Legislature(2009 - 2010)BARNES 124
02/08/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB308 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 308 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 308-OIL AND GAS PRODUCTION TAX
1:05:19 PM
CO-CHAIR NEUMAN announced that the only order of business is
HOUSE BILL NO. 308, "An Act relating to the tax rate applicable
to the production of oil and gas; relating to credits against
the oil and gas production tax; and relating to the period in
which oil and gas production taxes may be assessed."
1:06:16 PM
REPRESENTATIVE JOHNSON, sponsor of HB 308, stated that a couple
of the bill's provisions, such as the progressivity, are very
similar to those that were included in the original version of
Alaska's Clear and Equitable Share (ACES) that was introduced by
Governor Palin. He said he believes the state may have
overstepped its bounds with ACES, and therefore HB 308 would
make six changes to the current ACES law.
1:07:51 PM
REPRESENTATIVE OLSON moved to adopt the proposed committee
substitute (CS) for HB 308, Version 26-LS1328\E, Bullock, 2/5/10
("Version E") as the work draft.
REPRESENTATIVE TUCK objected for purposes of discussion.
REPRESENTATIVE JOHNSON explained that the primary difference
between the original version of HB 308 and Version E, which he
is asking to be adopted, is the local hire provision. That
provision was not ready at the time the original bill was
introduced. While the local hire provision is a substantive
change, the other differences between the two versions are
technical changes where language was moved from section to
section to make the bill read more smoothly.
1:09:57 PM
REPRESENTATIVE GUTTENBERG asked why Representative Johnson
believes the local hire provision in HB 308 would stand up to
constitutional muster anymore than anything else has in the
past.
REPRESENTATIVE JOHNSON responded that he does not know about
constitutional muster, but he does know that the film credit
bill [Senate Bill 230] passed by the Twenty-Fifth Alaska State
Legislature offered a 10 percent discount for local hire. Those
provisions have not been challenged and have worked successfully
for two years.
1:11:02 PM
REPRESENTATIVE GUTTENBERG argued that the film industry is a
completely different animal than the oil industry and pointed
out that the legal counsel's memo states there may be a
constitutionality issue. This issue has been to court. The oil
industry has a history of opposing the legislature's efforts to
hire Alaskans, and has actively engaged in opposition to hiring
Alaskans to such a degree that he has had to explain to top
level executives why they are not good corporate citizens in
Alaska. He surmised Version E will go to the House Judiciary
Standing Committee.
REPRESENTATIVE JOHNSON responded that HB 308 would put local
hire at the forefront of what the legislature expects. This is
not like the cases that Alaska has lost for local hire or for
charging more for out-of-state hunting and fishing licenses than
for in-state, he maintained. Under HB 308, local hire is not
mandatory, it is an incentive. If a company chooses not to take
advantage of the provision, it will pay the tax rate it has
today. If a company chooses the incentive, it can buy down its
base tax rate by the percentage of local hire. It is no
different than Tennessee offering a 10-year moratorium on taxes
to Saturn for putting a plant in that state and hiring local
people. He thinks this is a way that is legal because half the
people he talks to say it is legal and half say it is not, and
Mr. Bullock's memo says the provision may be unconstitutional,
not that it is unconstitutional. The only way to know for sure
is to test it and he is prepared to go to court.
1:15:24 PM
REPRESENTATIVE GUTTENBERG maintained that incentives have never
worked before with the oil industry.
REPRESENTATIVE JOHNSON disagreed. He said he thinks the oil
industry is a creature of profit and that no industry or
business has a conscience. Industry adds up the numbers and if
they are in the black they do it, and if they add up red they do
not, and the largest black number gets the investment. Through
this incentive, HB 308 would help to make the industry's bottom
line look good by replacing some of the non-resident workers on
the North Slope with Alaskans.
1:16:49 PM
REPRESENTATIVE P. WILSON understood Version E would not mandate
a company to do local hire; it is just available to the company
if it wishes to have a bigger tax write-off. She asked what the
results of the local hire incentive have been with the film
industry.
REPRESENTATIVE JOHNSON replied that this week a local casting
director was hired for a movie that will be filmed in Alaska and
to receive the tax reduction this director is looking for local
residents. He said he believes the film industry makes its
decisions the same way as does the oil industry - the biggest
black number gets the investment.
1:18:22 PM
REPRESENTATIVE JOHNSON, in response to Co-Chair Neuman, noted
that the current discussion is on the differences between
Version E of HB 308 and HB 308 as introduced, and the main
difference is the local hire provision. The other five changes
that would be made to current ACES law are the same in both
versions of the bill. In further response, he said that all six
changes will be explained once Version E is adopted and
discussion begins on it.
REPRESENTATIVE TUCK maintained his objection to adopting Version
E as the working document.
1:20:28 PM
REPRESENTATIVE JOHNSON, in regard to scheduling for HB 308,
stated that today he will provide his presentation as the
sponsor and presentations will also be made by committee
consultant Dan Dickinson and bill drafter Don Bullock. The
administration will be available at the next committee meeting
to answer questions about the six proposed changes. Anyone else
that members wish to have testify can be asked to do so.
CO-CHAIR NEUMAN requested that members let the co-chairs know
whether there are any particular departments that should come
speak to the committee regarding HB 308.
1:21:37 PM
REPRESENTATIVE TUCK, in regard to the factory in Tennessee,
inquired whether that corporate tax credit was for the factory
moving there and/or for an audit program to ensure the factory
was hiring in-state workers.
REPRESENTATIVE JOHNSON answered he is uncertain how Tennessee
set up its plan, but that it was a 10-year tax moratorium - not
a tax credit - so the factory paid no taxes for 10 years. The
basic premise of Version E is that the state would be offering
incentives with the understanding that there will be local hire.
There is probably no direct correlation with anything else other
than the film industry that could be looked at regarding someone
getting a discount for hiring Alaskans.
1:22:58 PM
REPRESENTATIVE JOHNSON added that Alaska charges more for out-
of-state fishing licenses than resident licenses. The state
also charges more for out-of-state commercial licenses than in-
state, thus a bidder preference of 10-15 percent is provided as
a direct discount for just living here. Version E does not even
go to those levels; it would provide that a company can choose
to take advantage of a discount. There would be no mandate that
a company hiring an Alaska resident gets something another
company is not entitled to - which is the basic premise, called
equal treatment, for the lawsuits that the state has lost. Each
individual company, not the state, would make the determination
as to the hiring of an out-of-state person or a local resident.
CO-CHAIR NEUMAN said the crux is that a company can take
advantage of tax credit progressivity by hiring Alaska
residents.
1:24:29 PM
REPRESENTATIVE JOHNSON explained the mechanism by which the tax
credit progressivity would work. Alaska currently has a flat
base production tax rate of 25 percent. According to the
Department of Labor & Workforce Development (DLWD), about 70
percent of the 5,000 people working on the North Slope are
Alaskans. Version E would provide incremental buy-downs of the
tax rate in return for hiring a workforce that is greater than
80 percent Alaska residents. A company with 85 percent local
hire would have its base production tax rate reduced to just
over 24 percent. A company with 100 percent local hire would
have its base production tax rate reduced to 20 percent. Each
half point increase in local hire would have a correlating
reduction of the base production tax rate. Compared to the
original ACES, the 5 percent tax reduction would reduce annual
revenue to the state treasury by about $500 million while
generating about $1.2 billion in economic benefit to the state.
1:26:00 PM
REPRESENTATIVE JOHNSON portrayed legislators' potential support
or opposition to Version E as being related to two differing
philosophies: one philosophy being it is better to have $500
million in the state's treasury and one philosophy being it is
better to have $1.2 billion in the private sector. He said his
philosophy is that $500 million in the hands of private citizens
is better than $500 million in the state's treasury;
philosophically, he believes it is better that his constituents
have the money and make their own decisions. However, he
recognizes that the various regions of the state will differ in
philosophy, and some regions will believe it is better for the
money to go to government because that would mean work through
capital projects and other social programs.
CO-CHAIR NEUMAN agreed with Representative Johnson.
1:27:57 PM
REPRESENTATIVE TUCK disagreed that Version E is about private
versus public as he thinks all committee members want to see
Alaskans get jobs on the North Slope. Rather, it is about
whether the method proposed in Version E would be successful in
the courts. He understood a recent court decision found that
the price difference between out-of-state and resident fees for
fishing licenses is unconstitutional under the basis of equality
between the states. To him, Version E is about out-of-state
jobs versus in-state jobs. He knows plenty of Alaskans that
would love to have those jobs on the North Slope. It is the
highest paying industry in the state and Alaskan families would
prosper from those job opportunities.
REPRESENTATIVE TUCK related that when he first became involved
with the Alaska Process Industry Careers Consortium, an
organization that trains Alaskans for jobs on the North Slope,
work was being done on an instrumentation program that would be
implemented nationwide. However, when his organization tried to
get buy-in, the oil industry refused while utilities were all
for it, so it subsequently went to the back burner.
Fortunately, the oil industry is now getting more involved
because, he thinks, industry has realized it will soon need to
replace workers on the North Slope due to top-heaviness in age.
REPRESENTATIVE TUCK said he does not know whether it really is
cheaper to hire out-of-state workers than to train local people
and put them to work. He wants to make sure that Version E will
actually accomplish the intent and do so effectively and
legally. He does not want to see the state get balled up on
good intentions by making a mistake along the way, so he wants
to work through this to find the best way to accomplish the
intent.
1:30:50 PM
REPRESENTATIVE JOHNSON responded that Version E is not like
fishing licenses because it does not charge anyone for anything;
it would not charge a company an additional business license for
not hiring Alaskans. He hopes there has been a sea change in
the oil industry and that there will be cooperation in hiring
more Alaskans and he wants to incentivize the industry to do so.
He wants it to make sense to the accountants sitting in offices
in Houston, Texas, to decide to hire Alaskans for those $83,536-
per-year jobs. He also hopes that if a company cannot find a
resident for a job that it will require the non-resident it does
hire to move to Alaska in order to be hired. He predicted the
oil companies will become the state's biggest training
facilities. The industry will do what is right for its bottom
line and he is trying to align that bottom line with what works
for Alaskans.
CO-CHAIR NEUMAN pointed out that the State of Alaska provides a
7.5 percent buyer preference when the Department of Corrections
purchases cheese, milk, or produce from Alaska's farmers.
Additionally, the state offers corporate tax credits for
training programs.
1:34:27 PM
REPRESENTATIVE GUTTENBERG related that for approximately 20
years under the economic limit factor (ELF), the tax rate for
the Kuparuk oil field was close to zero and the investment rate
was very low. Had industry been investing at the rate the
sponsor is projecting, the state would not be seeing the
production decline that it is seeing now. He asked whether
anyone will be available to answer questions about how reducing
the tax rate as provided under Version E will change the
industry's business plan of very little reinvestment even when
it had almost no taxes.
REPRESENTATIVE JOHNSON replied that someone will be testifying
on all aspects of the bill. Times have changed considerably;
for example, it was heard on the House floor today that it will
be very difficult for anyone to invest in the National Petroleum
Reserve-Alaska (NPR-A). The only place where companies will be
able to invest for awhile is Kuparuk and Prudhoe Bay, and this
is what the state must look at to fill the Trans-Alaska Pipeline
System (TAPS). The focus is going to be on those legacy fields
and HB 308 deals with that by addressing well workover in
addition to new exploration for tax credit.
1:36:57 PM
REPRESENTATIVE TUCK inquired as to the reasons for the oil
industry's hiring of so many out-of-state workers.
REPRESENTATIVE JOHNSON suggested this question be asked when
industry representatives are before the committee, but he
guesses it is a little bit the money as well as the availability
of help. He thinks Version E addresses this issue by making it
worth industry's while to train Alaskans as opposed to the easy
way of hiring someone from out of state. He reiterated his
belief that the oil industry would become the state's number one
trainer in order to take advantage of this tax break.
1:38:17 PM
REPRESENTATIVE JOHNSON, in response to another question from
Representative Tuck, said the [base production] tax rate is
currently 25 percent. If 100 percent resident hire is achieved,
the tax rate would be reduced to 20 percent. This reduction
represents about $500 million less to the state's treasury and
about $1.2 billion more to the private sector, using a 1.9
multiplier factor.
CO-CHAIR NEUMAN pointed out that there are several charts in the
committee packet in this regard and witnesses will be explaining
it further as well.
1:41:13 PM
REPRESENTATIVE JOHNSON, in response to Representative P. Wilson,
explained that there are 5 percentage points in tax reduction
and that this percentage is split into 10 equal increments
between 85 percent resident hire and 100 percent resident hire.
He wanted the increments to be small enough to provide an
incentive to go beyond an 80 percent resident hire and to strive
for 100 percent local hire.
REPRESENTATIVE P. WILSON said she likes this as she thinks more
Alaskans are not hired by the industry because they are
uneducated in the areas desired by the oil industry. Version E
would be a definite incentive that makes it worth the industry's
while to educate Alaska workers.
1:43:34 PM
REPRESENTATIVE KAWASAKI disagreed, saying he thinks a lot of
people in Alaska are qualified for these jobs but have not been
hired. Even with a nominal to 0 percent tax rate on the legacy
fields, the companies still refused to hire locals. He cited a
report in the committee packet regarding mining, oil, or gas
extraction jobs that states: 3,000 workers are residents and
1,000 are nonresident workers; wages for resident workers are
$440 million and for nonresidents the wages are $150 million;
and for earnings per quarter resident workers received $37,000
and nonresidents received $44,000. While he appreciates
offering an incentive to industry to do more for local hire, the
university has done a lot of training, as has the Department of
Labor & Workforce Development and local pipeline construction
companies. He offered his opinion that something is being
missed by chasing an industry that has done well in the state
and that has refused to hire local. He is tired of providing
corporate welfare to this industry, as both the industry and the
state are making money off this non-renewable resource and that
is a fair thing to do.
1:46:54 PM
REPRESENTATIVE JOHNSON agreed the state has done a lot and has
trained a lot of people, and that it is not working. Therefore,
he is trying something different by offering an incentive. If
industry does not play, it does not get the tax advantage and
the state still gets its money. The only thing being chased is
jobs for Alaskans, and under Version E this would be done
through the local hire provision as well as the other provisions
related to investment credits.
1:48:43 PM
REPRESENTATIVE TUCK, referred to page 4, Version E, line 19, and
asked whether the tax savings are based on how ACES is currently
administered or on the changes proposed by the bill.
CO-CHAIR NEUMAN requested Representative Johnson to first
identify the section that the local hire provision is in.
REPRESENTATIVE JOHNSON said the local hire provision is located
on page 6 under [AS 43.55.022]. The section that is being
referenced by Representative Tuck is in the original bill and
has to do with progressivity, and Version E makes no change to
that. The only difference between the original bill and Version
E is Section 43.55.022, which relates to local hire.
CO-CHAIR NEUMAN interjected that this is Section 15 [page 6,
Version E].
REPRESENTATIVE JOHNSON agreed. He said the section he was
referring to is on page 6, lines 12-31, Version E, which deals
with local hire, not progressivity.
1:50:33 PM
REPRESENTATIVE TUCK surmised that the provisions on page 6,
roughly lines 12-31, Version E, are related to the new number
from page 4, lines 19-23, Version E.
REPRESENTATIVE JOHNSON said that is incorrect and is an apples
to oranges comparison because one is progressivity and one is
local hire. One deals with the base rate and the other deals
with progressivity, which is a different section of law and a
different tax.
REPRESENTATIVE TUCK understood that the local hire provisions
are not tied to the tax progressivity.
REPRESENTATIVE JOHNSON replied correct, [the local hire
provisions] are tied to the base rate of 25 percent.
REPRESENTATIVE TUCK maintained his objection to adopting Version
E as the working document. He requested that members be able to
ask questions of Mr. Donald Bullock, the drafter of Version E.
1:52:33 PM
DONALD BULLOCK JR., Legislative Counsel, Legislative Legal and
Research Services, Legislative Affairs Agency, Alaska State
Legislature, stated that he wrote the [2/5/2010] memo referred
to earlier. He explained that Version E takes a different
approach to local hire than what has been seen before. It would
not require that 5 percent of the workers be residents, which
means that 5 percent of those jobs may not be filled by
nonresidents. It is distinguished from the license issues
because workers from out of state are not paying anything
differently to come in and work. Rather, Version E would
introduce an economic factor to the employers to take into
consideration the cost through the tax of hiring different
percentages of Alaska residents versus nonresidents. That is
only one factor because employers must also look at whether the
skills are available. The tax break would be offset if out-of-
state labor was less expensive than in-state labor, and in that
case it would be an economic decision to hire workers that cost
less. Therefore, Version E introduces another factor by
providing an incentive that lowers a company's taxes when it
hires Alaskans.
MR. BULLOCK pointed out that Version E does not say a company
must do this. It gives the company a benefit if it does, and
that is why his memo does not say it is a waste of time to do
this. It is a different approach that would be open to
interpretation, and he is unaware of a case that has dealt with
this approach. Version E would provide incentives to employers
to hire Alaskans and see where their economics lie in their
business.
MR. BULLOCK noted that this is also different than the situation
where there were no taxes due for an oil field because without
an incentive it does not make any difference who a company
hires. It would be an economic decision if the field is coming
close to breaking even or if the company can start saving costs.
It is not a residency or non-residency issue; the tax is already
zero - there was not an incentive for the state to offer.
MR. BULLOCK said he cannot tell members that if the state is
taken to court it is going to lose. However, he expects that it
will be taken to court, and the issue will be whether this is
enough of an incentive that is offered to employers that it in
fact is onerous to nonresidents. He does not know the answer to
this and that is why he did not offer anything affirmative in
his memo. Had this been like other bills or other passed
legislation that requires 20 percent of a company's workers be
Alaskans, it would be pretty clear that no, this cannot be done.
1:55:35 PM
REPRESENTATIVE TUCK inquired whether there was a similar concern
when the tax advantage for the film industry was being
considered [Senate Bill 230].
MR. BULLOCK answered he cannot speak to that bill because he did
not work on it; he can only speak to Version E of HB 308, which
he drafted.
1:56:12 PM
REPRESENTATIVE KAWASAKI asked whether other industries might
challenge that this benefit is only given to the oil industry.
MR. BULLOCK responded probably. This offer is an economic
incentive; other industries could be eligible to the same thing.
Calculation of the percentage is based on the number of hours
that are worked for projects and expenses that are qualified
expenditures under ACES 43.55.165, and the number of hours
directly relates to the number of people that would be working.
Because contractors, as well as the companies themselves, are
making lease expenditures that may be allowed, contractors would
be included within this rebate system. However, the benefit
goes to the person that is subject to the production tax, the
person who is paying the contractor.
1:57:58 PM
REPRESENTATIVE GUTTENBERG understood Mr. Bullock to be saying
that this would apply not just to the leaseholder but to all the
leaseholder's subcontractors down the line.
MR. BULLOCK replied any work that is done on a lease expenditure
that is allowed as a deduction in determining what the
production tax is.
1:58:12 PM
REPRESENTATIVE GUTTENBERG inquired whether a non-resident person
could claim that this is a commerce clause issue - if it cannot
be done one way, then it cannot be done another way that would
accomplish the same thing.
MR. BULLOCK answered that he is not saying it will not be
challenged. He reiterated that there is not a direct burden on
a non-resident, the burden is only indirect. It is on the one
that makes the decision - the employer - as opposed to a law
that says a person will pay more to buy something, such as a
license, because he or she is a non-resident. The state would
not be requiring that a certain percentage must be Alaska
residents, which would mean that that percentage is unavailable
to nonresidents. All jobs are available to all people, whether
residents or nonresidents. If nonresidents are hired, they may
cost more; however, they could cost less because of differential
labor costs. So, Version E takes an economic approach rather
than requiring a certain number of positions or a certain
percentage. That is where he is unsure, because it is not a
direct burden, it goes through the employer and what it costs
the employer to run the business overall.
1:59:57 PM
REPRESENTATIVE GUTTENBERG asked whether there is something
comparable to this that has happened in the past.
MR. BULLOCK responded not that he is aware of. Most of what has
happened in the past is that the state has charged nonresidents
more to do something, such as go to college or fish. Or the
state has said employers must have a certain percentage of
residents. So, Version E is different than the majority of the
cases that have come. He is just saying there is a possibility
that it could be challenged; the plaintiff would have to show
that it is a direct impact on nonresidents.
REPRESENTATIVE GUTTENBERG said he thinks the legislature would
hear that it is a direct impact on nonresidents, but he respects
Mr. Bullock's opinion.
CO-CHAIR NEUMAN said members are the legislature and it is the
legislature that makes the laws.
2:01:13 PM
REPRESENTATIVE KAWASAKI noted that some industries already have
a workforce of 80-90 percent residents. He asked whether this
would impact how the state does business with other industries.
MR. BULLOCK replied he is unsure what is being asked, but that
under the equal protection argument there is a sliding scale in
economic issues. If the legislature says there is a good reason
why it is discriminating in this case and that good reason does
not have to do with a fundamental right - but working is a
fundamental right - that there is more flexibility. The state
must show that it is good public policy and in the best interest
of the state to do that discrimination, and that the means of
doing it is a reasonable way to get there. This is a bill for a
particular industry and it could be done in different industries
but it would depend on the mechanism that is used. In this
particular case, there is a significant tax on Alaska's largest
industry, so there is a clear vehicle for providing a rebate or
a tax break. The state could have another break in AS 43.20,
which has a benefit to corporations that pay income tax, but it
does not do anything for taxpayers that are not subject to that
because they are not incorporated.
2:03:19 PM
REPRESENTATIVE GUTTENBERG requested a definition of residency
worker under AS 43.40.092 and severability, as there is no
severability in Version E at this time.
MR. BULLOCK answered that severability is presumed in every act.
While severability is sometimes put in specifically, the court
will separate what may be separated. The definition of a
resident worker is in the motor fuel statutes, and it takes on
from the definition in Title 1, which is that someone is
physically present with the intent to remain. That statute is
about the burden of proof and one of the proofs is whether a
person is eligible for a dividend from the Alaska Permanent
Fund; a resident worker is not defined anywhere in the statutes
except in that one provision. Therefore, he took what the state
had available when drafting Version E.
2:04:57 PM
REPRESENTATIVE GUTTENBERG posed a scenario in which HB 308,
Version E, passes in its current form as a tax incentive, but
the residency provision is cut by the courts. He asked whether
the other provisions in the bill would still remain in place.
MR. BULLOCK responded that there is no direct link between the
provision providing a rebate for Alaska hire and the provisions
for relief from interest on retroactive regulations and change
in the progressive tax rate. Therefore, it is possible the
court would leave the remainder of the bill in place.
2:05:51 PM
REPRESENTATIVE TUCK maintained his objection to adopting Version
E as the working document. He said he thinks the concept of
ensuring that Alaskans are taken care of first is very good.
Therefore, he would like to see this provision as its own bill
to ensure that it gets all the way through the legislature. He
has always tried to figure out ways to ensure that Alaskans get
those North Slope jobs. One way is to make sure Alaskans are
trained. The state's high schools and universities could be
doing more, as could the Department of Labor & Workforce
Development. For sure, however, is that the oil industry could
be doing a lot more. To get more Alaskan hires, he would like
to see the oil industry do the training rather than relying on
the state to do the training. He pointed out that he has worked
on the North Slope as an electrician and that people without a
southern drawl or British accent usually feel out of place on
the North Slope. He further stated that most of those North
Slope workers do not spend their money in Alaska because they
fly directly from the North Slope to where they live outside of
the state. Version E would provide the opportunity to see
whether this works and whether it has potential for being
applied to other industries.
REPRESENTATIVE TUCK withdrew his objection. There being no
further objection, Version E was before the committee.
2:08:31 PM
REPRESENTATIVE JOHNSON said that to him HB 308, as a whole, is a
jobs bill. The best way to reduce social ills such as domestic
violence, drugs, and prisons is to give someone a home, respect,
and a reason for getting up every day, and the way to do that is
with a job. Therefore, he has named the bill the Alaska Job
Security Act. He said he hopes the bill will be transferable to
other industries and welcomes members to file other bills in
this regard. He stated that in terms of progressivity, the
language in HB 308 is the same as the original ACES bill
introduced by Governor Palin to take the place of the petroleum
production profits tax (PPT). He offered to go over the history
of the ACES legislation with Representative Tuck since he was
not in the legislature at that time.
2:10:44 PM
REPRESENTATIVE JOHNSON reviewed the six changes that would be
made to existing law by HB 308, Version E. He said some of
these changes are related to small errors and oversights in the
ACES bill and some are substantive policy changes. The first
change is that Version E would allow credits for workover rigs,
the philosophy being that anything that puts a barrel of oil
down the pipeline, whether from a new or existing well, should
be allowed to have those credits. Additionally, he related,
both a new well and a workover each represent 100 jobs,
according to industry. The second change is that Version E
would drop the interest rate so that 11 percent is the
[ceiling]. The third change is that HB 308, Version E, would
provide that until the ACES regulations are accepted and
published, the state can go back and collect any taxes that are
mispaid by a producer, but it cannot charge interest on those
mispaid taxes if the taxpayer was operating in good faith.
2:12:26 PM
CO-CHAIR NEUMAN pointed out that under existing statute, the
credits are forwarded to try and get further exploration, but
that he thinks HB 308, Version E, targets new technology for the
workover of existing wells. He surmised that this provision
will also be an incentive for smaller companies to do workovers
on smaller wells.
REPRESENTATIVE JOHNSON replied that a qualified workover may be
as simple as a collapsed casing that is causing reduced
production. In an effort to put more flow through the Trans-
Alaska Pipeline System, the tax credit would apply to anything
from exploring for new geology to basically everything below the
wellhead, regardless of whether a well is already there.
Currently, it is considered new exploration when the distance is
something like one to three miles from an existing well and the
credit does not apply to wells that are drilled within a shorter
distance than that. He thinks that was an oversight in the
original ACES that has deprived the state of both royalties and
throughput. Governor Parnell has indicated this is something
that will be included in his bill as well [the governor's bill,
HB 337/SB 271, was introduced on 2/10/10].
2:15:20 PM
REPRESENTATIVE JOHNSON, in response to Representative
Guttenberg, said he will have Mr. Dan Dickinson point out where
the six changes are located in Version E, but for the moment he
is providing an overview.
REPRESENTATIVE JOHNSON continued his review of the changes. He
noted that ACES changed the look-back period for an audit from
three years to six years, and HB 308 would return this look-back
period to three years so that the oil industry is treated the
same as other industry. The fifth change is the local hire
provision that has already been talked about. The sixth change
would reduce the progressivity from 0.4 percent to 0.2 percent.
He explained that 0.2 percent was the figure proposed in the
administration's original ACES bill and that it was changed
somewhere in the committee process. A 0.2 percentage would
preclude the possibility of having 110 percent progressivity.
He maintained that this change is also about jobs because it
leaves more money for investment which would translate into more
oil flowing through the pipeline. He related that in 2009 there
were 2,776 unemployment claims for the oil industry, almost
double the 1,067 claims made in 2007 and the 1,350 claims made
in 2008.
2:19:11 PM
REPRESENTATIVE P. WILSON inquired whether the proposed changes
in HB 308 could make it beneficial for industry to drill even
when it is known there is no oil in a certain location. She
further asked whether there will be a sectional analysis.
CO-CHAIR NEUMAN said the bill will be reviewed section by
section so members can ask questions.
REPRESENTATIVE JOHNSON added that the plan is to spend some time
reviewing the bill and that Legislative Legal and Research
Services is in the process of preparing a sectional analysis.
In regard to encouraging the drilling of a dry hole, he pointed
out that if $1 million was spent to drill a well, the 20 percent
tax credit would amount to $200,000; so drilling dry holes for
the tax credit just would not happen.
2:21:29 PM
REPRESENTATIVE KAWASAKI asked what the value is of the credit
for well workovers.
REPRESENTATIVE JOHNSON responded that if a producer does not do
a workover, it gets nothing, and it costs the state nothing. If
a workover is done, the credit will depend upon the amount of
capital expenditure and he thinks each individual well will be
dealt with differently. He suggested this question be asked of
the producers when they testify.
2:22:35 PM
REPRESENTATIVE KAWASAKI inquired whether industry is currently
doing these workovers and whether it is a higher or lower number
today.
REPRESENTATIVE JOHNSON understood that very little workover is
occurring on the North Slope and that most of those rigs are
setting on their sides. He suggested that this question also be
asked of the producers when they testify because such rig counts
are available.
2:23:12 PM
CO-CHAIR NEUMAN offered his understanding that the state is
still writing some of the regulations for ACES, and HB 308 would
work in a coordinated effort in this regard. He asked where the
state is in writing these regulations and who is writing them.
REPRESENTATIVE JOHNSON replied he does not know. He related
that he has talked to members of the industry and for the most
part they are clueless as to what will be in the regulations
even though ACES was passed two years ago. Some of the
regulations are done and some are not.
2:24:54 PM
REPRESENTATIVE KAWASAKI pointed out that it took this body
almost four months to decide on [Marmot] Day, so not having
regulations in nearly two years does not seem out of the
ordinary. He said he thinks it is premature to talk about
rolling back taxes on the oil industry when committee members
have not heard from the administration or industry experts about
how ACES is working to date. He said he hopes it is the
sponsor's and co-chair's intent to hear from these folks before
HB 308 is moved out of committee.
CO-CHAIR NEUMAN assured Representative Kawasaki that it is the
intent of both co-chairs to take a look at where things are at.
REPRESENTATIVE JOHNSON stated that he will try to get any person
that members wish to have come speak and that the administration
is due to testify, as are industry experts. The committee is
already ahead because of the four months that legislators spent
reviewing and becoming educated about ACES. He intends to have
serious discussions, not railroad the bill through. He said he
thinks there is a problem and that it is costing the state jobs
and opportunity. If the state does not develop its own
resources and take charge, the state's future is dismal.
Legislators can talk and talk, but nothing gets done until there
is a bill before members. It will be up to members of the
committee and the full body to determine which way to go with HB
308.
REPRESENTATIVE KAWASAKI reiterated he would like to hear what
the administration has to say.
CO-CHAIR NEUMAN added that everyone is working through the
regulations and all else the best they can.
2:29:01 PM
REPRESENTATIVE TUCK, in regard to the unemployment numbers cited
by Representative Johnson, inquired how it is known whether the
numbers are not Alaskans that are being replaced by people from
the Lower 48. He further asked whether those unemployment
numbers include out-of-state workers that have been laid off.
REPRESENTATIVE JOHNSON said he believes those were resident
numbers that he cited. Both numbers are available because the
Department of Labor & Workforce Development tracks both in-state
and out-of-state numbers. He added that he believes the number
would be closer to 5,000 if the out-of-state figures are
included. He offered to get that number for committee members.
2:30:43 PM
REPRESENTATIVE TUCK related that according to the report
entitled, Nonresidents Working in Alaska, 2008, issued by the
Department of Labor & Workforce Development, the percent of
total new hires for nonresidents in oil field services went up
42.7 percent. It would be nice to know whether Alaskans are
being displaced, he reiterated.
REPRESENTATIVE JOHNSON answered that the Department of Labor &
Workforce Development will be before the committee and able to
address that. The department will also be responsible for
auditing and making sure that the [42.7] percent starts going in
the opposition. He said Version E is his attempt to fix the
problem that he has perceived.
REPRESENTATIVE TUCK agreed, provided it does not go in the
opposite direction so that the state is losing jobs overall. He
inquired whether there is a fiscal note that reflects Version E.
REPRESENTATIVE JOHNSON said he will get that to members.
2:32:44 PM
REPRESENTATIVE P. WILSON stated she is pleased that members are
looking at this and determining how HB 308 would affect ACES.
She pointed out that even though it took the legislature a long
time to look at ACES, a lot of amendments were done on the floor
and many were done on the fly, making it hard to determine what
all was affected.
REPRESENTATIVE JOHNSON responded that he likened it to a feeding
frenzy and that there were amendments members did not
understand. Numerous members wanted to prime co-sponsor HB 308,
but he refused so he could maintain a certain amount of control
and ability to slow it down to enable everyone to know what they
are voting on. Given the months that were spent on ACES, most
of HB 308 has already been reviewed by members. It is not a
revisit of a whole new concept; it is a tweaking of what the
governor originally brought to legislators.
CO-CHAIR NEUMAN urged members unfamiliar with ACES to learn
about it from the administration.
2:35:39 PM
REPRESENTATIVE GUTTENBERG said it is currently unknown whether
ACES is working because many of the regulations are not yet in
place. Members learned much from both the Murkowski and Palin
administrations and were taught that international conditions
have a lot more to do with what happens in Alaska than what is
done by the legislature. The part of ACES that did pass and
which has now lapsed is the standard deduction. Without doing
anything, the industry will be getting a tax break of $230-$250
million from now on, and he would like to see what effect that
will have on development and exploration. Much of ACES is still
in play and it cannot be determined what it did or did not do.
Additionally, the stock market has a lot of effect on
everything. At this point, people can only speculate rather
than talk about real history.
2:39:25 PM
DAN DICKINSON, CPA, Consultant to the Legislative Budget and
Audit Committee, began his PowerPoint presentation by pointing
out where each of the six proposed changes can be found within
Version E [slide 3]. He explained that Version E is voluminous
because of the changes in technical definitions about interest,
and every time it is referred to in the rest of the statute
book, the reference must be changed. The sections highlighted
in yellow are the meat of the bill and are the sections that he
will discuss.
2:41:00 PM
MR. DICKINSON said Section 6 of Version E deals with the
proposed change in interest rate that is paid on delinquent
taxes [under AS 43.05.225]. Section 6 would change this rate to
be the [lower of] the federal funds rate plus two percent or up
to a ceiling of 11 percent [slide 5]. He explained that this
interest rate applies to all of Alaska's 20 tax types, such as
cigarette, bed, and other taxes, and that percentage-wise the
oil and gas production tax is by far the largest [source of
revenue] at well over 90 percent. Under current law, the
interest rate is established as the higher of the federal funds
rate [plus 5 percent] or 11 percent. He suggested that the
revisions be made effective on the beginning or ending of a
quarter, given that the interest is compounded quarterly.
2:42:26 PM
MR. DICKINSON related the historical context of the current
interest rate, which was implemented in 1991 when a huge series
of litigations in both royalty and tax were coming to a peak.
In the 1970s and early 1980s, many people were irked that the
state's interest rate, particularly for royalty claims, was a
simple rather than compound rate; thus, in a 20-year-old claim
the difference between a simple and a compounded rate was huge.
These people argued that from a company's standpoint, it made
sense to underpay taxes and then pay simple interest when the
bill became due because - in essence - the company was getting a
loan from the state for an incredibly low rate. Therefore, in
1991 the focus was on making the rate compound for both royalty
and tax. Over the decade of the 1980s, the federal funds rate
declined from about 14 percent to about 6 percent; thus, by 1991
the 11 percent floor had become a ceiling [slide 6]. Interest
rates continued to fall over the next 20 years and under current
law this 11 percent has become the required interest rate.
Today the federal funds rate is 0.5 percent, but the interest
rate that is being charged for taxes is 11 percent, which is 22
times the federal funds rate. He said this context is important
because when the current interest rate was put in place, it
represented a number below which the federal funds rate plus 5
percent was expected to be.
2:45:52 PM
MR. DICKINSON compared the actual interest rate charged by the
state from 1980-2009 to the rate that would have been charged
had Version E been in place during that same time period [slide
8]. He pointed out that the interest rate under Version E would
have been considerably lower than 11 percent; thus, under
Version E, the prevailing rate applied to all taxes would have
been the federal funds rate plus 2 percent.
2:47:21 PM
MR. DICKINSON, in response to Representative Guttenberg,
reiterated that the interest rate for all tax types is the same;
thus the interest rate on oil taxes is the same as for the other
types of taxes. He explained that the thick blue line [slide 7]
represents the federal funds rate, and the thick red line above
that blue line is the flat 11 percent floor and the thin purple
line above that blue line is the federal funds rate plus 5
percent. Since passage of the [1991] bill, there have been only
one or two quarters in which the federal funds rate plus 5
percent actually exceeded that 11 percent; thus, over most of
[1991-2009], the interest rate has been 11 percent.
2:48:48 PM
MR. DICKINSON compared Alaska's current interest rate to the
federal interest rates under the Internal Revenue Service and
the tax code [slide 9]. For individuals, the interest rate is
the federal funds rate plus 3 percent for both overpayment and
underpayment of taxes. For corporations the interest rate for
overpayment of taxes is the federal funds rate plus 0.5 percent
and for a large underpayment it is the federal funds rate plus 5
percent. Thus, Alaska's current rules line up with the federal
situation of corporations with large overpayments. Version E
would change Alaska's interest rate to being more in line with
the federal general corporate rate [federal funds rate plus 2
percent for tax overpayment and federal funds rate plus 3
percent for tax underpayment]. He pointed out that the federal
rate does not have a ceiling or a floor; it is only the federal
funds rate plus a percent.
2:49:59 PM
MR. DICKINSON moved to the second proposed change located in
Section 7 of Version E [slide 11]. Section 7 would mandate that
interest is not due on an increase in tax liability that is the
direct result of the adoption of regulation with retroactive
application until 30 days after the effective date of the
regulation. Governor Parnell has proposed to address this same
issue in a bill that he will soon be introducing [the governor's
bill, HB 337/SB 271, was introduced on 2/10/10]. In a January
14, 2010, press release the governor states that he would "allow
for the waiver of interest charges on late payments due to the
retroactive application of new regulations."
MR. DICKINSON explained why this second change is necessary
[slide 12]. Production tax is due on the last day of the month
following the month of production [AS 43.55.020(a)]. Generally,
within that 30 days a company can get a fair estimate of the tax
due. However, lots of things can happen that will change the
amount of tax due: audits, the taxpayer receiving new
information, retroactive revision of tariffs, and retroactive
changes in regulations. Under current ACES law, when such
changes happen, the change goes back to the first month that the
company owed the tax. For example, if a tax is owed on the last
day of August 2007 for production in July 2007, and an ACES
regulation is later put into place that says something the
taxpayer thought was an expense is not, the taxpayer will owe
interest on that back to August 2007. The law says that if
there is a tax dispute, the attorney general or the Department
of Revenue can settle a compromise with the taxpayer in regard
to a figure and a penalty [AS 43.55.070]. However, the statute
does not mention interest and thus the attorney general's
interpretation is that interest cannot be compromised.
Therefore, even if a taxpayer's position is deemed as having
been reasonable at the time the tax was paid, the taxpayer must
still pay the interest if more tax is owed as a result of
subsequent regulations.
2:52:44 PM
MR. DICKINSON outlined the five major areas in which ACES gave
the Department of Revenue new rules for taxpayers [slides 13-
14]. The new reporting requirements [AS 43.55.030 and .040]
came out in regulation in May 2008, effective as of June 2008.
New regulations directing how taxpayers must deal with combining
two half years of production tax came out in September 2009,
effective October 2009. Because production tax is a yearly tax,
and the effective dates of most of the ACES reforms was July 1,
2007, ways of combining two half years had to be implemented.
Furthermore, ACES directed that allowable costs shall be defined
by the department under regulation [AS 43.55.165(a)] and those
new rules came out in January 2010, effective February 2010. He
pointed out that the costs of employee training are not
deductible under these new regulations. In regard to new rules
for reasonable transportation for things like the Trans-Alaska
Pipeline System and tankers, ACES directs that the cost a
taxpayer is allowed to deduct will be the lower of what is
actually paid or what the department thinks is actually
reasonable [AS 43.55.150]. However, two years later, no
regulation has been promulgated and taxpayers still do not know
what the department thinks is reasonable. Under HB 308, Version
E, interest could not be charged on the difference in the tax
when the regulation comes out retroactively.
2:54:56 PM
MR. DICKINSON turned to the third proposed change located in
Section 11 of Version E [slides 15-24]. Section 11 would change
progressivity [AS 43.55.011(g)] from 0.4 percent to 0.2 percent.
He pointed out that the progressivity can be huge. Of the $6.9
billion brought in from the production tax in fiscal year 2008,
$4.2 billion came from the 25 percent base tax rate and $3.2
billion came from progressivity [slide 17]. This $3.2 billion
in progressivity is the same amount that was received from
royalties that same fiscal year. The amount received for income
taxes was $0.6 billion and the amount for state and local
property taxes was $0.4 billion.
2:56:05 PM
MR. DICKINSON reviewed how the proposed change in progressivity
would work [slide 18]. Progressivity would start at 0.2 percent
until an additional 25 percent in progressivity is added. Then
it would go to 0.1 percent per additional dollar until 50
percent in progressivity is added, at which point the
progressivity is capped. Under current law, the initial
progressivity goes up at 0.4 percent for every extra dollar
until the 25 percent is reached [slide 19]. Then it goes at 1.0
percent [until the 50 percent cap is reached]. He noted that
the progressivity proposed by Version E is identical to the
original version of ACES introduced by Governor Palin, except
that Governor Palin's proposal would have capped progressivity
at 25 percent.
2:57:28 PM
MR. DICKINSON, in response to Representative Guttenberg, said he
has not done an analysis of what this would have meant over the
past two years. However, slide 21 depicts a graph from the
Department of Revenue's January 14, 2010, analysis in which the
department talks about three important aspects of the tax rate:
the nominal rate; the marginal rate, which is the amount paid in
tax for every additional dollar of revenue that a company
receives; and the effective rate, which is a restatement of the
tax as a gross figure. He referred members to [slides 22-24]
for a further sense of what would have happened in the
intervening years.
2:58:27 PM
MR. DICKINSON addressed the fourth proposed change regarding
local hire [Section 15 of Version E]. He noted that most of the
employers in the oil and gas industry on the North Slope are
companies that provide oil field services, and the employment
figures shown on [slide 29] are only for companies that provide
direct services. Not included on that slide are Alaskan
companies that provide services for catering, security,
engineering, transportation, communication, and construction.
He pointed out that these are the companies that will have to
improve their local hire rates, and they will have to pass that
information on to the taxpayers to get the credit. So, what
will happen is that the taxpayers will insist in their contracts
with these companies that the amount of local labor be proven.
Therefore, the proposed provision will translate down from the
taxpayers to the operators of the units to the contractors to
the subcontractors. This is not an imposition; it is an
economic incentive that is removed several times from the folks
who actually have to make the behavioral changes.
CO-CHAIR NEUMAN urged members with questions to speak to staff
at the Department of Revenue and to Representative Johnson.
3:00:36 PM
MR. DICKINSON pointed out that slide 33 deals with the fifth
proposed change regarding the 30 percent credit for well work
[Section 17 of Version E].
REPRESENTATIVE JOHNSON reiterated that work on HB 308 will
continue and that Mr. Dickinson will be available by phone for
further questions when the bill is again considered by the
committee. In response to Representative Kawasaki, he stated
that it will be up to the administration to determine which
people to bring before the committee to answer questions and
present the administration's position.
[HB 308 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSHB 308 version E.pdf |
HRES 2/8/2010 1:00:00 PM |
HB 308 |
| CSHB 308 Sponsor Statement.E.pdf |
HRES 2/8/2010 1:00:00 PM |
HB 308 |
| Technical Aspects of CSHB 308.E.pdf |
HRES 2/8/2010 1:00:00 PM |
HB 308 |