Legislature(2017 - 2018)HOUSE FINANCE 519

04/07/2017 01:30 PM FINANCE

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Audio Topic
02:06:31 PM Start
02:07:19 PM HB111
06:31:57 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 1:00 PM 4/8/17 --
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
Amendments
+= HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME TELECONFERENCED
<Bill Hearing Canceled>
+= SB 26 APPROP LIMIT & PER FUND:DIVIDEND;EARNINGS TELECONFERENCED
<Bill Hearing Canceled>
Meeting will recess to 4/8/17 1:00 PM
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 7, 2017                                                                                            
                         2:06 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
2:06:31 PM                                                                                                                    
                                                                                                                                
[Note: Meeting recessed and continued on April 8, 2017 at                                                                       
1:59 p.m. See separate minutes dated April 8, 2017 for                                                                          
detail.]                                                                                                                        
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 2:06 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Jane Pierson, Staff, Representative  Neal Foster; Ken Alper,                                                                    
Director,    Tax    Division,   Department    of    Revenue;                                                                    
Representative    Louise    Stutes;   Representative    Andy                                                                    
Josephson; Representative Geran Tarr.                                                                                           
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                             
                                                                                                                                
          HB 111 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Foster reviewed the meeting agenda.                                                                                    
                                                                                                                                
HOUSE BILL NO. 111                                                                                                            
                                                                                                                                
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
2:07:19 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton MOVED to ADOPT the proposed committee                                                                           
substitute (CS) for HB 111, Work Draft 30-LS0450\M (Nauman,                                                                     
4/6/17).                                                                                                                        
                                                                                                                                
Representative Wilson OBJECTED.                                                                                                 
                                                                                                                                
JANE PIERSON,  STAFF, REPRESENTATIVE NEAL  FOSTER, explained                                                                    
the changes in the CS with  a document provided by the House                                                                    
Finance  Committee co-chairs  titled "HB  111 -  Comparison"                                                                    
dated April 6,  2017 (copy on file). She  read from prepared                                                                    
remarks detailing the changes in the legislation:                                                                               
                                                                                                                                
     In  the Resources  version, Section  1 was  contingency                                                                    
     language, which  is deleted  from the  finance version.                                                                    
     Section 1  of the  finance version has  to do  with the                                                                    
     powers  and   duties  of  the  commissioner   under  AS                                                                    
     31.05.030(n). It  can be found  on page 1 of  the bill.                                                                    
     It  deletes a  reference to  a 10  percent gross  value                                                                    
     reduction under AS 43.55.160(g)  in accordance with the                                                                    
     repeal of this provision.                                                                                                  
                                                                                                                                
     Section  2 has  to do  with the  Department of  Revenue                                                                    
     disposition of tax information  AS 40.25.100(a); it can                                                                    
     be found  on page 2  of the finance version.  It amends                                                                    
     disclosure of  tax information  in accordance  with the                                                                    
     new provisions  allowing certain  tax credit  and lease                                                                    
     expenditure information to be made public.                                                                                 
                                                                                                                                
     Section 3 is interest AS  43.05.225, found on page 2 of                                                                    
     the bill.  It removes the three-year  limit on interest                                                                    
     and is the same as  was in the House Resources version.                                                                    
     The  disclosure  of  tax  and  credit  information,  AS                                                                    
     43.05.230(a) was deleted  and it referenced preapproval                                                                    
     small producer  credit and the floor  and disclosure of                                                                    
     tax information.                                                                                                           
                                                                                                                                
     Section 4, disclosure of tax  and credit information is                                                                    
     found in AS 43.05.230(l); it can  be found on page 3 of                                                                    
     the bill. It  provides for a report  making certain oil                                                                    
     and gas  tax credit  and lease  expenditure information                                                                    
     public.                                                                                                                    
                                                                                                                                
     Section  5,  is  disclosure   of  tax  information,  AS                                                                    
     43.05.230(m),  found on  page 3  of the  bill. It  adds                                                                    
     subsection   (m)   allowing  disclosure   of   publicly                                                                    
     available  production  tax  information or  tax  credit                                                                    
     information   related    to   gas    storage,   service                                                                    
     industries, processing facilities,  and adds subsection                                                                    
     (n)  making public  certain  information regarding  oil                                                                    
     refinery  tax  credits.  It  also  allows  for  certain                                                                    
     confidential  taxpayer  information   relating  to  tax                                                                    
     credits, to be disclosed.                                                                                                  
                                                                                                                                
2:11:11 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued to address changes in the CS:                                                                             
                                                                                                                                
     We deleted Section  5 of the Resources  bill, which was                                                                    
     allowing  certain   confidential  taxpayer  information                                                                    
     related to tax credits,  to be disclosed to legislators                                                                    
     in  executive session,  in  conformance  with a  signed                                                                    
     confidentiality agreement.                                                                                                 
                                                                                                                                
     Section 6, oil and  gas production tax, AS 43.55.011(e)                                                                    
     is found  on page  4 of  the bill;  it changes  the tax                                                                    
     rate  to  25  percent  after January  1,  2018  and  it                                                                    
     retains the  2022 change  to gas  rate after  2022, and                                                                    
     amended in  accordance with  the secondary  tax bracket                                                                    
     provision.  Setting  a minimum  tax  at  5 percent  was                                                                    
     deleted, leaving  a hardened  4 percent  floor. Minimum                                                                    
     tax  is  also  deleted,   which  was  making  necessary                                                                    
     corrections  to  a piece  that  was  eliminated in  the                                                                    
     original HB 111.                                                                                                           
                                                                                                                                
     Section 7, oil and  gas production tax, AS 43.55.011(g)                                                                    
     is found on  pages 5 and 6 of the  bill; it establishes                                                                    
     an additional  15 percent tax  bracket, triggered  at a                                                                    
     production  tax  value  of   $60,  which  is  equal  to                                                                    
     approximately $100 ANS.                                                                                                    
                                                                                                                                
     Section 8, is a minimum  tax, AS 43.55.011(q), (r), and                                                                    
     (s),  found  on pages  6  through  8  of the  bill.  It                                                                    
     maintains the  hardened minimum  floor and  is adjusted                                                                    
     in accordance  with deletion of changes  to the minimum                                                                    
     tax previously  (r), which is deleted,  previous (s) is                                                                    
     now  (r).  The per  barrel  credit  that was  found  in                                                                    
     Section  7  of the  House  Resources  version has  been                                                                    
     deleted.                                                                                                                   
                                                                                                                                
     Section  9,  payment   of  gas  or  tax   for  gas,  AS                                                                    
     43.55.014(b)  is  found on  page  8;  it is  conforming                                                                    
     language to the new tax rate in AS 44.55.011(e).                                                                           
                                                                                                                                
     Section 10 is  payment of tax, AS  43.55.020(a) on page                                                                    
     8  through  19  of  the bill;  it  amends  the  section                                                                    
     governing  tax payments  and conforms  language to  the                                                                    
     new tax rate and the repeal of AS 43.160(g).                                                                               
                                                                                                                                
2:13:59 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued to list the changes in the CS:                                                                            
                                                                                                                                
     Section 11,  payment of tax, AS  43.55.020(g), is found                                                                    
     on page 19; it makes conformation to the new tax rate.                                                                     
                                                                                                                                
     Section  12 is  also payment  of tax,  AS 43.55.020(h),                                                                    
     found  on pages  19  and 20  of the  bill;  it is  also                                                                    
     conforming to the new tax rate.                                                                                            
                                                                                                                                
     Section 13,  payment of tax, AS  43.55.020(k), is found                                                                    
     on pages 20  and 21 of the bill; it  is also conforming                                                                    
     to the new tax rate.                                                                                                       
                                                                                                                                
     Section 14,  payment of tax, AS  43.55.020(l), is found                                                                    
     on page 21; it is also conforming to the new tax rate.                                                                     
                                                                                                                                
     Section  15, net  operating loss,  AS 43.55.023(b);  it                                                                    
     eliminates  net operating  loss credits  for the  North                                                                    
     Slope  and  is  the  same as  in  the  House  Resources                                                                    
     version, but it  has been amended for the  repeal of AS                                                                    
     43.55.160(g).                                                                                                              
                                                                                                                                
     Section 16,  net operating  loss, AS  43.55.023(c), can                                                                    
     be found  on page 23.  It's conforming an  amendment to                                                                    
     reflect the hardened  minimum floor and it  is the same                                                                    
     as in  the Resources  version, except it  reflects that                                                                    
     credits  cannot  reduce   payments  below  the  minimum                                                                    
     floor. The  net operating  loss was deleted,  which was                                                                    
     Section 11  in the Resources version.  Also deleted was                                                                    
     Section 12,  which is language  that was  conforming to                                                                    
     the new hardened floor.                                                                                                    
                                                                                                                                
     Section   17,   non-transferrable   tax   credits,   AS                                                                    
     43.55.024(i), is found  on page 23 of the  bill; it's a                                                                    
     conforming  amendment to  reflect the  hardened minimum                                                                    
     floor  and it  remains  the same  as  in the  Resources                                                                    
     version.   The   per   barrel  credit   found   in   AS                                                                    
     43.55.024(j) has  been deleted  from the  House Finance                                                                    
     version. We  are repealing the  per barrel  credit. The                                                                    
     dry hole credit,  which was found in Section  15 of the                                                                    
     Resources version has been deleted.                                                                                        
                                                                                                                                
2:16:40 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued reviewing changes in the CS:                                                                              
                                                                                                                                
     Section 18, exploration credit,  AS 43.55.025(i) can be                                                                    
     found  on  page  23  of the  bill;  it's  a  conforming                                                                    
     amendment  to reflect  the hardened  minimum floor  and                                                                    
     remained the  same as  in Section  16 of  the Resources                                                                    
     bill.  The  dry  hole  credit was  Section  17  of  the                                                                    
     Resources  bill  and that  has  been  deleted from  the                                                                    
     House Finance version. The oil  and gas tax credit fund                                                                    
     found  in AS  43.55.028(a) -  the language  was deleted                                                                    
     from the  House Resources version  so it is kept  as is                                                                    
     currently in statute. The oil  and gas tax credit fund,                                                                    
     AS 43.55.028(e), which changed  the cash payment limits                                                                    
     on  credits,   was  deleted  from  the   House  Finance                                                                    
     version, that too is kept as is currently in statute.                                                                      
                                                                                                                                
     Sections  19   and  20,  tax  credit   information,  AS                                                                    
     43.55.030(a) and  (e) is found  on pages 23  through 55                                                                    
     of the  bill. It  requires taxpayers to  report certain                                                                    
     information to  the Department of Revenue,  removes the                                                                    
     requirement  to file  a  detailed  description for  the                                                                    
     purpose of  the expenditure.  New language is  added to                                                                    
     ensure  that  the  credits   and  carry  forward  lease                                                                    
     expenditures are  reported by the lease  or property to                                                                    
     which they were incurred.                                                                                                  
                                                                                                                                
     Section 21 is  gross value at the  point of production,                                                                    
     AS 43.55.150; it  can be found on page 25  of the bill.                                                                    
     It adds  a new section  to ensure that the  gross value                                                                    
     at point of production does  not go below zero and that                                                                    
     stays the same as was in the House Resources version.                                                                      
                                                                                                                                
     Section 22, determination of production  tax of oil and                                                                    
     gas, AS 43.55.160(a),  is found on pages  25 through 27                                                                    
     of the bill  and is conforming language to  the new tax                                                                    
     rate.                                                                                                                      
                                                                                                                                
     Section 23,  determination of  production tax  value of                                                                    
     oil and gas, AS 43.55.160(e),  can be found on pages 27                                                                    
     and 28  of the  bill and it  conforms to  net operating                                                                    
     loss  carry forward  provisions  in Section  26 of  the                                                                    
     bill.                                                                                                                      
                                                                                                                                
2:19:19 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued to highlight the changes in the CS:                                                                       
                                                                                                                                
     Section 24,  determination of  production tax  value of                                                                    
     oil and gas,  AS 43.55.160(f), can be found  on page 28                                                                    
     of the bill and it conforms to the new tax rate.                                                                           
                                                                                                                                
     Section 25,  determination of  production tax  value of                                                                    
     oil  and gas,  AS 43.55.160(h),  is found  on pages  29                                                                    
     through 31  of the  bill. It is  conforming to  the new                                                                    
     tax  rate  and  the   calculation  of  the  second  tax                                                                    
     bracket.  We eliminated  AS  43.55.160(g) by  repealing                                                                    
     it,  which is  a 10  percent GVR  reduction for  higher                                                                    
     royalty fields.                                                                                                            
                                                                                                                                
     Section 26,  is net  operating loss carry  forwards, AS                                                                    
     43.55.165(a), found on page 31  through 32 of the bill.                                                                    
     It adds  AS 43.54.165(a)(3), allows 100  percent of net                                                                    
     operating losses  to be carried  forward when  there is                                                                    
     production.                                                                                                                
                                                                                                                                
     Section 27,  also net operating loss  carry forward, AS                                                                    
     43.55.165(m) and AS 43.55.165(n),  is found on pages 32                                                                    
     and  33;  (m)  is  a  rollback  provision  on  the  net                                                                    
     operating  losses,  reducing   the  100  percent  lease                                                                    
     expenditures by  10 percent of the  full original value                                                                    
     every  year after  seven  years; (n)  is  a ring  fence                                                                    
     provision, a  carry forward lease expenditure  can only                                                                    
     be   applied  to   a  lease   or  property   where  the                                                                    
     expenditure  occurred.  Section  26  of  the  Resources                                                                    
     version   directed  DNR   to  develop   regulations  to                                                                    
     establish a  review process  for DNR  preapproval. This                                                                    
     has been deleted from the House Finance version.                                                                           
                                                                                                                                
     Section  28,   oil  and   gas  competitive   board,  AS                                                                    
     43.98.050, on pages 33 through  35 is conforming to the                                                                    
     repeal of AS 43.55.160(g).                                                                                                 
                                                                                                                                
     Section 29  is the repealers;  it can be found  on page                                                                    
     35 of  the bill. It  repeals AS 43.55.024(j),  which is                                                                    
     the  sliding per  barrel  credit.  AS 43.55.029,  third                                                                    
     party assignment  of credits  and AS  43.55.160(g), the                                                                    
     10  percent gross  value reduction  for higher  royalty                                                                    
     fields.                                                                                                                    
                                                                                                                                
     Section  30  is  the  Cook   Inlet  working  group,  AS                                                                    
     43.98.050, found on pages 35  through 36, establishes a                                                                    
     legislative  working group  to analyze  the Cook  Inlet                                                                    
     fiscal  regime;  it stays  the  same  as in  the  House                                                                    
     Resources version.                                                                                                         
                                                                                                                                
2:22:30 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued to read the changes in the CS:                                                                            
                                                                                                                                
     Section 31 is an  applicability, the provision is found                                                                    
     on  page 36  and  reflects provisions  relating to  the                                                                    
     minimum  tax  floor  -   effective,  January  1,  2018.                                                                    
     Section 30 of the Resources version has been deleted.                                                                      
                                                                                                                                
     Section   32,    transition,   carry    forward   lease                                                                    
     expenditures, is found  on page 36. The  net loss carry                                                                    
     forward   provisions   apply  to   lease   expenditures                                                                    
     occurred on or after January 1, 2018.                                                                                      
                                                                                                                                
     Section  33,  transition  tax  credit  assignments,  is                                                                    
     found on  pages 36 and  37 of  the bill; it  states the                                                                    
     department  may  continue  to  apply  and  enforce  tax                                                                    
     credit  assignments   to  third  parties   for  credits                                                                    
     applied before January 1, 2018  and it remains the same                                                                    
     as in the House Resources version.                                                                                         
                                                                                                                                
     Section   34,  transition   payment   of  tax   filing.                                                                    
     Taxpayers shall pay the tax  as provided in current law                                                                    
     for  a  tax  or  installment  payments  or  productions                                                                    
     before January  1, 2018. This  has been amended  in the                                                                    
     House Finance version for the new sections.                                                                                
                                                                                                                                
     Section 35, is transition  gross value reduction, found                                                                    
     on pages 37 and 38; a  taxpayer who produces oil or gas                                                                    
     before  January  1,  2018 qualifies  for  an  extra  10                                                                    
     percent gross  value reduction  as provided  in current                                                                    
    law for the oil and gas produced before that date.                                                                          
                                                                                                                                
     Section 36, is  transition - retroactivity regulations,                                                                    
     found  on  page  38  and allows  for  retroactivity  of                                                                    
     regulations to carry out this act.                                                                                         
                                                                                                                                
     Section  37, also  has to  do  with retroactivity.  The                                                                    
     change is  to delinquent interest  in Section 3,  it is                                                                    
     retroactive to January 1, 2017.                                                                                            
                                                                                                                                
     Section 38,  is effective  dates. Sections  3 (Interest                                                                    
     rates),   30    (Cook   Inlet   Working    Group),   36                                                                    
     (retroactivity   of  regulations),   and  37(delinquent                                                                    
     interest rates) take place immediately.                                                                                    
                                                                                                                                
     Section 39, is  also effective dates found  on page 38.                                                                    
     The reduction  of net operating losses  takes effect in                                                                    
     2018.                                                                                                                      
                                                                                                                                
     Section 40,  is effective  dates found  on page  38. It                                                                    
     deals with  all other  sections of  the bill  and takes                                                                    
     place on January 1, 2018.                                                                                                  
                                                                                                                                
2:25:29 PM                                                                                                                    
                                                                                                                                
Representative Wilson  stated the bill was  vastly different                                                                    
than  the prior  bill version.  She appreciated  hearing the                                                                    
changes, but she needed more  detail. She asked if there was                                                                    
a fiscal note.                                                                                                                  
                                                                                                                                
Co-Chair  Foster replied  that the  committee would  address                                                                    
the merits of the  bill and receive additional explanations;                                                                    
however,  he  wanted to  have  a  working draft  before  the                                                                    
committee.                                                                                                                      
                                                                                                                                
Representative  Pruitt OBJECTED  to  the  working draft.  He                                                                    
supported  the  prior  version over  the  current  bill.  He                                                                    
emphasized  that   the  CS  did   not  represent   a  credit                                                                    
discussion. He  underscored that it would  revamp oil taxes.                                                                    
He  opined  that the  new  document  was  a way  to  destroy                                                                    
industry. He  stressed his frustration  about the  new bill.                                                                    
He believed  the CS  constituted a  complete rewrite  of the                                                                    
oil tax system. The CS  would "ring fence" the net operating                                                                    
loss (NOL) credits, if companies  were able to keep them. He                                                                    
stated   that   the  bill   would   not   even  maintain   a                                                                    
competitiveness review  board to provide information  to the                                                                    
legislature on the state's  competitiveness in the industry.                                                                    
He reiterated his  objection to the work  draft. He stressed                                                                    
that  the CS  was not  good for  Alaska. He  stated that  "I                                                                    
could not believe that you're going  to ask me to go back to                                                                    
the other one as the place to start from."                                                                                      
                                                                                                                                
Co-Chair Foster stated  if the committee adopted  the CS the                                                                    
intent was to hear modeling detail from DOR.                                                                                    
                                                                                                                                
Vice-Chair  Gara addressed  some  of the  concerns that  had                                                                    
been  vocalized. He  thought it  was clear  that many  House                                                                    
Finance Committee  members were  uncomfortable with  the two                                                                    
tax  rates  under  the current  production  tax  system.  He                                                                    
addressed new  fields (post-2003 fields) on  the North Slope                                                                    
that had  a zero percent  production tax rate on  average up                                                                    
to  about  $73 per  barrel.  The  state currently  paid  tax                                                                    
credits for fields  that paid zero production tax  - or some                                                                    
fields paid  a 4 percent  production tax. He  remarked those                                                                    
rates would  continue for at  least five to seven  years. He                                                                    
continued that  the next  year there  would be  more credits                                                                    
generated  that would  be  owed to  industry  than would  be                                                                    
generated in  production taxes. He  stated that much  of the                                                                    
public believed  it was  an unfair transfer  of a  burden to                                                                    
the public  and an  unfair benefit to  the oil  industry. He                                                                    
stated that  Mr. Rich Ruggiero [legislative  consultant] had                                                                    
talked about a fairer profits tax.                                                                                              
                                                                                                                                
2:31:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster asked  members to steer clear  of debate and                                                                    
making a  case for the  CS because the  CS had not  yet been                                                                    
adopted. He detailed that if  the work draft was not adopted                                                                    
there would be nothing to debate regarding the new CS.                                                                          
                                                                                                                                
Representative  Pruitt did  not believe  it was  appropriate                                                                    
for a  committee member  to tell other  people they  did not                                                                    
understand. He  also believed the comments  strayed from the                                                                    
differences between  the previous bill version  and the work                                                                    
draft.                                                                                                                          
                                                                                                                                
Representative Wilson  stated her understanding that  if the                                                                    
work  draft  was  adopted it  would  be  committee  members'                                                                    
responsibility to find their own  experts - she had not been                                                                    
a  part of  writing the  bill.  She asked  if the  committee                                                                    
would be  hearing from industry  again because  she believed                                                                    
the  work   draft  constituted  a   total  rewrite   of  the                                                                    
legislation.  She stressed  that  the state  could lose  the                                                                    
industry  due to  the changes.  She  referred to  statements                                                                    
that  production tax  did not  cover the  number of  credits                                                                    
provided.  She agreed,  but noted  there was  also corporate                                                                    
tax  and   royalties.  She  stressed  that   the  state  had                                                                    
benefitted  for  years off  the  credits  that were  due  at                                                                    
present. She detailed  that the money had been  put into the                                                                    
CBR instead  of into the  oil taxes. She continued  that the                                                                    
state had benefitted and had  received the money. She opined                                                                    
that it  was not fair  to the public  to "only be  taking it                                                                    
from  one  or the  other."  She  stated  that the  bill  was                                                                    
supposed  to be  about  fixing the  state's liability  issue                                                                    
regarding taxes it  owed. She referred to  testimony from an                                                                    
expert who  had been clear that  a rewrite of the  taxes was                                                                    
not needed  and that it  could be  dangerous to do  what she                                                                    
believed the current  work draft did. She asked  for the co-                                                                    
chair's expectation and intent.                                                                                                 
                                                                                                                                
2:34:01 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:35:00 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster stated  that the bill had  been introduced a                                                                    
few weeks earlier and the  committee had heard from industry                                                                    
and a number of experts.  He believed the committee knew the                                                                    
position of the various groups.  He stated it was the intent                                                                    
to see if the committee would adopt the working draft.                                                                          
                                                                                                                                
Representative  Wilson  MAINTAINED   her  OBJECTION  to  the                                                                    
adoption of the work draft.                                                                                                     
                                                                                                                                
Representative Pruitt remarked that  the work draft had come                                                                    
from one of the co-chairs'  offices. He wanted to understand                                                                    
the intent of  the bill going forward. He wanted  to know if                                                                    
the intent  was to get  as much  money from the  industry as                                                                    
possible.                                                                                                                       
                                                                                                                                
Co-Chair Foster replied  that part of the  answer would come                                                                    
forward  with  the  presentation   from  the  Department  of                                                                    
Revenue (DOR).                                                                                                                  
                                                                                                                                
Co-Chair  Seaton   relayed  that   as  the  bill   had  been                                                                    
developed, part of  the intent was to get a  fair return for                                                                    
Alaska  at  prices that  had  not  been modeled  during  the                                                                    
original timeframe,  to generate production tax  to pay back                                                                    
cashable  credits,  and  to eliminate  the  portion  of  the                                                                    
budget gap resulting from the excessive amount credits.                                                                         
                                                                                                                                
A roll call vote was taken on the motion.                                                                                       
                                                                                                                                
IN FAVOR: Gara, Grenn, Guttenberg,  Kawasaki, Ortiz, Foster,                                                                    
Seaton                                                                                                                          
OPPOSED: Wilson, Pruitt, Thompson, Tilton                                                                                       
                                                                                                                                
The MOTION  PASSED (7/4). There being  NO further OBJECTION,                                                                    
Work Draft 30-LS0450\M was ADOPTED.                                                                                             
                                                                                                                                
2:38:03 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster relayed the committee would hear from DOR.                                                                      
                                                                                                                                
Representative  Wilson  stated  that  unless  the  committee                                                                    
heard something  different from DOR,  the bill  would impact                                                                    
industry  in  a  very  different way  than  the  prior  bill                                                                    
version.   She  believed   the  industry   should  have   an                                                                    
opportunity to weigh in.                                                                                                        
                                                                                                                                
Co-Chair Foster  replied that as  the end of  session neared                                                                    
nearing the pace accelerated and  the goal was to get things                                                                    
accomplished.   He    understood   Representative   Wilson's                                                                    
comments and he would look into the suggestion.                                                                                 
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
relayed he  did not have  a specific presentation  and would                                                                    
come  back  to the  committee  at  5:00 p.m.  with  modeling                                                                    
detail and  a new fiscal  note. There were  numerous changes                                                                    
in  the CS;  the most  fundamental  was getting  out of  the                                                                    
business of  cash credits  - of  earning net  operating loss                                                                    
(NOL)  credits  subject  to  cash.  He  addressed  that  Mr.                                                                    
Ruggiero had talked about simplifying  the tax system with a                                                                    
flat rate  and including  some step ups  to the  rate. There                                                                    
was a disconnect in the  current law where the effective tax                                                                    
rates  were lower  than  the nominal  35  percent tax  rate,                                                                    
which  led to  some  unusual circumstances  where NOLs  were                                                                    
carried  forward and  earned  at 35  percent  when the  cash                                                                    
payment  for tax  was  somewhat less  than  that amount.  He                                                                    
believed it was  the rationale of the  previous committee to                                                                    
reduce the  carry forward to  50 percent, which  aligned the                                                                    
NOLs to  17.5 percent  - closer to  the effective  tax rate.                                                                    
The current  CS changed that  provision and all  losses were                                                                    
carried  forward -  all  could be  used  against future  tax                                                                    
liability, but because  the per barrel credit  went away and                                                                    
was  replaced  with a  lower  tax  rate, the  effective  and                                                                    
nominal tax rates were now the  same thing. The value of the                                                                    
carry forwards  would be  at the tax  rate and  people would                                                                    
gain value from their losses in  the future at the same rate                                                                    
that people were paying profit taxes at present.                                                                                
                                                                                                                                
Mr.  Alper continued  that it  was no  big surprise  that at                                                                    
lower prices (between the breakeven  point and around $80 to                                                                    
$90  per barrel)  there were  relatively  low effective  tax                                                                    
rates under  the current tax  law because of the  per barrel                                                                    
credit  and the  35  percent rate.  Throughout  most of  the                                                                    
range it was  the minimum tax - the 4  percent floor. The 25                                                                    
percent net  tax raised taxes in  the $50 to $90  per barrel                                                                    
range.  He  continued  that  the 25  percent  net  rate  was                                                                    
comparable to  the original  version of SB  21 [oil  and gas                                                                    
tax  legislation passed  in 2013]  as initially  proposed by                                                                    
the  former Parnell  Administration. He  expounded that  the                                                                    
taxes -  at that range  - were the  same as what  they would                                                                    
have been had the original version of SB 21 had passed.                                                                         
                                                                                                                                
Mr. Alper  explained that the progressive  bracket created a                                                                    
surtax on  the portion  of the  profits (the  production tax                                                                    
value  greater   than  $60  per  barrel),   which  was  very                                                                    
different from progressivity under  the prior Alaska's Clear                                                                    
and Equitable Share  (ACES) tax system. Only  the portion of                                                                    
the production  tax value  greater than  $60 was  paying the                                                                    
surtax.  For example,  if a  company had  $70 per  barrel in                                                                    
profits, which  would occur  at oil prices  of $110  to $115                                                                    
per barrel, the  first $60 would be taxed at  25 percent and                                                                    
only the last $10 would be  taxed at the 40 percent combined                                                                    
rate  (25 percent  plus 15  percent  surtax). He  elucidated                                                                    
that the  actual taxes at  the higher price  ranges (greater                                                                    
than $100 per  barrel) were almost identical  to the current                                                                    
law's base  tax. Therefore,  at higher  prices the  bill did                                                                    
not create  a tax increase and  at prices of $130  and above                                                                    
it was a  small tax cut. The real impact  of the tax changes                                                                    
was in the  $50 to $90 per barrel range.  The changes to the                                                                    
carry  forwards  were  much more  foundational  and  on  the                                                                    
credit side  of the  equation. He relayed  that he  would be                                                                    
back  before  the   committee  with  additional  information                                                                    
beginning at 5:00 p.m.                                                                                                          
                                                                                                                                
2:44:06 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt asked  if Mr.  Alper had  advised the                                                                    
governor on the makeup of the current bill version.                                                                             
                                                                                                                                
Mr.  Alper replied  on the  negative.  He had  been in  some                                                                    
discussion with the co-chairs' offices  in previous weeks so                                                                    
he  knew what  they were  working  on and  had informed  the                                                                    
governor  several days  earlier  of some  of  the things  he                                                                    
thought  were going  to be  in the  bill. He  expounded that                                                                    
some  of the  information  had turned  out  to be  incorrect                                                                    
because the direction had been  changed several times in the                                                                    
past few days.                                                                                                                  
                                                                                                                                
Representative Pruitt asked for  verification that Mr. Alper                                                                    
had a decent understanding of the current bill version.                                                                         
                                                                                                                                
Mr. Alper answered that he  had received the current version                                                                    
of  the  bill that  morning  along  with everyone  else.  He                                                                    
confirmed that he  was "more or less" familiar  with all the                                                                    
provisions.                                                                                                                     
                                                                                                                                
Representative Pruitt  asked if  Mr. Alper would  advise the                                                                    
governor to sign the bill in its current form.                                                                                  
                                                                                                                                
Mr.  Alper replied  that  he did  not know  if  it would  be                                                                    
appropriate for  him to  give that advice.  He did  not know                                                                    
the situation well  enough. He understood the  intent of the                                                                    
co-chairs  and  what  they  were   trying  to  do  with  the                                                                    
effective  tax curves.  He  also  understood the  governor's                                                                    
desire to  get the  state out of  the cash  credit business.                                                                    
The  bill met  those needs.  He did  not know  how he  would                                                                    
advise  the governor  and would  need to  study the  bill in                                                                    
greater detail. He  added that inevitably the  bill would be                                                                    
debated by the  Senate and much more would  be learned about                                                                    
all the various provisions included.                                                                                            
                                                                                                                                
Representative Pruitt understood the  need for the cashables                                                                    
as well. He  remarked that at some point  the governor could                                                                    
either  reside  over  a  state that  decided  it  wanted  to                                                                    
destroy the oil  industry or he could get  active and become                                                                    
involved. He  thought it was  time for the governor  to step                                                                    
in to  communicate how he  felt about the bill.  He stressed                                                                    
the  bill was  a terrible  message to  send to  industry. He                                                                    
referred to  current price battles between  Saudi Arabia and                                                                    
Russia. He  detailed that  Saudi Arabia  was looking  to get                                                                    
its  market share  back in  Europe  and because  of that  it                                                                    
would lower  its price. He  requested that the  governor get                                                                    
involved.  He  thought the  governor  should  be a  part  of                                                                    
ensuring the viability of the oil industry.                                                                                     
                                                                                                                                
2:47:07 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara remarked that an  important part of the bill                                                                    
was to  make sure that  companies were taxed based  on their                                                                    
profitability. He detailed  that what had formerly  been a 5                                                                    
percent gross tax that could  have put companies under water                                                                    
financially was replaced by a  profits tax - companies would                                                                    
not  be  taxed  if  they  were  not  profitable.  Profitable                                                                    
companies would pay 25 percent  of their profits. He thought                                                                    
the previous speaker  had made an overstatement.  He did not                                                                    
want to scare people about  things they should not be scared                                                                    
about.                                                                                                                          
                                                                                                                                
Representative Wilson asked if  the bill constituted a total                                                                    
tax rewrite.                                                                                                                    
                                                                                                                                
Mr. Alper answered that the  bill was a partial tax rewrite.                                                                    
He   elaborated  that   it  used   elements  of   bills  the                                                                    
legislature  had   considered  in  the  past;   it  included                                                                    
elements of various  versions of SB 21. He  noted that large                                                                    
portions of  the statute would  remain the  same; therefore,                                                                    
he  would  not  characterize  the bill  as  a  complete  tax                                                                    
rewrite, but it was substantial.                                                                                                
                                                                                                                                
Representative  Wilson asked  if the  DOR modeling  would be                                                                    
based on numbers representing how  much more the state could                                                                    
take from industry.                                                                                                             
                                                                                                                                
Mr. Alper  replied that  he would  not word  it in  the same                                                                    
way. He answered that the  modeling would show the effective                                                                    
tax rates and the total revenue  that would be brought in at                                                                    
a range of prices and  circumstances compared to the current                                                                    
law.                                                                                                                            
                                                                                                                                
Representative Wilson relayed  that she had read  the bill a                                                                    
couple of  times. She  wanted to  know what  information the                                                                    
department  would provide  later  in the  day  to show  what                                                                    
impact taking away all credits would have.                                                                                      
                                                                                                                                
Mr.  Alper answered  there were  no credits  removed in  the                                                                    
current  version  compared  to  others.  The  sliding  scale                                                                    
credit would be  eliminated, but it was  a counterbalance to                                                                    
the 35 percent tax, which was  also going away. The bill was                                                                    
reverting to an  earlier version of a bill [SB  21] that was                                                                    
debated several years earlier.                                                                                                  
                                                                                                                                
2:50:06 PM                                                                                                                    
                                                                                                                                
Representative Wilson  stated that everything she  had heard                                                                    
about the original intent of the  bill was that it was aimed                                                                    
at taking care  of one very specific point -  how to pay the                                                                    
owed cashable credits  and to quit going more  into the hole                                                                    
regarding  what  was  owed.   She  believed  an  expert  had                                                                    
testified and  recommended to the  committee that  the issue                                                                    
was something  the committee  could take care  of in  a bill                                                                    
first.                                                                                                                          
                                                                                                                                
Mr. Alper  answered that  Mr. Ruggiero  had described  it as                                                                    
the  most pressing  issue. Many  members of  the legislature                                                                    
and  the  governor  had  also   characterized  as  the  most                                                                    
pressing  issue facing  the  state  in oil  and  gas law  at                                                                    
present. The issue of changing  and simplifying the tax code                                                                    
and getting rid  of the per barrel credit was  a part of Mr.                                                                    
Ruggiero's   recommendations.  He   recalled  Mr.   Ruggiero                                                                    
pointing out  to the House Resources  Committee the inherent                                                                    
distortion in the per barrel  credit. He stated that the per                                                                    
barrel  credit  threw  numerous things  off  and  there  was                                                                    
probably good public policy value  in getting rid of it, but                                                                    
what it should be replaced with was the pertinent question.                                                                     
                                                                                                                                
Representative Wilson recalled hearing  that making too many                                                                    
changes or  turning too  many knobs at  one time  could have                                                                    
substantial negative consequences. She  surmised that the CS                                                                    
made  numerous changes  that had  not been  in the  previous                                                                    
bill version the committee had heard public testimony on.                                                                       
                                                                                                                                
Mr.  Alper answered  that he  would prefer  to describe  the                                                                    
components individually  later in the day.  He was uncertain                                                                    
which changes  Representative Wilson or other  members found                                                                    
problematic.  He  was happy  to  explain  each of  them.  He                                                                    
reiterated his  earlier statement  that at  a wide  range of                                                                    
prices  the  effective  tax (actual  tax  collected  by  the                                                                    
state) was nearly identical to the status quo.                                                                                  
                                                                                                                                
Representative Wilson  assumed DOR's  projection for  oil in                                                                    
the pipeline was based on current  tax law. She asked if the                                                                    
department  would  present  updated   numbers  to  show  the                                                                    
effects  and  possible negative  impacts  of  the bill.  She                                                                    
believed the bill should scare the public.                                                                                      
                                                                                                                                
Mr.  Alper responded  that  the department  was  not in  the                                                                    
position to question how company  decision making may change                                                                    
based on  any changes in the  bill. He did not  know how the                                                                    
industry  would  react.  He  believed  that  like  committee                                                                    
members, companies were still  trying to digest the language                                                                    
in  the CS.  His  staff  was currently  working  to get  the                                                                    
changes  modeled and  the department  would not  be able  to                                                                    
contemplate behavioral  changes. He concluded that  once the                                                                    
individual line  items of the  bill were considered,  he did                                                                    
not think it  would add up to something quite  as onerous as                                                                    
it was being made out to be.                                                                                                    
                                                                                                                                
Representative Wilson  stated that  she found  the magnitude                                                                    
of the  bill incredible. She  noted that the  department had                                                                    
limited   time  to   articulate   a   response  to   provide                                                                    
information to  the committee.  She did  not believe  it was                                                                    
fair  to  have  a  rushed  response.  She  agreed  that  the                                                                    
governor needed  to weigh in  on the issue.  She underscored                                                                    
that it would impact all Alaskans.                                                                                              
                                                                                                                                
2:54:44 PM                                                                                                                    
                                                                                                                                
Representative Thompson  stated the CS appeared  to be close                                                                    
to a  complete rewrite of  SB 21. He  did not believe  SB 21                                                                    
had  been  given an  adequate  chance  to  show how  it  had                                                                    
impacted the  industry and  production. He  was disappointed                                                                    
that the  DOR revenue forecast  had not yet  been published.                                                                    
He remarked that the last  revenue forecast had included oil                                                                    
at $38  per barrel.  He emphasized that  the price  had been                                                                    
over $50  per barrel for  quite some time. The  last revenue                                                                    
forecast  had projected  under 500,000  barrels per  day for                                                                    
the   next  year's   production;  however,   production  was                                                                    
currently  well over  550,000 barrels  per day  (not 490,000                                                                    
dropping to 450,000).  He hoped the modeling  would take the                                                                    
actual  production into  consideration. He  stated that  the                                                                    
department  was three  weeks behind  on getting  its revenue                                                                    
forecast out. He  wanted to know what  had been accomplished                                                                    
and  how changing  everything would  impact  the status.  He                                                                    
hoped  the  modeling  would reflect  things  that  would  be                                                                    
coming  out in  the  revenue forecast.  He  stated that  the                                                                    
committee did not have all  the pertinent information and it                                                                    
was  difficult to  make sound  decisions when  the bill  may                                                                    
reverse accomplishments that had been made.                                                                                     
                                                                                                                                
Mr. Alper  replied that  the comment  pertained more  to the                                                                    
revenue forecast than  the bill. He corrected  that the fall                                                                    
forecast had  included a price  of oil for the  current year                                                                    
at $47 per  barrel; the $39 per barrel figure  had been from                                                                    
the  previous   spring.  The  price   of  oil   had  tracked                                                                    
relatively close  to the  fall forecast  - the  actual price                                                                    
was a couple of dollars  above the projected price. He noted                                                                    
that production  was also  ahead of  the forecast.  When the                                                                    
spring  forecast  came  out  - the  following  Friday  -  he                                                                    
expected  to  see  a small  amount  of  additional  revenue,                                                                    
perhaps  around  $200 million.  He  did  not like  that  the                                                                    
department was a bit behind  on its forecast. He referred to                                                                    
a  current newspaper  article explaining  that  there was  a                                                                    
regulatory interpretation  issue that  DOR needed to  get to                                                                    
the bottom of.  It had brought everything to  a standstill -                                                                    
the  department  had to  publish  an  advisory bulletin  and                                                                    
rework  many  of  the forecast  assumptions,  including  the                                                                    
sequencing of  credits, how certain credits  interacted with                                                                    
each other, and  how it would impact  the anticipated amount                                                                    
of purchased credits (where one  company purchased them from                                                                    
another). Given  the circumstances the department  could not                                                                    
publish  a  revenue  forecast with  incomplete  information,                                                                    
which meant the  process was delayed a couple  of weeks. The                                                                    
department  was on  target to  provide the  forecast to  the                                                                    
legislature the following week.                                                                                                 
                                                                                                                                
Representative  Thompson  referred  to  the  $8  per  barrel                                                                    
credit. He  asked for  verification that  if a  company used                                                                    
the credit they could not use  any other credits to take the                                                                    
amount below the [tax] floor.                                                                                                   
                                                                                                                                
Mr. Alper replied in the affirmative.                                                                                           
                                                                                                                                
Representative Thompson asked what it  meant that the $8 per                                                                    
barrel credit was being eliminated.                                                                                             
                                                                                                                                
Mr. Alper  answered that the  $8 per barrel credit  had been                                                                    
limited in  SB 21 to go  below the floor. The  CS eliminated                                                                    
the per  barrel credit and  the floor was hardened  in other                                                                    
specific language in several places  in the bill. Therefore,                                                                    
the 4  percent minimum tax would  still be the hard  floor -                                                                    
no credits could be used to  go below the floor. He referred                                                                    
to the crossover  point where the net tax and  the gross tax                                                                    
intersect  on  the  graph  - for  the  average  producer  it                                                                    
happened around $73  per barrel. The CS  drove the crossover                                                                    
point substantially  to the  left at  about $55  per barrel.                                                                    
Only  relatively low-priced  production  would actually  pay                                                                    
the  4  percent  minimum  tax and  higher  prices  would  be                                                                    
subject to the new 25 percent net tax.                                                                                          
                                                                                                                                
2:59:53 PM                                                                                                                    
                                                                                                                                
Representative  Tilton  remarked   that  the  state  already                                                                    
received more  than the  industry at  all price  points. She                                                                    
wondered if the change was  wise. She wondered what the goal                                                                    
was. She  thought the goal  should be  long-term production.                                                                    
She was skeptical  about the bill's ability  to achieve that                                                                    
goal.                                                                                                                           
                                                                                                                                
Mr. Alper did  not believe he was the  appropriate person to                                                                    
answer. He recognized the importance  of the question, which                                                                    
was  up  to  the  legislature  to debate.  His  job  was  to                                                                    
implement the taxes passed by the legislature.                                                                                  
                                                                                                                                
Vice-Chair  Gara  compared the  CS  to  the House  Resources                                                                    
Committee version. He stated that  the Resources version had                                                                    
a  5  percent  gross  tax  (a  percentage  of  revenue,  not                                                                    
profits)  at $50  and above  and a  4 percent  gross tax  at                                                                    
prices below  $50 per barrel. The  CS returned to the  SB 21                                                                    
rates  -  zero at  low  prices,  1  percent at  low  prices,                                                                    
increasing to  4 percent at  $25. He asked  for verification                                                                    
that the  rates in the  CS remained the  same [as in  SB 21]                                                                    
and had been hardened.                                                                                                          
                                                                                                                                
Mr. Alper  replied that Vice-Chair Gara  was describing what                                                                    
happened to  the minimum  tax at very  low prices  below $25                                                                    
per barrel.  He agreed  that the  existing law,  retained in                                                                    
the CS,  of a stairstep  from zero  below $15 per  barrel, 1                                                                    
percent above  $17.50, and  all the  way up  to $25  was the                                                                    
same. He relayed  that across most price  points the current                                                                    
CS  was  less  onerous  on   the  industry  than  the  House                                                                    
Resources Committee version.                                                                                                    
                                                                                                                                
3:02:45 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton thought  it was  important to  remember the                                                                    
committee  had heard  testimony  about the  gross  tax at  5                                                                    
percent. He  stated that industry  had testified that  the 5                                                                    
percent gross tax  represented a 25 percent  increase in its                                                                    
taxes. The change  was eliminated under the  current CS. The                                                                    
current bill version included a net  tax - if a producer did                                                                    
not have  much net  income they  would not  pay tax.  The 25                                                                    
percent tax rate  applied to net positive  income. The prior                                                                    
bill version  would change  the per  barrel tax  credits and                                                                    
lowered where  they were effective  by about $20,  which had                                                                    
also been changed in the  current CS. The current bill would                                                                    
eliminate new  cashable credits. Additionally,  industry had                                                                    
testified in opposition to only  being able to carry forward                                                                    
50  percent of  NOLs -  the current  CS allowed  industry to                                                                    
carry  forward 100  percent. The  major elements  of the  CS                                                                    
accomplished the  established goals.  He continued  that all                                                                    
the  elements had  been  available to  and  testified on  by                                                                    
industry and the legislative consultant.  He stated that the                                                                    
consultant had testified that his  preference would be to go                                                                    
to a  stepped net  tax. He  reminded committee  members that                                                                    
the bill  did not include  a change in progressivity  as had                                                                    
previously been the  case where a higher tax  applied to all                                                                    
profits. He explained the tax  under the current version was                                                                    
more like an  income tax. The bill included  a new component                                                                    
- a 15  percent additional tax, which was only  taxed on the                                                                    
amount  above $100;  it was  bracketed just  like an  income                                                                    
tax. The lower tax was paid  if the production tax value was                                                                    
lower  than $60.  He believed  the model  would show  the CS                                                                    
structure was beneficial  across a wide range.  The bill was                                                                    
much simpler  than having an  interaction between a  net tax                                                                    
and gross sliding scale per barrel credits.                                                                                     
                                                                                                                                
3:06:10 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  asked   if  the  bill  contained                                                                    
anything that  was unique  or that  had not  been previously                                                                    
discussed. He  remarked that there  were many  concepts that                                                                    
the legislature  had discussed for  years. He  believed part                                                                    
of the problem was that when  one concept was changed in the                                                                    
oil tax structure  something else needed to  be adjusted. He                                                                    
asked  if  the bill  contained  anything  new that  had  not                                                                    
previously been analyzed.                                                                                                       
                                                                                                                                
Mr. Alper  replied that many of  the transparency components                                                                    
were relatively new  to the current year, but  they had been                                                                    
in the  House Resources Committee  version of the  bill. The                                                                    
current  CS contained  the ring  fencing concept,  which was                                                                    
new. He  believed the topic merited  substantial discussion.                                                                    
He had spoken  with the co-chairs about  their intent, which                                                                    
in some  ways stemmed  from the previous  committee's desire                                                                    
for a preapproval  process or some control  over making sure                                                                    
the  state  knew  what  it  was  getting  when  someone  was                                                                    
investing  using  state  money. Ultimately  the  ring  fence                                                                    
language was intended to recognize  that a company had carry                                                                    
forwards  from a  project, but  they had  a loss  - it  only                                                                    
kicked  in when  a  company  was operating  at  a loss.  The                                                                    
carried  forward lease  expenditures could  only be  used to                                                                    
offset the  production value from the  actual property where                                                                    
the initial investment  had been made. He  explained that it                                                                    
took  away   the  possibility  that  someone   may  spend  a                                                                    
significant amount  of money and  use the offsets  to reduce                                                                    
their taxes from  another part of the North  Slope. The more                                                                    
dramatic possibility  would be the failure  circumstance. He                                                                    
provided  a scenario  where a  company  spent a  significant                                                                    
amount of money  and was unsuccessful. He  detailed that the                                                                    
company   had   $1   billion  in   carried   forward   lease                                                                    
expenditures and was  looking to get out  of Alaska. Without                                                                    
some sort  of ring  fence or  limitation, the  company could                                                                    
sell its entire  Alaskan subsidiary to a  major producer for                                                                    
any  price.  Under  the circumstance,  the  buyer  would  be                                                                    
purchasing  the $1  billion worth  of carried  forward lease                                                                    
expenditures and could use it  to offset its production from                                                                    
one  of the  major legacy  fields. He  believed it  would be                                                                    
detrimental and  not fit within  the intent of  the program.                                                                    
He  understood the  ring fencing  language in  the CS  was a                                                                    
means  to  prevent  that from  happening.  He  relayed  that                                                                    
everything  else  in   the  bill  had  been   at  a  minimum                                                                    
introduced  as an  amendment  or in  a  previous version  of                                                                    
another bill;  there was  nothing brand  new in  the current                                                                    
CS.                                                                                                                             
                                                                                                                                
3:09:52 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  requested  to  hear  about  the  statutory                                                                    
relief valve  pertaining to royalty  relief. He  stated that                                                                    
the provision  had been included  in all the  state's recent                                                                    
oil  tax systems  going back  to the  Economic Limit  Factor                                                                    
(ELF) system. He  was interested to hear  about the possible                                                                    
royalty reduction depending on the  royalty a field paid and                                                                    
whether it was a new or existing field.                                                                                         
                                                                                                                                
Mr. Alper  clarified that  royalty relief  is a  function of                                                                    
royalty,  which was  a  function of  state  lands and  state                                                                    
leases and  fell within the Department  of Natural Resources                                                                    
(DNR) purview.  He explained  that a  company made  the case                                                                    
that  its field  was challenged  economically and  could ask                                                                    
for  a reduction  in the  royalty rate  for some  period. He                                                                    
stated  that it  was not  unusual for  the contractual  12.5                                                                    
percent royalty  to be reduced  to something like  5 percent                                                                    
for  a number  of years;  7.5  percent of  the 12.5  percent                                                                    
(two-thirds) would be  foregone - the state  would take less                                                                    
royalty,  which would  help  the field  get  over the  hump.                                                                    
After a  designated period, the  rate would increase  to the                                                                    
full amount.  He stated that  it was an  application process                                                                    
that  required  a  best interest  finding  and  quantitative                                                                    
analysis; a  report from DNR  staff would  determine whether                                                                    
the  application should  qualify.  The  most recent  royalty                                                                    
relief  case had  been the  Nuna  field (Caelus's  expansion                                                                    
near Oooguruk)  - the company  had applied and  had received                                                                    
royalty  relief.  The  company  had testified  that  it  was                                                                    
contingent  on  meeting  certain investment  thresholds.  He                                                                    
furthered that because of the  economy and the price of oil,                                                                    
the development  had been  slowed down  - the  company would                                                                    
likely have to  reapply for royalty relief  when the project                                                                    
started back up.                                                                                                                
                                                                                                                                
Vice-Chair Gara  stated that the basic  standard for royalty                                                                    
relief was if a company with  a new or existing field proved                                                                    
the field to  be uneconomic under current  conditions to the                                                                    
department, it  could receive the  royalty reduction  to try                                                                    
to make the project economic.                                                                                                   
                                                                                                                                
Mr. Alper  answered yes and  that the question  pertained to                                                                    
DNR, which was outside of his expertise.                                                                                        
                                                                                                                                
Representative  Pruitt followed  up on  the NOL  changes. He                                                                    
questioned whether  it was really possible  to compare being                                                                    
able  to  use the  full  35  percent  NOL credit  to  future                                                                    
liabilities.  He stated  that in  theory going  back to  the                                                                    
current structure would  make sense, but he  viewed the ring                                                                    
fencing as a  dramatic shift. He asked if the  value in ring                                                                    
fencing remained for the companies  in the same way that 100                                                                    
percent of their NOLs would.                                                                                                    
                                                                                                                                
3:13:47 PM                                                                                                                    
                                                                                                                                
Mr. Alper  expressed uncertainty about his  understanding of                                                                    
the  question. He  relayed that  typically once  an investor                                                                    
began  making   major  investments   they  expected   to  be                                                                    
producing oil within  five or six years.  Under the scenario                                                                    
the company would have production  and value and its carried                                                                    
forwards  would  be  used to  offset  production  from  that                                                                    
field. The  value of the ring  fence was to ensure  that the                                                                    
tax reduction  did not occur until  the company successfully                                                                    
developed the  field it had  been investing in in  the first                                                                    
place.                                                                                                                          
                                                                                                                                
Representative  Pruitt  understood.  He asked  if  requiring                                                                    
companies  to narrow  [carried  forwards]  down to  specific                                                                    
fields would  maintain the value  for a company  to continue                                                                    
to  invest in  Alaska. He  stated that  currently a  company                                                                    
could   take   the    losses   against   investment,   which                                                                    
incentivized  them  to  invest.   Whereas,  the  bill  would                                                                    
require a company to wait on  that on the specific field. He                                                                    
asked  if the  value to  the  company remained  in the  same                                                                    
capacity if the ring fencing provision was implemented.                                                                         
                                                                                                                                
Mr. Alper  did not  believe he was  qualified to  answer the                                                                    
question.  He deferred  to industry.  He clarified  the ring                                                                    
fencing provision in  the bill. He provided a  scenario of a                                                                    
company with existing production  that was also investing in                                                                    
a new  field somewhere  on the  North Slope.  The investment                                                                    
would be  fully usable, as  it was presently, to  offset the                                                                    
company's taxes from the  company's existing production; the                                                                    
provision did not change the  commingled nature of the North                                                                    
Slope tax.  The difference  resided in  a loss  scenario. He                                                                    
detailed  that  the carried  forward  losses  were the  only                                                                    
thing that would be tied to the lease or property.                                                                              
                                                                                                                                
Representative Pruitt  asked if  the industry had  asked for                                                                    
ring fencing.                                                                                                                   
                                                                                                                                
3:16:12 PM                                                                                                                    
                                                                                                                                
Mr. Alper replied  that he did not believe  anyone would ask                                                                    
for ring  fencing. He detailed  the purpose of  ring fencing                                                                    
was to  protect the  state's interest,  most notably  in the                                                                    
failure scenario  when a company  with carried  forwards was                                                                    
unable  to   bring  a  field  into   production.  Under  the                                                                    
scenario,  in  the absence  of  ring  fencing, it  would  be                                                                    
necessary  to have  some other  means to  protect the  state                                                                    
from carried forwards  being used to offset  taxes the state                                                                    
would otherwise receive.  He furthered that the  goal was to                                                                    
prevent a  company from  selling the  carried forwards  to a                                                                    
major  producer. He  believed ring  fencing seemed  to be  a                                                                    
reasonably  elegant   way  to   accomplish  the   goal.  The                                                                    
protection  was necessary  in  a world  of  large amount  of                                                                    
carried forward lease expenditures.                                                                                             
                                                                                                                                
Representative  Pruitt   thought  he  had   heard  testimony                                                                    
earlier in the  meeting that industry had  requested some of                                                                    
the things in the CS. He  did not recall the component being                                                                    
requested.                                                                                                                      
                                                                                                                                
Representative  Ortiz   asked  if  ring  fencing   was  used                                                                    
elsewhere  in  the  United  States  or  in  other  locations                                                                    
competing [for investment] with Alaska.                                                                                         
                                                                                                                                
Mr.  Alper replied  in the  affirmative.  He expounded  that                                                                    
field-based taxation  was not unusual throughout  the world.                                                                    
He  explained  that before  Alaska  had  switched to  a  net                                                                    
profits tax  with the Petroleum Production  Tax [PPT] system                                                                    
in 2006, ELF had been a  ring-fenced tax - every field had a                                                                    
separate tax. He elaborated that  the Cook Inlet oil and gas                                                                    
tax, which was  still tied to ELF was a  ring fence tax. The                                                                    
specific  reasons  for  bringing  the  structure  back  were                                                                    
unique,  but  field-based  taxation cost  recovery  was  not                                                                    
unusual.                                                                                                                        
                                                                                                                                
Co-Chair Foster  reminded committee members  that amendments                                                                    
on the bill were due the following day.                                                                                         
                                                                                                                                
Representative  Pruitt asked  if  the  committee would  hear                                                                    
from Mr. Ruggiero [legislative consultant].                                                                                     
                                                                                                                                
Co-Chair  Foster  replied  that   he  would  look  into  the                                                                    
possibility.                                                                                                                    
                                                                                                                                
Representative  Pruitt  asked  if   Mr.  Ruggiero  had  been                                                                    
involved in the current CS.                                                                                                     
                                                                                                                                
Co-Chair Seaton  replied that Mr. Ruggiero  had supplied the                                                                    
model  and  had  done  follow  up work  on  the  model.  Mr.                                                                    
Ruggiero  had suggested  (to the  committee) implementing  a                                                                    
stepped net tax - a  better system that would eliminate some                                                                    
of the current  problems. He had also asked  Mr. Ruggiero in                                                                    
a prior committee  meeting whether the state  should use its                                                                    
net  tax system  to  offset royalties  with  the 10  percent                                                                    
gross value reduction. Mr. Ruggiero's  comment had been that                                                                    
it did  not make sense  to use the  tax system to  lower its                                                                    
royalties.                                                                                                                      
                                                                                                                                
Representative  Pruitt  remarked  that  the  CS  included  a                                                                    
dramatic  change. He  thought it  would be  helpful to  hear                                                                    
from Mr. Ruggiero.                                                                                                              
                                                                                                                                
Co-Chair  Foster  relayed  that  he  could  check  into  the                                                                    
possibility during the coming recess.                                                                                           
                                                                                                                                
3:20:36 PM                                                                                                                    
RECESSED                                                                                                                        
                                                                                                                                
5:08:29 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster relayed that Mr.  Ruggiero was not available                                                                    
to testify. He discussed the agenda.                                                                                            
                                                                                                                                
Mr. Alper  provided a PowerPoint presentation  titled "CS HB                                                                    
111(FIN) Oil  and Gas Production  Tax and  Credits: Analysis                                                                    
of House  Finance Committee Substitute" dated  April 7, 2017                                                                    
(copy  on file).  He turned  to  slide 3  and addressed  the                                                                    
minimum  tax   (floor).  The  purple  text   throughout  the                                                                    
presentation  indicated new  components of  the legislation.                                                                    
The  House Resources  Committee  increased  the minimum  tax                                                                    
rate to  5 percent at  oil prices  above $50 per  barrel; it                                                                    
had  removed changes  at zero  to  3 percent.  The CS  under                                                                    
consideration  reverted   to  current  law   and  maintained                                                                    
minimum  tax rates  and  structures from  SB  21. The  House                                                                    
Resources  Committee  had  hardened  the  tax  floor,  which                                                                    
prevented  all credits  from being  used  below the  minimum                                                                    
tax. There  were many circumstances  in current law  where a                                                                    
taxpayer could go below the  4 percent with certain credits.                                                                    
The  House Finance  Committee  CS made  an  exception -  the                                                                    
small producer credit could still go below the minimum tax.                                                                     
                                                                                                                                
Mr. Alper addressed slide 4  related to the hardening of the                                                                    
tax floor for gross value  reduction (GVR) eligible new oil.                                                                    
Under current  law the $5  per barrel credit could  reduce a                                                                    
tax  liability to  zero. The  House Resources  Committee had                                                                    
created a  hard "adjusted"  minimum tax where  the 20  to 30                                                                    
percent  reduction   was  applied  before   calculating  the                                                                    
minimum tax. The effective minimum  tax rate was between 2.8                                                                    
and 3.2 percent  for new oil. Whereas, HB  111(FIN) kept the                                                                    
adjusted  minimum  tax  structure.  He  explained  that  the                                                                    
percent  GVR  benefit  was   eliminated  and  the  effective                                                                    
minimum tax  was always  3.2 percent for  new oil.  He added                                                                    
that new oil  had a limited duration under  current law that                                                                    
had  been  changed   the  previous  year  in   HB  247;  GVR                                                                    
eligibility  was  only  good for  between  three  and  seven                                                                    
years.                                                                                                                          
                                                                                                                                
5:13:09 PM                                                                                                                    
                                                                                                                                
Mr. Alper turned  to slide 5 and explained  the treatment of                                                                    
North  Slope NOLs.  The  35  percent NOL  credit  - was  the                                                                    
biggest consternation  about future state liabilities  - and                                                                    
was eliminated and replaced with  a carry forward structure.                                                                    
The House  Resource Committee bill  version had  allowed for                                                                    
50 percent carry forward of  losses, with the possibility of                                                                    
earning  an  "uplift"  or  interest  of  about  8.5  percent                                                                    
annually for up to seven  years. The finance version allowed                                                                    
100  percent of  losses to  be carried  forward without  the                                                                    
uplift. After  seven years the  carried forward  value began                                                                    
to  decrease  by  10 percent  per  year.  Additionally,  the                                                                    
carried forward  expenditures could  only be used  to offset                                                                    
value from  the lease or  property where they  were incurred                                                                    
(ring fencing). The bill  included reporting requirements to                                                                    
ensure  the  state knew  where  expenses  were incurred  and                                                                    
where they could be used.                                                                                                       
                                                                                                                                
Co-Chair  Foster noted  Vice-Chair  Gara and  Representative                                                                    
Pruitt had joined the  meeting. He recognized Representative                                                                    
Andy Josephson in the audience.                                                                                                 
                                                                                                                                
Representative Wilson  wanted to  ensure she  understood the                                                                    
ring fence  concept. She provided  a scenario where  she had                                                                    
an  oil  field  with   two  developments.  She  stated  that                                                                    
currently she could combine the  losses and gains of the two                                                                    
fields. She believed under the  ring fencing concept the two                                                                    
fields  would  become  their   own  separate  entities.  She                                                                    
continued that if  there was a loss on one  field and a gain                                                                    
on  the other,  the loss  could only  be taken  down to  the                                                                    
minimum  and the  full  gain  on the  other  field would  be                                                                    
counted. She asked for the accuracy of her statements.                                                                          
                                                                                                                                
Mr. Alper  replied that  the word "field"  did not  exist in                                                                    
statute  -  statute referred  to  lease  or property,  which                                                                    
usually meant a  unit, which was defined  in regulations. He                                                                    
believed  that  two  fields  in   the  same  unit  would  be                                                                    
interpreted as  one entity. The  ring fence  concept applied                                                                    
to two  very different  production areas on  different parts                                                                    
of the  North Slope. If one  of the fields was  making money                                                                    
and  the other  was losing  money, the  losses on  the field                                                                    
losing  money would  have to  be used  against future  gains                                                                    
from  that  field. He  provided  a  scenario where  a  large                                                                    
producer   made  good   money  on   legacy  production   and                                                                    
reinvested a  portion of  profits in  a new  development. He                                                                    
explained that  the scenario  was fine and  was all  part of                                                                    
the  intermixed  tax  structure   on  the  North  Slope.  He                                                                    
continued that  it only became  relevant if the  company was                                                                    
operating  at  a loss  for  the  year  for its  North  Slope                                                                    
investments  -  at that  point,  the  loss amount  would  be                                                                    
locked into the field where incurred.                                                                                           
                                                                                                                                
Representative Wilson  used restaurants  as an  analogy. She                                                                    
provided  a  scenario where  she  owned  two very  different                                                                    
types  of restaurants.  Currently in  her federal  taxes she                                                                    
would combine  the two businesses together  to determine her                                                                    
gain  or loss.  She  surmised that  under  the ring  fencing                                                                    
structure, if one restaurant had  a loss she could only take                                                                    
the tax minimum  to 3.2 percent and could  carry forward the                                                                    
losses.  She  stated  that  the entire  gain  on  the  other                                                                    
restaurant would have to be  included. She continued that it                                                                    
appeared  the  state  would  be  charging  less  at  the  25                                                                    
percent, but  in reality she  could actually be  paying more                                                                    
under  her  example because  the  two  restaurants could  no                                                                    
longer be combined.                                                                                                             
                                                                                                                                
Mr. Alper  continued with the  analogy. He detailed  that if                                                                    
the  first  restaurant was  making  $50,000  and the  second                                                                    
restaurant lost  $40,000, the owner  would pay taxes  on the                                                                    
$10,000  profit. However,  if  the second  restaurant had  a                                                                    
$60,000  loss, the  overall $10,000  loss  (between the  two                                                                    
businesses) could  only be carried forward  and used against                                                                    
the second restaurant's future profits.                                                                                         
                                                                                                                                
5:18:05 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  thought  Mr.  Alper  had  previously                                                                    
stated  that two  fields  in different  areas  on the  North                                                                    
Slope could  not be  combined to  have a  loss or  gain. She                                                                    
thought that  under the ring  fencing structure,  that would                                                                    
no longer be possible.                                                                                                          
                                                                                                                                
Mr.  Alper  replied there  were  different  degrees of  ring                                                                    
fencing. There was  full ring fencing where  every field had                                                                    
a   separate  tax   calculation  and   potentially  separate                                                                    
progressivity. He  detailed that  under ELF every  field had                                                                    
been separate and had a  separate multiplier. That structure                                                                    
was not in  the CS. The taxation  on all oil and  gas on the                                                                    
North Slope  was a single  tax or a "segment."  He explained                                                                    
that if  the overall  North Slope was  operating at  a loss,                                                                    
the attachment of the expenditures  associated with the loss                                                                    
were  tied to  the  field  where they  were  incurred. In  a                                                                    
profit situation it was still a single combined tax.                                                                            
                                                                                                                                
Mr. Alper advanced to slide  6 and addressed the North Slope                                                                    
tax rate,  which was  35 percent  of PTV  less a  per barrel                                                                    
credit.  The  House  Resources Committee  bill  version  had                                                                    
shifted the  per barrel  credit so the  break points  of the                                                                    
different dollars (e.g. $3 to $4  or $2 to $3) were moved by                                                                    
$20,  meaning that  the typical  producer  would receive  $2                                                                    
less in  credits. The change  resulted in a tax  increase of                                                                    
about $300 million.  The House Finance Committee  CS did not                                                                    
include  the provision  and removed  the  entire per  barrel                                                                    
credit, replacing it  with a lower tax rate.  The current CS                                                                    
reduced the base  tax back to the original SB  21 rate of 25                                                                    
percent at prices below about $90  to $95 per barrel. The CS                                                                    
added a bracket  of progressivity with a  15 percent surtax.                                                                    
He acknowledged  that it added up  to a 40 percent  tax, but                                                                    
it was  only 40  percent on profits  that were  greater than                                                                    
$60 per  barrel. The bracketed  structure was similar  to HB                                                                    
110,  a tax  reform bill  from  2011 offered  by the  former                                                                    
Parnell  Administration -  the  tax had  stepped up,  rather                                                                    
than being a  blanket tax increase across  all price points.                                                                    
The effective tax  rates closely tracked current  law at the                                                                    
higher price  rates. Additionally, the CS  aligned the value                                                                    
of  the  carry  forward  with the  effective  tax  rate.  He                                                                    
explained that  one of  the structural errors  in SB  21 was                                                                    
that the NOL or loss rate  at 35 percent was higher than the                                                                    
effective tax  rate companies pay when  profitable at almost                                                                    
any price. He  detailed that the tax value of  a loss became                                                                    
greater than the  tax value of a gain.  He addressed ramping                                                                    
down  of  NOL  rates  and  noted that  HB  247  (passed  the                                                                    
previous year by  the House) had a 25 percent  NOL rate that                                                                    
was designed in  part to rationalize the  effective tax rate                                                                    
with the  statutory tax  rate. The  current CS  resolved the                                                                    
issue by  removing the  per barrel credit  and using  the 25                                                                    
percent tax rate  - it became the nominal  and effective tax                                                                    
rate. He  furthered that if  a company  had a loss  that was                                                                    
carried  forward,  it was  saving  future  taxes at  the  25                                                                    
percent  rate.  There  was more  parity  for  the  companies                                                                    
making money and the companies losing money.                                                                                    
                                                                                                                                
5:22:19 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked why the bill  used a production                                                                    
tax value  versus an  actual barrel  cost. She  wondered who                                                                    
determined what the value was.                                                                                                  
                                                                                                                                
Mr. Alper  asked if Representative  Wilson was  referring to                                                                    
the progressivity trigger point.                                                                                                
                                                                                                                                
Representative Wilson referred to a  bullet point on slide 6                                                                    
that stated a bracket of  progressivity was added [with a 15                                                                    
percent surtax]  on a portion  of PTV greater than  $60. She                                                                    
stated it was  not $60 per barrel and equated  to a price of                                                                    
around $94 to $95 per barrel.                                                                                                   
                                                                                                                                
Mr. Alper  answered that it was  closer to $104 to  $105 per                                                                    
barrel. The PTV was the  statutory definition of net, it was                                                                    
the  profit. The  production tax  did  not kick  in until  a                                                                    
company had a profit. The 25  percent tax (or 35 percent tax                                                                    
in current law)  was calculated on PTV. He  detailed that if                                                                    
a company was  making $1 per barrel, it was  taxed at the 35                                                                    
percent.  The  structure specified  that  if  a company  was                                                                    
making $1 to  $59 per barrel it was taxed  at 25 percent. He                                                                    
furthered that if  a company was making $61  per barrel, $60                                                                    
would be taxed at the 25  percent and the remaining $1 would                                                                    
be taxed  at 40 percent.  Likewise, if a company  was making                                                                    
$100 per  barrel, $60 would be  taxed at 25 percent  and $40                                                                    
would be taxed  at 40 percent. He concluded  that because it                                                                    
was  a net  tax,  the trigger  points  for different  breaks                                                                    
should generally be tied to net amounts.                                                                                        
                                                                                                                                
5:24:12 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  for verification  that  aside                                                                    
from the small producer credit,  there were no other credits                                                                    
that  would reduce  the tax.  She surmised  that the  profit                                                                    
would  be multiplied  by the  applicable  tax percentage  to                                                                    
determine the amount owed.                                                                                                      
                                                                                                                                
Mr. Alper replied  it was possible companies  may have other                                                                    
credits. For example, if a  company was doing work in Middle                                                                    
Earth   and  had   capital,  exploration,   or  well   lease                                                                    
expenditure  credits,  those  credits  could  reduce  a  tax                                                                    
payment  below the  statutory number,  but not  below the  4                                                                    
percent floor.                                                                                                                  
                                                                                                                                
Representative  Wilson  asked  for verification  that  other                                                                    
than  the small  producer credit,  there would  be no  other                                                                    
credits to reduce a company's tax on the North Slope.                                                                           
                                                                                                                                
Mr. Alper replied in the  affirmative. However, if a company                                                                    
had  purchased credits  from another  company, it  could use                                                                    
the  purchased  credits  to  reduce   its  taxes  below  the                                                                    
statutory rate, but not below the 4 percent floor.                                                                              
                                                                                                                                
Vice-Chair Gara spoke  to the intention that  at high prices                                                                    
the tax  rate would not exceed  the 35 percent under  SB 21.                                                                    
He detailed  that the surtax  applied to a PTV  greater than                                                                    
$60.  He explained  that for  a low  profit field  with high                                                                    
costs  the surtax  may not  kick  in until  $150 per  barrel                                                                    
because it  had $90 in costs  at the field. If  a flat price                                                                    
of oil was  picked it would kick in much  faster for the low                                                                    
profit fields.                                                                                                                  
                                                                                                                                
Mr. Alper  replied in the  affirmative. He detailed  that it                                                                    
would  be the  average  comingled profits  of the  company's                                                                    
overall  North Slope  operations. The  higher the  cost, the                                                                    
higher the price would lead to the $60 PTV.                                                                                     
                                                                                                                                
5:26:48 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked  for verification that if  there was a                                                                    
high-cost  field  that was  not  profitable  until $80,  the                                                                    
structure requiring  $60 of profits [PTV]  before the surtax                                                                    
kicked in, would  be fairer (to the  company) than attaching                                                                    
the surtax at $100 per barrel.                                                                                                  
                                                                                                                                
Mr. Alper  responded he was  trying to steer clear  of words                                                                    
like fair, but Vice-Chair Gara's statements made sense.                                                                         
                                                                                                                                
Mr.  Alper turned  to  slide  7 and  addressed  GVR. The  CS                                                                    
maintained the  3.2 percent  modified hard  floor introduced                                                                    
in the House  Resources Committee bill version.  The CS also                                                                    
maintained  the $5  per  barrel credit.  He  noted that  the                                                                    
other sliding  scale per barrel  credit had  been eliminated                                                                    
in  the bill.  He explained  that the  $5 per  barrel credit                                                                    
meant that  GVR-eligible fields would  pay no more  than the                                                                    
minimum tax  up to prices of  about $90 per barrel.  New oil                                                                    
would pay the  3.2 percent for a very wide  range of prices.                                                                    
The CS would  eliminate the 30 percent GVR  for high royalty                                                                    
fields, which had been added in the late stages of SB 21.                                                                       
                                                                                                                                
Mr. Alper  advanced to slide  8 and discussed  other changes                                                                    
in the CS. He explained that  most of the other changes were                                                                    
non-monetary and  were more technical  or impacted  a policy                                                                    
issue that did  not necessarily have a cost.  He stated that                                                                    
the   interest  rate   was  one   of  the   administration's                                                                    
priorities. There was a problem  with existing law where the                                                                    
interest rate went to zero after  three years on oil and gas                                                                    
production  tax. He  explained  the provision  made it  very                                                                    
hard  to  get  anyone  to  settle their  taxes  and  pay  an                                                                    
assessment;  it was  cheaper to  appeal and  take the  issue                                                                    
through  the   court  system  if   there  was   no  interest                                                                    
liability. He  stated that  the 7  percent interest  rate in                                                                    
the CS  was more  flexible and seemed  fair; it  was halfway                                                                    
between the historic  rate and the 3  percent implemented by                                                                    
SB 21.                                                                                                                          
                                                                                                                                
Mr. Alper continued to address  other changes on slide 8. He                                                                    
stated   that  the   transparency  sections   were  somewhat                                                                    
different than what  had been passed by  the House Resources                                                                    
Committee. The  CS added references  to the  carried forward                                                                    
lease expenditures  - information  would be provided  to the                                                                    
public  - to  the legal  extent  - regarding  the amount  of                                                                    
carried  forward  lease  expenditures  a  company  had  (its                                                                    
credits  earned  but not  cashed).  The  dataset became  the                                                                    
building block to  enable DOR to administer  the ring fence.                                                                    
One  of the  potential problems  with a  ring fence  was how                                                                    
much  work  it could  be  for  DOR  staff.  So long  as  the                                                                    
taxpayer was providing the information  regularly as part of                                                                    
their   tax   filing,   the  department   would   have   the                                                                    
information.  The  CS  maintained House  Resource  Committee                                                                    
language specifying  that the  gross value  at the  point of                                                                    
production (GVPP)  could not  go below zero.  He spoke  to a                                                                    
scenario   with   a   remote,   single   field   with   high                                                                    
transportation costs.  He stated that if  the wellhead value                                                                    
(the  GVPP -  the  value  after subtracting  transportation)                                                                    
went below zero,  the negative value could  not reduce taxes                                                                    
from other fields.                                                                                                              
                                                                                                                                
5:30:51 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  continued  to  address   other  changes  in  the                                                                    
legislation on  slide 9.  He relayed that  there had  been a                                                                    
per  barrel credit  volatility problem  associated with  the                                                                    
migrating credits.  He detailed  that if there  were certain                                                                    
months within  a year with  high prices and others  with low                                                                    
prices  where some  were above  the minimum  tax and  others                                                                    
were below it, the state  could be liable for large refunds.                                                                    
He expounded  that credits  earned in  one month  could have                                                                    
been  used  in another.  The  issue  was  made moot  by  the                                                                    
current version of the bill  - it had been tied specifically                                                                    
to the  per barrel credit,  which the CS eliminated.  The CS                                                                    
repealed the ability  to assign a tax  credit certificate to                                                                    
a financial company  through a third party  where the credit                                                                    
was paid  by the state  to a  banker directly. He  noted the                                                                    
feature  had  been  added in  non-oil  and  gas  legislation                                                                    
several years earlier.  Although the CS did  not address any                                                                    
Cook  Inlet tax  or  credit issues  (it  addressed only  the                                                                    
North Slope),  it would establish a  new legislative working                                                                    
group to look at possible  future changes to be addressed in                                                                    
a future  legislative session. The  Cook Inlet tax  cap, the                                                                    
ELF-based  $0.17 on  gas that  was  originally scheduled  to                                                                    
sunset in 2022 had been extended in HB 247 and was ongoing.                                                                     
                                                                                                                                
Co-Chair Foster recognized Representative  Geran Tarr in the                                                                    
audience.                                                                                                                       
                                                                                                                                
5:32:30 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara asked  for verification  that under  the CS                                                                    
there would continue to be no  production tax on oil in Cook                                                                    
Inlet.                                                                                                                          
                                                                                                                                
Mr. Alper  replied that  HB 247 had  changed the  Cook Inlet                                                                    
tax cap to  $1 per barrel. For the most  part Cook Inlet oil                                                                    
production was taxed at the $1 rate.                                                                                            
                                                                                                                                
Vice-Chair Gara stated that in  two prior statutes there had                                                                    
been a structure that migrated  from a base-profits tax rate                                                                    
that moved  up. He stated  that the inflection point  was at                                                                    
$60  in profits.  He  asked about  the  inflection point  in                                                                    
prior laws that contained the feature.                                                                                          
                                                                                                                                
Mr.  Alper replied  that  ACES had  been  a progressive  tax                                                                    
structure that  had a 25  percent base rate. Under  the ACES                                                                    
structure the  tax rate began to  increase at $30 PTV  - the                                                                    
rate had increased by four-tenths  of a percent for every $1                                                                    
above $30.                                                                                                                      
                                                                                                                                
Vice-Chair Gara  asked for verification  that PPT  under the                                                                    
former Murkowski  Administration had  a similar  feature. He                                                                    
asked where the point had occurred under PPT.                                                                                   
                                                                                                                                
Mr. Alper  replied that  PPT, the  original net  profits tax                                                                    
from  2006,  included a  22.5  percent  base rate  that  had                                                                    
increased by two-tenths of a  percent for every dollar above                                                                    
$40 PTV.                                                                                                                        
                                                                                                                                
5:34:28 PM                                                                                                                    
                                                                                                                                
Mr. Alper advanced to slide  10 and addressed items that had                                                                    
been  removed  from  the   bill  including  intent  language                                                                    
regarding  appropriations (buying  the backlog  of credits);                                                                    
executive   sessions/legislative   access  to   confidential                                                                    
information under  limited circumstances; the  Department of                                                                    
Natural  Resources   (DNR)  preapproval  process   of  lease                                                                    
expenditures; the dry  hole credit; and no  changes had been                                                                    
made to per-company credit cap,  haircut, or barrels per day                                                                    
cash thresholds.  He elaborated that  in many ways  the ring                                                                    
fencing  provision compensated  for the  removal of  the DNR                                                                    
preapproval  process  language.  He explained  that  if  the                                                                    
issue was that the state needed  to ensure that a project it                                                                    
was funding  was in  its best interest,  the issue  would be                                                                    
resolved  if no  one would  be getting  the value  until the                                                                    
field came into production -  if someone sold the lease they                                                                    
would retrieve  the value.  He explained  that the  dry hole                                                                    
credit had  been a recommendation  by Mr. Ruggiero as  a way                                                                    
of buying  out a  failure case  carry forwards.  He remarked                                                                    
that he did not believe the  dry hole provision in the House                                                                    
Resources  Committee  version  had   been  as  intended.  He                                                                    
explained  that the  CS removed  any changes  made in  prior                                                                    
bill  versions to  the per-company  credit cap  ($70 million                                                                    
per year). The discount companies  had to take on the amount                                                                    
of cash  beyond $35 million  had been  taken out of  the CS.                                                                    
The  House  Resources  Committee  version  had  reduced  the                                                                    
barrels per day threshold from  $50,000 to $15,000 (the size                                                                    
company to become  ineligible to get cash  for credits), but                                                                    
the current  CS removed  the change.  He concluded  that the                                                                    
status quo was  maintained for credits and  company size. He                                                                    
stated that  the world of  cash, caps, and  thresholds would                                                                    
be limited  to Middle Earth  under the CS. He  detailed that                                                                    
Cook Inlet credits  were gone and North  Slope credits would                                                                    
be eliminated by the bill.                                                                                                      
                                                                                                                                
5:36:56 PM                                                                                                                    
                                                                                                                                
Mr. Alper moved  to slide 11 that contained  a graph showing                                                                    
effective tax  rates (the  amount of  taxes received  net of                                                                    
credits as  a percentage  of profit) on  legacy/non-GVR oil.                                                                    
The blue  line represented  current law  (SB 21).  He stated                                                                    
the  curve  to the  left  was  unusual; it  represented  the                                                                    
impact of the minimum tax -  where the company got closer to                                                                    
break even or  losing money, the tax rate  became higher. He                                                                    
highlighted that in the low $70  range (at the bottom of the                                                                    
point)  the net  profits tax  kicked in  and increased.  The                                                                    
jagged  nature of  the line  represented  the various  stair                                                                    
steps of  the per barrel  credit ($8 to $7  to $6 and  so on                                                                    
down to  zero). He explained  that the 35  percent statutory                                                                    
tax rate was  reached when the credit went to  zero at about                                                                    
$160 per barrel. The dotted  blue line represented SB 21 NOL                                                                    
rate  at a  range of  prices.  He detailed  that the  losses                                                                    
under SB 21 were always  earning at 35 percent, although the                                                                    
tax  rate was  much  lower. The  red  lines represented  the                                                                    
House Resources Committee  bill. The impact on  the left was                                                                    
the 5  percent minimum tax and  the impact on the  right was                                                                    
the $2  shift in the  stagger to  the per barrel  credit; it                                                                    
was a tax  increase across all price ranges  reverted to the                                                                    
35 percent curve much more  quickly. The value of losses was                                                                    
at about 17.5  percent, which related to the idea  of the 50                                                                    
percent carry forward.  He furthered that if  a company took                                                                    
half its losses,  carried them into a future  year, and used                                                                    
them  against  the  35  percent   tax  rate  -  it  was  the                                                                    
equivalent of a 17.5 percent NOL.                                                                                               
                                                                                                                                
Mr.  Alper continued  to explain  slide 11.  The green  line                                                                    
represented  the  current  CS;  it included  the  4  percent                                                                    
minimum tax  and should  overlap the blue  line on  the left                                                                    
side of the chart. The  large horizontal segment of the line                                                                    
at 25 percent reflected the  25 percent net profits tax that                                                                    
kicked in  at about $50 to  $55 per barrel and  went all the                                                                    
way to where the progressive  surcharge would start at about                                                                    
$100  per barrel.  The green  curve bending  upwards to  the                                                                    
right  represented the  weighted average  of the  40 percent                                                                    
tax for the high value and  the 25 percent tax for the first                                                                    
$60 of  value. He elucidated  that the line  closely tracked                                                                    
the status quo. The bill  was close to revenue neutral above                                                                    
oil  prices of  about  $100 per  barrel.  He explained  that                                                                    
because there  was no per  barrel credit distorting  the NOL                                                                    
rate between the value of a  loss and the value of a profit,                                                                    
the NOL  rate was the  same as the  profit rate -  meaning a                                                                    
company would get  their losses, presuming the  price of oil                                                                    
was less than $100, at the  25 percent rate; if the price of                                                                    
oil  exceeded $100  the  company would  cash  in its  losses                                                                    
(when  it  carried  them  forward) at  a  higher  rate  that                                                                    
related to the tax rate they  would be paying at that point.                                                                    
There was some parity on both sides of the equation.                                                                            
                                                                                                                                
5:40:44 PM                                                                                                                    
                                                                                                                                
Mr. Alper noted  he had an additional slide  not included in                                                                    
the  presentation  meant to  go  between  slides 11  and  12                                                                    
related to effective tax rates  for new/GVR oil. He intended                                                                    
to  address the  slide at  the end  of the  presentation. He                                                                    
addressed  a  line  graph  on  slide  12  related  to  total                                                                    
production tax revenue.  The red line represented  the SB 21                                                                    
status quo,  the green line represented  the House Resources                                                                    
Committee bill version, and the  purple line represented the                                                                    
current  CS. The  slide showed  a moderate  increase in  tax                                                                    
revenue between  oil prices of  $55 or  $60 to $90  or $100,                                                                    
with the greatest  impact around $80 per  barrel. He pointed                                                                    
to  the space  between the  purple  and red  lines at  those                                                                    
prices and explained  the difference was the  same in dollar                                                                    
value as the effective tax  rate curve between the green and                                                                    
red on slide  11. He noted that at higher  oil prices actual                                                                    
revenue came  in slightly lower  - there was a  crossover at                                                                    
around  $100  to $110  per  barrel.  He  stated that  at  $4                                                                    
billion  to $5  billion in  revenue at  very high  prices, a                                                                    
couple hundred  million could get  lost in the noise  of the                                                                    
underlying math - it was hard  to tell what was really going                                                                    
on.  Effectively, in  the  current  CS it  was  a minor  tax                                                                    
decrease at very high oil prices.                                                                                               
                                                                                                                                
5:42:31 PM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  if SB  21  also had  a $5  per                                                                    
barrel  credit before  it  had been  turned  into a  sliding                                                                    
scale.                                                                                                                          
                                                                                                                                
Mr. Alper  replied that there  were three primary  stages to                                                                    
SB  21.  The  original  version  introduced  by  the  former                                                                    
Parnell Administration  had been  a 25  percent tax  with no                                                                    
per  barrel credit.  The bill  version that  had passed  the                                                                    
Senate was  a 35 percent  tax with  a $5 per  barrel credit.                                                                    
The House  Resources Committee had  added the  sliding scale                                                                    
to replace the $5 [per barrel credit].                                                                                          
                                                                                                                                
Mr. Alper addressed the fiscal  note summary on slide 13. He                                                                    
explained  that  the  fiscal note  narrative  was  still  in                                                                    
transit, but  its tables were included  in the presentation.                                                                    
He highlighted that  the tax impact was  concentrated in the                                                                    
$55 to  $90 per  barrel price range;  it was  the difference                                                                    
between  35 percent  minus  the per  barrel  credit and  $25                                                                    
percent flat, which  was higher. The crossover  of the gross                                                                    
and net  tax moved  substantially lower,  from about  $74 to                                                                    
$55. He  returned to  slide 11 and  explained the  blue line                                                                    
(current  law) showed  a crossover  of the  minimum and  net                                                                    
taxes at  about $75  per barrel;  whereas, the  crossover in                                                                    
the  green line  was  at about  $50 to  $55  per barrel.  He                                                                    
returned to slide 13 and  added there was a comparably small                                                                    
revenue impact at high prices.                                                                                                  
                                                                                                                                
5:44:06 PM                                                                                                                    
                                                                                                                                
Mr. Alper  moved to slide  14 and addressed the  fiscal note                                                                    
summary related  to the  budget. He  stated that  tax credit                                                                    
bills  all  had two  halves:  1)  how  much money  would  be                                                                    
brought  in   because  of   the  tax   change  and   2)  how                                                                    
appropriations   were   changed.   He  detailed   that   the                                                                    
appropriations side related to  how many credits people were                                                                    
earning  and  how  much  the  state  would  be  required  to                                                                    
appropriate  to  purchase  the credits.  He  clarified  that                                                                    
because the bill came close  to eliminating cash credits, it                                                                    
would  result in  reduced spending.  The long-term  forecast                                                                    
was  for a  cash credit  demand  of about  $150 million  per                                                                    
year.  He noted  the estimate  was on  the low  end and  was                                                                    
based on  certain expectations of  known company  spending -                                                                    
it did  not include  the possibility of  some of  the larger                                                                    
multi-billion   projects/discoveries   moving  forward.   He                                                                    
stated that whatever the number,  it would be close to wiped                                                                    
out by  the bill - there  would no longer be  liabilities to                                                                    
buy  cash credits.  The associated  projects would  not come                                                                    
into  production  during  the   fiscal  note  period;  carry                                                                    
forwards  would  not  turn  into  offset  taxes  during  the                                                                    
timeframe  addressed  in the  fiscal  note.  He stated  that                                                                    
until a project was sanctioned,  and its life cycle modeling                                                                    
was generated,  it would be  difficult to see the  impact of                                                                    
the carry forwards.                                                                                                             
                                                                                                                                
Mr.  Alper  turned to  a  fiscal  note  table on  slide  15,                                                                    
showing  the  impact  at forecast  prices.  He  relayed  the                                                                    
information  would  be  included  in  the  fiscal  note.  He                                                                    
pointed  to a  blue row  on  the table  showing the  revenue                                                                    
impact  of the  25 percent  tax and  elimination of  the per                                                                    
barrel and sliding  scale credit - beginning  at $20 million                                                                    
in FY  18 through $100  million in  FY 21 and  continuing to                                                                    
increase in  later years to  over $300 million.  The revenue                                                                    
was projected to increase because  the higher forecasted oil                                                                    
price.  The  maximum  change  showed up  at  about  $80  per                                                                    
barrel.  Another  blue  row  near the  bottom  of  the  page                                                                    
represented  cash credits.  A  substantial  fraction of  the                                                                    
$150  million   forecasted  to  be  spent   on  credits  was                                                                    
disappearing ($130 million to  $135 million). The yellow row                                                                    
reflected the total  of the bill's fiscal  impact, which was                                                                    
relatively modest  in the short-term  and over  $400 million                                                                    
in the  out-years. He directed  attention to the  bottom row                                                                    
on table "change in year-end  balance due to proposal."  The                                                                    
item pertained  to carried forward  lease expenditures  - it                                                                    
was a  new concept. He  expounded that there  were currently                                                                    
no  carried forward  lease expenditures  other than  a small                                                                    
amount of carried forward losses  by major producers (the 14                                                                    
shown  in  the status  quo  in  FY  18). He  furthered  that                                                                    
without credits  companies would carry forward  their losses                                                                    
- in the future the state  would see $160 million in revenue                                                                    
lost (25  percent of $640  million) once the  companies were                                                                    
able  to  use the  carry  forward  credits to  offset  their                                                                    
production tax value.                                                                                                           
                                                                                                                                
5:48:16 PM                                                                                                                    
                                                                                                                                
Mr. Alper advanced  to slide 16 and addressed  a fiscal note                                                                    
table  showing  the  bill's  impact at  a  range  of  prices                                                                    
including the forecast, $20, $40,  $60, $80, $100, and $120.                                                                    
He noted  that slide 15  showed forecast prices -  the price                                                                    
was currently  $47 per barrel  and was projected at  $50 for                                                                    
the following  year and was  projected to increase  into the                                                                    
$70 to  $80 range  in out-years. He  elaborated that  an oil                                                                    
price of $20 per barrel  was difficult to model - especially                                                                    
when  sustained at  that price  -  because company  behavior                                                                    
would change,  and many  would stop  drilling wells  at that                                                                    
price  point. At  that price  everyone  operating in  Alaska                                                                    
would  be  losing money  and  large  operating loss  credits                                                                    
would be  earned. He noted  it was difficult  to contemplate                                                                    
the $20  per barrel scenario  ever happening. The  $60 price                                                                    
was closer  to the forecast  - it included a  certain amount                                                                    
of increased  taxes due to  the change  in tax rate  and per                                                                    
barrel credit, in addition to  the impact of the elimination                                                                    
of the credits.  He pointed out that the  fiscal impact came                                                                    
close to disappearing at oil  prices of $120 per barrel with                                                                    
the impact concentrating in the lower price ranges.                                                                             
                                                                                                                                
Mr.  Alper moved  to  a  slide separate  from  those in  the                                                                    
presentation  titled "Fiscal  Analysis: Effective  Tax Rates                                                                    
(New/GVR   oil)   (add  between   slides   11   and  12   of                                                                    
presentation)"  dated  April  7,  2017 (copy  on  file).  He                                                                    
pointed out  that the blue  line showing the status  quo and                                                                    
the  red line  showing  the House  Resources Committee  bill                                                                    
version  were  the same  beginning  at  $80 per  barrel.  He                                                                    
explained  that  GVR  oil  under current  law  paid  no  tax                                                                    
because  the per  barrel $5  credit could  go to  zero until                                                                    
around  $70 -  at  that point  there was  a  35 percent  tax                                                                    
reduced by  the GVR itself,  minus the $5 credit.  The curve                                                                    
increased  and  reached  a maximum  effective  tax  rate  of                                                                    
around 22 percent. The green  line, representing the current                                                                    
CS, came in higher at low  prices due to the hard floor, but                                                                    
lower at  high prices  because of the  25 percent  base rate                                                                    
(instead of  the 35  percent base rate).  He pointed  to the                                                                    
red  line and  noted the  higher  floor was  visible to  the                                                                    
left.  The minimum  tax curve  went  to $90,  which was  the                                                                    
impact of the  lower 25 percent tax with the  $5 credit. The                                                                    
curve  began increasing  again at  prices  between $100  and                                                                    
$105 per barrel because of the  25 percent net tax minus the                                                                    
$5 credit. There was a bit of  a bend in the curve where the                                                                    
progressive tax  kicked in above  $105. He pointed  out that                                                                    
the green line tapered up  and eventually caught up with the                                                                    
red and  blue line at  about $160 per barrel.  He elucidated                                                                    
that  although the  bill  raised  taxes on  GVR  oil at  low                                                                    
prices, it lowered taxes on GVR oil at high prices.                                                                             
                                                                                                                                
Representative Pruitt  asked when  DOR projected  oil prices                                                                    
would reach $75.                                                                                                                
                                                                                                                                
Mr.  Alper answered  that he  did not  believe the  forecast                                                                    
price of oil was moving  substantially over what had been in                                                                    
the fall.  He believed it  would be  in about three  or four                                                                    
years.                                                                                                                          
                                                                                                                                
Representative Pruitt  asked how  the recent rulings  by DOR                                                                    
concerning tax credits would be impacted by the bill.                                                                           
                                                                                                                                
Mr. Alper  believed Representative  Pruitt was  referring to                                                                    
the ordering  of credits advisory bulletin  he had mentioned                                                                    
earlier. He explained that the  issue raised in the bulletin                                                                    
had  to do  with the  interaction of  the per  barrel credit                                                                    
with other credits;  because the per barrel  credit would be                                                                    
eliminated  by  the  bill,  the issue  would  be  moot.  The                                                                    
advisory  bulletin also  related  to the  fact that  certain                                                                    
credits would  harden the  tax floor  while others  did not,                                                                    
and how  they would interact  with each other.  He explained                                                                    
that because  nearly all  credits were  hardened to  the tax                                                                    
floor in  the bill, it  would make  moot most of  the points                                                                    
raised in the advisory bulletin.                                                                                                
                                                                                                                                
5:54:27 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt   asked  about  credits   that  could                                                                    
potentially be  used in future  years. He asked if  the bill                                                                    
would impact  a company's ability  to use credits  in future                                                                    
years  since the  advisory bulletin  dealt with  more recent                                                                    
timeframes under  the current  tax structure  - prior  to HB                                                                    
111. One of the issues the  state was wrestling with was the                                                                    
$500  million   and  growing  pool  of   unpurchased  credit                                                                    
certificates largely  as subject  to the veto.  He continued                                                                    
that due to very low prices  and major producers were at the                                                                    
minimum tax,  it was difficult  for them  to be able  to buy                                                                    
any. The department was hoping  that prices would recover to                                                                    
the  point where  some head  room was  afforded to  give the                                                                    
ability to  purchase certain  credits, which  would recreate                                                                    
the  secondary market.  He believed  that ideally  "we'd all                                                                    
like that issue to go away as part of a broader solution."                                                                      
                                                                                                                                
Representative Pruitt asked about  the administration of the                                                                    
ring fencing.  He discussed that  currently taxpayers  had a                                                                    
consolidated return.  He asked how the  concept would impact                                                                    
the administration for the department and companies.                                                                            
                                                                                                                                
Mr. Alper shared that he  had a recent conversation with the                                                                    
supervisor of the production audit  group. He explained that                                                                    
companies already  reported their  expenses to the  lease or                                                                    
property  - the  department  already  received the  detailed                                                                    
information. The  bill added a  new section in  AS 43.55.030                                                                    
(taxpayer   reporting  requirements)   that   tied  to   the                                                                    
transparency section specifying  the department would create                                                                    
a report with the information  and release it to the public.                                                                    
He spoke  to the  importance of building  more functionality                                                                    
into  the department's  tax handling  software to  track the                                                                    
information. For  example, a company  may have  $300 million                                                                    
worth of  carry forwards, but  half were from one  field and                                                                    
half  were  from another  field  -  once the  company  began                                                                    
earning a  profit on the  fields the department  could track                                                                    
them. He  noted that  the department's software  was already                                                                    
robust, it would  merely need a new feature  added. He added                                                                    
that the department had included  a $1.2 million fiscal note                                                                    
to  account   for  substantial  programming  time   for  the                                                                    
contractor to build  in the various tax  changes. The number                                                                    
had not been  increased with the addition of  the ring fence                                                                    
feature.                                                                                                                        
                                                                                                                                
Representative  Pruitt  addressed  the auditing  aspect.  He                                                                    
stated  there  were  currently  various  scenarios  auditors                                                                    
faced  due  to  the  various   tax  regimes  the  state  had                                                                    
implemented in  throughout the past  six years.  He reasoned                                                                    
that  adding  another  tax  structure  would  bring  another                                                                    
challenge for  companies to  meet auditing  requirements. He                                                                    
wondered if there would be a need for additional auditors.                                                                      
                                                                                                                                
Mr. Alper  responded that the department  did not anticipate                                                                    
new  staff. There  was an  inherent  time lag  in the  audit                                                                    
process -  longer than he  was comfortable with.  He relayed                                                                    
that  DOR had  recently  completed the  series  of 2010  tax                                                                    
audits   (which  fell   within  the   six-year  statute   of                                                                    
limitations) - 2010  had been under the  ACES tax structure.                                                                    
He had  one group of  staff who  were leading up  the effort                                                                    
and  were fully  enmeshed in  all the  nuances of  ACES. The                                                                    
department also had other staff  concentrating on tax credit                                                                    
reviews  of   current  lease  expenditures   or  exploration                                                                    
credits for 2016, which fell under  the SB 21 tax system. He                                                                    
added that the group was  also beginning to get HB 247-based                                                                    
submissions  for review.  He expounded  that  his staff  was                                                                    
very capable and would adapt to the new regime.                                                                                 
                                                                                                                                
6:00:02 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt observed  that  the structure  facing                                                                    
DOR  auditors  was incredibly  complex.  He  thought at  one                                                                    
point  there had  been a  discussion  about simplifying  the                                                                    
process. He reasoned  that the bill would  add an additional                                                                    
and   different  layer   of  complexity   for  auditors   to                                                                    
understand.  He  asked  if  the   structure  would  be  more                                                                    
difficult for the state to administer.                                                                                          
                                                                                                                                
Mr. Alper  acknowledged that the ring  fence was complicated                                                                    
and would be  a challenge to administer. He  believed it was                                                                    
an  important  feature  if the  legislature's  goal  was  to                                                                    
create carry forwards. The feature  would ensure the state's                                                                    
interests were  protected from  carry forwards  leaking from                                                                    
project to  project. He stated  there were other ways  to do                                                                    
it. For example,  he had spoken to a  committee member about                                                                    
possible claw  backs where the  state could  recapture value                                                                    
if a field  changed hands. The preapproval  mechanism in the                                                                    
House  Resources Committee  version was  another option.  He                                                                    
underscored that  the department  could administer  the ring                                                                    
fence provision. He assumed there  would be some wrinkles in                                                                    
figuring out  how to  do it, but  that was  the department's                                                                    
job.                                                                                                                            
                                                                                                                                
6:01:38 PM                                                                                                                    
                                                                                                                                
Representative Pruitt remarked that  current oil prices were                                                                    
around $50 per  barrel and that Mr. Alper  had estimated the                                                                    
price would potentially  rise to $75 per barrel  in the next                                                                    
three to four  years. He referred to  the supplemental graph                                                                    
related to effective  tax rates for GVR  oil (royalties were                                                                    
not  included).  He noted  the  change  was substantial.  He                                                                    
referred to a  tax increase shown on the graph  and asked if                                                                    
the department  anticipated a  change in  attitude regarding                                                                    
investment decisions.                                                                                                           
                                                                                                                                
Mr. Alper replied  that he did not know  how companies would                                                                    
react to  what amounted to a  tax increase at prices  of $50                                                                    
or  $60 per  barrel. He  knew that  many producers  had been                                                                    
supportive of SB  21 as it had been  originally introduced -                                                                    
they  had preferred  it to  ACES. The  current bill,  across                                                                    
that range of prices, imposed  the original SB 21 structure.                                                                    
He stated that the bill  was worse on companies than current                                                                    
law  because of  the per  barrel credit,  which resulted  in                                                                    
lower taxes at $50 to  $60 per barrel. He believed companies                                                                    
would not  prefer the bill  because it was only  rational to                                                                    
want to  pay lower taxes.  He was not  in a position  to say                                                                    
whether   the  bill   would  impact   companies'  investment                                                                    
decisions.                                                                                                                      
                                                                                                                                
6:04:07 PM                                                                                                                    
                                                                                                                                
Representative   Wilson  asked   Mr.  Alper   to  list   the                                                                    
difference between the  current SB 21 tax  structure and the                                                                    
bill's tax structure.                                                                                                           
                                                                                                                                
Mr. Alper replied  that the overarching change  was that the                                                                    
bill  would eliminate  the concept  of cashable  tax credits                                                                    
for losses. He believed the  reason the legislation had been                                                                    
introduced  to deal  with the  long-term  liability of  cash                                                                    
credits. Beyond  that issue, the  bill changed the  tax rate                                                                    
and  per barrel  credit in  a way  that would  raise revenue                                                                    
during   a  certain   range  of   prices.  The   third  most                                                                    
substantial  change  was  the  increased  transparency  that                                                                    
would result from the bill  - much more information would be                                                                    
made public so that policy  makers and the public would know                                                                    
what was going on at a  particular oil patch. He stated many                                                                    
of the provisions would be  pushing up against the limits of                                                                    
taxpayer confidentiality.                                                                                                       
                                                                                                                                
6:06:01 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  referred   to  the  state's  current                                                                    
cashable tax  credit liability. She asked  for clarification                                                                    
on how many  credits the state would be liable  for that had                                                                    
not  been  included  in  the  appropriation  vetoed  by  the                                                                    
governor the previous year.                                                                                                     
                                                                                                                                
Mr. Alper answered that the  pool of January 1, 2017 credits                                                                    
was about $500  million and was an important  number to have                                                                    
because the regulations  had changed with the  passage of HB                                                                    
247. The next $500 million  appropriated would pay off those                                                                    
credits in pro rata share.  He continued that if the current                                                                    
legislature  appropriated $74  million  (the  number in  the                                                                    
House's  version  of  the   operating  budget),  roughly  15                                                                    
percent of  the January  1 liability would  be paid  off. He                                                                    
furthered that  if $400 million was  appropriated, companies                                                                    
would  receive  $0.80 on  the  dollar.  The issuance  of  an                                                                    
additional $500  million in  credits was  anticipated during                                                                    
2017. By the time the  bill's effective date was reached the                                                                    
liability would be about $1 billion.                                                                                            
                                                                                                                                
Representative  Wilson  referred to  a  tax  rate change  on                                                                    
higher  revenue. She  asked if  the change  occurred at  oil                                                                    
prices between  $60 to $85  per barrel. She asked  about the                                                                    
higher revenue range.                                                                                                           
                                                                                                                                
Mr. Alper addressed the change  in the current bill from the                                                                    
status quo. He  stated that under the  CS, increased revenue                                                                    
would occur  from the crossover  point from the  minimum tax                                                                    
at around  $50 to $55  per barrel up  to around $90  to $100                                                                    
per barrel.                                                                                                                     
                                                                                                                                
Co-Chair  Seaton remarked  there had  been a  statement made                                                                    
earlier that  the CS would eliminate  the competitive review                                                                    
board.  He  clarified  that  the bill  did  not  remove  the                                                                    
competitive review board.                                                                                                       
                                                                                                                                
Mr.  Alper  answered that  there  was  an amendment  to  the                                                                    
competitiveness review  board sections  to conform  with the                                                                    
elimination of  the 30  percent GVR.  He confirmed  that the                                                                    
competitiveness review board would remain in place in law.                                                                      
                                                                                                                                
6:08:52 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton asked Mr. Alper  to address cashable credits                                                                    
and efforts  to eliminate  them. He  asked for  detail about                                                                    
the  components needed  due to  the elimination  of cashable                                                                    
credits, such  as carried  forward NOLs  and the  ring fence                                                                    
provision.                                                                                                                      
                                                                                                                                
Mr. Alper  responded that the bill  would eliminate cashable                                                                    
credits.  He explained  that companies  would hold  onto the                                                                    
value for use  against future taxes. He  stated that without                                                                    
any further  change, the action would  preserve the existing                                                                    
distortion between the  nominal 35 percent tax  rate and the                                                                    
tax  rate companies  actually paid.  He  continued that  the                                                                    
bill's change to  the 25 percent tax rate  had been designed                                                                    
to  clean  up  the  discrepancy.   Although  it  was  not  a                                                                    
mandatory change  to get out  of the cash  credits business,                                                                    
it  resolved  the  remaining  factor.  He  detailed  that  a                                                                    
possible  leakage   of  credits  was  created.   There  were                                                                    
multiple  ways  to deal  with  the  problem. He  provided  a                                                                    
scenario where  a company spent $1  billion and subsequently                                                                    
decided the  project was  a failure.  He questioned  how the                                                                    
company  would reclaim  value  for the  loss.  The dry  hole                                                                    
credit, which had been in a  previous version of HB 111, was                                                                    
one way  to address  the problem. He  explained that  if the                                                                    
state  was  not  cashing  out  credits,  the  company  could                                                                    
potentially  sell its  investment for  $0.05 on  the dollar,                                                                    
but the company purchasing  the investment could potentially                                                                    
use  the  carried  forward  credits  to  offset  profits  on                                                                    
another one  of its  fields. He  explained that  the ability                                                                    
for the  situation to  occur was way  outside the  intent of                                                                    
the law,  but it would be  viable if the ring  fence was not                                                                    
included in the CS.                                                                                                             
                                                                                                                                
Mr.  Alper  continued  that  there  were  other  options  to                                                                    
address the  problem. He  did not  personally have  a strong                                                                    
preference  about the  option  selected,  but he  emphasized                                                                    
that  the issue  was a  problem and  something needed  to be                                                                    
done to prevent the leakage of  value from field to field to                                                                    
protect the  state's long-term interest.  The state  did not                                                                    
want the  taxes from major  producers to be lost  because of                                                                    
another  company's failed  project  in another  part of  the                                                                    
North Slope.  He stated that  the pieces were  interlinked -                                                                    
when one  problem was solved,  the next problem  became more                                                                    
visible.  How  far  the  committee  wanted  to  go  was  the                                                                    
decision  of the  committee. He  agreed with  Representative                                                                    
Wilson's   earlier  observation   that  the   bill  made   a                                                                    
substantial  change   to  the  underlying  tax   system.  He                                                                    
questioned whether  it was  worth solving  numerous problems                                                                    
at the  same time while  making changes to the  tax statutes                                                                    
or if the  legislature only wanted to solve  the one largest                                                                    
problem, while leaving  other problems for a  later year. He                                                                    
stated  that the  question ultimately  became the  choice of                                                                    
the legislature.                                                                                                                
                                                                                                                                
Co-Chair  Seaton  referred to  the  ring  fencing and  other                                                                    
aspects of  the bill.  He had foreseen  that there  would be                                                                    
less push  to develop a  field if NOLs could  be transferred                                                                    
when a  field was under  development was purchased  and used                                                                    
by  another  company for  another  location.  He provided  a                                                                    
scenario where a  project's internal rate of  return was not                                                                    
sufficient  for  one company  to  pursue,  but it  could  be                                                                    
profitable.                                                                                                                     
                                                                                                                                
[Note: power outage caused computer shutdown.]                                                                                  
                                                                                                                                
6:13:38 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
6:18:42 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Seaton spoke to the  state's goal of trying to push                                                                    
fields  into   production  by  offering   credits,  cashable                                                                    
credits,  and other  incentives. He  reiterated his  concern                                                                    
that switching  from credits to  carry forward  losses could                                                                    
mean  a company  could  sell  [a field]  and  make its  NOLs                                                                    
available for the purchasing company  to use against another                                                                    
property -  it may  be more  advantageous to  the purchasing                                                                    
company than moving  into production on the  field. He asked                                                                    
if  there  were  alternatives  to ring  fencing  that  would                                                                    
encourage projects to move forward into production.                                                                             
                                                                                                                                
                                                                                                                                
Mr.  Alper replied  that if  a  company was  stuck with  not                                                                    
getting value  back until a  project moved  into production,                                                                    
perhaps  on the  margins a  company may  be incentivized  to                                                                    
push forward even  if the rates of return  were not stellar.                                                                    
He considered that if the  carry forwards were sellable to a                                                                    
company working  someplace else it  may create  an incentive                                                                    
to  never  bring  a  field   into  production.  The  counter                                                                    
argument would be  that the state was  creating something of                                                                    
less  value  because they  were  shackling  a company  to  a                                                                    
lease. He  surmised that  it may  be true, but  it may  be a                                                                    
good  idea. The  idea was  that if  the state  was going  to                                                                    
provide  a benefit,  it  should not  be  provided until  the                                                                    
state  knew  it  was  going towards  producing  oil  in  the                                                                    
location the  benefit was  being received.  He did  not know                                                                    
all  the  ways  to  accomplish the  goal;  there  were  many                                                                    
sophisticated and  modern ways  to incentivize new  oil, but                                                                    
Alaska was  not a production sharing,  contract jurisdiction                                                                    
- it was  not doing a full field ring  fence. The ring fence                                                                    
was a relatively mild version  of a separation from field to                                                                    
field, but  it would  force a  company to  get a  field into                                                                    
production if they wanted to get their value back.                                                                              
                                                                                                                                
6:21:42 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  referred  to the  DOR  fall  revenue                                                                    
forecast  and  the  increase  in  oil  production  that  had                                                                    
occurred since the  passage of SB 21.  She believed everyone                                                                    
understood  there  were  issues with  the  cashable  credits                                                                    
because the  state had  not paid  them on  time like  it was                                                                    
supposed to.  She remarked that  the state now owed  a debt.                                                                    
She believed it  appeared the "sweet spot"  had been located                                                                    
given  the increased  oil production.  She  thought it  made                                                                    
sense  to take  care of  the  major problem  - the  cashable                                                                    
credits -  before making any  more changes that  could cause                                                                    
production to  decrease again by around  3 percent annually.                                                                    
She believed  it was  the first  time in  a long  time where                                                                    
production had increased.                                                                                                       
                                                                                                                                
Mr. Alper was not advocating for  any bill or what needed to                                                                    
be included.  He observed that  getting out of  the cashable                                                                    
credit business  appeared to be  a near  consensus priority.                                                                    
At that point it came down  to how to implement the change -                                                                    
there  were  certain  questions that  arose,  such  as  what                                                                    
happened  to carry  forwards, who  could  use them,  whether                                                                    
they were transferable,  and what they should  be valued at.                                                                    
There  were pro  and  con  policy reasons  for  many of  the                                                                    
questions. He referred to the  progressivity in the tax code                                                                    
that created  lower effective tax  rates than  statutory tax                                                                    
rates so carry  forwards were worth 35 percent  when the tax                                                                    
was less. He  stated that the questions did not  need to get                                                                    
resolved  at present,  but they  could be.  He did  not know                                                                    
whether the  items would  damage the  state's standing  as a                                                                    
competitive entity  versus some other change.  He understood                                                                    
the concern and  agreed it was an important  debate to have.                                                                    
He continued that once the  one problem was solved, the next                                                                    
problem  was evident.  The question  was whether  to address                                                                    
the  next problem  at present  or  save it  until later.  He                                                                    
reasoned  that if  the  problem was  saved  until later  the                                                                    
state would  get accused of  changing oil taxes  eight times                                                                    
instead of seven times.                                                                                                         
                                                                                                                                
Representative Wilson countered that  the current system was                                                                    
working.  She remarked  that someone  may disagree  with her                                                                    
statement. She noted that DOR  compiled the revenue book and                                                                    
assumed it  was honest in  its depiction of the  increase in                                                                    
oil production. She elaborated it  was about 100,000 barrels                                                                    
off compared to actual production.  She stated it was a fact                                                                    
that there was more oil  currently coming down the pipeline.                                                                    
She underscored  there had been substantial  concern about a                                                                    
decrease in oil  production when SB 21  was implemented. She                                                                    
believed everyone could  agree on the goal  of increased oil                                                                    
production. She  referred to the  current issue  that needed                                                                    
solving.  She acknowledged  there may  or may  not be  other                                                                    
problems. However, she stressed that  oil was the number one                                                                    
income provider to  the state. She supported  taking care of                                                                    
the one issue.  She agreed that the legislature  may have to                                                                    
consider the  tax system again  anyway because the  bill may                                                                    
result in a  3 percent decrease in production.  She asked if                                                                    
the scenario was a possibility.                                                                                                 
                                                                                                                                
Mr.  Alper replied  that he  did  not want  to downplay  the                                                                    
importance of the  increase in production. He  stated it was                                                                    
important  to recognize  that when  the  debate had  started                                                                    
over  PPT  (11 years  earlier),  production  had been  about                                                                    
800,000 barrels per day and  there had been a steady decline                                                                    
since that  time. He furthered  that a couple of  new fields                                                                    
had come  online. Additionally, there were  some smaller new                                                                    
fields  actively  under  development  that  could  hopefully                                                                    
offset the natural  decline of the other  fields. There were                                                                    
also  the  bigger  discoveries   such  as  Conoco's  Royale,                                                                    
Armstrong's  Pikka,  and  Caelus's  Smith  Bay.  The  bigger                                                                    
discoveries would  be the ones  to reverse the  direction of                                                                    
the  North Slope.  He explained  that if  the state  were to                                                                    
continue  to pay  75 percent  of companies'  costs it  could                                                                    
probably guarantee a  lot of that production,  but the state                                                                    
would not be receiving any  value for it. He recognized that                                                                    
production  was  essential, but  the  state  also needed  to                                                                    
receive revenue. He  remarked that it was not  merely a jobs                                                                    
program  -  the  state  required  revenue  to  operate.  The                                                                    
balance was to  produce revenue for the state  and not drive                                                                    
producers away. The  goal was to ensure that  what the state                                                                    
spent on the industry was in  line with the benefit it hoped                                                                    
to receive  at the back end.  He did not know  whether there                                                                    
was  a  specific  sweet  spot  and  whether  it  existed  at                                                                    
present. He reasoned that if  the cost of the flattening was                                                                    
billions  of  dollars  of  future  liability,  a  correction                                                                    
probably needed to occur. He  did not have sufficient detail                                                                    
to  conclude  for certain.  He  noted  that everyone  had  a                                                                    
different opinion.                                                                                                              
                                                                                                                                
Representative Wilson  agreed that  everyone had  an opinion                                                                    
on  what  should  or  should   not  be  done;  however,  she                                                                    
emphasized  that production  was up  at present  and changes                                                                    
made  by the  legislature in  the next  several weeks  could                                                                    
change that.  She believed  it was  important to  include in                                                                    
the discussion.  She wanted the  public to  understand there                                                                    
was  a way  to  take  care of  the  cashable credits,  while                                                                    
keeping SB 21  intact, and to keep development  moving in an                                                                    
upward  direction. She  opined that  if changes  (other than                                                                    
the elimination  of the cashable  credits) were made  in the                                                                    
legislation, some projects may not  come online. She did not                                                                    
want to  lose sight of  how much  the state had  gained. She                                                                    
did  not want  to get  greedy -  the state  received revenue                                                                    
from  production  tax  and  royalties  that  went  into  the                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
Mr. Alper  responded that the status  quo was unsustainable,                                                                    
which  he believed  everyone accepted.  It was  important to                                                                    
recognize that  companies working  in Alaska also  knew that                                                                    
the  status quo  was  unsustainable. He  furthered that  the                                                                    
companies  the state  hoped would  move forward  and produce                                                                    
large  fields  knew that  the  35  percent and  higher  cash                                                                    
credits were  not viable [for  the state]. He  stressed that                                                                    
the companies  needed to  know what the  system would  be to                                                                    
make  investments in  good conscience.  He  stated that  the                                                                    
companies could not invest under  the belief that the status                                                                    
quo would  be in  place for  the next  10 years,  because it                                                                    
would not be; the state  could not afford it. He recommended                                                                    
settling  on   a  decision  for  companies   to  make  their                                                                    
decisions.                                                                                                                      
                                                                                                                                
Representative Wilson thought  companies would appreciate it                                                                    
because  the  state had  yet  to  be  able  to settle  on  a                                                                    
decision.                                                                                                                       
                                                                                                                                
Vice-Chair  Gara   asked  for  DOR  to   come  prepared  the                                                                    
following day to  address the issue of fields  that had come                                                                    
online  since  the  passage  of  SB  21.  He  remarked  that                                                                    
legislators   had   differing   opinions  about   when   the                                                                    
investment  had  begun.  He  was  interested  in  the  Point                                                                    
Thomson  and  CD5  fields   specifically.  He  believed  the                                                                    
commitments on the two fields had occurred prior to SB 21.                                                                      
                                                                                                                                
Mr. Alper  answered that  CD5 had  been in  the works  for a                                                                    
long time;  there had  been some  delays related  to federal                                                                    
permitting. The  Point Thomson settlement had  been in 2012.                                                                    
He elaborated  that producers that  know the issue  well had                                                                    
testified to  the committee that  they had  made commitments                                                                    
to  the projects  since the  passage of  SB 21.  He remarked                                                                    
that  it was  hard  to say  - the  internal  process of  all                                                                    
companies  was   different  and  took  multiple   years.  He                                                                    
believed  companies  had been  hoping  for  a tax  reduction                                                                    
package  and once  it  happened they  wanted  to show  their                                                                    
satisfaction.  He  stated  there  was no  way  to  determine                                                                    
absolutely "what is because of  something else." He hoped to                                                                    
be only a spectator during the meeting the following day.                                                                       
                                                                                                                                
Representative  Pruitt  asked  if   Mr.  Ruggiero  would  be                                                                    
available to testify the following day.                                                                                         
                                                                                                                                
Co-Chair  Foster  replied  that   staff  had  contacted  Mr.                                                                    
Ruggiero  who  had  replied  that he  was  not  prepared  to                                                                    
testify.                                                                                                                        
                                                                                                                                
[Note: power  outage caused  computer shutdown.  The meeting                                                                    
recessed until the following day at 1:00 p.m.]                                                                                  
                                                                                                                                
HB  111  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Foster relayed the meeting would recess until the                                                                      
following day when the committee would hear amendments to                                                                       
HB 111 [see April 8, 2017 1:00 p.m. minutes for detail].                                                                        
                                                                                                                                
RECESSED                                                                                                                      
6:31:57 PM                                                                                                                    
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
CSHB 111 Comparison ver. M.pdf HFIN 4/7/2017 1:30:00 PM
HB 111
HB 111 - CS WorkDraft Bill ver M.pdf HFIN 4/7/2017 1:30:00 PM
HB 111
HB111CS(FIN) - DOR Presentation - 4.7.17.pdf HFIN 4/7/2017 1:30:00 PM
HB 111
DOR Present4a HB111 Reaction to HFIN CS 4-7-17.pdf HFIN 4/7/2017 1:30:00 PM
HB 111
HB 111 4.7.17 Gara Oil Tax Documents for Distribution.PDF HFIN 4/7/2017 1:30:00 PM
HB 111
HB111 - Supporting (040617).pdf HFIN 4/7/2017 1:30:00 PM
HB 111
HB111 - Opposing (040617).pdf HFIN 4/7/2017 1:30:00 PM
HB 111