and easy to administer                                                                                              
     High/low government take at low/high prices                                                                                
     Disadvantages marginal investment                                                                                          
                                                                                                                                
     Net taxes                                                                                                              
     More volatile revenues for government                                                                                      
     Harder to administer                                                                                                       
     Efficient-do not distort decision-making                                                                                   
     Enable investment across commodity cycle                                                                                   
                                                                                                                                
6:27:21 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  continued  to  address Slide  8.  He  said  that                                                                    
volatile  revenues  were  more   easily  weathered  when  an                                                                    
economy  was diversified  and when  a substantial  sovereign                                                                    
wealth fund was  available. He noted that  because net taxes                                                                    
were harder to  administer they could result  in backlogs of                                                                    
audits.                                                                                                                         
                                                                                                                                
Representative  Wilson   wondered  what  effect   the  audit                                                                    
backlog was  having on assessing  how well the  credits were                                                                    
working. She assumed that the  compounded interest was based                                                                    
on the backlogged audits.                                                                                                       
                                                                                                                                
Mr.  Mayer  answered  that  the backlog  was  not  an  ideal                                                                    
situation. He believed that everyone  hoped for certainty in                                                                    
the equation and reducing the backlog was essential.                                                                            
                                                                                                                                
Representative  Wilson asked  about  interest  rates in  the                                                                    
bill (simple  versus compound). She  wondered how big  of an                                                                    
issue the compound interest issue would be.                                                                                     
                                                                                                                                
Mr.  Mayer  replied  that  compound  interest  made  a  huge                                                                    
difference over a  period of time, and  that simple interest                                                                    
was  an anomaly  through the  drafting process  and not  the                                                                    
original intent of SB 21.                                                                                                       
                                                                                                                                
Representative Wilson  argued that  the audit  backlogs were                                                                    
the  states fault.  She wondered  whether  any other  states                                                                    
allowed for audits  to fall so far behind,  and then charged                                                                    
companies compounded interest.                                                                                                  
                                                                                                                                
Mr.  Mayer lamented  that he  did not  have the  details. He                                                                    
noted that  this was  a challenge only  faced by  net profit                                                                    
systems.                                                                                                                        
                                                                                                                                
6:31:41 PM                                                                                                                    
                                                                                                                                
Representative Gara interjected that  the industry had never                                                                    
asked for  additional auditors to  handle the  workload, and                                                                    
that  attempts   to  add  auditors  had   been  defeated  in                                                                    
committee. He mentioned taxing high  on the gross at the low                                                                    
end, and high  of profits at the high end.  He asserted that                                                                    
the   state's  gross   tax  was   much   lower  than   other                                                                    
jurisdictions, and  Alaska's profits tax at  high prices was                                                                    
modest or lower than other jurisdictions.                                                                                       
                                                                                                                                
Mr.  Mayer  replied  that  the  idea of  the  slide  was  to                                                                    
illustrate that all  fiscal systems were a  balance. He felt                                                                    
that the  state was unique  in its hybrid between  the gross                                                                    
royalty  and the  net profit  tax. He  stressed that  Alaska                                                                    
could not be both Norway and North Dakota.                                                                                      
                                                                                                                                
Representative Munoz spoke  to the 4 percent  gross tax. She                                                                    
asked whether  the present system  was reasonable  or should                                                                    
it be solidified.                                                                                                               
                                                                                                                                
Mr. Mayer  answered that  there was a  slide to  address the                                                                    
question.                                                                                                                       
                                                                                                                                
Co-Chair  Thompson asked  members  to  hold their  questions                                                                    
until the end of the presentation.                                                                                              
                                                                                                                                
Mr. Mayer moved  to Slide 9, which discussed  an overview of                                                                    
the  North Slope  and  offered details  of  cash flow  taxes                                                                    
using a highly simplified cash  flow and income example. The                                                                    
crux of the  slide was to illustrate  the difference between                                                                    
cash flow  and income.  Alaska's net profit  tax was  a cash                                                                    
flow tax  and not an income  tax. Cash flow taxes  were more                                                                    
efficient and more volatile. The purpose  of a net tax is to                                                                    
minimize  distorting impact  on  investment,  which is  best                                                                    
achieved by making the state's  fiscal cost/benefit as close                                                                    
as possible  to the  equity investor,  and should  result in                                                                    
outflows during development, receipts during investment.                                                                        
                                                                                                                                
6:39:59 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  surmised  that  Alaska was  at  the  25                                                                    
percent  cash flow  line; if  the state  operated under  the                                                                    
example tax system  it would experience big  losses, with no                                                                    
counter income.  He highlighted the importance  of observing                                                                    
the  figures after  the  first 3  years,  and thought  those                                                                    
projections could inspire the movement of the bill.                                                                             
                                                                                                                                
Mr. Mayer addressed Slide 10,  which offered an intellectual                                                                    
genesis of  the tax system  currently in place. He  spoke to                                                                    
the original 2006 proposal, which  began with a paper penned                                                                    
by Dr.  Pedro van Meurs.  The point of production  tax (PPT)                                                                    
as proposed  by Dr.  van Meurs reflected  a 25  percent flat                                                                    
cash flow  tax, a  credit for  net operating  losses (NOLs),                                                                    
and a  20 percent capital  credits. He relayed that  had the                                                                    
exact proposed  system been put  into place the  state would                                                                    
have  had  a  constant  45 percent  government  support  for                                                                    
spending,  both  for new  and  incumbent  players alike.  He                                                                    
added that there  would be a statewide floor of  zero as the                                                                    
credits would be tradable rather than reimbursable.                                                                             
                                                                                                                                
6:43:09 PM                                                                                                                    
                                                                                                                                
Mr. Mayer stated  that the issue was what  happened when oil                                                                    
prices were  low (slide 10)  and how would the  state handle                                                                    
the timing of  the various cash flows. He  elaborated on the                                                                    
tradable versus  the transferrable  credits. He  pointed out                                                                    
the impact  of the  20 percent  capital credit  at $80/bbl.,                                                                    
would move the royalty line  down. He said that even without                                                                    
the any of  the questions of the  progressivity that existed                                                                    
under  ACES,  the  system was  progressive  because  the  20                                                                    
percent of the capital fluctuated  with the price of oil. He                                                                    
believed that the system was  intended to balance regressive                                                                    
and  progressive elements.  He  noted that  at prices  above                                                                    
$60/bbl., the royalties and the net tax remained parallel.                                                                      
                                                                                                                                
6:46:30 PM                                                                                                                    
                                                                                                                                
Representative  Edgmon referred  to  a point  made by  Vice-                                                                    
Chair  Saddler earlier.  He referred  to Slide  9. He  asked                                                                    
whether  the net  operating loss  was incorporated  into the                                                                    
example.                                                                                                                        
                                                                                                                                
Mr.  Mayer turned  to Slide  10 and  reminded the  committee                                                                    
that the chart on the right  was a snapshot in time. He said                                                                    
that  that zero  line  on  the chart  assumed  that any  net                                                                    
operating loss  had to be  carried forward into  the future.                                                                    
He  hypothesized  the 25  percent  net  tax going  negative,                                                                    
which would  be the same  thing as  having a 25  percent net                                                                    
operating  loss  credit,  would  result  in  the  tax  after                                                                    
credits being negative.                                                                                                         
                                                                                                                                
Representative  Edgmon  asked if  he  could  apply the  same                                                                    
logic to Slide 9.                                                                                                               
                                                                                                                                
Mr. Mayer replied in the affirmative.                                                                                           
                                                                                                                                
6:48:56 PM                                                                                                                    
                                                                                                                                
Mr. Mayer moved to Slide 11,  which spoke to the role of the                                                                    
NOL. He  stressed that  the idea  of the  NOL credit  was to                                                                    
equalize  the  tax  system impact  across  large  and  small                                                                    
companies. He repeated the cash  flow example; the incumbent                                                                    
could  deduct  spending  against   their  liability  at  the                                                                    
marginal tax  rate; a company  without a liability  would be                                                                    
paid  out a  credit, which  would result  in that  much less                                                                    
revenue  to the  state. He  noted that  the issue  would not                                                                    
exist with  an income tax  because no  one would be  able to                                                                    
immediately  write the  losses off  against their  taxes. He                                                                    
said that the existence of the  NOL was the corollary of the                                                                    
fact  that it  was  a  cash flow  tax  that affected  people                                                                    
equally.                                                                                                                        
                                                                                                                                
Representative Wilson asked what  the impact from asking all                                                                    
companies to  carry forward  their credits  would be  on the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr. Mayer answered  that there was a slide  later to address                                                                    
the question.                                                                                                                   
                                                                                                                                
6:51:56 PM                                                                                                                    
                                                                                                                                
Mr.  Mayer  continued  with  Slide 11.  He  noted  that  the                                                                    
original  proposal  would  have enabled  tradable,  and  not                                                                    
refundable,  credits  with the  idea  that  the state  would                                                                    
never  get  to the  point  where  it  was spending  more  on                                                                    
credits than on  revenue coming in because  the credit would                                                                    
be  self-limiting. He  stated that  in reality  many of  the                                                                    
credits sold  for much less  than the face-value of  the tax                                                                    
benefit, as  a result, credits  were made refundable  by the                                                                    
treasury.                                                                                                                       
                                                                                                                                
Mr. Mayer turned to Slide  12, which offered a comparison of                                                                    
the 2006  proposal and ACES.  He spoke  to the chart  at the                                                                    
right;  the green  line represented  the  2006 proposal  and                                                                    
showed that the impact of the  flat 25 percent tax rate, the                                                                    
20 percent  capital credit brought  down the  liability, and                                                                    
at  $60/bbl.  there  would  be  no  liability  in  order  to                                                                    
counteract the regressive royalty.  He stated that ACES took                                                                    
the basic structure  of the 2006 proposal, but  instead of a                                                                    
flat 25  percent added  progressivity on  top. He  noted the                                                                    
introduction of  the 4 percent  gross minimum floor,  and he                                                                    
discussed  the  system  under $80/bbl.  He  concluded  that,                                                                    
broadly speaking, in  the same way that the  35 percent base                                                                    
rate under SB  21 could go below 35 percent,  the 25 percent                                                                    
base rate  under ACES could  go above and below  25 percent,                                                                    
in both  cases the effective  credit was designed  to create                                                                    
the progressive  component. He relayed  that the  20 percent                                                                    
Capital Credit  would bring the  effective tax rate  down to                                                                    
zero under  ACES, under SB 21  it was the Dollar  Per Barrel                                                                    
Production Credit that was serving the same function.                                                                           
                                                                                                                                
6:55:45 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler requested to hear  the high points of the                                                                    
presentation. He asked Mr. Mayer  to pick the most important                                                                    
points  in   his  presentation  in  order   to  provide  the                                                                    
committee the  information it needed more  efficiently as it                                                                    
had been a long day.                                                                                                            
                                                                                                                                
Representative  Gara  suggested  that  the  testifier  could                                                                    
testify again before a better rested committee.                                                                                 
                                                                                                                                
Representative  Munoz   asked  whether  there  would   be  a                                                                    
continuation of the presentation the following day.                                                                             
                                                                                                                                
Co-Chair Thompson  responded that there were  other items on                                                                    
the agenda for the following day.                                                                                               
                                                                                                                                
HB 247 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
6:57:03 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
7:00:36 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Thompson relayed that the committee would recess                                                                       
until 8:30 a.m. the following day.                                                                                              
                                                                                                                                

Document Name Date/Time Subjects
HB 247 enalytica, HFIN April 1, 2016.pdf HFIN 4/1/2016 5:00:00 PM
HB 247