Legislature(2007 - 2008)SENATE FINANCE 532
11/12/2007 04:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
| + | HB2001 | TELECONFERENCED | |
CS FOR HOUSE BILL NO. 2001(FIN) am
An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; providing a limit on the
amount of tax that may be levied on the production of
certain gas that is produced outside of the Cook Inlet
sedimentary basin; relating to the sharing between agencies
of certain information relating to the production tax and
to oil and gas or gas only leases; expanding the period in
which the Department of Revenue may assess the amount of
oil and gas production tax and conservation surcharges;
prohibiting a producer or explorer from receiving tax
credits if certain judgments are not satisfied and
requiring, as a condition of receiving the tax credits, the
deposit of the amount of certain unpaid judgments and
certain interest on those judgments in the court during an
appeal and relating to that interest; relating to state oil
and gas audit masters; making conforming amendments; and
providing for an effective date.
Co-Chair Steadman called the Senate Finance Committee meeting to
order at 4:10:55 PM.
4:11:47 PM
STEVE PORTER, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, reminded the Committee about a past
presentation which talked about the value equation; value, minus
the costs, times the tax, minus the credits, yields the total
value. He began his presentation by focusing on total revenue -
West Coast - received from selling the oil, as depicted on graph
1. He related that the next step is that transportation costs
are deducted from every barrel of oil, both the royalty barrels
and the non-royalty barrels, shown in slide 2.
4:14:55 PM
Mr. Porter highlighted gross production value - the value after
the royalty is taken care of, as depicted on slide 3. Next,
producer costs are taken out before the production tax value is
determined - slide 4. The production tax value is the value
upon which the tax is calculated.
Mr. Porter turned to slide 5 to show the base production tax,
which on the current PPT is 22.5 percent. The new proposed tax
is 25 percent. The slide shows the producer cash flow, not
producer profit, because "profit" suggests a return on the
money. The state tax is based on a single snapshot in a year -
whatever cash flow happens in that year is taxed.
Co-Chair Stedman noted that Senator Stevens, Senator Ellis,
Senator French, and Senator Therriault had joined the meeting.
Mr. Porter explained that in a low price world the margin for
the tax base begins to occur. Revenue share is a percentage of
the effective rate of the tax.
Mr. Porter discussed excluded costs from the producer cash flow.
Those costs are actual costs and cannot be included in the
producer cash flow. As excluded costs are increased, the
producer cash flow is lessened. They cannot be considered as
part of producer profit.
Mr. Porter turned to slide 7 to show the next piece, corporate
income tax.
4:18:51 PM
Mr. Porter discussed the progressivity tax shown on slide 8,
which is based on the trigger price. It is based on the amount
of cash flow per barrel. The slope of the line is based on the
tax factor, whether it was .4 or .2 percent.
Co-Chair Stedman noted that Senator Wagoner and Senator
Wielechowski had joined the meeting.
Mr. Porter addressed the federal government take shown on slide
9, which is 35 percent off the top after all the other
calculations are made. The producer does get to deduct state
taxes against the federal tax. Two elements are not shown on
this slide: property tax and credits.
4:20:41 PM
Mr. Porter reported that slide 10 shows that, at the current
price of roughly $9 per barrel, the base tax ends up being about
22.5 to 25 percent, the progressivity tax, if it caps out at 25
percent, would be roughly the same, corporate income tax and
federal tax are added, and the current effective tax rate is
plus or minus $90 per barrel.
At-Ease: 4:21:25 PM
Reconvened: 4:22:56 PM
DAN DICKINSON, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, referred to a handout entitled "Summary
Comparison between Various Approaches to Production Tax" (copy
on file.) The analysis compares current law with HB 2001
(Alaska's Clear and Equitable Share - ACES), and CSHB
2001(FIN)am, which passed out of the House recently. The color
coding shows red as current law, yellow depicts the Governor's
proposal (ACES), and white reflects something not found in
either of the other two proposals.
4:24:13 PM
Mr. Dickinson explained that on the first page, the base rate
for the House version of the bill is 25 percent. The
progressivity has elements from current law and the Governor's
proposal, as well as elements of its own. The trigger point -
or how much margin is allowed on each barrel before
progressivity kicks in - is at $30. The slope - or the amount
added to the tax for each dollar per barrel over the starting
place - is at .4 percent. It is calculated on a monthly basis
and it is applied to the net with a cap of 25 percent of net.
4:25:54 PM
Mr. Dickinson suggested examining the language in the bill at
this point. He referred to page 12 of the House version of HB
2001 where subsection (g) deals with progressivity. He
summarized that the monthly production tax value is calculated
in the manner described in AS 43.55.160(a), except that the
gross value at the point of production for the month is
substituted for the gross value at the point of production for
the calendar year. The base tax is calculated by taking the
gross value and subtracting the costs in order to come up with
the net value.
Mr. Dickenson reported that the floor remains as in current law
- a single floor calculated on the North Slope. Credits can
still be applied against the floor. The rate ranges from 0 to 4
percent. The one difference has to do if there are gas sales
from the North Slope for use in state.
4:28:25 PM
Mr. Dickinson explained the investment credits, which are found
in AS 43.55.023. The provision in current law that says they
can be taken in the year of investment, applies to the House
version of the bill. The percentage of loss carry forward
credits has been changed to 25 percent. A new entrant would get
20 percent. The ability to use transitional investment (TIE)
credits ends December 31, 2007. If investments were made
between March 31, 2001, and March 31, 2006, then there is money
in the TIE credits. He explained how TIE credits could still be
allowed to go forward.
4:31:30 PM
Mr. Dickinson related that exploration credits are found in AS
43.55.025 and predate PPT. The exploration credits varied
depending on certain conditions. With PPT, the same set of
rules applied. This legislation raises exploration credits to
30 percent, but keeps development and production capital
investments at 20 percent.
Mr. Dickinson noted that bad acts are disallowed when applying
for credits. Under the new legislation, DNR will take a more
active role. In addition, exploration outside of the Cook Inlet
has to be three miles from any pre-existing well.
Mr. Dickinson reported that the confidentiality of well data has
changed to two years, or if the Commissioner of DNR thinks the
data would adversely affect a lease sale, or if a private
landowner does not want the information to become public.
4:34:37 PM
Mr. Dickinson explained that the current bill expands what is
allowed for pre-existing wells. Transitional investment credits
prior to 2003 can be offered by DNR for up to 5 percent of the
costs incurred.
Mr. Dickinson listed the exception to tax credits. If there is
an unpaid judgment, the state will withhold credits.
4:36:26 PM
Mr. Dickinson addressed the state purchase of the credits, which
can be made by appropriation and has a limit of $25 million per
taxpayer. The ARM Board is authorized to purchase credits and
the state would, in turn, purchase the credits from the ARM
Board.
Mr. Dickinson dealt with the allowable lease expenditures -
costs that are deductible. AS 43.55.165 has been changed to say
that before a cost can be deducted, the State has to authorize
it through regulations. The idea behind the structuring of
costs was the notion that most of the oil produced are in units
with working interest owners. The change involves the implicit
use of producer audits of operators.
4:38:55 PM
Mr. Dickinson explained that there is a list of bad acts which
would disallow the deduction of costs for repair or replacement.
The current law regarding dispute resolution remains. Public
outreach costs are listed and removed.
Mr. Dickinson reported that the final item under deductible
costs for operating a lease would be determined on a formulaic
basis. He explained the formula, which will apply to legacy
fields. Base costs in 2006 would be multiplied by 3 percent
annually. He related how recalculations would be determined if
overpayments were made. The first year, the base would be
multiplied by 137 percent due to a shortened timeframe.
4:42:06 PM
Mr. Dickinson continued to speak to forecast issues. Before a
penalty is assessed, the state must ask for documentation. The
request for documentation can not occur retrospectively.
Mr. Dickinson addressed the disclosure of tax information,
comparing the three various approaches. The House version
states that information of individual taxpayers cannot be
revealed. It does require that tax information for three
taxpayers be combined.
4:44:49 PM
Mr. Dickinson explained that in the House version, the sharing
of data between departments remains unchanged. The statute of
limitation was changed to six years. The Department of Revenue
would create six exempt positions for master auditors and the
remaining positions would remain classified.
Mr. Dickinson noted that the effective date of the bill would be
January 1, 2008.
Mr. Dickinson mentioned that downstream costs were changed in
the House version to be the lower of the actual or the
reasonable costs for tankers and for the pipeline.
Co-Chair Stedman noted that Senator Green was present.
Mr. Dickinson addressed the gas ceilings in Cook Inlet. The
average rate is calculated and any gas produced for instate use
receives the same rate.
4:50:34 PM
Mr. Dickinson spoke about additional penalties for over and
under reporting of payments. The IRS rules apply for under
payment of taxes. An additional penalty has been added for
under reporting of payments. If costs are overestimated by 10
percent, the company would owe a 10 percent penalty. Gross
negligence would incur a 20 percent penalty.
Mr. Dickinson reviewed the intent language. He noted that
savings from the ceilings on gas should be passed on to the
consumers.
4:53:11 PM
Mr. Dickinson discussed the final four administrative issues.
Monthly estimated payments under current law do not allow for a
ceiling. The House version of the bill allows for ceilings to
be applied monthly. Up to $50 million generated by
progressivity may be appropriated to go to LIHEAP funding.
There is new language that deals with whistleblowers. There is
a provision which allows DNR to rewrite their Net Profit Share
Lease Regulations to be retroactive. The required 2011 Report
was deleted.
Mr. Dickinson addressed a mechanical issue in one of the
amendments that dealt with fixed operating costs, which also
required a report in 2011.
4:56:14 PM
Senator Elton asked about the unpaid judgment as an exception to
tax credits. He assumed that it would apply to the Exxon
Valdez, but not to Point Thomson. Mr. Dickinson did not know.
Senator Dyson stressed the importance of protecting high level
auditors from punishment for disagreeing with their boss. He
questioned if the whistle blowing provisions would apply. Mr.
Dickinson explained that state employees are excluded from the
provisions. Senator Dyson questioned if they should be provided
protection. Mr. Dickinson noted that auditors can only be
removed for cause. Master auditors could be removed merely
because they were thought to be troublesome to the
administration's vision.
Mr. Porter added that the application is correct in that the
risk is there. Generally, auditors are in the professional
ranks and it normally would not be a problem.
5:05:06 PM
BARRY PULLIAM, SENIOR ECONOMIST, ECON ONE, RESEARCH, CONTRACTOR,
LEGISLATIVE BUDGET AND AUDIT COMMITTEE, referred to a handout
entitled, "Estimated Average Effective Tax Rate, Government
Shares and Revenue Impacts at Various West Coast ANS Price
Levels" (copy on file.) He noted that the charts contain new
DOR volume projections and new cost projections. The House
version of the bill was also added.
Mr. Pulliam highlighted the first chart, "Effective Tax Rate on
Gross Taxable Value at Various West Coast ANS Price Levels."
The chart compares PPT, PPT Expected, SB 2001, Senate Judiciary
CS, and the House bill. He noted that the difference between
PPT and the PPT expected is the cost issue. The PPT expected
incorporates the cost as expected last year, while PPT
incorporates currently expected costs. All five tax rates use
the Fall 2007 DOR Forecasts.
Mr. Pulliam pointed out that the House bill and the Senate
Judiciary version closely mirror each other because they have
some of the same elements. They have the same 25 percent tax
rate and the same progressivity feature. They each top out at a
50 percent overall tax rate. They fall below, at low prices,
the SB 2001 line because they don't have the same gross floor
that SB 2001 has. They raise more quickly, over $55 per barrel,
because of the higher progressivity. He pointed out that the
House bill is not retroactive, which results in a lower tax
rate. Another difference is that the House bill incorporates
deemed operating costs for Prudhoe Bay and Kuparuk. EconOne has
estimated these numbers in aggregate, which could cause them to
change.
5:10:48 PM
Mr. Pulliam explained that the next chart is "Estimated Total
Government Share at Various West Coast ANS Price Levels". The
House bill and the Senate Judiciary bill are very similar
because each is progressive with the government share rising at
higher price levels. All the tax scenarios have a progressivity
feature to them.
5:12:00 PM
Mr. Pulliam spoke to the "Estimated Marginal Government Share at
Various West Coast ANS Price Levels". He explained the revenue
to the state and federal government as prices rise by a dollar
per barrel. At $80 per barrel, the share of the increased
revenue at $81 would be 80 percent to government take and 20
percent to the industry. The figures increase until 85 percent;
at that time they decline. Until that point, rising
progressivity causes the tax rate to climb. Prices begin to
decrease due to cap provisions; all are at 50 percent with the
exception of the current PPT, which caps out at 47.5 percent.
Mr. Pulliam noted that the Senate Judiciary and House versions
of the bill, with .4 progressivity, will reach the higher take
point sooner than the current PPT or SB 2001. At $100 ANS the
cap would occur. When progressivity is not as steep, it would
not be reached until $120 or more.
5:16:18 PM
Mr. Pulliam spoke to the fourth slide, "Estimated Average
Effective Tax Rate, Government Shares and Revenue Impacts at
Various West Coast ANS Price Levels". The bottom box shows the
estimated revenue impact of each of the different proposals
relative to the current PPT. The Senate Judiciary CS and the
House bill have similar figures. He explained that at $80 a
barrel, the Senate Judiciary CS and the House bill both would
have significant revenue impacts over and above SB 2001.
5:17:46 PM
Co-Chair Steadman asked for an explanation of how Capex and Opex
are handled when the price deviates from the $60 mark. Mr.
Pulliam explained that the operating and capital costs are fixed
at a $60 reference level and then allowed to deviate from that
point. If prices rise above $60 they both increase; if prices
fall below $60 they both decrease. They operate with a one-year
lag. The relationship for Capex is larger than for Opex. Capex
modeling is consistent with DOR assumptions and the modeling
that results in their fiscal notes. The specific figures for
capital are that if prices go up by 1 percent, capital spending
would go up .3 percent the following year. The reverse is also
true. The relationship for operating costs is, for every
percent increase in price over $60, operating costs go up by .2
percent the following year. The reverse is also true.
5:19:57 PM
Senator Thomas noted that the chart indicates that PPT Expected
would outperform all versions other than a price range from
about $95 - $122. Mr. Pulliam agreed. He explained that the
analysis of the PPT Expected forecast focused on a narrower
price band. Forecasters did not foresee the high rise of
prices. The assumption reflects a fixed cost world.
5:22:48 PM
In response to a question by Senator Thomas, Mr. Pulliam stated
that it would be unlikely in the near time period that prices
would fall below $40 per barrel.
AT EASE: 5:24:02 PM
RECONVENE: 5:26:35 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, provided a
handout entitled, "Tax Rates in Various Versions of SB 2001"
(copy on file.) He reviewed the major provisions of a tax system
based on net cash flow. PPT has a base rate of 22.5 percent.
ACES, Senate Judiciary, and House versions of the bill raise the
base rate to 25 percent. The Senate Finance version returns to
a base rate of 22.5 percent. Currently under PPT, the trigger
is at $40. All of the other proposals have a trigger at $30.
The rates vary; under PPT the progressivity is .25 percent, ACES
is .20 percent, Senate Judiciary and the House versions are at
.40 percent, and the Senate Finance version is at .60 percent
and has multiple triggers and multiple rates. Comparing maximum
rates shows PPT at 47.5 percent, ACES, Senate Judiciary, and
House at 50 percent, and Senate Finance is capped at 75 percent,
but never actually goes beyond 50 percent.
Mr. Teal compared the tax systems three ways: increase in
revenue, total revenue, and government share. He emphasized
that the models are snapshots and many components such as
monthly take vs. annual take and credit delays don't show up.
These models depict relative positions.
5:30:38 PM
Mr. Teal looked first at increases in revenue under ACES
relative to PPT. The base rate is 25 percent. He described the
gross floor and the impact of the trigger, which flattens out
and produces $400 to $500 million more a year than PPT. He
compared the progressivity factor in PPT and ACES.
Mr. Teal described what would happen when adding the Senate
Judiciary line. The base rate is 25 percent, but at the trigger
point, a much higher progressivity kicks in, which generates
more revenue more quickly. PPT is a longer, slower climb.
Eventually, ACES, and Senate Judiciary produce the same revenue
at high oil prices.
5:33:38 PM
Mr. Teal noted that the House and Senate Judiciary versions are
the same. He described the addition of the Senate Finance
version to the graph. It produces the same amount of revenue as
PPT does with a 22.5 percent base rate until the trigger point
is reached, at which point progressivity is high - as much as .6
percent. Then it begins to taper off producing between $1
billion and $1.7 billion more than PPT. Where others reach
their maximum at 50 percent, PPT continues to climb at .1
percent progressivity and holds flat at very high oil prices.
5:34:53 PM
Mr. Teal turned to the second way of comparing tax scenarios,
total state revenue. Revenue continues to climb under all
scenarios. PPT is low; ACES is a shift upward. Senate
Judiciary and House versions are higher revenue at lower oil
prices, but then the high progressivity in the Senate Finance
begins to catch up, and at the $90 range, the same revenue is
produced. At higher prices, the progressivity continues to
climb and produces more revenue than the others.
5:36:01 PM
Mr. Teal addressed the third way of comparing tax scenarios,
government share of revenue. PPT has the lowest government
take, ACES is higher because of a higher base and lower
progressivity, the House and Senate Judiciary versions shift up
and then flatten out, and Senate Finance almost follows PPT.
The difference is due to reasonable transportation costs.
Senator Dyson questioned the net surcharge and trigger for the
Senate Finance version. Mr. Teal explained that progressivity
begins at $30 and the rate is .6 percent. At $50, it drops to
.5 percent, at $70 it drops to .35 percent, and beyond $90 it is
.1 percent. He explained the advantage of having multiple
trigger points.
5:39:20 PM
Senator Elton referred to the charts on page 8 and 9 and
requested clarification regarding crossover points. Mr. Teal
responded that they differ because the scale of each graph is
different.
Senator Elton expressed confusion that the numbers on page 8 did
not concur with the numbers on page 9. Mr. Teal referred to
page 10 and pointed out that the numbers fall on top of each
other. The differences are quite small. This chart was drafted
right before the meeting started so some errors may be present.
5:43:14 PM
Senator Thomas asked if there were other differences such as
TAPS language or other specific items that may have an impact.
Mr. Teal replied that, unlike EconOne, he left out estimates of
costs to the operating cap in order to present a snapshot.
There are production, volume, credits, and delay factors that do
affect these models.
Co-Chair Stedman explained the importance of having Legislative
Finance involved in the process. EconOne will have
presentations on progressivity in the near future.
5:47:11 PM
Senator Dyson asked if the changes in the CS were largely
regarding base rates, trigger points, and progressivity. Co-
Chair Stedman said there would also be other changes.
CS HB 2001 (FIN) am was HELD in Committee for further
consideration.
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