Legislature(2021 - 2022)BARNES 124

04/21/2021 01:00 PM RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSHB 54(FSH) Out of Committee
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
          HB 130-CORP. TAX: REMOVE EXEMPTIONS/CREDITS                                                                       
1:28:01 PM                                                                                                                    
CHAIR PATKOTAK announced  that the final order  of business would                                                               
be  HOUSE BILL  NO.  130,  "An Act  relating  to exclusions  from                                                               
income,  credits, and  deductions against  the Alaska  net income                                                               
tax; establishing an income tax on oil or gas business entities;                                                                
and providing for an effective date."                                                                                           
1:28:40 PM                                                                                                                    
REPRESENTATIVE  ADAM WOOL,  Alaska  State  Legislature, as  prime                                                               
sponsor,  introduced   HB  130.    He   paraphrased  the  Sponsor                                                               
Statement  [included  in  the committee  packet]  which  read  as                                                               
follows [original punctuation provided]:                                                                                        
     House  Bill  130 is  designed  to  close loopholes  and                                                                    
     ensure  fairness  in   Alaska's  corporate  income  tax                                                                    
     structure. The bill resolves three important issues.                                                                       
     First,   it  expands   the  jurisdiction   of  Alaska's                                                                  
     existing  corporate  income  tax  to all  oil  and  gas                                                                    
     producers  doing  business  here. Currently,  only  "C"                                                                    
     corporations  pay this  tax  on  their Alaska  profits.                                                                    
     This  is   increasingly  concerning  as   new,  smaller                                                                    
     companies  begin producing.  The Department  of Revenue                                                                    
     has  estimated   that  30%  of  Alaska's   current  oil                                                                    
     production  is  by  companies   who  are  organized  as                                                                    
     something  other than  C-corporations  and thus  exempt                                                                    
     from our current tax structure.  This is costing Alaska                                                                    
     an estimated  $25 to $30  million per year in  lost tax                                                                    
     revenue,  potentially  much  higher should  oil  prices                                                                    
     recover. With  the passage  of HB130,  all oil  and gas                                                                    
     producers will pay the same  rate of tax based on their                                                                    
     Alaska-derived profits.                                                                                                    
     Second, it  resolves a new  issue that has  arisen with                                                                  
     the  passage  of  the  federal  CARES  Act  coronavirus                                                                    
     relief bill.  Typically, a corporation  who experiences                                                                    
     an  operating  loss  can carry  that  loss  forward  to                                                                    
     reduce their  future year taxes.  The CARES  Act allows                                                                    
     corporations  to carry  any 2018-2020  losses backwards                                                                    
     to a  prior tax  year. Because Alaska  law incorporates                                                                    
     most provisions  of the  IRS tax  code, that  same item                                                                    
     applies to  Alaska's tax. In practice,  this means that                                                                    
     Alaska  will  be  paying  retroactive  tax  refunds  to                                                                    
     corporate  taxpayers, for  a forecasted  total of  $162                                                                    
     million between  FY2021 and  FY2022. HB130  severs this                                                                    
     link to the  federal tax code for  this specific issue,                                                                    
     preventing  Alaska from  having  to  pay these  refunds                                                                    
     during our historic budget crisis.                                                                                         
     Finally, it  closes two  small but  important loopholes                                                                  
     that   were  identified   in   the  state's   "Indirect                                                                    
     Expenditures  Report."  It  restricts  the  ability  of                                                                    
     corporations  to claim  federal  tax  credits for  work                                                                    
     that has  nothing to  do with  Alaska, and  removes the                                                                    
     ability to  deduct foreign  royalties from  a company's                                                                    
     income calculation. These  provisions provide no policy                                                                    
     benefits  and give  an unneeded  tax  break to  several                                                                    
     hundred  companies.  Together,  they are  estimated  to                                                                    
     cost the state $3.5 to  $5 million per year.. Together,                                                                    
     the three items will earn  or save Alaska close to $200                                                                    
     million next  year, and take an  important step towards                                                                    
     a comprehensive fiscal plan.                                                                                               
1:36:22 PM                                                                                                                    
KEN  ALPER,   Staff,  Representative  Adam  Wool,   Alaska  State                                                               
Legislature, gave  a PowerPoint presentation [hard  copy included                                                               
in the committee packet] on  behalf of Representative Wool, prime                                                               
sponsor of  HB 130, titled  "House Bill 130 Corporate  Income Tax                                                               
Reform."   He  presented slide  2, "What  Does HB130  Do?", which                                                               
read as follows [original punctuation provided]"                                                                                
     Three  separate reforms  to  Alaska's Corporate  Income                                                                  
     Tax, each  closing a loophole  or exemption  that costs                                                                  
     the state money                                                                                                          
     1. Federal  CARES Act  loss-carryback issue  forces the                                                                    
     state to pay large tax refunds;                                                                                            
     2. Oil and  gas companies who are  not "C" corporations                                                                    
     do not have to pay the same tax as those who do;                                                                           
     3.   Several   smaller   tax   credits   or   "indirect                                                                    
     expenditures"  that don't  appear to  have any  current                                                                    
     purpose or value                                                                                                           
     ?but first a little  background on our Corporate Income                                                                  
MR. ALPER presented slide 3, "Alaska's Corporate Income Tax,"                                                                   
which read as follows [original punctuation provided]:                                                                          
     ? All states have some sort of corporate taxation                                                                          
     ?  State  taxes  are  typically  tied  to  the  federal                                                                    
     corporate income tax                                                                                                       
          o   National   ("water's    edge")   profits   are                                                                    
     apportioned to Alaska based on certain key ratios:                                                                         
               club Percentage of Sales, Property, and Payroll                                                                  
               club Based on the federal  "UDITPA"  (Uniform                                                                    
     Division  of Income  for Tax  Purposes  Act), which  we                                                                    
     adopted in 1959                                                                                                            
          o For oil  and gas taxpayers, Alaska has  set up a                                                                    
     separate, parallel system.                                                                                                 
     The same tax rates apply, but a different formula:                                                                         
     Global  profits  are  apportioned to  Alaska  based  on                                                                    
     different ratios                                                                                                           
               club Percentage  of   Sales,  Property,   and                                                                    
     Extraction (i.e. production)                                                                                               
     ?  Tax  is paid  based  on  apportioned Alaska  profits                                                                    
     based on  the tax table  in AS 43.20.011.  Top marginal                                                                    
     rate is 9.4% of profits above $222,000.                                                                                    
MR. ALPER continued to slide 4, "Who Pays This Tax?", which read                                                                
as follows [original punctuation provided]:                                                                                     
     ?  "C" Corporations.  Legally these  are entities  that                                                                    
     hold  the company's  assets  and  income separate  from                                                                    
     that of the individual owners of the company                                                                               
          o  Profits are  retained  within  the company  and                                                                    
     taxed separately                                                                                                           
     ? All corporations  have to file a tax  return with the                                                                    
     Department  of   Revenue,  but   type  "S"   corps  are                                                                    
     currently exempt from the actual tax                                                                                       
     ? About  17,000 file  tax returns,  but only  the 6,000                                                                    
     "C" Corps are liable to pay                                                                                                
     ? DOR  reports the  tax collections separately  for oil                                                                    
     and non-oil companies                                                                                                      
          o  Oil tax  is quite  "elastic"  with oil  prices;                                                                    
     average of  the last  five years  is only  $33 million,                                                                    
     but  over  $500 million  /  year  during the  2005-2014                                                                    
          o Non-oil tax is much  more stable; average of the                                                                    
     last five years  was $103 million and  was $123 million                                                                    
     / year during the 2005-2014 period                                                                                         
     ?  Overseen by  a staff  of about  16 auditors  and tax                                                                    
     technicians in Anchorage and Juneau                                                                                        
MR. ALPER presented slide 5, "Who Pays This Tax?", which showed                                                                 
a graph of non-oil corporate taxes by industry sector.                                                                          
1:42:37 PM                                                                                                                    
REPRESENTATIVE HOPKINS asked what type  of oil companies could be                                                               
impacted by the provisions under HB 130.                                                                                        
MR. ALPER  responded that  HB 130 would  create a  definition for                                                               
"oil  or  gas business  entity",  which  carries forth  from  the                                                               
existing split in  the corporate income tax  between producer and                                                               
transporter.  He noted that  the profits of a for-profit pipeline                                                               
would be subject to the tax change.                                                                                             
MR. ALPER continued  his presentation with slide  6, titled "Part                                                               
1: CARES Act  Carry-Back Issue," which read  as follows [original                                                               
punctuation provided]:                                                                                                          
     The  2020 CARES  Act included  a provision  for federal                                                                    
     corporate taxpayers                                                                                                        
          o Any  2018-2020 losses  can be  carried backwards                                                                    
     to a prior tax year                                                                                                        
          o  Companies  could  then  re-file  an  older  tax                                                                    
     return,  and potentially  get  a  refund of  previously                                                                    
     paid taxes                                                                                                                 
     Alaska has  adopted the IRS Code  "by reference" unless                                                                    
     specifically excepted                                                                                                      
          o HB130 creates  an exception, de-linking Alaska's                                                                    
     corporate income tax from the CARES Act rule                                                                               
     The Department of Revenue has  estimated that the state                                                                    
     is liable for about $162 million in tax refunds                                                                            
MR. ALPER  continued to  slide 7, "Part  1: CARES  Act Carry-Back                                                               
Issue,"  which showed  two graphs  from the  spring 2021  revenue                                                               
forecast  presentation to  the House  Finance Committee  on March                                                               
16,  2021.   The  graphs  showed  the  revenue  lost due  to  the                                                               
provisions  detailed   in  the   previous  slide,   totaling  the                                                               
aforementioned $162  million.  He  said, "These are  refunds that                                                               
the state  would be on  the hook to  write checks for:  past paid                                                               
taxes that are getting paid back  to the taxpayer."  He clarified                                                               
that currently,  net operating  losses can be  used to  lower the                                                               
tax liability of future profits.   He explained that under HB 130                                                               
there would be more state revenue  now and less in the future; if                                                               
it doesn't pass, however, there  would be much less state revenue                                                               
now  but a  little more  in future  years.   "Representative Wool                                                               
believes ...  we need the money  now.  By 2024,  hopefully, we've                                                               
resolved our  underlying fiscal  situation, whereas  $160 million                                                               
is a  lot of money,  facing the uncertainty that  Alaska's facing                                                               
right now," he said.                                                                                                            
1:49:05 PM                                                                                                                    
REPRESENTATIVE  SCHRAGE  expressed   optimism  that  the  state's                                                               
fiscal deficit  will be fixed in  the coming years and  said that                                                               
funding  from the  American Rescue  Plan  Act of  2021 (ARPA)  is                                                               
"somewhat"   guaranteed.     He  asked,   "Can  you   share  your                                                               
perspective on  why we wouldn't  want to  just go ahead  and take                                                               
care of this now while we do  have that ARPA funding and keep the                                                               
burden in  future years  lower, so  that should we  end up  in an                                                               
unfortunate  situation where  we  don't have  a resolved  budget,                                                               
that's not an additional burden on us?"                                                                                         
REPRESENTATIVE WOOL  explained that  the ARPA funds  include many                                                               
provisions, some  which prohibit  the money  from being  used for                                                               
paying expenses  such as pensions  and taxes, and that  the funds                                                               
are  already allocated.   He  characterized the  state budget  as                                                               
"roughly balanced,"  but said the  permanent fund  dividend (PFD)                                                               
hasn't been  "worked in" to  the budget.   He noted that  in 2020                                                               
the  PFD paid  out $680  million, of  which the  $162 million  in                                                               
potential tax refunds would help cover.                                                                                         
1:52:27 PM                                                                                                                    
MR. ALPER continued  his presentation with slides 9,  10, and 11,                                                               
all titled  "Part 2: Oil  and Gas Taxpayer  Equitable Treatment,"                                                               
which read as follows [original punctuation provided]:                                                                          
     ? The corporate income tax is not the production tax.                                                                      
     These are completely different issues                                                                                      
     ? Corporate income  tax is one of  four major petroleum                                                                    
     revenue sources                                                                                                            
          1.  Royalty (landowner  share) when  production is                                                                    
     on state land. At least  ? of royalties go to Permanent                                                                    
          2.   Property  (ad   valorum)  Tax   on  pipeline,                                                                    
     equipment,  and  facilities.  About  80%  of  petroleum                                                                    
     property tax is credited back to local governments                                                                         
          3. Production (severance) tax  on net profits with                                                                    
     a minimum tax "floor"                                                                                                      
     ? Alaska has  a long history of  treating oil producers                                                                    
     different  from other  companies  within the  corporate                                                                    
     income tax                                                                                                                 
          o  Current  "extraction"   formula  and  worldwide                                                                    
          o 1978-1981  use of "separate  accounting" (Alaska                                                                    
     specific profits) rather  than apportionment; upheld by                                                                    
     Supreme Court 10                                                                                                           
     ?  For  most  of  Alaska's   history  as  a  major  oil                                                                    
     producing state,  the vast  majority of  the production                                                                    
     has  been from  traditional, integrated  companies that                                                                    
     paid the corporate tax as "C-Corps"                                                                                        
     ?  In  recent  years,  newer,  smaller  companies  have                                                                    
     entered Alaska,  and some of  the older  producers have                                                                    
     sold their assets                                                                                                          
     ? Currently, about 30% of  our oil production is from a                                                                    
     company  that is  organized as  something other  than a                                                                    
       -Corporation."  Typically,  these producers  are  "S-                                                                    
     ? HB130  changes the  statute so that  all oil  and gas                                                                    
     producers would pay this tax at the same rate                                                                              
     Why aren't these profits being taxed?                                                                                    
     ? A  type S corporation is  taxed in the same  way as a                                                                    
     Partnership or LLC                                                                                                         
     ? They calculate their profits,  and file a federal tax                                                                    
     return, but  their profits are not  legally retained by                                                                    
     the company.                                                                                                               
     ?  Profits are  "passed through"  to their  owners, and                                                                    
     taxes  are paid  via  the owners'  personal income  tax                                                                    
     ? This works in the  federal system, but because Alaska                                                                    
     has  no individual  income tax,  these profits  are not                                                                    
     taxed at all by the State                                                                                                  
MR. ALPER clarified that the purpose  of HB 130 is to resolve the                                                               
issue of  untaxed profits within Alaska.   He noted that  the tax                                                               
information of S  corporations ("S corps") is  private, but since                                                               
oil  and   gas  companies  have   similar  cost   structures  and                                                               
profitability, possible state revenue  could be extrapolated from                                                               
what is already received from  oil and gas companies operating as                                                               
C corporations ("C corps").                                                                                                     
1:57:46 PM                                                                                                                    
REPRESENTATIVE  MCKAY  said  that  he  objected  to  Mr.  Alper's                                                               
assertion that  a major oil  company has the same  cost structure                                                               
as  an individually-owned  S corp,  such  as Hilcorp.   He  said,                                                               
"Hilcorp is  known to  operate at  a much  lower overhead,  so to                                                               
speculate and assume that they have  the same cost structure as a                                                               
major [oil and gas company], I think, is incorrect."                                                                            
MR.  ALPER  said  that  he  agrees  that  Hilcorp  is  known  for                                                               
operating  on smaller  margins; however,  since it's  an S-corp.,                                                               
its finances  can't be publicized; therefore,  he was estimating.                                                               
He noted that because of  its efficiency, Hilcorp may actually be                                                               
more profitable, resulting in more  revenue to the state under HB
1:59:12 PM                                                                                                                    
MR. ALPER resumed his presentation with slides 13-16, "Part 3:                                                                  
Corporate Tax Indirect Expenditures," which read as follows                                                                     
[original punctuation provided]:                                                                                                
       Alaska  statutes have  a large  number of  tax breaks                                                                    
     that in some way reduce revenue.                                                                                           
          o  These are  generally referred  to as  "Indirect                                                                    
     ? The  legislature started looking closely  at these in                                                                    
     2014, with the passage of HB306 by Rep. Thompson                                                                           
          o This  bill requires  periodic reports  from both                                                                    
     the Legislative Finance Division  and the Department of                                                                    
     ? HB130 addresses  two specific "indirect expenditures"                                                                    
     identified in these reports                                                                                                
          o  Both were  previously proposed  for elimination                                                                    
     in 2018,  in HB399  by Rep.  Thompson (bill  passed the                                                                    
     House and died in Senate Finance)                                                                                          
     1.  Federal  Tax  Credits   that  reduce  a  taxpayer's                                                                    
     federal tax liability can be  apportioned to Alaska and                                                                    
     reduce a company's Alaska  tax liability, regardless of                                                                    
     whether  the  credit was  in  any  way related  to  the                                                                    
     company's Alaska activity                                                                                                  
          o Example:  A company earns a  $10 million federal                                                                    
     credit  for  investing  in  an  "opportunity  zone"  in                                                                    
     California.  Per  HB130,   that  expenditure  would  no                                                                    
     longer be  used in the apportionment  of that company's                                                                    
     income  to  Alaska.  Depending   on  the  company,  our                                                                    
       hare" could be a couple hundred thousand.                                                                                
     2. 80% of  Foreign Royalties received by  a company are                                                                    
     currently   excluded   from   income   before   it   is                                                                    
     apportioned to Alaska                                                                                                      
          o These  are generally royalties  for intellectual                                                                    
     property,  patents, copyrights,  etc. Not  the resource                                                                    
     "royalties" we usually think about here                                                                                    
          o  Example:  a  software  company  licenses  their                                                                    
     operating system  to a company in  Europe. The licensee                                                                    
     pays a royalty to the  taxpayer based on their sales to                                                                    
     customers. Per HB130, those  royalty payments would now                                                                    
     be fully counted in the income apportionment to Alaska                                                                     
          o  A New  York judge  recently ruled  that foreign                                                                    
     royalties  could not  be excluded,  and that  requiring                                                                    
     taxes  to  include  these  payments  from  non-resident                                                                    
     companies was not unconstitutional                                                                                         
     ? Together, these  two items cost the  state an average                                                                    
     of  $4.0 million  / year  during  the 2015-2018  period                                                                    
     (last complete years available)                                                                                            
     ? In  the current  Indirect Expenditures  report (pages                                                                    
     164-165),  DOR   said  there  would   be  no   cost  to                                                                    
     administer either change if they were eliminated                                                                           
MR.  ALPER  presented  slide 17,  "Fiscal  Note  Summary,"  which                                                               
showed the  subcomponents of HB  130 and their  projected revenue                                                               
over  the  next six  years,  as  well as  the  cost  for two  new                                                               
corporate  income  tax  auditor  positions.    He  concluded  his                                                               
presentation with slide 19, "Technical  Amendment," which read as                                                               
follows [original punctuation provided]:                                                                                        
     DOR identified  several small issues that  could impact                                                                  
     implementation. We have  submitted a proposed amendment                                                                  
     (G.1) to the Chair that would resolve them:                                                                              
     ?   In  the   reference  to   the  Federal   CARES  Act                                                                    
     legislation, an incorrect subsection number is used                                                                        
     ?  Concern that  a  taxpayer who  already re-filed  and                                                                    
     received a refund  for a carry-back loss  could have to                                                                    
     pay penalties and interest if  the bill passes and they                                                                    
     must  pay  back  these refunds.  Amendment  allows  for                                                                    
     ?  Authorizes   DOR  to  write  regulations   that  are                                                                    
     retroactive to the effective date of the bill                                                                              
2:05:13 PM                                                                                                                    
REPRESENTATIVE MCKAY referred to Section 2, page 2, lines 15-18                                                                 
of HB 130 which read as follows:                                                                                                
     *  Sec. 2.  AS 43.20.011  is  amended by  adding a  new                                                                    
     subsection to  read: (g) In  this section, "oil  or gas                                                                    
     business  entity"   means  a  person  engaged   in  the                                                                    
     production of  oil or gas  from a lease or  property in                                                                    
     this state or  engaged in the transportation  of oil or                                                                    
     gas by pipeline in this state.                                                                                             
REPRESENTATIVE  MCKAY said  he  would prefer  that  Section 2  be                                                               
addressed  separately from  the  proposed legislation.   He  then                                                               
referred  to comments  he made  on the  House floor  in which  he                                                               
"quoted the Fraser Institute, which  ranked Alaska forty-ninth in                                                               
the  country,  only  second  to   New  York  State,  in  business                                                               
friendliness," and  expressed that HB  130 could "put us  at 51."                                                               
He  opined that  Hilcorp  extended  the life  of  Cook Inlet  oil                                                               
fields and  has increased  production at  Prudhoe Bay,  which had                                                               
been in decline for 45 years.   He said, "The idea that we should                                                               
target S corporation  companies for specific taxes may  be to our                                                               
detriment; S  corporations operating  our oil  fields may  be the                                                               
future, and  we have to be  prepared for that."   He hypothesized                                                               
that,  should  HB  130  pass, Hilcorp  may  cease  operations  in                                                               
Alaska.   He then said, "I  also wonder, is it  constitutional to                                                               
target one  company in our state  in such a fashion?   It's right                                                               
here in  the slides,  we're going after  Hilcorp."   He expressed                                                               
curiosity at how other oil-producing  states treat the taxes of S                                                               
corps, LLCs, and partnerships.                                                                                                  
REPRESENTATIVE  WOOL   explained  that  HB  130   doesn't  target                                                               
Hilcorp; rather,  Hilcorp was  highlighted because  they acquired                                                               
the  land   previously  operated  by   BP,  which  had   been  in                                                               
partnership  with  ConocoPhillips  Alaska,  Inc.  and  ExxonMobil                                                               
Corporation in Prudhoe Bay,  and had been taxed as a  C corp.  He                                                               
noted that California  has an income tax, so a  shareholder of an                                                               
S-corp.  there  would  have  a   tax  liability.    He  expressed                                                               
understanding of  the wariness  of tax  changes and  the possible                                                               
business  implications  but said  that  taxes  change often,  and                                                               
businesses also make decisions based on other factors.                                                                          
2:14:21 PM                                                                                                                    
REPRESENTATIVE  FIELDS asked  whether  this proposed  legislation                                                               
would apply only to Hilcorp at this time.                                                                                       
REPRESENTATIVE WOOL said  that while Hilcorp is known to  be an S                                                               
corp, he  doesn't know whether  there are  any other oil  and gas                                                               
companies that are S corps.                                                                                                     
MR. ALPER said  under Alaska tax law, anyone who  owns a share of                                                               
an oil field is an oil producer.                                                                                                
REPRESENTATIVE  FIELDS asked  what  the tax  differences are  for                                                               
business that are  not oil and gas producers, whether  they are C                                                               
corps or S corps, and if a similar discrepancy exists.                                                                          
MR. ALPER responded that S corps  don't pay any state income tax,                                                               
no matter what  type of business, and that  many small businesses                                                               
are S  corps.   In response  to Representative  Fields' follow-up                                                               
question, Mr. Alper  clarified that when he was  a shareholder in                                                               
an S-corp.,  he paid federal  taxes for the business  through his                                                               
personal income taxes but had no tax liability to the state.                                                                    
REPRESENTATIVE FIELDS asked how many S-corps operate in Alaska.                                                                 
MR.  ALPER  replied that  approximately  10,000  S corps  operate                                                               
within Alaska.                                                                                                                  
2:19:05 PM                                                                                                                    
REPRESENTATIVE GILLHAM said that he's  concerned about how HB 130                                                               
could affect the gold mining  and fishing industry, Wal-Mart, and                                                               
Fred Meyer.                                                                                                                     
REPRESENTATIVE   WOOL  explained   that  large,   publicly-traded                                                               
companies are  C corps, and  that S corps  which are not  oil and                                                               
gas companies would not be affected by HB 130.                                                                                  
2:20:03 PM                                                                                                                    
REPRESENTATIVE  HANNAN  noted that  Hilcorp  is  paying taxes  on                                                               
profits earned in Alaska to  the federal government instead of to                                                               
the State of  Alaska, and that HB 130 wouldn't  change the amount                                                               
of  taxes  being  paid,  only  which  governmental  entity  would                                                               
receive the revenue.                                                                                                            
MR.  ALPER  responded,  "Yes,  Mr. Hildebrand  pays  tax  to  the                                                               
federal  government, presuming  that his  numbers are  positive."                                                               
He  noted  that  under  HB 130,  every  incremental  dollar  that                                                               
Hilcorp  would  pay to  the  State  of  Alaska would  reduce  its                                                               
federal tax liability.                                                                                                          
2:21:58 PM                                                                                                                    
REPRESENTATIVE RAUSCHER asked whether  Hilcorp would be providing                                                               
testimony on HB 130.                                                                                                            
CHAIR PATKOTAK  said that, as  far as  he knows, Hilcorp  has not                                                               
been contacted.                                                                                                                 
2:22:40 PM                                                                                                                    
REPRESENTATIVE CRONK asked why HB 130  is specific to oil and gas                                                               
companies instead  of all  S corps.   He  noted that  Alaska gets                                                               
12.5 percent on  "every barrel that goes  through that pipeline,"                                                               
and  he questioned  negating that  production and  pondered where                                                               
"the happy medium" may be.                                                                                                      
REPRESENTATIVE WOOL replied that there  would be 10,000 new state                                                               
income taxes  filed, which  he characterized  as "a  much heavier                                                               
lift."   He commented  that he is  not sure he  would want  to do                                                               
that.   If  he were  to propose  enacting a  broad-based tax,  he                                                               
added, he was not sure it would  be on S corps.  He observed that                                                               
if the  state were to enact  a state income tax,  "every business                                                               
owner that  owns an  S corp  would have to  pay it  through their                                                               
personal state  income tax,"  which, he opined,  would be  a more                                                               
equitable way to  tax.  He said that the  Prudhoe Bay [oil field]                                                               
has, until recently, been owned  by three large corporations that                                                               
have paid taxes  to the State of  Alaska, and now that  an S corp                                                               
has bought one of those  shares, the state could potentially lose                                                               
the  $50  million  in  annual  revenue  it  had  previously  been                                                               
2:26:18 PM                                                                                                                    
RYAN FITZPATRICK, Commercial Analyst, Division of Oil and Gas,                                                                  
Department of Natural Resources (DNR), presented excerpts from a                                                                
PowerPoint on HB 130 [hard copy included in the committee                                                                       
packet], titled "Petroleum Revenue Systems: Royalties."  He                                                                     
clarified that the purpose of his presentation is to provide                                                                    
context around the petroleum revenue system and noted that slide                                                                
9, "Total Petroleum Revenue by Restriction and Type, Millions of                                                                
Dollars," provides background information detailing the major                                                                   
types of petroleum revenue.  He then paraphrased slide 2, "State                                                                
Oil & Gas Lease Revenue Types," which read as follows [original                                                                 
punctuation provided]:                                                                                                          
     ? Share of gross production of oil and gas from the                                                                        
     lease owed to the landowner.                                                                                               
     ? Set as a fraction (e.g. 1/8) or percentage (e.g.                                                                         
     12.5%) or production.                                                                                                      
     ? Owed upon severance from the lease.                                                                                      
     ? May be taken as payment in value ("RIV") or as                                                                           
     delivery in kind ("RIK").                                                                                                  
     ? Generally free of costs of production (CAPEX and                                                                         
     OPEX), but subject to transportations costs.                                                                               
     Net Profit Share                                                                                                         
     ? Share of net profits generated by the lease from oil                                                                     
     and gas production.                                                                                                        
     ? Set as a percentage (e.g. 30%, 40%, 79.59%) of net                                                                       
     ? Owed once developments costs have been recovered                                                                         
     (with interest).                                                                                                           
     ? Always taken as a payment.                                                                                               
     ? Paid on net profits after deducting costs of                                                                             
     production (both OPEX and CAPEX).                                                                                          
     Bonus Bid                                                                                                                
     ? Cash payment paid when lease is issued.                                                                                  
     ? Typically the bid variable, so lessees compete on                                                                        
     the bonus bid amount.                                                                                                      
     Lease Payment                                                                                                            
     ? Annual cash payment, may be credited against royalty                                                                     
     ? Set as a dollar per acre amount for each lease, some                                                                     
     leases include increases during the lease term.                                                                            
2:30:38 PM                                                                                                                    
The committee took an at-ease from 2:30 p.m. to 2:37 p.m.                                                                       
2:37:41 PM                                                                                                                    
MR. FITZPATRICK finished  showing the information on  slide 2 and                                                               
continued  to  slides  3  and   4,  titled  "Royalty  Calculation                                                               
Examples"  and  "Net  Profit Share  Calculation  Examples."    He                                                               
explained that the  royalty calculation begins with  the price of                                                               
a  barrel  of oil;  pipeline  tariffs  and marine  transportation                                                               
costs are deducted; net value  is multiplied by total production;                                                               
and total  production is multiplied  by the royalty rate  to find                                                               
the dollar amount of revenue to  the state.  For net profit share                                                               
leases, revenue  to the state  is determined by both  the royalty                                                               
rate  and a  separate  rate based  on the  profit  made from  the                                                               
MR. FITZPATRICK  concluded his presentation  with slide  5, which                                                               
displayed  a map  of the  North Slope  showing state  and federal                                                               
lands, the  Arctic National Wildlife Refuge  (ANWR), Arctic Slope                                                               
Regional  Corporation (ASRC)  lands, and  private land  holdings,                                                               
all of which provide revenue to the state.                                                                                      
2:44:55 PM                                                                                                                    
COLLEEN GLOVER,  Director, Tax  Division, Department  of Revenue,                                                               
presented  a PowerPoint  on HB  130  [hard copy  included in  the                                                               
committee  packet] titled  "Oil  and Gas  Tax Revenue  Overview."                                                               
She  began on  slide 2,  "Agenda," which  listed two  tax revenue                                                               
sources as follows [original punctuation provided]:                                                                             
     1. Oil and Gas Revenue Tax Sources                                                                                         
          ? Property Tax Overview                                                                                               
          ? Production Tax Overview                                                                                             
          ? Corporate Income Tax Overview                                                                                       
     2. Oil and Gas Total Revenues                                                                                              
MS. GLOVER presented slide 3,  titled "Oil and Gas Fiscal System:                                                               
Overall  Order  of  Operations,"   which  displayed  a  flowchart                                                               
showing the  relationship between royalties, which  are the first                                                               
element  of   the  fiscal  system;  property   taxes,  which  are                                                               
considered  lease   expenditures  and  can  be   applied  against                                                               
production tax;  production tax, which comes  after royalties are                                                               
subtracted  and  allows  property   tax  as  a  deduction;  state                                                               
corporate income tax, of which  production tax, property tax, and                                                               
royalties are  excluded; and federal corporate  income tax, which                                                               
excludes all other royalties and taxes.                                                                                         
MS. GLOVER  paraphrased slide  5, titled  "Oil and  Gas revenues:                                                               
Property  Tax,"  which  read  as  follows  [original  punctuation                                                               
     ? Based on assessed value of oil and gas property                                                                          
     ? State tax rate is 2% (20 mills) of assessed value                                                                        
     ? Municipalities can levy property taxes at same rate                                                                      
     it taxes all non-oil and gas property                                                                                      
         o Taxes paid to municipalities acts as credit                                                                          
     towards tax due to state                                                                                                   
        o Municipalities receive large majority of total                                                                        
        ? Governing Statute AS 43.56; Regulations 15 AAC                                                                        
MS. GLOVER  explained that oil and  gas property tax is  a tax on                                                               
production, pipeline, and equipment.   She then moved on to slide                                                               
6,  titled  "Oil and  Gas  Revenues:  Property Tax  Distribution,                                                               
FY2020," which  displayed a  table showing the  amount of  tax by                                                               
jurisdiction and the proportions  for state and local government.                                                               
She noted  that the total  tax revenue  for fiscal year  2020 was                                                               
$280 million, of which the  state kept approximately $123 million                                                               
with the remainder allocated to the communities.                                                                                
2:49:36 PM                                                                                                                    
REPRESENTATIVE HOPKINS asked about  the weighted average referred                                                               
to  in the  slide 6  footnote,  which read  as follows  [original                                                               
punctuation provided]:                                                                                                          
     The  Fairbanks  North  Star  Borough,  Kenai  Peninsula                                                                    
     Borough, and  Matanuska-Susitna Borough  do not  have a                                                                    
     uniform mill  rate for  petroleum properties.  The rate                                                                    
     presented here  is the weighted-average  effective mill                                                                    
     rate based on the 2020 certified tax roll.                                                                                 
MS.  GLOVER   replied  that  she   couldn't  speak   to  specific                                                               
municipalities, but  overall, communities  "can only tax  oil and                                                               
gas property to the same rate that they tax other property."                                                                    
2:51:07 PM                                                                                                                    
REPRESENTATIVE HANNAN  asked Ms.  Glover whether  she is  able to                                                               
confirm the existence of more than one  S corp in the oil and gas                                                               
industry in Alaska.                                                                                                             
MS. GLOVER  replied that  the Department  of Revenue  can't state                                                               
who  is or  isn't  a  taxpayer.   She  said,  "There are  several                                                               
entities that are  a[n] oil producer, or actually own  the oil on                                                               
the  North  Slope   or  in  the  Cook  Inlet,  that   are  not  C                                                               
2:52:21 PM                                                                                                                    
REPRESENTATIVE FIELDS asked, "Why?  I find this puzzling."                                                                      
MS. GLOVER  explained that,  while the  Department of  Revenue is                                                               
allowed   to   aggregate   certain  information,   it's   legally                                                               
prohibited from disclosing individual taxpayer information.                                                                     
2:53:00 PM                                                                                                                    
DAN  STICKEL,  Chief  Economist,   Tax  Division,  Department  of                                                               
Revenue, continued  the PowerPoint presentation, titled  "Oil and                                                               
Gas Tax Revenue  Overview," with slide 8, "Oil  and Gas Revenues:                                                               
Production  Tax," which  read  as  follows [original  punctuation                                                               
     ? Assessed on taxable barrels of oil and gas                                                                               
     ? Taxed at segment level                                                                                                   
          o All North Slope one segment                                                                                         
          o Cook Inlet fields are each separate segments                                                                        
        ? Governing Statute AS 43.55; Regulations 15 AAC                                                                        
MR. STICKEL explained that "taxed  at segment level" means that a                                                               
company may calculate  tax according to the  production value and                                                               
costs for  the entire area  in which it's operating,  rather than                                                               
calculating for each  individual field.  He said  that Cook Inlet                                                               
has  a  tax  ceiling  in   statute,  as  well  as  lower  overall                                                               
production,  and both  factors limit  the revenue  collected from                                                               
the Cook Inlet Basin.                                                                                                           
2:56:53 PM                                                                                                                    
NICOLE  REYNOLDS, Deputy  Director, Tax  Division, Department  of                                                               
Revenue, continued  the PowerPoint presentation, titled  "Oil and                                                               
Gas Tax Revenue Overview," with  slide 11, "Oil and Gas Revenues:                                                               
Corporate  Income  Taxable  Entities,"   which  read  as  follows                                                               
[original punctuation provided]:                                                                                                
     ? Generally, Alaska follows the Internal Revenue Code                                                                      
     when determining an entity's taxable status.                                                                               
     ? Applies to C-Corporations only                                                                                           
MS.  REYNOLDS explained  that a  C corp  is an  independent legal                                                               
entity  owned by  its  shareholders, with  profits  taxed at  the                                                               
entity level only.  Alaska  uses the federal provisions exempting                                                               
an  S corp  from tax  at the  entity level;  rather, S  corps are                                                               
treated  as partnerships,  so owners  report a  share of  company                                                               
earnings on their individual tax  returns.  Alaska treats limited                                                               
liability    companies   (LLCs)    as   partnerships    or   sole                                                               
proprietorships, depending  on their federal  filing status.   In                                                               
response to an  earlier question asking how many  S corps operate                                                               
in  Alaska,   she  said  that  there   are  approximately  11,700                                                               
companies, which includes oil and gas companies.                                                                                
2:58:46 PM                                                                                                                    
REPRESENTATIVE  SCHRAGE asked  whether  aggregate data  regarding                                                               
oil and gas companies could be provided.                                                                                        
MS.  REYNOLDS  replied  that she  would  research  whether  she's                                                               
allowed to provide the information.                                                                                             
REPRESENTATIVE FIELDS  said that he  would like to know  how many                                                               
oil and gas companies are S corps.                                                                                              
REPRESENTATIVE  SCHRAGE  clarified  that   he's  not  asking  for                                                               
identifying  information,   only  the  number  of   oil  and  gas                                                               
companies operating as S corps.                                                                                                 
3:00:12 PM                                                                                                                    
MS. REYNOLDS continued  her presentation with slide  12, "Oil and                                                               
Gas  Revenues:  Corporate  Income  Tax," which  read  as  follows                                                               
[original punctuation provided]:                                                                                                
     ? AS 43.19  Multistate Tax Compact (MTC)                                                                                   
          o Regulations 15 AAC 19.011-.1490                                                                                     
     ? AS 43.20  Alaska Net Income Tax Act (ANITA)                                                                              
          o Regulations 15 AAC 20.010-.920                                                                                      
     ? 26 U.S.C. 1  1399 and 6001  7872                                                                                         
          o  Adopted,   as  amended,  by  reference   in  AS                                                                    
MS. REYNOLDS  gave a  brief history  of tax  laws adopted  by the                                                               
State  and  explained  that  Alaska adopts  any  changes  to  the                                                               
Internal Revenue Code as they happen.                                                                                           
3:02:10 PM                                                                                                                    
REPRESENTATIVE HANNAN referred to Section  7 on page 3, [lines 8-                                                               
16], of HB 130, which read as follows:                                                                                          
     Sec. 7.  The uncodified law  of the State of  Alaska is                                                                  
     amended by adding a new section to read:                                                                                   
          CARES   ACT;   NET   OPERATING   LOSS   CARRYBACK.                                                                    
     Notwithstanding  AS 43.20.021(a),  changes  made to  26                                                                    
     U.S.C. 172  by sec.  2302, P.  L. 116-136  (CARES Act),                                                                    
     amending   26  U.S.C.   172(b)(1),   providing  for   a                                                                    
     carryback of net operating losses  arising in a taxable                                                                    
     year  beginning after  December  31,  2017, and  before                                                                    
     January  1, 2021,  do  not apply  to  a state  taxpayer                                                                    
     filing net income  taxes under AS 43.20 for  a tax year                                                                    
     beginning after  December 31, 2017, and  before January                                                                    
     1, 2021.                                                                                                                   
REPRESENTATIVE  HANNAN asked  Ms. Reynolds  whether there  is any                                                               
sense of how many taxpayers  will apply net operating losses from                                                               
2020 to previous years' taxes.                                                                                                  
MS. REYNOLDS answered  that, as 2020 returns  haven't been filed,                                                               
the Department of Revenue doesn't have a firm number.                                                                           
REPRESENTATIVE HANNAN clarified her question.                                                                                   
MS. REYNOLDS responded that there  have been taxes filed claiming                                                               
refunds from tax years 2018 and 2019.                                                                                           
3:04:04 PM                                                                                                                    
MS.  REYNOLDS continued  the PowerPoint  presentation with  slide                                                               
13,  "Oil  and Gas  Revenues:  Corporate  Income Tax  Calculation                                                               
Example,"  which showed  how a  C corp  in Alaska  calculates its                                                               
state corporate  income tax  liability.   She clarified  that the                                                               
tax  rate applies  to the  net  taxable income  within the  state                                                               
after deducting  the net operating  losses.  She continued  on to                                                               
slide   14,  "Oil   and  Gas   Revenues:  Corporate   Income  Tax                                                               
Apportionable   Income,"   which   read  as   follows   [original                                                               
punctuation provided]:                                                                                                          
     Oil &  Gas C-Corporations use the  "Worldwide Reporting                                                                    
     Method"  under  AS   43.20.144(b)  to  determine  their                                                                    
     unitary   combined  groups   and  their   apportionable                                                                    
MS. REYNOLDS  clarified that for presentation  purposes she would                                                               
focus  on  oil  and  gas producers  and  pipeline  companies,  as                                                               
identified in  AS 43.20.144,  referring to them  as "oil  and gas                                                               
taxpayers."    She  then explained  that  "apportionable  income"                                                               
means  the  entire  business income  of  a  multi-state  taxpayer                                                               
subject to  apportionment.  Oil  and gas  taxpayers apportionable                                                               
income  is  their  federal  taxable   income  with  four  primary                                                               
exceptions:  taxes based  on  net income  that  were deducted  in                                                               
determining  federal taxable  income are  added back;  intangible                                                               
drilling and development costs that  were deducted as expenses in                                                               
determining   federal   taxable   income  are   capitalized   and                                                               
depreciated on  a slower,  straight-line expense  approach rather                                                               
than   the  accelerated   federal   depreciation  schedule;   the                                                               
depletion deduction  is allowed  only on  a cost  depletion basis                                                               
rather than on a percentage  depletion basis; or, depreciation is                                                               
computed  using the  pre-1981 federal  rule, which  is a  slower,                                                               
straight-line  expense  approach   rather  than  the  accelerated                                                               
schedule under  federal law.   The apportionment formula  is used                                                               
to determine how  much of the taxpayer's  apportionable income is                                                               
taxable by the State of Alaska.   Taxpayers engaged in oil or gas                                                               
production  as well  as pipeline  transportation generally  use a                                                               
three-factor   formula   composed   of   property,   sales,   and                                                               
extraction, which  are all added  together and divided  by three.                                                               
Taxpayers engaged  in either oil  and gas production  or pipeline                                                               
transportation use a modified  apportionment factor, depending on                                                               
their  business activity.   Sales  for oil  and gas  taxpayers is                                                               
based on sales in Alaska rather than worldwide sales.                                                                           
3:09:32 PM                                                                                                                    
MS. REYNOLDS continued  her presentation with slide  16, "Oil and                                                               
Gas Revenues:  Corporate Income Tax Net  Operating Losses," which                                                               
read as follows [original punctuation provided]:                                                                                
     ? Prior to 2017, NOLs could be carried back two years                                                                      
     and forward 20 years.                                                                                                      
      ? Tax Cut and Jobs Act (TCJA) limited the ability of                                                                      
     corporations to carry back NOLs.                                                                                           
     ? CARES Act, Section 2303, reversed the TCJA treatment                                                                     
       of NOLs arising in 2018, 2019, and 2020 to provide                                                                       
     stimulus and cash infusion to economy.                                                                                     
        ? Change was to the timing of when these can be                                                                         
     applied not to the value of the NOLs                                                                                       
          ? Can be carried back five years                                                                                      
        ? Applies to losses in tax years 2018, 2019, and                                                                        
     2020 only.                                                                                                                 
MS.  REYNOLDS  explained  that  the  purpose  of  the  carry-back                                                               
provision  was to  provide stimulus  to  companies that  suffered                                                               
large losses in  2018, 2019, and 2020 and to  give the economy an                                                               
infusion of cash.  She said that  for tax year 2021, the law will                                                               
revert back  to the  TCJA treatment of  net operating  losses, so                                                               
those losses  would be  limited to 80  percent of  taxable income                                                               
and "can only be carried forward indefinitely."                                                                                 
3:12:45 PM                                                                                                                    
REPRESENTATIVE HANNAN noted Ms. Reynolds'  use of the phrase "can                                                               
only be carried forward indefinitely."   She asked, "Does it mean                                                               
I can carry  it forward until I choose to  use that net operating                                                               
loss?   Or, if  I had so  much of  a loss that  I could  carry it                                                               
forward for forty years, I could do that?"                                                                                      
MS. REYNOLDS said that it means  that a taxpayer would be able to                                                               
apply the loss in future  years until they've exhausted the loss.                                                               
She illustrated that  with a $100 million loss in  tax year 2020,                                                               
and  a future  tax  liability of  only $10  million  per year,  a                                                               
taxpayer would be able to apply  the $100 million loss to each of                                                               
those future years until the loss is exhausted.                                                                                 
3:14:49 PM                                                                                                                    
CHAIR PATKOTAK announced that HB 130 was held over.