Legislature(2013 - 2014)
03/12/2013 10:13 AM Senate FIN
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 21
"An Act relating to appropriations from taxes paid under
the Alaska Net Income Tax Act; relating to the oil and gas
production tax rate; relating to gas used in the state;
relating to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax
credits for certain losses and expenditures; relating to
oil and gas production tax credit certificates; relating to
nontransferable tax credits based on production; relating
to the oil and gas tax credit fund; relating to annual
statements by producers and explorers; relating to the
determination of annual oil and gas production tax values
including adjustments based on a percentage of gross value
at the point of production from certain leases or
properties; making conforming amendments; and providing for
an effective date."
10:13:54 AM
Co-Chair Kelly MOVED to ADOPT the proposed committee
substitute for SB 21, Work Draft 28-GS1647\P
(Nauman/Bullock, 3/11/13).
Co-Chair Meyer OBJECTED for the purpose of discussion.
SUZANNE ARMSTRONG, STAFF, SENATOR KEVIN MEYER, presented
the committee substitute (CS) and provided a sectional
analysis. She explained a number of changes from the Senate
Resources version. Section 1, Section 3, Section 5, Section
6, Section 8, Section 14, Section 21, Section 38, Section
39, and Section 40 were conforming amendments that
correlated to changes to AS 43.05.225 found in Section 4 of
the bill. Section 4 amended the statute by decreasing the
interest rate on delinquent taxes to either the lower of 3
percentage points above the applicable annual federal rate
or at the annual rate of 11 percent. The amended statute
was included as a response to concerns raised by the Alaska
Oil and Gas Association and industry. The combination of
the six year statute of limitations coupled with the high
interest rate penalty and the method of calculating the tax
left open the possibility of additional taxes imposed by
the Department of Revenue (DOR) on the underpaid taxes
after audit. The interest rate penalty did not reflect
current financial conditions. She noted that not all of the
sections referenced earlier specifically pertained to oil
and gas taxes; however, the penalty or interest rate under
other titles of law were tied to the interest rate so
conforming changes were necessary.
Ms. Armstrong continued with Section 2. She explained that
the Community Revenue Sharing (CRS) fund was currently tied
to 20 percent of the revenue from the calculation of
progressivity on the production tax. The CS eliminated
progressivity and stipulated that the legislature may
contribute an unspecified amount to the Community Revenue
Sharing fund. The provision did not change the formula for
revenue sharing in current statute. She mentioned that the
$60 million contribution limit and the total fund balance
limit of $180 million remained intact.
Ms. Armstrong referenced Section 7 that concerned the
qualified oil and gas industry service expenditure credit
applicable to the corporate income tax. She reported that
the tax was not altered from the Senate Resources Committee
version of SB 21. After discussion with DOR, a future
amendment will address changes to the provision that would
"tighten down" the credit and reduce the ten year statute
of limitations to seven years.
Ms. Armstrong commented that Section 9 established the base
rate of 30 percent for the oil and gas production tax. She
reported that no changes were made to Section 10 that
related to gas used in-state outside of Cook Inlet. She
noted that Section 10 in the CS corresponded to Section 4
in the resources version of SB 21. She mentioned that
Sections 11 and 12 pertained to tax payment and was
unaltered from the resources version. The only change to
Section 12 reflected the 30 percent base rate and the
calculation of the GRE (Gross Revenue Exclusion). She
pointed out that Page 10, lines 4 to 6 addressed the
calculation of the GRE. She noted that line 6 contained an
error and the 30 percent figure should be 20 percent.
10:22:04 AM
Ms. Armstrong added that Section 13 addressed the payment
of tax and was the same as Section 7 of the resources
version. She remarked that Section 15 corresponded to tax
credits or losses on expenditures and limited the tax
credit for qualified capital expenditures incurred north of
68 degrees for expenditures incurred before January 1, 2014
and did not change from the resources version. She noted
that Section 16, Section 17, Section 18, Section 23, and
Section 29 pertained to the net operating losses and the
carry forward annual loss credit.
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, discussed Section 17, the treatment of net
operating losses. He suggested that the language in Section
17 needed refinement. He explained the intent of the
section. A net operating loss (NOL) meant that expenditures
were greater than revenue. Under current law the state
monetized net operating losses in the following year. In
instances when the tax floor was zero and a producer cannot
use all of it's incurred expenditures on the tax to minus
zero, current law allowed converting the loss to a credit
at a rate of 30 percent. The state "bought" the credit in
the following year. The resources CS modified the section
so that the loss was carried forward with 15 percent
interest until the time that the producer earned offsetting
income. He expounded that the finance CS diverged from the
previous version and applied the provision to the first 10
years of the well on the Gross Revenue Exclusion (GRE). He
believed that the NOL credit provision in the resources CS
carried forward for ten years would not enable the full
benefit of the NOL credit. He judged that current law was
preferable to the resources CS; NOL's converted to a credit
monetizable to the state in the year they occurred. The
committee wanted to incite expenditures and limited the
NOL's to the amount of expenditures monetized the next
year. Without the spending, the unused credit would carry
forward at 15 percent interest until there was offsetting
income.
Co-Chair Meyer interjected that the intent was also to have
the money spent in Alaska. Mr. Marks concurred.
Ms. Armstrong continued. She noted that Section 18, Section
23, and Section 29 would also need altering with any
changes to Section 17. Section 24, dealt with the small
producer tax credit and was extended to 2022, which
corresponded to Section 17 of the resources version. She
reported that Section 26 referring to the $5 per barrel
allowance was maintained in the finance CS. She continued
that the exploration incentive credits in Section 27 and
Section 28, established in the resources CS were extended
to 2022. The three mile boundary from the bottom hole of a
pre-existing well drilled for oil and gas was maintained as
well as the eligibility qualifiers for the credit under AS
43.55.025.
Ms. Armstrong referred to Section 30 and Section 31
pertaining to the oil and gas credit fund and reported that
no changes occurred from the resources CS. Sections 32 and
33 also remained the same. Section 34, Section 35, and
Section 36 pertained to the determination of the production
tax value and did not change.
Ms. Armstrong detailed that Section 37 established the
qualifiers for the GRE. The mechanisms were different from
the resources version. The CS established that the gross
value at the point of production that met certain criteria
was reduced by 20 percent for 10 years from the production
date. She listed the criteria: oil and gas produced from a
well within a lease or property that did not contain a
lease from within a unit on January 1, 2003; the oil or gas
produced from a well within a participating area
established after December 31, 2011 that is within a unit
formed under AS 38.05.180(p) before January 1, 2003 if that
participating area does not contain a reservoir that had
previously been in a participating area before December 31,
2011, and lastly; the oil or gas produced from a well that
the producer can demonstrate to the Department of Revenue
(DOR) that drains a reservoir that the Department of
Natural Resources (DNR) had certified and approved upon
review of a plan of development that the oil was not
contributing to production before December 31, 2012.
She furthered that collaboration between DNR, DOR, and
Department of Law (DOL) was ongoing on the final criterion
in order to ensure that the bill's language allowed for the
correct calculation to confirm "new oil."
10:31:38 AM
Ms. Armstrong concluded that the remaining provisions in
the CS remained the same as the resources version.
Co-Chair Meyer interjected that "preliminary" discussions
were held with the administration regarding the definition
of new oil from legacy fields and whether making the
determination was possible. Ms. Armstrong confirmed the
discussions and noted the designation of new oil was under
review.
Co-Chair Meyer highlighted the changes. He applauded the
resources version and mentioned the efforts of Senator
Giessel. He noted that very few changes occurred in the
finance CS. He offered that the base rate was changed to 30
percent down from 35 percent, but the $5 per barrel
allowance remained. He mentioned the GRE was dropped from
30 percent to 20 percent. The GRE was expanded to proven
new oil in the legacy fields. A ten year time limit on the
GRE was added. The competitive review board was eliminated
from the finance CS. The CRS was unchanged. The NOL and the
carry forward were changed to reflect the intent that the
expenditures would be reinvested in Alaska; suggested by
Vice-Chair Fairclough. The manufacturing credit against
state income tax, exploration incentive credits, small
producer credit, elimination of the qualified capital
credit, and the effective dates remained the same. He
offered that the committee repealed progressivity because
as the price of oil raised the amount of money the state
collected increased. The committee's goal was to levy a
similar tax rate at all prices of oil.
Co-Chair Meyer expressed that the goal of the legislation
was to become competitive and to get more oil into the
pipeline. He hoped that the CS would meet the objective.
Senator Dunleavy cited Section 4, Page 2 and questioned
whether the producer would "always" receive the lower
interest rate. He asked about the percentage points in an
inflationary period. He wondered whether the lower rate
would still apply. Ms. Armstrong answered in the
affirmative.
Senator Olson asked about the Alaska Municipal League and
its comments on any revenue impacts or confusion about the
effects of the bill on revenue sharing. Ms. Armstrong
offered to contact the league.
Senator Olson requested a comparison of the different
versions of SB 21 to Alaska's Clear and Equitable Share
(ACES). Ms. Armstrong replied that a comparison was
forthcoming.
10:39:02 AM
Ms. Armstrong addressed the question regarding revenue
sharing. She disclosed that a new formula for the CRS fund
was established in 2008 and was tied to progressivity in
ACES. The CS provision did not tie the fund to a specific
funding source, which provided more security. The formula
would work the same way; every year the legislature may
appropriate the funding specified by the formula.
Co-Chair Meyer asked the administration for preliminary
comments on the CS.
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, cited Section 17, Page 14 regarding
the loss carry forward provisions. He summarized the
committee's intent to ensure that a loss carry forward
credit reimbursement was balanced by spending in the year
the company was claiming the credit. The spending occurred
in the same year the credit reimbursement was issued.
Otherwise, the credit was carried forward and offset
against the tax liability as contained in the resources
version. He referred to Section 30, Page 24 and explained
that the provision reflected a conforming change in the
governor's version. He cited AS 43.55.028 that provided the
mechanism for payment of credits. He suggested that the
committee focus on the mechanism that writes the check for
the credit instead of adjusting the credit. Placing
restrictions on AS 43.55.028 and restricting when a credit
could be turned in for cash payment would accomplish the
same outcome in a simpler manner.
Co-Chair Meyer restated the question regarding the
determination of new oil in legacy fields. Mr. Pawlowski
wanted to defer the question to DNR.
Co-Chair Meyer wished to better understand the net
operating loss and the tax credits. He asked for
clarification.
Mr. Pawlowski provided an explanation of the loss carry
forward. He related that the loss carry forward provided
equal treatment for a company without a tax liability.
Currently, when a company spends money it was deductible
against its taxes. A benefit was granted to the company
based on the tax rate. At a 30 percent net tax rate taxes
decreased by 30 cents on each dollar. Without the
liability, a loss was created and was not shared by the
state. The loss carry forward attempted to provide an
equivalent for the new entrant similar to the existing
producer. The new entrant's credit would be carried forward
until the point in time a production tax liability was
incurred. He stated that the reduced GRE and the higher
base rate affected the economics for the new entrant. The
CS offered an opportunity for a new entrant to receive an
"upfront" cash payment provided the company continued to
spend in the state. The value for the new entrant provided
access to capital to continue its investment. The intent
was to "strike a balance." The investment occurred in "many
stages" and money was spent before production began. He
summarized that the loss carry forward was attempting to
equalize treatment between companies that had tax
liabilities and new entrants that do not.
10:49:16 AM
Co-Chair Meyer cited exploration tax credits or small
producer tax credits as examples of the types of credits
entitled to loss carry forwards. He wondered whether the
taxes were "stackable." Mr. Pawlowski replied that some
were stackable. The small tax credit was non-transferable
and not monetizable. A small producer qualified for the
basic credit on production. The ability to stack credits
was more complicated for the exploration incentive credit.
Co-Chair Meyer asked whether the concept of spending tax
credit refunds in the state was part of ACES. Mr. Pawlowski
discerned that the previous tax systems were attempting to
balance offsets of credits and tax rates. The CS before the
committee attempted to flatten the tax rate system offset
by incentives against production. Loss carry forward's were
based on lease expenditures and only the expenditure
qualified.
Co-Chair Meyer remarked that he favored targeted capital
tax credits for new wells. He believed the credits provided
relief for upfront costs for development on the North
Slope. However, the loss of revenue to the state's treasury
was dramatic. The committee opted instead for the GRE.
Mr. Pawlowski added that the targeted tax credit liability
to the state grew in proportion to the investment. Lots of
new investment grew the liability to the state.
Senator Bishop asked whether the NOL carry forward could
include exploration credits that did not result in
production. Mr. Pawlowski answered in the affirmative. He
expounded that how valuable the credit would be was
determined by how much the company continued to spend in
the state. The company must spend additional money to turn
the credit into cash. If production was never realized many
credits would fall under "non-cashable" carry forwards that
without production became worthless.
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, answered, in response to a question by Senator
Bishop, that the 025 exploration credits mandated that the
company comply with information requirements. Generally all
geologic data became public at some point in the future,
but the state obtained 025 credit data at an earlier time.
Vice-Chair Fairclough recalled that the governor wanted
simplicity in a new tax structure and was a reason for the
elimination of progressivity. The administration had
concerns over credits and the impact on the states cash
flow in the future. She proposed that if the state provided
credits and "had skin in the game" then the money should
stay in Alaska and not migrate to outside fields. She
wanted the money reinvested in wells and specifically
support the smaller producers. She hoped for increased
production. She stated that Alaska was incentivizing future
production with Alaskans money.
Co-Chair Meyer added that the committee supported the idea
but it was "still a work in progress."
10:58:57 AM
Mr. Balash explained DNR's process to determine new oil in
legacy fields. The Division of Oil and Gas utilized
unitization and participating areas "mechanisms" to "count"
new oil. He pointed out that the resources version of SB 21
included the expansion of participating areas. The finance
version required that the lessee must prove to DNR that a
certain volume of oil was not counted as previous
production. A producers drilling plan must demonstrate that
the oil was new and would be recovered. The producer would
then qualify for a GRE in the legacy unit. He relayed that
the department would "refine" the definition of new oil in
order to clearly specify who had the "burden of proof" and
that DNR approval was compulsory for the GRE.
Co-Chair Meyer interjected that the industry testified that
oil was plentiful in the legacy fields, but it was more
difficult to obtain. Mr. Balash confirmed that "billions of
barrels" of recoverable oil remained in the legacy fields.
He stated that the amount recovered was "in part a function
of the rate of decline." The more work done to reduce the
decline the more of the oil would be recovered. He was
aware of the industry's efforts to find and recover the
additional "pockets" of oil. The bill placed the burden on
industry to demonstrate how the new oil would be identified
and recovered. He thought the state should help incentivize
the production of new oil under those circumstances.
Co-Chair Meyer mentioned Norway's tax credit to incite new
oil production and the desire to circumvent new capital tax
credits, which lead to using the GRE as an incentive for
new oil production in legacy fields. He requested an
explanation of the GRE.
Mr. Pawlowski explained that a tax credit was an upfront
payment but the GRE was a reduction in the taxable value.
He added that 20 percent of the gross value of eligible new
oil was subtracted from the production tax value or net
profit, subsequently; the 30 percent tax rate was applied.
The GRE reduced the corporation's total tax liability. An
upfront payment was not required with credits. The CS
limited the GRE to ten years per well. The GRE concept was
introduced, because of auditing complications in trying to
attribute specific costs to specific projects. Calculating
gross values at the point of production was a relatively
simple calculation; number of barrels times gross value. He
summarized that 20 percent of the value of approved new oil
was an additional deduction on the overall corporate tax
rate.
Co-Chair Meyer emphasized that the tax reduction was only
available for the production of new oil. Mr. Pawlowski
confirmed.
Co-Chair Meyer requested comments on the GRE's 10 year time
limit. He expressed concern that production would
accelerate. Mr. Pawlowski replied that analysis was ongoing
and advised that comments would be better deferred.
11:07:23 AM
Senator Dunleavy asked about a credit for manufacturing in
the state. Mr. Pawlowski responded that the credit was
retained in the CS and found on Section 7, Pages 3 to 4,
beginning on line 15.
Vice-Chair Fairclough responded to the GRE time limit. She
postulated that all oil became gross oil revenue exclusion
recipient with time if not limited in some manner. She
thought that it depended on the type, size, and the life
cycle of the project. She wanted to see the modeling done
by the consultants and the administration to determine a
"sweet spot" to best utilize the GRE and establish fair
time limits for the producer and the state. She believed
that the calculation was a "complicated" policy decision.
11:11:39 AM
Senator Bishop appreciated Vice-Chair Fairclough's
comments. He hoped for detailed modeling and further
discussions on various scenarios.
Mr. Pawlowski pointed out that in determining the
committee's intent regarding the amount of production that
qualified for the GRE helped the department determine how
much production did not qualify for the GRE.
Senator Olson wondered whether other tax regimes used the
GRE and how successful it was to incite new production. Mr.
Pawlowski recalled that the GRE was discussed last session.
He recommended that PFC Energy address the effectiveness
question.
JANAK MAYER, MANAGER, UPSTREAM, PFC ENERGY, offered that
the GRE was discussed in the committee last year when
examining ways to differentiate between existing and new
production. The overall tax system calculated production
and costs on a companywide level. Differentiating between
different streams of production was more complicated. The
GRE was simpler and provided a tax benefit based solely on
the revenue side. Similar approaches were taken in other
regimes, specifically the Brown Field Allowance used in
Great Britain. He noted that the GRE's impact from the CS
reduced government take from approximately 63 percent to 60
percent.
11:17:00 AM
Senator Olson restated his question about other tax regimes
in the world employing the GRE and its impact on increased
production. He was looking for a clear measure of success.
Mr. Mayer responded that the Brown Field Allowance was the
most comparable tax. Presently, new production could not be
attributed to the allowance but increased investment was
indicated.
Senator Kelly asked when the allowance was enacted. Mr.
Mayer replied that enactment occurred within the last year.
Senator Dunleavy asked whether the investment activity
increased immediately. Mr. Mayer replied that the response
within the legacy fields was swift.
Co-Chair Meyer asked whether the CS improved Alaska's
competitiveness on a global basis. Mr. Mayer answered that
the taxes made Alaska more competitive when compared to
other "peer jurisdictions."
Co-Chair Meyer thought that some elements of ACES worked
such as the capital tax credits, but that progressivity was
not competitive.
Senator Bishop remembered that industry committed $45
billion for new projects with and additional increase of
$100 billion with the Brown Field Allowance. Mr. Mayer
understood that the figures included decommissioning
existing fields, which did not create new oil.
SB 21 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|