Legislature(2017 - 2018)BARNES 124

02/17/2017 01:00 PM RESOURCES

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Audio Topic
01:05:58 PM Start
01:06:36 PM HB111
03:03:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Agriculture TELECONFERENCED
<Above Item Removed from Agenda>
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
**Streamed live on AKL.tv**
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
                                                                                                                                
1:06:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE  BILL  NO.  111,  "An  Act relating  to  the  oil  and  gas                                                               
production tax,  tax payments, and credits;  relating to interest                                                               
applicable  to  delinquent  oil   and  gas  production  tax;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
1:08:07 PM                                                                                                                    
                                                                                                                                
KEN  ALPER,  Director,  Tax   Division,  Department  of  Revenue,                                                               
informed the  committee the presentation  on HB 111  would answer                                                               
previously submitted  written questions and continue  to specific                                                               
sections of the bill, which  contain elements of legislation that                                                               
has been  previously proposed,  and is  perhaps familiar  to some                                                               
members.  He introduced the four parts of the presentation.                                                                     
                                                                                                                                
REPRESENATIVE  BIRCH   asked  Mr.   Alper  if   HB  111   is  the                                                               
administration's   proposal  and   whether  the   bill  has   the                                                               
governor's support.                                                                                                             
                                                                                                                                
CO-CHAIR TARR, in response to  Representative Birch, said the co-                                                               
chairs have asked  the administration to respond to  the bill "in                                                               
the same way  that they provide the fiscal note.   So Mr. Alper's                                                               
analysis today is relative to that."                                                                                            
                                                                                                                                
MR. ALPER, in further response  to Representative Birch, said the                                                               
governor does not  support or oppose the bill, and  does not take                                                               
a  position on  legislation  as it  works  through the  committee                                                               
process;  however, he  related the  governor has  said additional                                                               
changes need  to be made in  "the oil and gas  tax credit world."                                                               
The  administration did  not propose  the bill,  and he  said his                                                               
capacity  today   was  to   provide  information   and  analysis.                                                               
Returning attention  to part one  of the presentation,  Mr. Alper                                                               
advised  there was  an error  in an  earlier presentation  and he                                                               
would  point  out the  discrepancies.    He  then turned  to  the                                                               
question of government  take, and stated $141 billion  in oil and                                                               
gas revenue, restricted and unrestricted,  is the actual total of                                                               
the  amount collected  since the  beginning  of the  Trans-Alaska                                                               
Pipeline System  (TAPS), early  in 1978.   Since the  state's tax                                                               
policy  switched to  a net  system, in  the years  2007 to  2016,                                                               
Alaska  has   received  $64  billion.     Referring  to  previous                                                               
testimony  advising government  take should  be one-third  of oil                                                               
and gas revenue, he specified that  33 percent of market value is                                                               
too high  because the  market value  of all  Alaska oil  was $527                                                               
billion, and the  state averaged 27 percent from 1978  to 2016; a                                                               
33  percent share  would  put  all of  the  development costs  on                                                               
industry [slide 4].   Of the wellhead value, also  known as gross                                                               
value at the point of production  (GVPP), 33 percent share is too                                                               
low, and he provided the  corrected totals:  total wellhead value                                                               
of all  Alaska oil  was $347  billion and  the state  averaged 41                                                               
percent from  1978 to 2016.   Of profits, 33 percent  is too low.                                                               
Based on data  available since 2007, the divisible  profit of all                                                               
Alaska oil  was $111 billion,  and the state averaged  57 percent                                                               
from 2007 to 2016, with federal take  added to that.  At the time                                                               
of Senate Bill  21 [passed in the 28th  Alaska State Legislature]                                                               
total government take  was expected to be around 65  percent at a                                                               
wide range  of prices, which  reflects a two-thirds  to one-third                                                               
split; however, the  federal take will never  approach 33 percent                                                               
following  federal  tax reform  in  1987,  and he  explained  the                                                               
effects  related  to federal  taxes.    Furthermore, with  a  new                                                               
federal  administration, there  may  be  additional decreases  in                                                               
federal taxes [slide 6].                                                                                                        
                                                                                                                                
1:16:28 PM                                                                                                                    
                                                                                                                                
MR.  ALPER presented  a graph  of  state the  share of  petroleum                                                               
revenue,  based  on market  value  that  was unchanged  from  the                                                               
presentation at the hearing on 1/30/17  [slide 8].  Slide 9 was a                                                               
corrected  graph of  the state  share of  GVPP [wellhead  value],                                                               
showing a  decline from 1998 to  2005; in a higher  price, higher                                                               
tax  timeframe, the  average state  share of  gross was  about 47                                                               
percent,  and  now it  is  about  30  percent.   In  response  to                                                               
questions, Mr.  Alper adjusted GVPP  for cash credits  limited to                                                               
those earned on the North Slope.                                                                                                
                                                                                                                                
REPRESENTATIVE   RAUSCHER   asked   for  clarification   on   the                                                               
corrections.                                                                                                                    
                                                                                                                                
MR. ALPER, referring to the graph  on slide 9, said the corrected                                                               
percentages are  40 percent,  47 percent,  and 30  percent.    In                                                               
further response to Representative  Rauscher, he explained during                                                               
the creation of a new data  set "a data point got dropped," which                                                               
added royalty barrels  in error.  Continued to slide  10, he said                                                               
the  payment of  cash credits  is shown  in blue  crosshatch bars                                                               
subtracted from  state share.   He stressed in the  gross period,                                                               
state  share remains  40  percent, however,  in  the net  profits                                                               
system during  high prices, state  share averages 46  percent and                                                               
during  low   prices,  state  share  decreases   to  27  percent,                                                               
illustrating that tax credits have more impact at lower prices.                                                                 
                                                                                                                                
REPRESENTATIVE   PARISH  asked   whether  the   slide  represents                                                               
outstanding credits that have not been repurchased by the state.                                                                
                                                                                                                                
MR. ALPER  answered the credits  illustrated are actual  cash out                                                               
the  door; further,  he said  the impact  of unpurchased  credits                                                               
relates to credits from 2017 and are not reflected in slide 10.                                                                 
                                                                                                                                
CO-CHAIR JOSEPHSON  returned to slide  10, and asked  whether the                                                               
blue  crosshatch  bar  for  2016  would  be  larger  without  the                                                               
governor's veto of $200 million.                                                                                                
                                                                                                                                
MR. ALPER  explained the  governor put a  cap on  the repurchased                                                               
credits  at $500  million.   There was  an estimate  that credits                                                               
would reach  $750 million,  in fact,  at the  end of  fiscal year                                                               
2016  (FY  16), the  state  paid  $498  million worth  of  credit                                                               
certificates, which was an appropriate number for FY 16.                                                                        
                                                                                                                                
CO-CHAIR JOSEPHSON has  heard in FY 16 there  was turmoil related                                                               
to the certifications.                                                                                                          
                                                                                                                                
MR.  ALPER further  explained the  governor's veto  addressed the                                                               
concept of the open-ended repurchase  of credits, which brought a                                                               
reaction  from  investors and  industry;  in  fact, industry  was                                                               
correct in  recognizing a  change.   Specifically in  Cook Inlet,                                                               
capital and  well credits  are tied to  spending and  applied for                                                               
quarterly and  approved; net operating  losses (NOLs)  require an                                                               
annual tax  filing due in March.   When cash became  limited, the                                                               
Department of  Revenue (DOR)  bundled the  credits and  the NOLs,                                                               
and that pushed certain credits into the next fiscal year.                                                                      
                                                                                                                                
CO-CHAIR  TARR  asked  Mr.  Alper  to  clarify  fiscal  year  and                                                               
calendar year.                                                                                                                  
                                                                                                                                
MR. ALPER  gave an  example of  a company  that has  an operating                                                               
loss from  work occurring in 2014,  and files its taxes  in March                                                               
2015, and  DOR releases  the credits  in July.   However,  by the                                                               
time the appropriation and  banking activities transpire, payment                                                               
is made  in August 2015, which  is FY 16 for  a state expenditure                                                               
tied to a company expenditure in calendar year 2014.                                                                            
                                                                                                                                
CO-CHAIR  TARR  surmised  the  period of  lower  prices  is  also                                                               
related.  In  addition, slide 10 does not  illustrate tax credits                                                               
used against tax liability.                                                                                                     
                                                                                                                                
1:28:36 PM                                                                                                                    
                                                                                                                                
MR. ALPER  clarified a  tax credit  against liability  is revenue                                                               
that the  state did not receive;  the slide shows money  that was                                                               
actually  received, and  therefore includes  the credits  against                                                               
liability.  He  continued to slide 11,  which illustrated profits                                                               
on a  barrel of  oil at $54  per barrel, as  forecast for  FY 18.                                                               
The  bill would  reduce  producer  share from  29  percent to  27                                                               
percent, and increase  state and municipal share  from 56 percent                                                               
to 58 percent.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  PARISH,  referring to  slide  11,  asked why  the                                                               
federal share is reduced.                                                                                                       
                                                                                                                                
MR.  ALPER explained  federal taxes  are  calculated after  state                                                               
take, and so  federal take is "their piece of  a slightly smaller                                                               
pie."  Adding additional information  on the percent of value, he                                                               
said at $50  per barrel, each percentage point of  total value is                                                               
worth about  $90 million, and  each percentage point  of wellhead                                                               
value is  about $75 million.   A change proposed in  HB 111 would                                                               
impact the  per barrel credit  and increase the  state's revenue;                                                               
therefore, every  dollar shift is  a change, and  for non-royalty                                                               
oil,  $1 per  barrel in  added tax,  or reduced  credit, is  $160                                                               
million.   A  1 percent  per barrel  increase to  a gross  tax is                                                               
about $65  million.   To explain how  the bill  affects companies                                                               
operating  at a  breakeven  level,  he said  every  1 percent  of                                                               
profit  is $1.6  million  to  the state  for  every dollar  above                                                               
"breakeven"; for  example, if  the breakeven  is $40  per barrel,                                                               
and the price  of oil is $60 per barrel,  every percent of profit                                                               
taken  by the  state in  increments  would be  worth $32  million                                                               
[slide 12].                                                                                                                     
                                                                                                                                
1:34:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  observed the state's royalty  share is 12.5                                                               
percent, "so  is it fair  to say  that the state  actually drives                                                               
twelve and a half times $90  million, or almost a billion dollars                                                               
in that scenario?"                                                                                                              
                                                                                                                                
MR. ALPER  pointed out  12.5 percent belongs  to the  state after                                                               
transportation  costs are  subtracted;  in fact,  the state  gets                                                               
12.5  percent  of  the  wellhead   value.    The  earlier  slides                                                               
indicating  the state  received 30  percent included  the royalty                                                               
percentage  plus  production,   corporate  income,  and  property                                                               
taxes.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  BIRCH restated  his  point is  every increase  in                                                               
production is reflected in an  increase in royalty share realized                                                               
by the state.                                                                                                                   
                                                                                                                                
MR. ALPER said  yes.  Every dollar movement in  the price of oil,                                                               
over the course of one year,  is worth $25 million to $30 million                                                               
to the  state.  He  turned to  questions related to  the economic                                                               
limit factor (ELF) [passed in  the 10th Alaska State Legislature]                                                               
multiplier decline  from 1998-2006.   The data on slide  13 seeks                                                               
to  "carve  out" the  North  Slope  portion of  total  production                                                               
because  ELF   was  a  North   Slope  multiplier.     Within  ELF                                                               
legislation, every  oil field had a  different multiplier; during                                                               
1995-1997 the average ELF multiplier  was 11.1 percent.  The last                                                               
column  indicated lost  or forgone  revenue with  a sum  total of                                                               
nearly $3 billion over nine tax years [slide 13].                                                                               
                                                                                                                                
CO-CHAIR JOSEPHSON  inquired as  to the  lesson learned  from the                                                               
data provided on slide 13.                                                                                                      
                                                                                                                                
1:39:02 PM                                                                                                                    
                                                                                                                                
MR. ALPER  said the oil  tax system  had not changed  since 1989;                                                               
the  ELF formula  was very  complex,  and formulas  are based  on                                                               
expectations  and  assumptions,  which  degrade  over  time,  and                                                               
underperform.   He  opined slide  13 illustrates  the tax  system                                                               
should be  revisited at the time  it begins to underperform.   As                                                               
an aside,  Mr. Alper  responded to  a question on  the cost  of a                                                               
lawsuit defending an executive order  in 2005 modifying ELF.  The                                                               
state prevailed in the lawsuit,  spending $486,000 in its defense                                                               
to  save  $500   million.    Returning  to   questions  from  the                                                               
committee, he stated there were  three earlier tax credits in the                                                               
gross  tax  system:   1.)  exploration  incentive credit  against                                                               
royalty for  exploration, now repealed; 2.)  education tax credit                                                               
from  1987  for  contributions to  qualifying  institutions;  3.)                                                               
alternative credit  for exploration  passed in 2003,  designed to                                                               
be  used against  liability, carried  forward, or  transferred or                                                               
sold to another taxpayer [slide 14].                                                                                            
                                                                                                                                
MR. ALPER directed attention to the  oil and gas tax credit fund,                                                               
the statutory language  of which has changed since FY  09.  Slide                                                               
15  illustrated  claimed credits,  expenses,  and  end year  fund                                                               
balance from  estimated appropriations for  FY 09 through  FY 16.                                                               
Based on  oil price, the percentage  was either 10 percent  or 15                                                               
percent, and  limited by  a statutory cap.   Had  the legislature                                                               
appropriated by  the formula from FY  09 through FY 15,  the fund                                                               
would  be  dry -  in  a  manner similar  to  today  - except  for                                                               
industry's  expectation  that  the   state  will  repurchase  the                                                               
credits.                                                                                                                        
                                                                                                                                
1:48:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR  surmised  if the  state  followed  its  statutory                                                               
minimum, there would  have been a balance in the  fund in certain                                                               
years.   However, if the  tax system continues to  allow credits,                                                               
the state  must make  further appropriations to  the oil  and gas                                                               
tax credit fund.                                                                                                                
                                                                                                                                
REPRESENTATIVE  BIRCH said  there has  been anecdotal  discussion                                                               
that  the oil  and gas  industry invests  around $6.5  billion to                                                               
generate state revenue  through its royalty share and  taxes.  He                                                               
suggested  DOR  provide  data  that  indicates  whether  the  tax                                                               
credits  have  been  successful  inducing  smaller  independents,                                                               
production, and investment.                                                                                                     
                                                                                                                                
MR.  ALPER offered  to provide  aggregated  information from  the                                                               
DOR,  Tax Division,  Revenue Sources  Book  and Forecasts  (RSB),                                                               
broken out by the deductible  lease expenditures of taxpayers and                                                               
the non-deductible lease expenditures by explorers.                                                                             
                                                                                                                                
REPRESENTATIVE  RAUSCHER  stated  another byproduct  of  industry                                                               
investment, in addition  to creating jobs, is the  sales that are                                                               
conducted in the process of doing business.                                                                                     
                                                                                                                                
MR.  ALPER agreed  the oil  industry  is critical  to the  Alaska                                                               
economy in terms of employment  and procurement, and is estimated                                                               
to generate one-third of the state's economy.                                                                                   
                                                                                                                                
CO-CHAIR  TARR pointed  out slide  15 illustrates  the difference                                                               
between   following   statutory  guidelines   versus   open-ended                                                               
payments.                                                                                                                       
                                                                                                                                
1:54:10 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  stated slides  16  and  17  are updates  to  previous                                                               
presentations.   Slide 16  was a graph  of production  tax before                                                               
credits, production  tax net  of repurchased  credits, production                                                               
tax  after credits  used against  tax  liability, including  Cook                                                               
Inlet  credits, and  NOL credits.   As  prices declined,  credits                                                               
become a  negative in  FY 15;  in FY 17,  the vetoed  credits are                                                               
deferred to FY 18,  and thus are not a big  impact.  However, the                                                               
credits reappear as  a $900 million expense in FY  18.  Also, the                                                               
graph shows a blue line  which represents carried forward NOLs of                                                               
the major producers.   Slide 17 was the same  analysis on all oil                                                               
and gas revenue.                                                                                                                
                                                                                                                                
1:57:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  asked for  a slide  showing just  the North                                                               
Slope credits, because the high  investment in Cook Inlet credits                                                               
influences  the data.   The  tax  credit discussion  needs to  be                                                               
centered on good and reliable information.                                                                                      
                                                                                                                                
MR. ALPER  said DOR will  provide the requested  information, and                                                               
advised the  impact from FY 13  through FY 18 on  the repurchased                                                               
credits will be approximately one-half.                                                                                         
                                                                                                                                
MR.  ALPER  began the  analysis  of  HB  111.   He  informed  the                                                               
committee  most  of   the  provisions  in  the   bill  have  been                                                               
previously debated  in various  formats -  with the  exception of                                                               
Section 6 - and he referenced  sections of the bill and pertinent                                                               
proposed legislation  [slide 19].   Section 1  addresses interest                                                               
rates, and he  noted the interest rate of 11  percent was changed                                                               
in Senate  Bill 21 to 3  percent over the federal  discount rate,                                                               
not compounded.   The administration  felt this rate was  too low                                                               
and the governor sought a  compromise; however, the compromise in                                                               
House  Bill 247  [passed in  the 29th  Alaska State  Legislature]                                                               
changed the  interest rate  to 7  percent for  a period  of three                                                               
years, and  afterward reverting  to zero.   A zero  interest rate                                                               
means  a taxpayer  will  not pay  a tax  assessment  or settle  a                                                               
dispute,  because no  interest would  accrue, and  HB 111  solves                                                               
this  problem.   He  urged  for an  amendment  so  that a  single                                                               
interest rate would  apply to all outstanding  state taxes [slide                                                               
20].                                                                                                                            
                                                                                                                                
There followed a  brief discussion on how to  facilitate a change                                                               
to the interest rate related to taxes.                                                                                          
                                                                                                                                
2:06:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON inquired  as to whether an  interest rate that                                                               
applies for any type of tax would create a problem.                                                                             
                                                                                                                                
MR. ALPER said  all of the other taxes were  paying at 11 percent                                                               
from the '70s until 2013, and now  pay 3.5 to 4 percent.  Simpler                                                               
taxes get audited  faster if at all; however, if  there are taxes                                                               
due, the state should get  a reasonable return, especially in the                                                               
likelihood of  the state spending Alaska  Permanent Fund earnings                                                               
to  fund  the  operations  of   government,  and  permanent  fund                                                               
earnings are about 7 percent.                                                                                                   
                                                                                                                                
REPRESENTATIVE  PARISH   questioned  whether  a  change   in  the                                                               
interest rate  on all outstanding  taxes would  inspire taxpayers                                                               
to initiate litigation.                                                                                                         
                                                                                                                                
MR. ALPER was  unsure.  He opined an aggressive  audit program is                                                               
the most  effective deterrent to  elusive taxpayers.   Turning to                                                               
Section  2, he  provided  a graph  illustrating  the increase  in                                                               
revenue resulting from  a change in interest from 4  percent to 5                                                               
percent.   He  noted  an increase  in the  minimum  tax tends  to                                                               
slightly increase  the range of  prices at which the  minimum tax                                                               
is in  effect [slide 21].   Further, at  $55 per barrel  oil, the                                                               
impact of a 1 percent increase  is $50 million to $60 million per                                                               
year [slide 22].  In response  to Co-Chair Tarr, he stated at $80                                                               
per  barrel, the  Senate Bill  21 calculation  generally governs,                                                               
and the minimum  tax is not in affect.   This factor is concealed                                                               
as the slide shows aggregated figures.                                                                                          
                                                                                                                                
2:13:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  said slide 22 illustrates  the proposed tax                                                               
increase on the  oil and gas industry:  at  current prices, a $50                                                               
million to $60 million increase.                                                                                                
                                                                                                                                
2:13:22 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  said yes.    In  further response  to  Representative                                                               
Birch, he said  at current prices, this is  the largest component                                                               
of the  state's revenue increased  by the bill.   He acknowledged                                                               
the change in per barrel credits  has an impact at higher prices,                                                               
but at current prices, [the increase  in tax rate] is the largest                                                               
change in revenue.   Changes in Senate Bill  21 prevented sliding                                                               
scale per barrel credits going  below 4 percent of GVPP; however,                                                               
other  credits,  including  NOLs, gross  value  reduction  (GVR)-                                                               
eligible  per   barrel  credits,  small  producer   credits,  and                                                               
alternative  credits  for  exploration,  can be  used  to  reduce                                                               
payments below the  minimum tax.  Current law  allows all credits                                                               
other than  the sliding scale  credits to reduce taxes  below the                                                               
minimum  tax -  commonly referred  to  as "the  floor"; the  bill                                                               
seeks  to prevent  all other  credits in  AS 43.55  from reducing                                                               
taxes below the minimum tax  - commonly referred to as "hardening                                                               
the floor" [slides 23 and 24].                                                                                                  
                                                                                                                                
MR.  ALPER continued  to explain  the  minimum tax  in Section  3                                                               
addresses  three different  issues pertaining  only to  the North                                                               
Slope:  1.) small producer  credits for companies producing fewer                                                               
than 50,000  barrels of  oil per  day in  Alaska fields;  2.) per                                                               
barrel credits  for GVR oil, now  that GVR is limited  from three                                                               
to  seven years;  3.) NOLs  for producers  not eligible  for cash                                                               
credits can be carried forward and  used to pay below the minimum                                                               
tax -  the most prominent  issue surrounding hardening  the floor                                                               
[slide  25].   Mr.  Alper  then  explained how  GVR-eligible  per                                                               
barrel credits can reduce taxes  below the minimum tax for legacy                                                               
and GVR-eligible oil at $60 per barrel [slide 26].                                                                              
                                                                                                                                
2:20:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON questioned  whether the  terms in  House Bill                                                               
247 restrict GVR oil from going beneath the floor.                                                                              
                                                                                                                                
MR. ALPER said no.   House Bill 247 made two  changes to GVR, but                                                               
producers can use  the $5 per barrel credit to  reduce the tax to                                                               
zero.                                                                                                                           
                                                                                                                                
CO-CHAIR JOSEPHSON  asked if the  foregoing issue was  vetted and                                                               
understood in 2013.                                                                                                             
                                                                                                                                
MR. ALPER  opined it was  recognized that GVR-eligible  oil would                                                               
be  allowed to  go to  zero.   The issue  is not  a reduction  of                                                               
value, but  whether GVR can reduce  the value to a  negative.  He                                                               
remarked:                                                                                                                       
                                                                                                                                
     What  we learned  was that  the  gross value  reduction                                                                    
     could be  used to artificially increase  the calculated                                                                    
     size of  a loss, and in  doing so could increase  a net                                                                    
     operating loss credit, and we  started seeing some very                                                                    
     distorted operating loss credits  that were far greater                                                                    
     than 35  percent of the loss  - 80, 90, 100  percent of                                                                    
     the  loss -  because  of the  multiplicative factor  of                                                                    
     being able  to increase your  loss with the GRV.   That                                                                    
     was  inadvertent, without  question.    There was  some                                                                    
     substantial  consensus in  the  committee process  last                                                                    
     year, and  that was a  feature that found its  way into                                                                    
     the final version of [House Bill] 247.                                                                                     
                                                                                                                                
CO-CHAIR JOSEPHSON surmised  the foregoing is an  example of "the                                                               
stacking  feature":   legally using  every credit  to maximize  a                                                               
loss.                                                                                                                           
                                                                                                                                
MR. ALPER said the stacking  feature is generally applying two or                                                               
more credits  to the  same expense, and  he provided  an example.                                                               
In response  to Co-Chair Tarr,  he gave  an example of  a company                                                               
with a  $20 million loss that  has earned a 35  percent credit of                                                               
$7 million;  if the  loss is  modified by GVR  and becomes  a $50                                                               
million loss,  the credit becomes  $17.5 million, which  equals a                                                               
90 percent tax credit.                                                                                                          
                                                                                                                                
REPRESENTATIVE   RAUSCHER   surmised   the   bill   erased   NOLs                                                               
altogether.                                                                                                                     
                                                                                                                                
2:25:08 PM                                                                                                                    
                                                                                                                                
MR. ALPER said no.  House Bill  247 directs GVR cannot be used to                                                               
further reduce to  a negative production tax value;  Section 3 of                                                               
HB 111 proposes the calculation of  tax for GVR-eligible oil - 35                                                               
percent of  net as adjusted, minus  the $5 credit -  would not be                                                               
allowed to go  below 4 percent of gross,  which currently happens                                                               
until  the  price of  oil  increases  to  about $69  per  barrel.                                                               
Therefore, currently new oil is not  paying a production tax.  He                                                               
reviewed the current  cashable credit policy related  to NOLs and                                                               
major  producers:   companies producing  over 50,000  barrels per                                                               
day  - the  major producers  and Hilcorp  - are  not eligible  to                                                               
receive  cash; NOLs  for explorers  and developers  are allowable                                                               
expenditures, thus spending  is a loss; NOLs  for producers occur                                                               
when   expenses  exceed   revenue  due   to  low   prices  and/or                                                               
investment.    As  estimated  in  the RSB,  at  least  one  major                                                               
producer had  an operating loss  in 2015, and others  possibly in                                                               
2016, thus  $107 million worth  of aggregated NOL credits  are to                                                               
be carried forward  and used against tax liability  between FY 17                                                               
and FY 19 [slide 27].                                                                                                           
                                                                                                                                
2:29:19 PM                                                                                                                    
                                                                                                                                
MR. ALPER recalled  hardening the floor and  letting loss credits                                                               
"roll  forward" was  recommended  by a  Senate  working group  in                                                               
2015, but  due to  market conditions for  the industry  and other                                                               
considerations, legislation  did not do  so.  He  expressed DOR's                                                               
technical  concern  with  the bill,  pointing  out  contradictory                                                               
language related to  credits and the application  thereof, and he                                                               
made a  recommendation to address  credits in  various individual                                                               
sections  [slide 28].   Mr.  Alper turned  to migrating  credits,                                                               
addressed  in  Section  3, subsection  (q),  which  prevents  per                                                               
barrel credits  from being used in  a month other than  the month                                                               
earned.   He provided  a slide listing  the effects  of migrating                                                               
credits, and  advised in  a period of  volatile prices,  the bill                                                               
seeks  to "keep  those per  barrel  credits in  their own  month"                                                               
[slide 29].  Slides 30 and  31 were graphics depicting the effect                                                               
of migrating  credits.   In 2014, during  which prices  were high                                                               
and  then dropped,  by  October the  per barrel  tax  was at  $8,                                                               
reducing  the  tax  after  credits  to about  $60  million.    By                                                               
December, companies could use $1 from  the $8 credit, and pay the                                                               
minimum  tax rate.    For  the year,  the  state received  $1,522                                                               
million  in  production tax  revenue;  however,  in November  and                                                               
December,  there  were  $112  million  in  "forgone"  per  barrel                                                               
credits.    In  April,  DOR learned  taxpayers  had  moved  their                                                               
credits to  January 2014, and applied  them to offset a  month of                                                               
higher  oil prices.   The  state  then refunded  $112 million  to                                                               
industry, resulting in  a reduction of production  tax revenue to                                                               
$1,410 million  [slide 31].   Mr. Alper  advised Section 3  of HB                                                               
111  intends  to prevent  migrating  credits.   He  stressed  the                                                               
revenue or savings gained by  preventing migrating credits cannot                                                               
be reflected  in the fiscal note,  as the impact is  only seen in                                                               
calendar  years  such as  2014,  although  the problem  could  be                                                               
exacerbated, and he provided an example [slide 32].                                                                             
                                                                                                                                
2:38:43 PM                                                                                                                    
                                                                                                                                
MR. ALPER  informed the committee  Section 4  contains conforming                                                               
language related to  migrating credits and how  to administer the                                                               
new  minimum tax.    Section  5 addresses  the  NOL  rate and  he                                                               
described prior changes  in the North Slope NOL  credit rate from                                                               
2006  through  2016.   During  the  time  of Alaska's  Clear  and                                                               
Equitable  Share   (ACES)  [passed  in  the   25th  Alaska  State                                                               
Legislature] tax  system, the NOL rate  was tied to the  base tax                                                               
rate, thus at  high prices and with  progressivity, the effective                                                               
tax rate  was often  higher than  the NOL rate.   Senate  Bill 21                                                               
tied the  NOL rate to  the base rate,  but the per  barrel credit                                                               
reduces the  effective tax  rate paid by  producers to  less than                                                               
the  NOL  rate to  explorers,  as  explained and  illustrated  on                                                               
slides 33 and 34.   The effect of HB 111 will  move 35 percent to                                                               
15  percent,  and  mimic  the  effective  tax  rate  as  much  as                                                               
possible, as a 35  percent flat tax rate is too  high.  Section 6                                                               
amends how  companies can  earn a tax  credit certificate  for an                                                               
operating loss  credit.  Currently,  a certificate can  be earned                                                               
for capital spending, well lease  expenditures, and NOLs.  Credit                                                               
certificates  can  be  transferred  to another  taxpayer  to  use                                                               
against  that company's  taxes.   However, HB  111 restricts  NOL                                                               
credits so they  are not eligible for state  cash repurchase, but                                                               
must be sold or carried forward.   Mr. Alper acknowledged this is                                                               
a very substantial change regardless of the tax rate [slide 35].                                                                
                                                                                                                                
2:43:44 PM                                                                                                                    
                                                                                                                                
MR.  ALPER continued  to Section  7.   He  directed attention  to                                                               
slide  36  that  illustrated  the amount  of  per  barrel  credit                                                               
received in 2018, based on a  range of prices.  The effective per                                                               
barrel  credit   changes  in  dollar  increments   following  the                                                               
wellhead value,  until a wellhead  value of $150 and  above, when                                                               
the per  barrel credit is  zero.  At  $50 per barrel,  per barrel                                                               
credits are  zero, the minimum  tax becomes equal or  larger than                                                               
35 percent of net, and the  minimum tax would govern.  In Section                                                               
7, HB  111 proposes  changing the  calculation at  prices between                                                               
$80 and  $110, so that  the per  barrel credit cannot  exceed $5.                                                               
This  change is  illustrated by  the purple  line and  the dotted                                                               
orange  line on  slide  36.   Slide  37  further illustrated  the                                                               
change  in minimum  tax  from 4  percent to  5  percent, the  tax                                                               
received under Senate Bill 21  with the sliding scale credit, and                                                               
the 35  percent tax less the  $5 maximum per barrel  credit.  The                                                               
change in revenue  is nearly $300 million at an  oil price of $75                                                               
to $85  per barrel, and he  concluded the tax increase  affects a                                                               
particular range  of moderate prices,  and less so at  higher and                                                               
lower  prices.   He  continued  to  Section  8 which  prevents  a                                                               
company from  earning a cashable  certificate for an  NOL credit;                                                               
Section  8 limits  credits that  are eligible  for repurchase  to                                                               
Middle  Earth  and  liquefied  natural   gas  (LNG)  storage  and                                                               
refinery infrastructure credits [slide  38].  Section 9 addresses                                                               
how much  cash per company  per year  can be spent,  reducing the                                                               
current limit  from $70 million to  $35 million.  House  Bill 247                                                               
allows  a  company to  get  cash  from  the  state at  a  certain                                                               
discount and  subject to  appropriation; HB  111 reduces  the per                                                               
company, per year  limit to $35 million,  and reduces eligibility                                                               
for  cash  to  producers  below  15,000  barrels  per  day.    He                                                               
explained  DOR's   concern  is  that  the   change  only  affects                                                               
explorers  and  developers  in  Middle  Earth  [slide  39].    He                                                               
provided  further  information  related to  large  annual  credit                                                               
payments  made between  2007 and  2016,  and pointed  out of  the                                                               
existing  $500  million  in earned  certificates  issued  by  the                                                               
state,  three different  companies  are  holding certificates  of                                                               
over $100 million [slide 40].                                                                                                   
                                                                                                                                
2:48:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  asked   whether  the  aforementioned  $500                                                               
million  represents the  credits  authorized  by the  legislature                                                               
last year and vetoed by the governor.                                                                                           
                                                                                                                                
MR. ALPER  advised the authorization  by the legislature  was for                                                               
$460 million, and  $430 million was vetoed by the  governor.  Had                                                               
the veto  not occurred, at this  time the state would  be holding                                                               
$70 million in  uncashed credits.  Finally,  the material section                                                               
of the  bill, Section 10,  prohibits GVPP from being  below zero.                                                               
He clarified  wellhead value, under certain  circumstances for an                                                               
individual field,  can go below  zero when affected  by expensive                                                               
transportation, such  as for  a remote  field, combined  with low                                                               
oil prices.   If  so, the  negative value  can offset  value from                                                               
other  fields  owned  by  the same  producer;  however,  this  is                                                               
relevant only in  unusual circumstances [slide 41].   He provided                                                               
a slide  that illustrated current  tariff structures  and pointed                                                               
out the difference  in tariffs is related to the  distance of the                                                               
fields to  feeder pipelines and the  Trans-Alaska Pipeline System                                                               
(TAPS);  marine transport  costs are  added.   The Point  Thomson                                                               
pipeline  is  designed to  carry  70,000  barrels per  day  which                                                               
consequently  raises  the  cost  of transporting  oil,  thus  the                                                               
tariff from  Point Thomson to  the Badami connection is  over $17                                                               
per barrel [slide 42].  Mr.  Alper gave an example of gross value                                                               
potentially   going  below   zero,  and   restated  Section   10,                                                               
originally  in previous  legislation  proposed  by the  governor,                                                               
protects the  state from a  company using a negative  number from                                                               
other production in the calculation of its taxes [slide 43].                                                                    
                                                                                                                                
2:55:47 PM                                                                                                                    
                                                                                                                                
MR. ALPER  directed attention  to the  fiscal note  identified as                                                               
"Provisions in  HB 111\O."  The  line item impact of  the minimum                                                               
tax increase from 4 percent to  5 percent results in increases of                                                               
$25 million in  FY 18, $75 million  in FY 19, and  $60 million in                                                               
FY  20,  which  is  the  main revenue  impact  of  the  bill.  In                                                               
addition, in  FY 18 and FY  19, there are increases  from changes                                                               
to credits effective  1/1/18, and from FY 20 to  FY 22, increases                                                               
from  changes to  per  barrel credits  effective  1/1/18.   Total                                                               
revenue impact  is $45 million  in FY 18,  $75 million in  FY 19,                                                               
and  $60  million  in  FY  20  in  new  revenue  from  the  bill.                                                               
Furthermore, there is the impact  of reduced spending, such as no                                                               
cash repurchase  of NOL credits,  resulting in  spending (budget)                                                               
impacts  of $60  million in  FY 19,  and $120  million in  FY 20.                                                               
Total fiscal  impacts are $45 million  in FY 18, $135  million in                                                               
FY  19, and  $180 million  in FY  20.   He cautioned  the reduced                                                               
demand  for credits  comes  with a  state  obligation for  future                                                               
demand for  credits to offset  future taxes, as indicated  on the                                                               
slide,  cumulating  in  $225  million  in FY  22.    All  of  the                                                               
estimates are based  on the [RSB] Fall 2016  Forecast [slide 45].                                                               
Slide 46  illustrated the net  fiscal impact  of HB 111  with oil                                                               
prices ranging from $20 to $120  per barrel of Alaska North Slope                                                               
(ANS), in years FY 18 through FY  27.  He concluded the impact of                                                               
HB 111  decreases as the price  of oil rises.   Mr. Alper offered                                                               
to  provide  comparative  analyses  on  any  forthcoming  related                                                               
legislation, amendments, and committee substitutes.                                                                             
                                                                                                                                
HB 111 was held over.                                                                                                           

Document Name Date/Time Subjects
HB111 ver O 2.8.17.PDF HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Fiscal Note DOR-TAX 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 Sectional Analysis 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Sponsor Statement 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 - DOR Response Questions & Bill Analysis Presentation - 2.17.17.pdf HRES 2/17/2017 1:00:00 PM
HB 111
HB111 - DOR Lifecycle Scenario Analysis Presentation - 2.17.17.pdf HRES 2/17/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HB 111