Legislature(2017 - 2018)HOUSE FINANCE 519

06/07/2017 01:30 PM FINANCE

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01:34:32 PM Start
01:35:06 PM Presentation: Oil & Gas Tax Fiscal Overview Related to Hb 111: Fiscal Impact Comparison by the Department of Revenue
01:35:14 PM HB111
04:27:46 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Oil & Gas Tax Fiscal Overview TELECONFERENCED
On the topic contained within - HB 111: Oil & Gas
Production Tax; Payments; Credits
- Fiscal Impact Comparison, Dept. of Revenue
HOUSE BILL NO. 111                                                                                                            
     OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                                  
1:35:14 PM                                                                                                                    
Co-Chair Foster reviewed the meeting agenda.                                                                                    
Representative  Wilson  noted  it  was  unusual  to  hear  a                                                                    
presentation related  to a bill  that had been  reported out                                                                    
of the committee and was currently in conference committee.                                                                     
Co-Chair Foster  replied the  intent was  to let  the public                                                                    
know about the differences in the bill.                                                                                         
Vice-Chair  Gara thought  it was  important  to correct  any                                                                    
misapprehension legislators  may have  about the  content of                                                                    
both bill versions.                                                                                                             
Representative Wilson  had no  problem with  receiving extra                                                                    
information.  She  wanted  the   public  to  understand  any                                                                    
changes  to the  bill would  occur in  conference committee.                                                                    
She  referred  to back  up  in  the committee's  folder  and                                                                    
remarked that  the data  was from  the spring  forecast. She                                                                    
requested updated information.  She referenced Caelus Energy                                                                    
and  asked  whether  the commissioner  could  address  their                                                                    
Co-Chair  Foster underscored  that  the  meeting was  purely                                                                    
Co-Chair  Seaton  confirmed  that   no  changes  were  being                                                                    
proposed in the committee, as  those were the purpose of the                                                                    
conference committee. The meeting  will help the legislature                                                                    
understand the  parameters of  the different  bill versions.                                                                    
The committee  would not be  discussing any  negotiations or                                                                    
changes   that  would   be  addressed   by  the   conference                                                                    
Co-Chair Foster added that the  presentation consisted of 17                                                                    
1:39:50 PM                                                                                                                    
Representative  Pruitt  noted  that  all  of  the  committee                                                                    
members  had   dealt  with  the  bill   previously.  He  was                                                                    
concerned that conference committee had  not yet met and the                                                                    
finance committee was having a  discussion about the content                                                                    
of  the conference  committee. He  added  that no  committee                                                                    
members were part of the conference committee.                                                                                  
Co-Chair Foster acknowledged  Representatives Sam Kito, Andy                                                                    
Josephson,  Justin   Parish,  Dave  Talerico,   Chuck  Kopp,                                                                    
Charisse  Millett, Ivy  Spohnholz,  and Dan  Saddler in  the                                                                    
Representative Guttenberg had been  told the Senate had made                                                                    
considerable changes  to HB  111, but he  had not  read that                                                                    
bill version.  He hoped  to gain  a better  understanding of                                                                    
the  changes  and  believed the  current  meeting  would  be                                                                    
1:42:32 PM                                                                                                                    
Representative Wilson  wanted to ensure the  public realized                                                                    
that the legislators had voted  to concur or not concur with                                                                    
the  Senate's  version. She  believed  the  majority of  the                                                                    
legislators  had made  sure they  knew the  facts about  the                                                                    
bill before voting on the House floor.                                                                                          
Vice-Chair  Gara agreed  that the  hope was  all legislators                                                                    
had  read  the  bill.  However,  he  had  learned  that  all                                                                    
legislators did not  know about the reduction in  oil tax or                                                                    
the added $1.4 billion in credits in the Senate version.                                                                        
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
clarified  the  presentation  predated a  recent  compromise                                                                    
proposed by the  governor. The department had  been asked to                                                                    
do a  comparison between  the House  and Senate  versions of                                                                    
the  legislation.  The   administration  intended  to  avoid                                                                    
policy  discussions, which  were  under the  purview of  the                                                                    
conference committee. The  presentation would simply present                                                                    
the technical details of both bill versions.                                                                                    
1:45:32 PM                                                                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
provided a  PowerPoint presentation titled  "New Sustainable                                                                    
Alaska Plan,  Pulling Together to  Build Our Future:  HB 111                                                                    
Oil and  Gas Production Tax/Tax Credits  Comparison of House                                                                    
and Senate Versions"  dated June 2, 2017 (copy  on file). He                                                                    
outlined that  there were two sections  of the presentation;                                                                    
one  detailing  the  fiscal  impacts   and  the  second  the                                                                    
differences between  the two versions. He  stated there were                                                                    
three main things to focus  on when examining the changes in                                                                    
the  legislation versions.  The  first  change regarded  the                                                                    
actual  taxes paid  to  the state,  the  second the  state's                                                                    
obligations  to credit  payments, and  the third  change was                                                                    
the concept of carried forward  value. He provided a summary                                                                    
of fiscal  impacts on  slide 3  "Summary of  Fiscal Impacts:                                                                    
Comparative Fiscal Note Analysis - Tax."                                                                                        
1:47:23 PM                                                                                                                    
Mr.  Alper   indicated  the  chart  showed   a  side-by-side                                                                    
comparison of the House and  Senate bill versions of HB 111.                                                                    
The bills were  most different in how  they treated revenue,                                                                    
primarily because  the Senate version did  not substantially                                                                    
modify the  underlying SB  21 [oil  and gas  production tax,                                                                    
28   Legislature]  tax  system,  whereas the  House  version                                                                    
changed the base tax rate from  35 percent to 25 percent and                                                                    
eliminated  the  sliding  scale  credit.  The  graph  showed                                                                    
forecasts for FY  19, FY 22, and FY 25,  tied to assumptions                                                                    
from the  spring revenue forecast  on price  and production.                                                                    
There were some small negative  numbers shown related to the                                                                    
Senate  bill, but  he cautioned  not to  get too  fixated on                                                                    
those  numbers.  He  detailed  that  those  represented  the                                                                    
elimination of  cash credits.  He provided  an example  of a                                                                    
small oil project (Mustang) coming  into production in 2022,                                                                    
under  the Senate  bill they  would  have a  suite of  carry                                                                    
forwards that would be used  to offset taxes, and that would                                                                    
appear  on the  fiscal  note  as a  small  reduction in  tax                                                                    
revenue for  the state,  however, it  was more  than counter                                                                    
matched on  the state's  outlay that was  not paid  out. The                                                                    
House numbers showed  positive revenue which had  to do with                                                                    
getting  rid   of  the  per  barrel   credit  which  brought                                                                    
everything to the  25 percent base tax rate.  The effect tax                                                                    
rate below  $100 per  barrel was below  25 percent  once the                                                                    
sliding scale per barrel credit was accounted for.                                                                              
1:49:28 PM                                                                                                                    
Mr. Alper  turned to  slide 4:  "Summary of  Fiscal Impacts:                                                                    
Effective  Tax   Rates  -  'Legacy'   Oil."  The   red  line                                                                    
represented  the status  quo which  was ACES,  and also  the                                                                    
Senate bill which  did not change ACES. The line  went up to                                                                    
35 percent  at the  end, showing the  effective tax  rate at                                                                    
very high  prices when the sliding  scale went to zero.   As                                                                    
the  per barrel  credit went  from $1  to $8  to eight,  the                                                                    
stair step  of the effective  tax rate steps down  to around                                                                    
ten percent  at the $70  to $80  per barrel price.  At lower                                                                    
prices the minimum tax kicked  in and the four percent floor                                                                    
would become a higher and  higher percentage of profits, and                                                                    
the  effective tax  rate would  get higher.  The dotted  red                                                                    
line  represented  the net  operating  loss  (NOL) or  carry                                                                    
forward loss rate of status  quo. Regardless of the tax rate                                                                    
companies were paying, they received  35 percent benefit for                                                                    
losses with  which to  offset taxes.  The per  barrel credit                                                                    
was eliminated in  the House bill. There was  no dotted blue                                                                    
line,  only the  solid  blue line.  The  effective tax  rate                                                                    
remained  25 percent  until the  progressive tax  feature of                                                                    
the  House  version for  profits  of  greater than  $60  per                                                                    
barrel, or  $100 per  barrel oil  prices, were  reached. The                                                                    
triangle-shaped area between the  red and blue lines between                                                                    
$50 and  $100 per barrel  reflected the tax increase  in the                                                                    
House version of the bill.                                                                                                      
Vice-Chair Gara referred  to the red line  and asked whether                                                                    
it represented the  percentage of profits paid  by a company                                                                    
in production tax.                                                                                                              
Mr. Alper replied in the affirmative.                                                                                           
Vice-Chair Gara  stated that current  prices were  about $50                                                                    
per  barrel, but  below $70  per barrel  the state  was only                                                                    
getting 4  percent tax because  the profits tax rate  was so                                                                    
Mr.  Alper  answered in  the  affirmative.  He detailed  the                                                                    
actual  tax calculation  was two  calculations in  parallel.                                                                    
One was the  35 percent tax minus the per  barrel credit ($8                                                                    
at low  prices), if  that number is  less than  gross value,                                                                    
then four percent of gross value was what was paid.                                                                             
Vice-Chair  Gara referred  to mention  of a  35 percent  tax                                                                    
that would  not be paid  until oil reached $160  per barrel,                                                                    
which had never been reached to date.                                                                                           
Mr.  Alper  answered  in  the   affirmative,  that  the  tax                                                                    
calculation  was 35  percent,  but was  reduced  by the  per                                                                    
barrel  credit that  lead to  an  actual tax  rate that  was                                                                    
always less than 35 percent except at very high prices.                                                                         
Vice-Chair  Gara spoke  to the  revenue in  taxes. He  noted                                                                    
that the Senate version  would reduce production tax revenue                                                                    
compared to  current law  by $15 million  by 2020.  He asked                                                                    
for verification and a reason why this would be the case.                                                                       
Mr. Alper  replied that  the small  negative numbers  in the                                                                    
Senate bill had  to do with reclassifying  of spending which                                                                    
would have  been paid  as credits. A  small portion  of that                                                                    
would be  used by companies  to offset their own  taxes. The                                                                    
savings to the state of not  paying out those credits in the                                                                    
Senate version  was greater  than the  tax decrease,  but it                                                                    
did show up as a small tax decrease.                                                                                            
Vice-Chair  Gara stated  this  regarded legacy  oil and  the                                                                    
higher tax  rates. He noted there  was a lower tax  rate for                                                                    
other fields. Under the Senate  proposal, for the higher tax                                                                    
rate there  is nothing  beyond the 4  percent minimum  on an                                                                    
average North Slope field until around $72 per barrel.                                                                          
Mr. Alper  replied that  the Senate  version did  not change                                                                    
the status  quo. The current  crossover between  the minimum                                                                    
tax and the net profits tax was around $73 per barrel.                                                                          
1:55:13 PM                                                                                                                    
AT EASE                                                                                                                         
1:56:07 PM                                                                                                                    
Representative  Wilson  thanked Representative  Saddler  for                                                                    
providing her with  a question. She asked what  the graph on                                                                    
slide 4 would  look like if the  companies were represented.                                                                    
Currently the companies kept less  than what the state took.                                                                    
She wondered  how much more of  a profit the state  would be                                                                    
Mr. Alper  answered that it  was important to  remember that                                                                    
production tax  was only  one of  four state  tax mechanisms                                                                    
that  the  state  received  from  oil  companies.  Currently                                                                    
companies  would   have  to  pay  the   state  royalty,  the                                                                    
production tax, corporate income  tax, property tax, and the                                                                    
federal corporate income tax.  The company percentage tended                                                                    
to increase  as the price  went up. The government  take was                                                                    
greater  than 50  percent and  certainly what  the companies                                                                    
were keeping was less than half the profits.                                                                                    
Representative Wilson  referred to  slide 3 and  asked which                                                                    
prices were referred to in 2019, 2022 or 2025.                                                                                  
Mr. Alper  replied that he  did not have precise  numbers on                                                                    
hand;  by order  of magnitude  the  forecast for  FY 19  was                                                                    
around $55, FY 22 looked at prices  of $60 and FY 25 at $70.                                                                    
He referred  to the graph on  slide 4 shows the  maximum gap                                                                    
between the two  versions. The tax increase  embedded in the                                                                    
House version hit its maximum around the $70 oil price.                                                                         
Representative Wilson  asked if  they just  discussed price,                                                                    
not volume forecasts.                                                                                                           
Mr.  Alper  replied that  the  forecast  volume decline  was                                                                    
approximately   four  percent.   Slow   steady  decline   in                                                                    
production was predicted in the  forecast. By 2025 it was in                                                                    
the low  400,000 barrel  volume area.  None of  the proposed                                                                    
large projects were built into the forecast at present.                                                                         
Representative Wilson  noted the discussion had  occurred in                                                                    
the past. She  remarked that in the past two  years they had                                                                    
not seen the 4 percent  decrease, but an increase. She asked                                                                    
how  the numbers  on slide  3 would  change if  actuals were                                                                    
used for 2017.                                                                                                                  
Commissioner Hoffbeck  answered that  the average  price for                                                                    
FY  17 was  currently running  about $0.50  less per  barrel                                                                    
than the  forecast. It  was expected  the fiscal  year would                                                                    
end  up  there.  Production  was currently  5,000  to  6,000                                                                    
barrels per day above  the forecast. However, currently they                                                                    
were seeing  standard seasonal declining production.  It was                                                                    
expected  to be  slightly  higher than  forecast, by  around                                                                    
3,000 to 5,000 barrel a day.                                                                                                    
Representative  Wilson asked  whether production  was around                                                                    
544,000  barrels per  day  currently. Commissioner  Hoffbeck                                                                    
answered it  would be  close to that  figure in  the current                                                                    
Representative Wilson stated it was  not 4 percent less than                                                                    
what  they  had. She  understood  using  forecasts but  felt                                                                    
using specific numbers was  helpful. She liked presentations                                                                    
to reflect both.                                                                                                                
2:02:02 PM                                                                                                                    
Representative Ortiz  referred to slide  4 and to  the price                                                                    
drop to $70  barrels followed by a slight  increase with the                                                                    
hardening of the floor.                                                                                                         
Mr. Alper  replied it  was the existence  of a  floor rather                                                                    
than its hardening or not.                                                                                                      
Representative  Ortiz asked  if  the tax  floor was  equally                                                                    
hardened by both versions of the bill.                                                                                          
Mr. Alper replied  in the affirmative. The  NOL credit would                                                                    
be  eliminated;  it  would  become  simply  carried  forward                                                                    
losses. NOL credits can be  used in certain circumstances to                                                                    
reduce tax payments below the  minimum tax. They were earned                                                                    
one  year  and  used  in  the following  year.  Due  to  the                                                                    
elimination,  companies  would  be   compelled  to  pay  the                                                                    
minimum  tax under  either  version of  the  bill that  they                                                                    
would not under the status  quo. Under either version of the                                                                    
bill, the floor would be hardened.                                                                                              
Representative  Pruitt  referred  to  slides 4  and  5  that                                                                    
addressed  tax  rates.  He discussed  a  conversation  about                                                                    
credits. He asked for verification  that the only reason the                                                                    
slides were  included were due  to the House version  of the                                                                    
bill.  He clarified  that  the Senate  version  of the  bill                                                                    
pertained to oil and gas  credits, whereas the House version                                                                    
also related to taxes.                                                                                                          
2:04:58 PM                                                                                                                    
Mr.  Alper believed  the statement  was  reasonable. He  had                                                                    
referred to  three types  of impacts  embedded in  the bill:                                                                    
tax,  credit, and  carry-forward  impacts.  The tax  impacts                                                                    
were  concentrated in  the  House version  of  the bill.  He                                                                    
would not  go as far as  to say the Senate  version included                                                                    
no  tax  impacts.  It  included  minor  changes  related  to                                                                    
interest rates  and hardening the  floor. For the  most part                                                                    
the  presentation was  to present  contrasts  to the  status                                                                    
quo, which was the Senate version of the bill.                                                                                  
Vice-Chair  Gara  asked  Commissioner Hoffbeck  whether  his                                                                    
projection  was that  prices would  be  slightly lower  than                                                                    
forecast.  He asked  whether he  was  saying there  was a  4                                                                    
percent decline.                                                                                                                
Commissioner Hoffbeck  clarified that he had  not brought up                                                                    
the 4 percent.  He elaborated that a 3 percent  to 4 percent                                                                    
decline was  embedded in the  forecast, but May  [2017], the                                                                    
most  recent completed  month, was  currently three  percent                                                                    
higher  than the  previous  year. A  downturn  was about  to                                                                    
begin.  Additionally,  a   maintenance  turnaround  had  not                                                                    
occurred the preceding year. There  would most likely be one                                                                    
in  the current  year, which  would mean  substantially less                                                                    
production  in  the early  months  of  the following  fiscal                                                                    
year. Large  fields, once they  peaked, usually  presented a                                                                    
fairly predictable  decline. There was no  assumption in the                                                                    
forecast that the fields had  bottomed out. The fields would                                                                    
continue to decline.                                                                                                            
Vice-Chair  Gara observed  that  the blue  line  on slide  4                                                                    
represented  the House  version of  the bill.  He asked  for                                                                    
confirmation  that  the 25  percent  tax  rate was  only  on                                                                    
Mr. Alper  replied that  the 25 percent  was on  profits. He                                                                    
pointed to a hook on the graph  at the end at the $50 point.                                                                    
It indicated  where the  minimum tax would  kick in.  In the                                                                    
House bill the cross-over point  between minimum tax and net                                                                    
tax  moved from  $73 or  $74 to  about $50  per barrel.  The                                                                    
state's 4  percent piece would  still be there, but  only at                                                                    
very low prices.                                                                                                                
2:09:31 PM                                                                                                                    
Vice-Chair  Gara stated  that  a number  of legislators  had                                                                    
agreed that  in the  former tax  system, Alaska's  Clear and                                                                    
Equitable  Share  (ACES), the  25  percent  tax rate  jumped                                                                    
quickly to  a higher  tax rate. He  asked whether  the House                                                                    
version stayed  at 25 percent  for the  first $50 or  $60 of                                                                    
profit. He asked how that compared to the current system.                                                                       
Mr. Alper  responded that  the House bill  had a  15 percent                                                                    
bracket  of surtax  above $60  per barrel  profit production                                                                    
tax  value.  The House  and  Senate  bills were  essentially                                                                    
revenue  neutral  to each  other  at  high prices.  The  tax                                                                    
increase in the House version  was concentrated on the lower                                                                    
price points, between $50 and  $100 per barrel. The greatest                                                                    
impact  was at  $70 or  $80  per barrel.  ACES would  appear                                                                    
below 25  percent. At lower  prices, the effective  tax rate                                                                    
of ACES included  20 percent capital credit, so  it would be                                                                    
represented  by  a diagonal  curve  from  below 25  percent,                                                                    
crossing over the blue line  to $80 dollar range, then would                                                                    
go up  above the blue  line to  show a higher  effective tax                                                                    
rate at higher prices.                                                                                                          
Co-Chair Seaton asked about the  relative impact on revenue,                                                                    
[between  the two  bills] at  $73 per  barrel, of  the carry                                                                    
forward rate  identical to  the effective  tax rate  [in the                                                                    
House version], compared to the  Senate version in which the                                                                    
carry forward rate is so  much higher than the effective tax                                                                    
Mr. Alper replied  that he would address  the carry forwards                                                                    
in  later   slides.  The  House  and   Senate  versions  had                                                                    
different tax  rates. When it  came time to count  them, the                                                                    
House version would  have a lower value,  which impacted the                                                                    
conversion of carry  forwards to future tax  value. He would                                                                    
address the issue in later slides.                                                                                              
Representative Wilson  asked why  the analysis began  at $50                                                                    
per barrel prices  rather than at zero, given  that the bill                                                                    
came about due to low prices.                                                                                                   
Mr. Alper  replied that below  break-even, or about  $40 per                                                                    
barrel,  the  effective tax  rate  became  greater than  100                                                                    
percent and  the information became  hard to graph  once the                                                                    
vertical line went off the chart.                                                                                               
Representative  Wilson asked  whether there  was a  point at                                                                    
which companies did not pay anything.                                                                                           
Mr.  Alper replied  that a  4  percent minimum  tax was  the                                                                    
governing  calculation at  those  lower  prices. The  larger                                                                    
companies could  not get  those if  they produced  more than                                                                    
50,000  barrels  per  day.  They   would  carry  their  NOLs                                                                    
forward. Companies could reduce  their payments to zero with                                                                    
the use of credits in certain circumstances.                                                                                    
Representative  Wilson  stated   that  the  biggest  concern                                                                    
seemed to be the cashable credits.                                                                                              
2:14:40 PM                                                                                                                    
Mr.  Alper  agreed  that cashable  credits  were  still  the                                                                    
primary focus  of the legislation.  The fact that  the state                                                                    
owed a  lot in  obligations and was  trying to  avoid paying                                                                    
for  those credits  into  the  future was  one  of the  core                                                                    
reasons the bill was introduced.                                                                                                
Mr. Hoffbeck reiterated  that they did not want  to get into                                                                    
policy  discussions. The  presentation was  aimed at  laying                                                                    
out the details and differences of the two versions only.                                                                       
Representative  Wilson  disagreed.  She elaborated  that  it                                                                    
would be  hard to compare  without discussing policy  in the                                                                    
two versions.  She stated  it would be  hard to  discuss the                                                                    
differences  without addressing  the current  legislation as                                                                    
well as past legislation.                                                                                                       
Representative Pruitt stated that it  was a policy call, and                                                                    
did not  see how discussion  of policy could be  avoided. He                                                                    
believed there were some things  the governor wanted to see.                                                                    
He remarked  that the governor  had spoken out  about policy                                                                    
in the days  leading up to the present meeting.  He asked if                                                                    
that  influenced the  conversation.  He thought  if the  two                                                                    
bodies  came  to  agreement  but the  governor  was  not  in                                                                    
agreement, the  whole process would  have to start  over. He                                                                    
asked whether the  thoughts of the governor  should be heard                                                                    
in the meeting.                                                                                                                 
Commissioner  Hoffbeck   respectfully  disagreed   with  the                                                                    
statements.  He   clarified  the  policy  issues   would  be                                                                    
addressed in  conference committee  and the  straight layout                                                                    
of the nuts and bolts  comparison of the legislation was the                                                                    
focus of the presentation.                                                                                                      
Representative Pruitt  agreed that the  conference committee                                                                    
should be having the conversation.                                                                                              
Vice-Chair  Gara wanted  to clarify  that his  intention for                                                                    
the bill  had been  to get  a fairer tax  for the  people of                                                                    
2:19:25 PM                                                                                                                    
Mr. Alper  summarized that  both versions  of the  bill were                                                                    
more or less  revenue neutral at higher prices  and moved to                                                                    
slide 5: "Summary  of Fiscal Impacts: Effective  Tax Rates -                                                                    
'New'  Oil."  New  oil  was eligible  for  the  gross  value                                                                    
reduction  (GVR).  The  red  line  showed  status  quo,  not                                                                    
impacted by  the Senate  version. It  showed the  35 percent                                                                    
tax  as  impacted by  the  GVR  reduction and  then  further                                                                    
reduced by the  flat tax credit of $5. As  there was no hard                                                                    
floor on  GVR oil, the  tax rate was effectively  zero below                                                                    
around $70 per  barrel. The tax rate never gets  close to 35                                                                    
percent  as there  was always  the $5  credit which  did not                                                                    
decline to zero.  The red dotted line was  the carry forward                                                                    
rate  for GVR  oil. In  status quo  there was  still the  35                                                                    
percent  benefit for  losses  or  incremental spending.  The                                                                    
House bill  was the blue  line. The House bill  hardened the                                                                    
floor for GVR  oil, which was not something  in current law.                                                                    
The House bill  hardened the floor to 3.2  percent, which is                                                                    
why it looked like a tax  increase at the lower price points                                                                    
below $70  per barrel.  There were two  different inflection                                                                    
points at  $90 and $110, which  have to do with  keeping the                                                                    
$5 barrel  credit. The House  bill eliminated  sliding scale                                                                    
credit for  old oil, did  not remove  $5 credit on  new oil,                                                                    
but did reduce  the base tax from 35 percent  to 25 percent.                                                                    
The  combination resulted  in  a tax  decrease  on GVR  oil,                                                                    
which is why  the blue line is below the  red line at higher                                                                    
prices and  was above  red line at  lower price  points. The                                                                    
effective tax rates are in fact  decreased on GVR oil in the                                                                    
House bill at a variety of price points.                                                                                        
2:22:04 PM                                                                                                                    
Representative Wilson used Caelus as  an example of new oil.                                                                    
She asked what the differences  under the two versions could                                                                    
mean for producers of new oil.                                                                                                  
Mr. Alper explained the basic  principle of the GVR. He gave                                                                    
the  example of  a small  field with  $100 million  in gross                                                                    
value. If it were old oil,  its profits would be taxed at 35                                                                    
percent and  it would receive  the per barrel  credit. Gross                                                                    
value reduction  means that  the first  20 percent  is taken                                                                    
off the top, so rather than  $100 million, it would be taxed                                                                    
on $80 million plus any  subtractions from that. New oil was                                                                    
not  held to  the minimum  tax, and  could go  to zero.  The                                                                    
current  legislation stated  that  there was  time limit  to                                                                    
receiving those  benefits, sometime between three  and seven                                                                    
years.  The Senate  version made  no changes.  In the  House                                                                    
version, the  floor was hardened.  Beyond where  minimum tax                                                                    
is a  factor, there was the  change in the tax  rate from 35                                                                    
percent  to  25  percent,  resulting  in  a  tax  cut  which                                                                    
appeared on the graph as above and below the line.                                                                              
2:25:18 PM                                                                                                                    
Representative Wilson  spoke to an announcement  from Caelus                                                                    
about production. She asked if  the numbers changed for 2019                                                                    
and 2022.                                                                                                                       
Mr. Alper  answered the Caelus  had announced that  it would                                                                    
not  be drilling  the follow  up project  in Smith  Bay. The                                                                    
company had drilled  two wells and thought  it would produce                                                                    
several billion  dollars' worth  of oil.  The well  that was                                                                    
intended for the  following winter would not  be drilled. No                                                                    
production from that field had  been built into the ten-year                                                                    
forecast.  Potential  credits  or tax  offsets  the  company                                                                    
would earn  as it would  be deferring the project  from 2018                                                                    
to 2019, but no modifications  in production were within the                                                                    
Representative  Wilson   thought  there  were  only   a  few                                                                    
companies currently  moving forward in finding  new oil. She                                                                    
asked  whether what  was happening  in statute  would impact                                                                    
current production.                                                                                                             
Commissioner  Hoffbeck stated  that the  department was  not                                                                    
prepared to  discuss Caelus's decision. Nothing  had changed                                                                    
since the bill was before the committee early in the year.                                                                      
Representative Wilson  felt that  things had  changed. While                                                                    
she understood  the commissioner  was trying to  keep policy                                                                    
out  of the  discussion, she  felt that  changes were  being                                                                    
made to the voter initiative on SB 21.                                                                                          
Mr.  Alper  responded that  both  versions  would be  making                                                                    
changes  to  SB  21  that  the  voters  voted  for.  It  was                                                                    
reasonable  to  state  that  the  House  version  made  more                                                                    
significant  changes,  however  both  made  changes  to  the                                                                    
original initiative  SB 21.  He wanted  to make  one comment                                                                    
about  Caelus' announcement.  He suggested  that the  bigger                                                                    
concern was the uncertainty  rather than specific changes to                                                                    
Representative Wilson  stated her concern that  whatever was                                                                    
done in  committee during the  current meeting  might impact                                                                    
future production.                                                                                                              
2:29:51 PM                                                                                                                    
Representative   Ortiz   referred   to  slide   5   of   the                                                                    
presentation.  He  wondered whether,  if  the  price of  oil                                                                    
remained  below  $70 per  barrel,  there  would not  be  any                                                                    
effective tax in the Senate's version.                                                                                          
Mr. Alper  responded in  the affirmative.  He added  that it                                                                    
really meant  that it  remained status  quo. The  big change                                                                    
was  that after  several years,  it changed  back to  legacy                                                                    
oil, so that benefit would not go on indefinitely.                                                                              
Representative  Ortiz asked  if  by several  years he  meant                                                                    
three years. Mr.  Alper replied that he meant  several as in                                                                    
between three  and seven  years, depending  on the  price of                                                                    
2:31:28 PM                                                                                                                    
Vice-Chair Gara asked if the  Senate version and current law                                                                    
allowed for  zero production  taxes, as  long as  oil prices                                                                    
remained below $70 per barrel, for seven years.                                                                                 
Mr.  Alper did  not  believe Vice-Chair  Gara had  specified                                                                    
that he  was referring  to new GVR  oil, but  assuming that,                                                                    
the answer was yes.                                                                                                             
Vice-Chair  Gara  asked  if   possible  reserves  in  Arctic                                                                    
National Wildlife Refuge (ANWR)  would be considered new oil                                                                    
under the Senate version, and were  it to open, it too would                                                                    
present zero production tax for seven years.                                                                                    
Mr.  Alper responded  that  he was  correct.  He added  that                                                                    
anything   that  happened   there   in   the  future   would                                                                    
automatically fall into the category of new oil.                                                                                
Vice-Chair  Gara wanted  people to  understand which  fields                                                                    
would  fall under  the GVR  field  categories. He  mentioned                                                                    
Oooguruk and Nikaitchuq as well as Point Thomson.                                                                               
Mr. Alper responded  that it was not a good  idea to mention                                                                    
specific  fields.  He indicated  that  Point  Thomson was  a                                                                    
field that was  created after 2011. They  would benefit from                                                                    
the GVR statutes as well.                                                                                                       
Vice-Chair Gara asked about the  blue line that went to 3.25                                                                    
percent minimum tax on new oil.                                                                                                 
Mr. Alper responded that it was  the 4 percent that could be                                                                    
reduced by 20 percent, to 3.2 percent.                                                                                          
2:34:16 PM                                                                                                                    
Vice-Chair Gara mentioned that Mr.  Alper had heard a lot of                                                                    
questions about  Caelus. It was his  understanding that only                                                                    
two wells  had been  drilled there, not  enough to  know how                                                                    
much oil was producible or how much oil might be there.                                                                         
Mr. Alper did  not have very much expertise  on the project.                                                                    
It  was a  good 100  miles from  any infrastructure.  If the                                                                    
project was  as large  as it  seemed, it  would be  a large,                                                                    
expensive project  that would  employ a  lot of  people, but                                                                    
would not see production for some years.                                                                                        
Vice-Chair  Gara thought  it was  an  exaggeration to  state                                                                    
there  were  200,000  barrels  per  day.  It  was  not  even                                                                    
delineated  enough to  be an  SEC  [Securities and  Exchange                                                                    
Commission] bookable reserve.                                                                                                   
Commissioner Hoffbeck stated he would  leave it up to Caelus                                                                    
to respond to questions about its field.                                                                                        
2:36:00 PM                                                                                                                    
Representative  Pruitt asked  what percentage  of the  total                                                                    
was new oil that fell under the rate on slide 5.                                                                                
Mr.  Alper answered  that  there was  a  table showing  that                                                                    
information  in  the Revenue  Sources  Book.  The table  had                                                                    
changed  dramatically   after  HB  247  [oil   and  gas  tax                                                                    
legislation passed  in 29   Legislature]. Currently 7  to 10                                                                    
percent was eligible for GVR.  The trend had been towards an                                                                    
increase, but now  that production tended to  fall off after                                                                    
three to seven years, the  forecast showed a decrease of new                                                                    
oil qualifying as  new by 2025. That could change  if one of                                                                    
the  large projects  began producing.  He could  provide the                                                                    
chart to the committee.                                                                                                         
Representative  Pruitt mentioned  being  aware  of a  slight                                                                    
change in  total price.  He asked if  it was  estimated that                                                                    
there would be a tax  increase based on the current estimate                                                                    
for any new oil, or 7 to 10 percent, for around six years.                                                                      
Commissioner Hoffbeck responded that  the only forecast that                                                                    
had changed was for the current year.                                                                                           
2:38:37 PM                                                                                                                    
Co-Chair  Foster  reminded the  committee  to  stick to  the                                                                    
presentation and to avoid policy discussions.                                                                                   
Mr. Alper continued to slide  6: "Summary of Fiscal Impacts:                                                                    
Comparative Fiscal Note Analysis - Budget":                                                                                     
        · Because both bills effectively eliminate cash                                                                         
          credits, they are very similar in the way they                                                                        
          reduce the future demand for state spending                                                                           
        · The slight differences have to do mostly with the                                                                     
          Senate also eliminating cash for Middle Earth                                                                         
        · The long term figure of $150 million per year                                                                         
          reflects the forecast assumption for credit cash                                                                      
               o This number could be substantially higher                                                                      
                  if one or more large projects is                                                                              
               o In that case, either bill would have a                                                                         
                  much greater budget impact.                                                                                   
Mr. Alper  stated that as  the current credits  were earned,                                                                    
they appeared  as a  budget item, as  an expected  demand on                                                                    
state  appropriations. Both  bills eliminated  cash credits,                                                                    
so  that  future  demand decreases  at  similar  rates.  The                                                                    
Senate  version eliminated  credits for  Middle Earth  while                                                                    
the House version retained them.   The number was relatively                                                                    
small, around  $10 million. The long-term  estimate was that                                                                    
about $150 million worth of  cash credits would be earned in                                                                    
future years.  However, if  a large  project like  Smith Bay                                                                    
were to  move forward,  that number  would increase.  If the                                                                    
state was getting out of  the business of cash credits, that                                                                    
meant reducing the budget by  $150 million per year into the                                                                    
future.  For the  North Slope,  both bills  were eliminating                                                                    
cash credits for operating losses.  Likewise, status quo had                                                                    
already eliminated cash  credits for Cook Inlet  in the bill                                                                    
that passed the  legislature in the previous  year [HB 247].                                                                    
That  left  the difference  between  the  two bills  in  the                                                                    
Middle Earth regime.                                                                                                            
Vice-Chair  Gara  suggested  that   cash  credits  could  be                                                                    
eliminated and  replaced with a  brand new credit  that cost                                                                    
just as  much money to  the people  of the State  of Alaska.                                                                    
He asked for confirmation that  $150 million was the cost of                                                                    
cash credits  in the estimate  going forward, and  that $145                                                                    
million per  year with carry  forward credits over  the next                                                                    
ten years was what was proposed in the Senate version.                                                                          
Mr. Alper  replied that the  next slide looked at  the issue                                                                    
as alluding to the counting  of the carry forward value, but                                                                    
the  Senate   bill  was  maintaining   the  same   tax  rate                                                                    
structure, the  same idea  of valuing  spending in  terms of                                                                    
its  tax offset  value. Whatever  was  not being  paid in  a                                                                    
credit  was simply  getting converted  into a  future offset                                                                    
against taxes. The  numbers were, by their  nature, going to                                                                    
be  very  similar.  The  number that  appeared  as  a  carry                                                                    
forward value in  the Senate was very similar  to the amount                                                                    
being  offset in  credits not  being  paid. It  was a  major                                                                    
difference because  it concerned  the time-value of  money -                                                                    
the state would not be  paying that or getting those offsets                                                                    
from  taxes  until  some  future year,  as  opposed  to  the                                                                    
present.  Generally speaking,  the state  did not  expect to                                                                    
see it until that company  was paying taxes, meaning it will                                                                    
be an  offset from  taxes rather  than a  cash appropriation                                                                    
made by the legislature.                                                                                                        
2:42:46 PM                                                                                                                    
Vice-Chair  Gara  queried  whether  the  Senate  bill  would                                                                    
replace  cash credits  of $1.5  billion  with carry  forward                                                                    
credits of $1.45 billion over  the next ten years. Mr. Alper                                                                    
replied in the affirmative.                                                                                                     
Vice-Chair  Gara stated  that he  personally considered  the                                                                    
current cash credit system sort of  a pig and saw the above-                                                                    
mentioned proposal as lipstick on a pig.                                                                                        
Mr. Alper advanced  to slide 7: "Summary  of Fiscal Impacts:                                                                    
Comparative  Fiscal  Note  Analysis   -  Impact  of  Carried                                                                    
Forward Liability":                                                                                                             
     With the elimination of cash credits, an important                                                                         
     variable is the future impact of carried forward                                                                           
     These are listed as a "tax equivalent," as they will                                                                       
     be used to offset future taxes outside the fiscal note                                                                     
          Tax Value of Carry-Forwards in Fiscal Year 2027                                                                       
          House is $610 million; Senate is $1,445 million                                                                       
    The difference is primarily driven by four factors:                                                                         
        1. Senate includes Middle Earth carry forwards (~$60                                                                    
        2. House  requires   using   carry   forward   lease                                                                    
          expenditures to zero PTV while still paying                                                                           
          minimum tax (~$60 million)                                                                                            
        3. Tax value of carry forwards is 35% in Senate bill                                                                    
          vs. 25% in House bill (~$400 million)                                                                                 
        4. House bill reduces value of carry forwards after                                                                     
          7 years (~$300 million)                                                                                               
Mr.  Alper stated  the House  version was  still paying  for                                                                    
Middle Earth,  while the Senate  version was not.  The other                                                                    
issue  had to  do  with how  they were  used.  In the  House                                                                    
version, a company could use  $100 million in carry forwards                                                                    
to reduce the  profits to some small number and  it would be                                                                    
the equivalent of paying the  minimum tax; however, it would                                                                    
take  $200 million  to bring  the value  to zero.  The House                                                                    
version  would  state that  companies  could  use the  whole                                                                    
$200 million  to drive  the  value to  zero  but would  they                                                                    
still pay  the minimum tax  which would result in  a certain                                                                    
loss  of carry  forward credits.  The Senate  version stated                                                                    
specifically that  the companies did  not have to  waste the                                                                    
credits  and  therefore  got  to save  more  to  carry  them                                                                    
forward  to use  against  a  future year.  It  made a  small                                                                    
difference in  the fiscal  note, but could  grow to  a large                                                                    
number, of around $60 million  between the two bills, in the                                                                    
future. The big dollar differences  had to do with the taxes                                                                    
themselves. He  used an  example about  an oil  company with                                                                    
$1 billion in  carry forward losses. In  the Senate version,                                                                    
that  was worth  $350 million  as it  reduced profits  by $1                                                                    
billion. The House bill had  a 25 percent calculation so the                                                                    
$1  billion  would  be  worth  $250  million,  as  they  are                                                                    
multiplied by what the tax rate is.                                                                                             
Mr. Alper  highlighted that  the biggest  difference between                                                                    
the two versions  was that the Senate  valued carry forwards                                                                    
at 35  percent, and  the House at  25 percent.  This element                                                                    
was  worth about  $400 million  difference  between the  two                                                                    
versions of the  bill. The other large  component related to                                                                    
an erosion  of value.  The Senate version  says they  can be                                                                    
used indefinitely. The House says  the value gets reduced by                                                                    
10 percent after  seven years, which would  sunset the value                                                                    
of carry  forwards, while the  Senate version says  they can                                                                    
be held  indefinitely. The House  version says that  if they                                                                    
cannot be used  within seven years, they lose  10 percent in                                                                    
value  per  year   starting  in  year  eight.   That  was  a                                                                    
cumulative reduction in value that  begins to appear in some                                                                    
of the  fiscal analysis  in the  House version,  making $300                                                                    
million  difference  in the  two  bills.  If one  added  $60                                                                    
million  plus  $60  million  plus  $400  million  plus  $300                                                                    
million, it gets close to  the $800 million total difference                                                                    
between the two versions.                                                                                                       
2:48:36 PM                                                                                                                    
Vice-Chair Gara  surmised that the  House bill  followed the                                                                    
normal process that other countries  do for profits taxes in                                                                    
that deduction  percentage is  roughly the  same as  the tax                                                                    
percentage - 25 percent tax means a 25 percent deduction.                                                                       
Mr. Alper  did not want  to opine  on the word  "normal." He                                                                    
stated House  version tax  rate was  aligned with  the value                                                                    
given to spending.                                                                                                              
Vice-Chair Gara referred to chart  seen in February, showing                                                                    
13  percent profits  tax rate  at $80  per barrel  for North                                                                    
Slope oil. Under  the Senate version, companies  would pay a                                                                    
13 percent profits tax rate but  get a 35 percent deduction,                                                                    
or triple the effective tax paid.                                                                                               
Mr. Alper  answered that  the chart in  the memo  showed the                                                                    
same data  set in the  graph in  slide 4. The  effective tax                                                                    
rate 13 percent at $80 oil,  and the value of the losses was                                                                    
35 percent, so what he was saying was correct.                                                                                  
Vice-Chair Gara asked whether the  Senate version included a                                                                    
9  percent tax  rate  at $75  per barrel  prices,  and a  35                                                                    
percent deduction, while the House  version there was only a                                                                    
25 percent tax rate and a 25 percent deduction.                                                                                 
Mr. Alper  replied in the  affirmative. He  elaborated House                                                                    
bill  did not  have a  gap  between tax  rate and  deduction                                                                    
Representative   Wilson  referred   to  testimony   by  Rich                                                                    
Ruggiero [Castle  Gap, legislative consultants] in  which he                                                                    
stated that all regimes allowed  companies to recover all of                                                                    
their costs.                                                                                                                    
Mr.  Alper replied  in the  affirmative. It  was fundamental                                                                    
tenet  of  a profits  based  system  that companies  get  to                                                                    
deduct all  expenses. The  devil was  in the  details. There                                                                    
was  a  difference between  the  statutory  tax rate  of  35                                                                    
percent and  the effective  tax rate due  to the  per barrel                                                                    
credit. Mr. Ruggiero had not  really addressed this, but had                                                                    
spoken about 100 percent carry forward.                                                                                         
2:52:11 PM                                                                                                                    
Representative  Wilson believed  Mr.  Ruggiero  had made  it                                                                    
pretty clear  that a company  should be allowed to  put that                                                                    
money  back into  their  activities. She  found  it hard  to                                                                    
understand only considering the  production tax, but not the                                                                    
other taxes involved.                                                                                                           
Co-Chair Seaton requested to return to the topic at hand.                                                                       
Representative Wilson clarified that  she was not asking the                                                                    
presenters to respond on the  other taxes she had mentioned.                                                                    
She wanted to ensure the  public realized the production tax                                                                    
only represented a small portion  of what the state received                                                                    
from companies.                                                                                                                 
Representative Pruitt referred to  the term "carry forward."                                                                    
He  asked  for  verification  that  carry  forwards  were  a                                                                    
portion  of the  cost of  doing  business. He  asked if  any                                                                    
companies did not  allow for the opportunity  to recoup some                                                                    
portion of their costs.                                                                                                         
2:55:10 PM                                                                                                                    
Mr. Alper  answered that  the carry forward  was all  of the                                                                    
spending that exceeds  revenue, or the sum  total of losses.                                                                    
In  the  current law,  they  were  turning the  losses  into                                                                    
credits. The  House and Senate  bill versions  had different                                                                    
tax  rates, but  both bills  allowed for  100 percent  carry                                                                    
forward use.  The 100 percent  carry forward  was calculated                                                                    
at  a different  tax  rate. The  House  version reduced  the                                                                    
value  of the  carry forward  after seven  years. He  agreed                                                                    
that it  could lead  to a circumstance  where a  company did                                                                    
not recoup 100 percent of the value in the future.                                                                              
Co-Chair Seaton  added that the  carry forward  was intended                                                                    
to be an  incentive to bring a field into  production in the                                                                    
nearer  term  rather than  sitting  on  it for  an  extended                                                                    
period. The policy basis for  that item was developed on the                                                                    
incentive  to bring  a  field into  production  in order  to                                                                    
receive the  full value  of carry  forwards. He  pointed out                                                                    
that if a company paid a  20 percent tax rate to the federal                                                                    
government and  could write  off expenses,  it would  get 20                                                                    
percent utilization  of that  money. If  it paid  35 percent                                                                    
tax  rate   it  would   get  35  percent   utilization.  The                                                                    
difference  between  the  two  bills was  that  one  said  a                                                                    
company  got 100  percent utilization  at the  effective tax                                                                    
rate. The other  says the company got  35 percent regardless                                                                    
of the tax rate paid.                                                                                                           
2:58:07 PM                                                                                                                    
Representative Pruitt  referred to  point 4  on slide  7. He                                                                    
asked  if $100  million is  invested into  a field,  and the                                                                    
time value erodes,  why would a company sit on  it for seven                                                                    
years, then  put it  into production. It  will erode  on its                                                                    
own. It would not affect the  state so much as the company's                                                                    
own shareholders.  He queried whether the  company should be                                                                    
determining  their  own  timeframe  if the  money  had  been                                                                    
invested. There  was no  reason for  the shareholder  not to                                                                    
get a  return sooner than  later. He  did not think  point 4                                                                    
brought things  on early,  only that  the company  could use                                                                    
all of the credit.                                                                                                              
Co-Chair Seaton replied that the  discussion could be had on                                                                    
policy outside the present meeting.                                                                                             
Vice-Chair  Gara  referred to  a  statement  that a  company                                                                    
should  be entitled  to sit  on a  field for  as long  as it                                                                    
determined. He disagreed  with that as Exxon had  sat on the                                                                    
Point  Thomson field  for 30  years and  the field  ended up                                                                    
being a zero percent tax field.                                                                                                 
Representative Pruitt thought  the statement was misleading.                                                                    
He clarified  that Point  Thomson did not  sit on  the field                                                                    
awaiting changes  in policy,  but changes  had been  made in                                                                    
the timeframe. It was also  part of the leases, however they                                                                    
were  not talking  about leases.  He stated  once investment                                                                    
had  been made  and  a  loss was  incurred,  it was  carried                                                                    
3:01:57 PM                                                                                                                    
Mr. Alper moved  to slide 9: "Differences  between House and                                                                    
Senate Credit Issues: Treatment of Carried Forward losses":                                                                     
        · Both bills eliminate the NOL credit for the North                                                                     
          Slope and replace it with a structure of carried                                                                      
          forward lease expenditures                                                                                            
        · Both bills allow for 100% of carry-forward,                                                                           
          without any "uplift" (interest)                                                                                       
        · House bill has provision where carry-forward                                                                          
          balances lose 10% of their value per year after                                                                       
          seven years                                                                                                           
        · Senate bill also eliminates the NOL credit for                                                                        
          Middle Earth, and repeals the underlying NOL                                                                          
          credit statute AS 43.55.023(b)                                                                                        
Mr. Alper  explained that the  black, blue, and red  text on                                                                    
the next group of slides  indicated items which were in both                                                                    
versions,  the  House  version,   and  the  Senate  version,                                                                    
3:04:21 PM                                                                                                                    
Mr. Alper  advanced to slide 10:  "Differences between House                                                                    
and  Senate  Credit Issues:  Use  of  Carry Forward  Losses:                                                                    
Ringfence Issues":                                                                                                              
     Ringfence Issue                                                                                                            
        · Both bills have no restriction if the producer                                                                        
          does not have an overall loss in the year the                                                                         
          costs are incurred; spending on a new project can                                                                     
          offset current taxes                                                                                                  
        · House bill requires carry forwards to only be                                                                         
          used to offset value from the property where                                                                          
          originally incurred                                                                                                   
        · Senate bill allows carry forwards to be used off                                                                      
     Minimize Loss of Credits Issue                                                                                             
        · House bill requires carry-forwards to be used to                                                                      
          zero production tax value, while producer still                                                                       
          pays minimum tax                                                                                                      
        · Senate bill allows taxpayer to use only as much                                                                       
          as they want / need to protect use of per-barrel                                                                      
          credits so that no carry forwards are "lost"                                                                          
Mr. Alper  stated that  neither bill  had any  limitation if                                                                    
spending was done by a  company that had other production in                                                                    
the state  that it  could be offset  from, such  as Conoco's                                                                    
Willow  project.  The  difference   was  that  Conoco  could                                                                    
develop the  field while still  operating Kuparuk and  own a                                                                    
substantial  interest  in  Prudhoe   Bay.  Conoco  could  be                                                                    
spending profits  in real time on  the new field. If  it did                                                                    
not  put  the  company  in a  loss  circumstance,  no  carry                                                                    
forward would  be issued.  The spending  from the  new field                                                                    
could offset  profits from the  new field. This  was current                                                                    
law and neither  version changed that in any  way. The House                                                                    
bill  put in  the restriction  that if  a loss  occurred, it                                                                    
could  only   be  used  to   offset  production   from  that                                                                    
particular field. That could happen  if the price of oil was                                                                    
low enough or spending was so  high that it more than offset                                                                    
their  profits. The  loss would  be tied  to that  field and                                                                    
would  also   impact  the  Armstrong  project.   The  Senate                                                                    
language did not  include the restriction. If  a company had                                                                    
other  production or  sells  a fraction  of  the project  to                                                                    
another  company and  that company  has projects  in Alaska,                                                                    
the  issue  was  establishing  which controls  were  on  the                                                                    
migration of the losses from  the original project to offset                                                                    
some   other  currently   producing  field.   He  spoke   to                                                                    
minimizing  the loss  of credits.  The House  version stated                                                                    
that the  company had to use  carry forwards to get  to zero                                                                    
and  there may  still  be the  minimum  production tax.  The                                                                    
amount resulting  in the 4 percent  had no tax value  to the                                                                    
company. The  Senate version says the  taxpayer can conserve                                                                    
carry forwards  and only  use what was  needed to  result in                                                                    
the minimum  tax payment without  losing any of  the benefit                                                                    
they may have coming to them.                                                                                                   
3:08:03 PM                                                                                                                    
Representative  Guttenberg spoke  to the  carry forwards  in                                                                    
the Senate bill  which allowed them to be  used "off lease."                                                                    
He  asked how  far off  lease  the carry  forwards could  be                                                                    
Mr.  Alper  replied that  this  regarded  a segment  in  the                                                                    
regulations, and  they could be  used anywhere on  the North                                                                    
Representative  Guttenberg asked  whether it  could be  used                                                                    
anywhere, for  any purpose, as long  as it was on  the North                                                                    
Mr.  Alper answered  that  if a  company  was holding  carry                                                                    
forwards from  one field on  the North Slope, they  could be                                                                    
used to offset taxes on another field.                                                                                          
Representative  Guttenberg asked  if the  audit requirements                                                                    
for both locations got looked at in the same way.                                                                               
Mr. Alper  was unsure  what Representative  Guttenberg meant                                                                    
by audit  requirements. He detailed  the value of  the carry                                                                    
forward loss  was established  in the year  in which  it was                                                                    
accrued. It  did pose  the question  of a  lease expenditure                                                                    
accrued in  2018 and put  against production in  2023. There                                                                    
was  not currently  a statute  of limitations  and it  would                                                                    
need  to be  looked at.  There would  be the  same level  of                                                                    
scrutiny on carry forwards as  was currently on current year                                                                    
3:10:25 PM                                                                                                                    
Representative Guttenberg  asked whether,  if a  company was                                                                    
working on a  lease and had a wellhead  expenditure and took                                                                    
it  off lease,  it did  not matter  if there  was work  on a                                                                    
wellhead on  an off-lease project  but was the value  of the                                                                    
credit that migrated.                                                                                                           
Mr. Alper  responded in the  legislation there was  not talk                                                                    
of  credits.  They were  now  known  as lease  expenditures.                                                                    
Subsequently, the definition was  broadened to include prior                                                                    
year  spending that  had been  carried forward.  It did  not                                                                    
matter what type of activity it was used for.                                                                                   
3:11:36 PM                                                                                                                    
Mr.  Alper turned  to slide  11: "Differences  between House                                                                    
and  Senate  Credit Issues:  Use  of  Carry Forward  Losses:                                                                    
Middle  Earth  Issues."  The  term  Middle  Earth  had  been                                                                    
developed during the petroleum  production tax (PPT) debates                                                                    
and  referred to  everything in  Alaska that  was not  North                                                                    
Slope or  Cook Inlet.  There was a  separate range  of taxes                                                                    
for Middle Earth.                                                                                                               
        · House bill made no changes to existing Middle                                                                         
          Earth credits (15% NOL; 10% Capital; 20% Well)                                                                        
          plus the 40% Exploration credit (through 2021)                                                                        
        · Remaining credits remain eligible for cash refund                                                                     
        · Senate bill eliminates the 15% NOL credit for                                                                         
          Middle Earth, in effect reducing state support                                                                        
          from between 25%-55% to between 10%-40%                                                                               
        · Senate bill makes remaining Middle Earth credits                                                                      
          ineligible for cash refund                                                                                            
        · Senate bill allows ME Exploration Credits to                                                                          
         offset the company's corporate income tax                                                                              
          o Provisional (unusable) certificates awarded at                                                                      
             time of application in order to preserve place                                                                     
             in line                                                                                                            
          o Seismic Exploration credits repealed in 2018                                                                        
3:15:51 PM                                                                                                                    
Representative   Guttenberg    asked   when    the   seismic                                                                    
exploration credits  ended. He  asked whether they  were cut                                                                    
off in the middle of a  project, or after the project ended.                                                                    
For example, if there was  a two-year exploration program in                                                                    
2017 and had  to end the second part of  project in 2018. He                                                                    
asked whether, once  a program was approved  for credits, it                                                                    
would be allowed to continue until it was done.                                                                                 
Mr.  Alper answered  that the  sunset dates  related to  the                                                                    
date the  work was  done. Work  had to  be completed  by the                                                                    
sunset date.  In the current  law for Middle Earth  that was                                                                    
January  1, 2022.  A 2021  program would  be covered,  but a                                                                    
2022 program  would not be.  The Senate version of  the bill                                                                    
meant it would  occur in 2018. Any seismic  work done before                                                                    
January 1, 2018, but anything beyond that date would not.                                                                       
Representative  Guttenberg thought  it would  be frustrating                                                                    
for numerous people working on a multi-year program.                                                                            
Vice-Chair Gara  thought the difference  was small  in terms                                                                    
of  dollars.  He  asked  what   Middle  Earth  credits  were                                                                    
expected to cost in the current and following fiscal years.                                                                     
Mr. Alper answered the numbers  were quite small, almost all                                                                    
regarded  Middle Earth,  and  was estimated  to  be plus  or                                                                    
minus $10  million. The  spending was  not currently  in the                                                                    
Vice-Chair Gara  referred to the  fiscal note on  the Senate                                                                    
version showing  a cost of  $1.45 billion and  asked whether                                                                    
it factored in the Middle Earth provision.                                                                                      
Mr. Alper  answered that the  second subtotal on  the fiscal                                                                    
note  tables   called  "total   budget  impact"   shows  the                                                                    
reduction  in  the  state's anticipated  appropriation.  The                                                                    
Senate  bill  was  slightly  larger by  $5  million  to  $10                                                                    
million per year  in the out years. The  difference was that                                                                    
the  Senate  eliminated the  Middle  Earth  credits but  the                                                                    
House did not.  That appears as a $5 million  to $10 million                                                                    
gap between the two bills.                                                                                                      
Vice-Chair Gara asked if the  carry forward numbers factored                                                                    
in Middle Earth and the North Slope.                                                                                            
Mr.  Alper pointed  to  slide  7 and  the  four points.  The                                                                    
Senate version was  taking credits the House  would still be                                                                    
paying cash  for and turning  them into carry  forwards. The                                                                    
total across ten years was $60 million.                                                                                         
Vice-Chair Gara spoke  to the cost of the  Senate version of                                                                    
$1.444  million  versus  the   House  version  of  the  bill                                                                    
$610 million. He  asked whether  that included  Middle Earth                                                                    
and North Slope.                                                                                                                
3:21:30 PM                                                                                                                    
Mr. Alper answered that the  number was all-inclusive across                                                                    
the entire  state. The Senate figure  includes Middle Earth.                                                                    
The figure did not appear in  the House as it was not making                                                                    
changes to Middle Earth.                                                                                                        
Mr.  Alper discussed  slide 12:  "Differences between  House                                                                    
and  Senate  Credit  Issues:  Purchasable  Credits  and  Tax                                                                    
Credit Fund":                                                                                                                   
   · Both bills retain ability to get cash for remaining                                                                        
     "corporate income tax" (refinery, LNG storage) credits                                                                     
     which will all be sunset by 2020                                                                                           
   · House bill retains the tax credit fund structure,                                                                          
     primarily due to the continuation of Middle Earth                                                                          
   · Senate bill repeals the tax credit fund once all                                                                           
     outstanding credits are paid off, or in 2022,                                                                              
     whichever is later                                                                                                         
Mr. Alper  elaborated the fund  in AS 43.55.028  would cover                                                                    
the obligation of  the state prior to the  effective date of                                                                    
the  bill. On  the later  date between  January 1  after all                                                                    
credits are  paid or January  1, 2022 [whichever  is later],                                                                    
the Senate bill would repeal "the .028 fund section."                                                                           
3:23:57 PM                                                                                                                    
Mr. Alper  scrolled to slide 14:  "Differences between House                                                                    
and Senate Tax Issues: Tax Rates and Production Credits":                                                                       
        · House bill reduces the base tax rate from 35% of                                                                      
          Production Tax Value to 25%, and eliminates the                                                                       
         $0 to $8 sliding scale per barrel credit                                                                               
        · House bill has a "surtax" of 15% of that portion                                                                      
          of PTV greater than $60                                                                                               
        · Net effect is a tax increase of $100 to $300                                                                          
          million at  oil prices  between $50 and  $100 with                                                                    
          the greatest impact in  the $60-$80 range. Revenue                                                                    
          neutral at higher oil prices                                                                                          
        · Senate bill retains all major SB21 features, so                                                                       
          that  it is  essentially  neutral  from a  revenue                                                                    
Mr. Alper detailed slide 15:  "Differences between House and                                                                    
Senate Tax Issues: Minimum Tax 'Floor' and GVR 'New Oil'":                                                                      
        · Both bills retain the 4% "floor tax rate                                                                              
        · Both bills, by eliminating the North Slope NOL                                                                        
          credit,  effectively  harden   the  floor  against                                                                    
          major producer losses                                                                                                 
          o  Only a material impact  at oil prices  of about                                                                    
             $40 or below                                                                                                       
        · House bill hardens the minimum tax for GVR-                                                                           
          eligible "new"  oil, preventing the  $5 per-barrel                                                                    
          credit from being used below the floor.                                                                               
          o  House adds a modified 3.2% minimum tax for GVR,                                                                    
             based on a 20% reduction below the base 4% tax                                                                     
        · House bill eliminates the 30% GVR for high                                                                            
          royalty fields                                                                                                        
        · Senate bill makes no changes to either issue                                                                          
Mr.  Alper elaborated  that there  was another  provision in                                                                    
existing  state law  specifying  that if  the  land was  all                                                                    
state  leases with  royalty of  greater  than 12.5  percent,                                                                    
then the  company received an  extra benefit of  10 percent.                                                                    
That provision was removed in  the House version and all new                                                                    
oil would only get 20 percent GVR.                                                                                              
3:27:31 PM                                                                                                                    
Vice-Chair  Gara referred  to discussion  about the  GVR. He                                                                    
asked  for verification  that  there was  not  a 30  percent                                                                    
reduction in the tax rate.                                                                                                      
Mr. Alper responded  it excluded 20 percent  from the volume                                                                    
from  taxation. The  baseline is  20 percent  or 30  percent                                                                    
lower and the same costs could  be subtracted from it, so it                                                                    
tended to  multiply the impacts.  For a 20 percent  GVR, the                                                                    
reduction  in  tax would  be  some  number greater  than  20                                                                    
Vice-Chair Gara queried  whether at very low  prices the low                                                                    
floor was the same in both bills and in the status quo.                                                                         
Mr. Alper  answered that it got  to 4 percent at  an average                                                                    
annual price greater  than $25 per barrel.  Should the price                                                                    
drop  that  much,  there would  eventually  be  one  percent                                                                    
minimum tax, and zero at $15 and less.                                                                                          
Co-Chair Seaton  asked for an explanation  of the difference                                                                    
between royalty and GVR.                                                                                                        
Mr. Alper  replied that GVR  would eventually be  subject to                                                                    
the 35  percent tax rate.  A 20 percent  GVR equated to  a 7                                                                    
percent reduction in gross tax  rates. Twenty percent of the                                                                    
value is  no longer subject  to that  35 percent tax  and 35                                                                    
percent of  20 percent is 7.  By adding an extra  10 percent                                                                    
gross  reduction, it  created  a tax  benefit  that was  the                                                                    
equivalent of an addition 3.5  percent of the gross, or 10.5                                                                    
percent.  In regards  to how  that related  to high  royalty                                                                    
structures,  the typical  state  share was  1/8   or 16  2/3                                                                    
percent,  which  was being  targeted  by  the provision.  By                                                                    
giving  a  3.5  percent  additional gross  benefit,  the  30                                                                    
percent GVR clawed back a  fairly substantial portion of the                                                                    
incremental royalty between 12.5 and the 16 2/3.                                                                                
3:31:51 PM                                                                                                                    
Co-Chair Seaton asked whether the  10 percent additional for                                                                    
the high  royalty fields  was equivalent  to a  reduction of                                                                    
3.5 percent royalty.                                                                                                            
Mr.  Alper responded  in  the affirmative  and  that a  16.6                                                                    
becomes equivalent to 13.1 percent royalty.                                                                                     
Co-Chair Seaton spoke to sliding  scales royalties that were                                                                    
bid terms.  He asked  whether the state  could be  giving up                                                                    
more  of  the royalty  and  going  down below  12.5  percent                                                                    
Mr.  Alper  responded  that  he   had  recently  received  a                                                                    
regulatory  clarification and  that  any additional  royalty                                                                    
payment for  the net  profit share  would not  count towards                                                                    
the greater  than 12.5 percent  and only the  baseline would                                                                    
have  to  be  greater  than  12.5  percent  to  trigger  the                                                                    
incremental feature.                                                                                                            
Co-Chair  Seaton  asked  whether  that  was  also  true  for                                                                    
sliding scale royalty.                                                                                                          
Mr.  Alper  was not  prepared  to  answer the  question.  He                                                                    
suggested   speaking   with   the  Department   of   Natural                                                                    
3:33:35 PM                                                                                                                    
Mr. Alper  scrolled to slide 16:  "Differences between House                                                                    
and Senate Tax Issues: Interest on Delinquent Taxes":                                                                           
        · Both bills eliminate the "three years then zero"                                                                      
          interest provision for Oil and Gas Production Tax                                                                     
          as passed by HB247 in 2016                                                                                            
        · House bill retains the 7% plus federal reserve                                                                        
          rate, compounding for Oil and Gas Production Tax                                                                      
        · House bill retains the 3% plus federal reserve                                                                        
          rate, simple interest, for all other taxes                                                                            
        · Senate bill recombines all taxes under the same                                                                       
         interest structure, as it was before 2017                                                                              
        · Senate bill has 3% plus federal reserve,                                                                              
          compounding, for all taxes                                                                                            
Mr.  Alper highlighted  that the  House  version retained  a                                                                    
bifurcated system,  whereas the  Senate version  aligned all                                                                    
bills, and  this was something  that needed to  be addressed                                                                    
in conference committee.                                                                                                        
3:35:43 PM                                                                                                                    
Representative Wilson asked how  much money was really being                                                                    
Mr.  Alper indicated  that the  amount was  indeterminate in                                                                    
the fiscal note. The number  depended on how large the audit                                                                    
assessment  was to  be in  a  few years.  The difference  of                                                                    
compound interest became  a very big part.  Three years ago,                                                                    
when ACES-era  interest was compounding,  60 percent  of the                                                                    
total  was  interest, and  only  40  percent was  principle.                                                                    
Whereas  in the  newer audits  in which  three years  of the                                                                    
lower interest rate  of SB 21, more  like one-third interest                                                                    
and two-thirds  principle. A big  difference accrued  over a                                                                    
number  of  years. It  was  a  question of  synergy  between                                                                    
different taxes. From  the state's point of  view, there was                                                                    
a certain  opportunity cost  if a company  does not  pay its                                                                    
taxes,  as  the  money  would  have to  come  out  of  state                                                                    
savings.  The  expected rate  of  return  on savings  was  7                                                                    
percent.  He reiterated  that  these  were policy  decisions                                                                    
that should be made in conference committee.                                                                                    
3:37:30 PM                                                                                                                    
Representative  Wilson  was  not talking  about  the  policy                                                                    
call, she was  talking about what had happened  in the past.                                                                    
She was looking for interest collected  for FY 15 and FY 16.                                                                    
She asked  whether there  was some line  in the  budget that                                                                    
showed interest  collected for  those years,  at the  end of                                                                    
the six-year audit cycle.                                                                                                       
Mr. Alper responded  that there was a firm grasp  of oil tax                                                                    
as  it  involved relatively  limited  audits  and they  were                                                                    
released  on   an  annual  cycle.   He  could   provide  the                                                                    
communications  back  and  forth   about  what  portion  was                                                                    
interest and  what was principle.  It was important  to note                                                                    
that  the money  went to  the Constitutional  Budget Reserve                                                                    
(CBR) and was  not General Fund money. He  was sure interest                                                                    
was tracked separately. He did not have the total at hand.                                                                      
Representative  Wilson  stated   companies  paid  what  they                                                                    
thought their taxes should be.  The audit addressed what the                                                                    
department determined  rather than the  companies. Companies                                                                    
were not going  six years without paying  any production tax                                                                    
at all.                                                                                                                         
Mr. Alper indicated  that certainly what she  was saying was                                                                    
true.  What  she was  describing  was  not  the end  of  the                                                                    
process. There  was an appeals  process and a  settlement or                                                                    
decision which usually fell somewhere in the middle.                                                                            
3:40:01 PM                                                                                                                    
Representative Wilson was curious  about the figure. She did                                                                    
not want  to argue about a  small amount. She would  like to                                                                    
know interest over last couple of years.                                                                                        
Mr. Alper  would provide  numbers for  the last  three audit                                                                    
3:40:51 PM                                                                                                                    
Representative  Pruitt  asked  whether over  the  prior  two                                                                    
years there had been an  instance in which those audits were                                                                    
completed before the six year statutory maximum timeline.                                                                       
Mr. Alper  relayed that the  extension of the audits  to six                                                                    
years  was part  of the  ACES bill.  It first  affected 2007                                                                    
taxes.  The department  had stayed  close  to the  statutory                                                                    
timeline.  The  previous March  was  the  deadline for  2010                                                                    
taxes.  Those  for  2011 were  nearing  completion.  By  the                                                                    
following  spring  the department  would  have  2012 and  in                                                                    
following fall  those for 2013.  The division was  on target                                                                    
to meet the deadlines.                                                                                                          
Representative  Pruitt   was  glad   to  hear   Mr.  Alper's                                                                    
response.  He asked  if  there had  been  interest that  the                                                                    
state  had  to  pay  during Mr.  Alper's  tenure.  He  asked                                                                    
whether taxes  were accruing  due to  things being  found in                                                                    
the audits.                                                                                                                     
Mr. Alper  responded in the affirmative.  He suggested there                                                                    
could  be  a situation  in  which  an audit  assessment  was                                                                    
triggered  and a  company  would choose  to  pay the  entire                                                                    
assessment  in order  to forestall  additional interest  and                                                                    
then go through the appeals process  which could go on for a                                                                    
couple of years.  In that the scenario the  state was paying                                                                    
the company back the difference plus all of the interest.                                                                       
Vice-Chair Gara  referred to  a deficit  in auditors  at the                                                                    
3:44:39 PM                                                                                                                    
AT EASE                                                                                                                         
3:44:53 PM                                                                                                                    
Mr.  Alper   replied  that   he  was   very  proud   of  the                                                                    
department's audit team.  He was not advocating  for more or                                                                    
fewer auditors.                                                                                                                 
3:45:58 PM                                                                                                                    
AT EASE                                                                                                                         
3:46:03 PM                                                                                                                    
Mr.  Alper addressed  slide 17:  "Differences between  House                                                                    
and Senate Tax Issues: Other Miscellaneous Issues":                                                                             
        · Prevents Gross Value at the Point of Production                                                                       
          from going below zero for a particular property                                                                       
        · Eliminates   the   ability   assign   tax   credit                                                                    
          certificate payments to a third party financer                                                                        
        · Adds transparency / public reporting related to                                                                       
          credits and lease expenditures held by companies                                                                      
        · Adds a new legislative working group to look at                                                                       
          Cook Inlet and Middle Earth taxes                                                                                     
        · In certain circumstances allows use of purchased                                                                      
          credit   certificates   against   prior-year   tax                                                                    
          liabilities, including penalties and interest                                                                         
Mr. Alper  spoke to a  recent report of which  companies had                                                                    
been paid  cash credits for  a total of around  $73 million.                                                                    
The  House  version  would  expand  upon  that  transparency                                                                    
feature. The Senate version would  allow a certificate to be                                                                    
used  against  prior-year  taxes with  certain  limitations,                                                                    
specifically  having   to  do  with  the   CBR.  Article  9,                                                                    
Section 17  states  that  if   there  is  an  administrative                                                                    
proceeding, the results  of that have to go to  the CBR. The                                                                    
Senate bill was  not trying to circumvent  the provision but                                                                    
additional liabilities from past  years could be offset with                                                                    
credit certificates.                                                                                                            
3:49:19 PM                                                                                                                    
Co-Chair Foster referenced the complex  issues in the bills.                                                                    
He asked  Mr. Alper to  provide a very broad  explanation of                                                                    
the differences between the two bills.                                                                                          
Mr.  Alper complied.  At the  broadest level,  both versions                                                                    
eliminated the idea  that the state was going  to be writing                                                                    
checks to oil companies for  tax credits based on work being                                                                    
done.  Both versions  changed  it to  a  structure in  which                                                                    
companies  would use  the carry  forwards  to offset  future                                                                    
taxes. Both  bills maintained a  net profit-based  tax which                                                                    
means that company  spending is an integral part  of the tax                                                                    
calculation. All of the spending  that was no longer turning                                                                    
into credits would be turned  to offsets later. Beyond that,                                                                    
the House  version made certain  formula changes to  the tax                                                                    
itself that  lead to a tax  increase of a couple  of hundred                                                                    
million dollars  per year  that the  Senate version  did not                                                                    
make.  Otherwise the  differences were  relatively technical                                                                    
and  not  big-dollar  items   but  which  certainly  merited                                                                    
further discussion in conference committee.                                                                                     
Co-Chair Foster  added that both  House and  Senate versions                                                                    
eliminate  cashable credits,  the  Senate  version does  not                                                                    
raise additional revenue whereas the House version does.                                                                        
Mr.   Alper  replied   that  the   statement  included   the                                                                    
fundamental  differences   and  similarities  of   the  bill                                                                    
versions.  He   added  that  his  contact   information  was                                                                    
available  on the  presentation if  people wanted  to follow                                                                    
Co-Chair  Seaton  noted that  the  synopsis  did not  really                                                                    
cover  the  future  liability  difference  of  $800  million                                                                    
between the two bill versions.                                                                                                  
Mr. Alper  answered that what  he had described was  part of                                                                    
changing   the   tax   rate.   He   stated   that   it   was                                                                    
counterintuitive that the House  version raised more revenue                                                                    
by lowering  the tax  rate, but that  was what  happened. It                                                                    
also eliminated  the per barrel  credit. A  major difference                                                                    
was because  the House had  a lower rate, the  House version                                                                    
lowered   the  value   of   the   spending  against   taxes.                                                                    
Essentially there  was no longer  such a thing as  a credit,                                                                    
instead it  was carrying forward  losses, which did  not get                                                                    
value until they were used.  The state's obligation in terms                                                                    
of future tax offsets was lowered.                                                                                              
Vice-Chair Gara referred to statements  that the Senate bill                                                                    
eliminated $1.50  billion in cash  credits, however,  it was                                                                    
replaced  by  $1.45 billion  in  carry  forward credits.  He                                                                    
hoped people  understood that this  meant it was  nearly net                                                                    
3:55:23 PM                                                                                                                    
Mr. Alper answered  it was a net profits  tax. The companies                                                                    
are  spending  money and  net  profits  tax means  that  the                                                                    
company  gets that  value back  somehow in  the future.  The                                                                    
Senate bill made  many fewer changes to how  the things were                                                                    
valued and the net result  was a revenue neutral change over                                                                    
the long-term.  It was different  in that the  payments were                                                                    
no  longer   in  the   budget;  there   was  no   longer  an                                                                    
appropriation battle over  how much to spend  on tax credits                                                                    
in a given  year. It was seen passively as  a reduction from                                                                    
future  taxes. The  House bill  also  had that  - there  was                                                                    
still a  large number in  the future  that would be  used to                                                                    
offset  taxes,  but  conceptually  it was  the  same  thing.                                                                    
Companies  were  losing  money,  they  were  carrying  those                                                                    
losses  into the  future, and  they would  use those  losses                                                                    
against future taxes.                                                                                                           
Co-Chair Seaton asked  for clarification on the  use of loss                                                                    
carry forwards down to zero.                                                                                                    
Mr.  Alper responded  that the  House version  was requiring                                                                    
the use of  carry forwards and then paying  the minimum tax,                                                                    
and the  Senate was only  requiring the amount used  down to                                                                    
the  minimum tax.  This showed  up  in the  analysis in  two                                                                    
different places.  In both circumstances, the  tax payer was                                                                    
paying  a minimum  tax. In  the Senate  version there  was a                                                                    
slightly larger  carry forward number because  they could be                                                                    
conserved  for a  future  year. They  also  appeared in  the                                                                    
analysis of  the life cycle  of project field  analysis. New                                                                    
fields  accrue the  same lease  expenditures. For  the first                                                                    
few years, they  would pay minimum tax even  at high prices.                                                                    
In the Senate  bill, six or eight years on  they would still                                                                    
be  paying  the  minimum  tax   as  they  were  using  carry                                                                    
forwards. In  year seven  and eight,  in the  House version,                                                                    
there  was  higher revenue.  It  appeared  in the  lifecycle                                                                    
analysis  mid field  life  as  one or  two  years of  higher                                                                    
revenue in the House version.                                                                                                   
3:58:35 PM                                                                                                                    
Co-Chair Seaton  asked if applying  to zero and  stopping at                                                                    
the minimum tax was a  difference between status quo and the                                                                    
Senate version of  the bill. He asked if  more carry forward                                                                    
occurred for  legacy fields  in the Senate  bill but  not in                                                                    
the status quo.                                                                                                                 
Mr.  Alper  replied that  it  was  important to  distinguish                                                                    
between  current year  and  carry  forwards when  discussing                                                                    
status quo.  Within the  current year,  the company  did not                                                                    
get a  loss until  it went  below zero.  A company  could be                                                                    
forced to  pay the minimum  tax while earning small  or zero                                                                    
profit  then certain  lease expenditures  would  be lost  as                                                                    
they are  only allowed to  get credits or the  carry forward                                                                    
to the  amount below  zero. With  carry forwards,  there was                                                                    
discussion of  the hard floor and  other restrictions. Under                                                                    
current law there  was generally not any loss  of the value.                                                                    
There were  restrictions on  what could be  used and  if the                                                                    
credits could  not be used,  they could be  carried forward.                                                                    
There were  use them  or lose them  credits within  a single                                                                    
year,  such as  the  small  producer credit  or  the $5  per                                                                    
barrel credit. That was status  quo. In both versions of the                                                                    
bill, the  going to  zero within a  year was  unchanged. The                                                                    
only  difference was  in the  carry forward  scenario. House                                                                    
carry forwards  go to zero  and then they would  pay minimum                                                                    
tax, whereas in the Senate  version companies could use only                                                                    
as much as want to in order to pay the minimum tax.                                                                             
Co-Chair Seaton referred  to slide 10 related to  the use of                                                                    
carry forward losses. He spoke  to the protection of the use                                                                    
of per barrel credits.                                                                                                          
Mr. Alper answered that it  was a change between the version                                                                    
that passed  the Senate Resources Committee  and what passed                                                                    
the Senate.  The committee  had said  that the  company only                                                                    
needed  to  use  the  amount  to  get  to  the  minimum  tax                                                                    
calculation, but  that calculation  assumed zero  per barrel                                                                    
credits.  He spoke  to  chart showing  how  much per  barrel                                                                    
credits were earned  and used at different  price points. It                                                                    
was visible  how much it stepped  up from zero to  $8 as the                                                                    
price  got  lower  until  about $90  per  barrel.  Once  the                                                                    
minimum tax  was reached,  more and more  of the  per barrel                                                                    
credits would be unusable. By  the time $50 per barrel, only                                                                    
about a  dollar in credit could  be used. At around  $55 per                                                                    
barrel,  a  company might  be  able  to  use $2  per  barrel                                                                    
credit. The  Senate Resources version would  have eliminated                                                                    
that  credit for  them.  The  way it  was  re-worded in  the                                                                    
Senate  Finance language,  the company  would  use only  the                                                                    
amount necessary  to arrive at  a calculation in  which they                                                                    
would receive the same benefit  as the $2 credit. This meant                                                                    
the company  would be using  less of the carry  forwards and                                                                    
able to use them to carry into a future year.                                                                                   
4:02:52 PM                                                                                                                    
Co-Chair Seaton  referred to  status quo  where expenditures                                                                    
were used up. He surmised  that the Senate version currently                                                                    
says they can be carried forward to offset future taxes.                                                                        
Mr.  Alper answered  that status  quo was  based on  current                                                                    
year  taxes, then  applying carry  forwards to  that amount.                                                                    
The Senate version  said that a company should  not lose any                                                                    
current  year  credits  and  should  therefore  be  able  to                                                                    
protect the carry forwards to use in a subsequent year.                                                                         
Vice-Chair Gara  referenced slide  7 and asked  about credit                                                                    
provisions  in  the bill  versions.  He  clarified that  the                                                                    
Senate  version was  for  $1.45 billion  over  the next  ten                                                                    
years, whereas the  House version was $610  million over the                                                                    
next ten years.                                                                                                                 
Mr.  Alper   replied  that   $610  million   was  originally                                                                    
$640 million in  early April.  The department  had refigured                                                                    
the  fiscal note  based on  the spring  forecast to  have an                                                                    
apples-to-apples comparison.  It may not have  been attached                                                                    
the House version.                                                                                                              
4:04:58 PM                                                                                                                    
Vice-Chair  Gara clarified  that  no member  on the  current                                                                    
committee had tried  to keep down the number  of auditors in                                                                    
Representative Wilson asked  about number 3 on  slide 7. She                                                                    
asked for clarification  on the tax value  of carry forwards                                                                    
in each of the versions.                                                                                                        
Mr. Alper spoke  about losses. There was  a certain forecast                                                                    
for company  spending that would  result in a loss  of about                                                                    
$4 billion  over the next  ten years. Lease  expenditures in                                                                    
Alaska are generally  around $4 billion per  year but mostly                                                                    
from major producers and were  used to offset revenue. There                                                                    
was  also  $4 billion  in  losses,  either  due to  lack  of                                                                    
production  or high  spending. Four  billion dollars  was in                                                                    
company hands and  that would be used in some  way to offset                                                                    
future tax. In  SB 21 the tax was calculated  at 35 percent,                                                                    
so $1.4 billion  was tax offset value of  the carry forward.                                                                    
The House  version reduced  the rate to  25 percent.  The $4                                                                    
billion would be  used to offset at the 25  percent level or                                                                    
$1.0  billion. The  calculation  of turning  the $4  billion                                                                    
into a tax  benefit was the difference  between $1.4 billion                                                                    
and $1.0  billion, which was  the $400 million shown  in the                                                                    
Representative   Wilson  asked   whether   there  would   be                                                                    
$400 million that the company would  not be able to get back                                                                    
under the analogy.                                                                                                              
Mr.  Alper  replied  in  the  negative.  He  explained  that                                                                    
companies were getting the $4  billion in losses at whatever                                                                    
the tax rate  was. If the tax rate was  increased, the value                                                                    
of the  carry forward  would increase. If  the tax  rate was                                                                    
reduced 10 percent  then the $4 billion would  only be worth                                                                    
$400 million,  but it  would still  be the  value of  the $4                                                                    
billion but  it would be used  at whatever the tax  rate was                                                                    
when it came to be used.                                                                                                        
4:08:02 PM                                                                                                                    
Representative  Wilson  asked  for verification  that  under                                                                    
either bill, companies  would get $400 million  but it would                                                                    
be calculated  differently. She was trying  to determine how                                                                    
the number became larger in the Senate version.                                                                                 
Mr. Alper  answered the difference was  that companies would                                                                    
get the $4  billion calculated against the tax  rate. The $4                                                                    
billion subtracted from profits and  taxed at 35 percent was                                                                    
more that  at 25 percent.  It was  the same $4  billion, but                                                                    
because the tax rates were  different, the impact of the tax                                                                    
calculation would be different.                                                                                                 
Representative Wilson  referred to  point 3  on slide  7 and                                                                    
asked for  verification it  spoke to only  the tax  rate not                                                                    
the investment.                                                                                                                 
Mr.  Alper answered  they were  speaking to  the $4  billion                                                                    
figure. Much  of that  money was being  accrued in  2018 and                                                                    
2019, but if  they were not in production  and therefore the                                                                    
money would not  be used until 2026 or 2027,  the 10 percent                                                                    
subtraction would start to kick  in. In this way, instead of                                                                    
$4  billion,  under  the  House version  it  would  be  $3.5                                                                    
billion  and that,  with  the further  addition  of the  tax                                                                    
calculation,  was  another  $300  million  between  the  two                                                                    
Representative  Wilson noted  it related  to the  life cycle                                                                    
Mr. Alper  had mentioned earlier.  She asked whether  he was                                                                    
using the  life cycle to show  that a company would  not see                                                                    
that deduction until year 8, 9, or 10.                                                                                          
Mr.  Alper   answered  that   the  lifecycle   analysis  was                                                                    
theoretical and  abstract. The $300  million was  the actual                                                                    
number in the  ten-year forecast of what  was believed would                                                                    
be spent  and how much  of that  money would lead  to actual                                                                    
production  within  the fiscal  note  period.  It was  money                                                                    
being  spent  that   the  state  do  not   see  coming  into                                                                    
production in the following ten years.                                                                                          
4:11:06 PM                                                                                                                    
Representative  Wilson  stated  that in  the  House  version                                                                    
companies were  penalized if there  was nothing to  write it                                                                    
off against.                                                                                                                    
Mr. Alper replied  the numbers showed as money  that had not                                                                    
been used. The  money existed on the companies'  books to be                                                                    
spent from 2028 and beyond on  taxes. On the House side some                                                                    
value had  been lost  so that  by 2027  the number  had gone                                                                    
down to $600 million.                                                                                                           
Representative Wilson asserted  that regardless of position,                                                                    
she  believed   everyone  wanted  to  see   an  increase  in                                                                    
production  on the  North Slope.  She thought  that was  the                                                                    
issue ultimately.                                                                                                               
Commissioner  Hoffbeck replied  that he  believed that  both                                                                    
the House and  Senate did what they thought was  in the best                                                                    
interest  of both  industry  and the  state.  He believed  a                                                                    
compromise was needed.                                                                                                          
Representative Wilson  supported compromise,  but not  if it                                                                    
decreased production.                                                                                                           
4:13:19 PM                                                                                                                    
Representative   Ortiz   referred   to  the   $800   million                                                                    
difference  in  carry forward  value  between  the two  bill                                                                    
versions.  He asked  if  that was  separate  from the  added                                                                    
revenue in the House version of up to $200 million.                                                                             
Mr.  Alper   responded  it   was  separate.   He  referenced                                                                    
companies holding  carry forward  credits and  detailed that                                                                    
slide 7  depicted what  the numbers would  be and  what they                                                                    
were worth in  2027.It was completely separate  from the tax                                                                    
Representative Ortiz asked about  the ultimate difference in                                                                    
revenue between the two versions.                                                                                               
Mr. Alper replied that the  House bill included $200 million                                                                    
per  year  in tax.  On  the  budget  side, the  Senate  bill                                                                    
eliminated  roughly   $1.5  billion  in  cash   credits  and                                                                    
replaced  them with  about $1.5  billion in  offsets in  the                                                                    
future. The  House version eliminated  the cash  credits and                                                                    
replaced  them with  a  smaller number  of  offsets for  the                                                                    
future. That  was a  second place in  which the  total grand                                                                    
value was larger on the House side.                                                                                             
4:15:26 PM                                                                                                                    
Representative Ortiz asked about  the total value difference                                                                    
between the two bills by 2025.                                                                                                  
Mr. Alper  provided the caveat  that this assumed  ten years                                                                    
of forecasts and prices and  production. He stated sum total                                                                    
of revenue in the House  version was about $1.5 billion over                                                                    
ten years. The  sum total of the difference  between the two                                                                    
bills in  tax carry  forwards was  another $800  million and                                                                    
there  was a  grand  total of  about  $2 billion  difference                                                                    
between the two bills.                                                                                                          
Representative Pruitt  referred to number  1 on slide  7. He                                                                    
suggested that carry  forwards or NOLs were  not credits but                                                                    
a reduction. Saying  there was an additional  $60 million in                                                                    
carry  forwards failed  to recognize  that if  it was  not a                                                                    
carry forward it would be cash  that the state needed to pay                                                                    
out. It did  not recognize that those would have  to be paid                                                                    
in cash at some point in the future.                                                                                            
Mr.  Alper  agreed and  added  that  both bills  were  fully                                                                    
eliminating  cash credits.  The  House  version was  keeping                                                                    
them in Middle  Earth. The sum total of the  Senate bill was                                                                    
about $80 million higher over  the ten-year period. That $80                                                                    
million  almost  matches  $60 million  in  additional  carry                                                                    
forwards in the Senate version.  It was net zero between the                                                                    
two bills for the particular line item.                                                                                         
Representative Pruitt stated that the  goal in HB 247 was to                                                                    
protect  the  NOL  credits   "as  essential  playing  fields                                                                    
levelers  between incumbent  producers and  newcomers" ["Key                                                                    
Goals and  Features of HB 247  - Governor's Oil and  Gas Tax                                                                    
Credit Reform  Bill", dated January  20, 2016]. He  asked if                                                                    
point  4 on  slide 7  was  eroding the  ability for  smaller                                                                    
companies with less money to compete with bigger players.                                                                       
Commissioner Hoffbeck answered that it  had all been part of                                                                    
the  total fiscal  package. The  fiscal package  had morphed                                                                    
and  there were  provisions that  were and  were not  in the                                                                    
original package.  They were currently  in a  position where                                                                    
everyone needed to compromise.                                                                                                  
Representative Pruitt  spoke to a less  capitalized company.                                                                    
He  asked  if  there  was potential  to  lose  some  smaller                                                                    
companies if  they are not  as capitalized as  others, since                                                                    
they could not place deductions  going past the seven years,                                                                    
based on how long it took to recoup their costs.                                                                                
4:20:48 PM                                                                                                                    
Commissioner Hoffbeck  answered there was nothing  the state                                                                    
could do  that would match  paying cash for the  credits. It                                                                    
had been  a substantial benefit  that was not paid  in other                                                                    
locations and  the state  could no  longer afford.  It would                                                                    
certainly be  a lesser benefit.  The impact was still  to be                                                                    
Representative  Pruitt  referred  to allowing  companies  to                                                                    
carry  liability  forward.  He   agreed  that  cash  was  an                                                                    
incentive  but he  was concerned  that  cost write-offs  and                                                                    
caps could reduce the perspective of smaller companies.                                                                         
Commissioner  Hoffbeck  answered  that the  severance  taxes                                                                    
were a separate  area. The rules put in  place are different                                                                    
by  jurisdiction.  He  believed  the House  and  Senate  had                                                                    
crafted bills that  they believed were in  the best interest                                                                    
of the  state and of  industry. He  did not know  whether it                                                                    
would have an impact.                                                                                                           
4:23:07 PM                                                                                                                    
Mr.  Alper  discussed making  major  changes  and stated  if                                                                    
there were  any change  in industry behavior,  the reduction                                                                    
in  value  and  loss  of cashable  credits  would  be  large                                                                    
determiners in that.                                                                                                            
Vice-Chair Gara spoke to the  difference between not getting                                                                    
as  much  revenue,  because  companies  deduct  their  carry                                                                    
forward credits  from the revenue  they give the  state, and                                                                    
cash  credits which  the state  paid out.  He surmised  that                                                                    
having  $150 million  in payouts  and  getting $150  million                                                                    
less  in  revenue, from  a  budgeting  stand point  for  the                                                                    
legislature, was the same thing.                                                                                                
Mr.  Alper replied  in the  affirmative but  underlined that                                                                    
earlier  he had  mentioned that  there was  a time  issue as                                                                    
well. The cash obligation was in  real time and a lot of the                                                                    
carry forward obligations were many years in the future.                                                                        
Vice-Chair Gara stated  he would argue that  given the level                                                                    
of  credits, since  the  state  was not  paying  them on  an                                                                    
annual  basis, there  was time  value to  that as  well. The                                                                    
state was not paying that  $1 billion of credits every year,                                                                    
but  over many  years. He  asked for  verification that  the                                                                    
Senate version contained $1.445  billion in liability to the                                                                    
state, and the House version  $610 million. He asked whether                                                                    
that  was roughly  an average  of about  $84 million  a year                                                                    
difference between the two versions.                                                                                            
Mr.  Alper  replied in  the  affirmative,  stating that  the                                                                    
first year or two were immaterial.                                                                                              
Vice-Chair  Gara  stated that  the  Senate  version cost  an                                                                    
extra  $84 million  a year  that  would have  to be  covered                                                                    
somehow.  He thought  it  was notable  that  the amount  was                                                                    
similar to what the Senate  had proposed cutting from budget                                                                    
for the  University and K-12.  He thought it was  similar to                                                                    
the  governor's  fuel tax  and  that  the legislature  could                                                                    
adopt the  fuel tax to  pay for that $80  million difference                                                                    
which would  go straight  to cash credits.  He did  not feel                                                                    
like it was  making progress, whereas they had  come up with                                                                    
a fair credit system for the oil industry.                                                                                      
4:26:15 PM                                                                                                                    
Commissioner   Hoffbeck  thanked   the  committee   for  the                                                                    
opportunity to  put the information  out there.  He stressed                                                                    
the  need  for  compromise.  The  administration  thoroughly                                                                    
believed all parties had put  forward what they believed was                                                                    
in the  best interest of  the state, but  it was time  for a                                                                    
Co-Chair Seaton thanked the presenters.                                                                                         

Document Name Date/Time Subjects
HB0111-fiscal note from Senate finance.pdf HFIN 6/7/2017 1:30:00 PM
HB 111
CS HB111 FIN_(House bill updated for Spring forecast).pdf HFIN 6/7/2017 1:30:00 PM
HB 111
DOR HB111 Bill Comparison Presentation - House Finance 6.2.17.pdf HFIN 6/7/2017 1:30:00 PM
HB 111
2007 Audit Assessments memo to Alper.pdf HFIN 6/7/2017 1:30:00 PM
DOR Response
2008 Audit Assessments memo to Alper.pdf HFIN 6/7/2017 1:30:00 PM
DOR Response
2009 Assessment Memo to Alper.pdf HFIN 6/7/2017 1:30:00 PM
DOR Response
2010 Assessment Memo to Alper.pdf HFIN 6/7/2017 1:30:00 PM
DOR Response