Legislature(2017 - 2018)SENATE FINANCE 532
05/04/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Presentation: Department of Revenue Analysis of Hb 111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
relating to carried-forward lease expenditures based
on losses and limiting those lease expenditures to an
amount equal to the gross value at the point of
production of oil and gas produced from the lease or
property where the lease expenditure was incurred;
relating to information concerning tax credits, lease
expenditures, and oil and gas taxes; relating to the
disclosure of that information to the public; relating
to an adjustment in the gross value at the point of
production; and relating to a legislative working
group."
9:10:19 AM
^PRESENTATION: DEPARTMENT OF REVENUE ANALYSIS OF HB 111
9:10:19 AM
Co-Chair MacKinnon requested that the presentation start on
slide 10.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
introduced himself. He apologized for the absence of
Commissioner Randall Hoffbeck, and indicated that Chief
Economist Dan Stickel could speak to the fiscal notes. He
continued that in addition to tax credit history, the first
9 slides of the presentation continued information on the
current balance of credits owed. He would refer to the
slides if necessary during the presentation.
Mr. Alper discussed the presentation "SCS CSHB 111(RES)\C -
Oil and Gas Production Tax Credits - Analysis of the Bill"
(copy on file). He referenced slide 7, informing that it
contained a table (that had been disseminated via memo the
previous week), that showed new information required by HB
247 [oil and gas tax policy legislation passed in 2016] and
listed what companies had received in cash credits in 2016.
Mr. Alper showed slide 10, "Specific Provisions of Senate
Resources Bill." He considered the effects of Senate
Resources Committee Substitute for HB 111.
Mr. Alper referenced slide 11, "Elimination of Cash
Credits-North Slope NOL":
Eliminates the "Carried Forward Annual Loss" (NOL)
credit by repealing AS 43.55.023(b)
• Instead of losses turning into cashable credits, the
excess expenditures are carried forward to be used in
a future year to offset revenue
o When used, only enough is used to reduce
liability to the equivalent of the minimum tax.
The rest carry forward
o Issue of interaction with GVR / multiplier
effect
• Value that's carried forward receives an "uplift" or
interest of 10% compounding for up to 7 years (only
for companies without production)
o 10% compound interest for 7 years roughly
doubles value
o Would like clarification on when the uplift
begins
* red text indicates technical concerns being
addressed
Mr. Alper indicated that the red text on the slides denoted
technical concerns, which had been previously discussed by
himself and Co-Chair MacKinnon and staff. He understood
that the concerns were being resolved by the committee and
did not materially impact the dollar value of the bill. He
stressed the importance of working through the technical
language of the bill so that the committee's will could be
carried forward with the bill.
9:12:56 AM
Mr. Alper continued discussing slide 11. He detailed that
the North Slope "Carried Forward Annual Loss" [or, net
operating loss] (NOL) credit was a 36 percent credit, the
Middle Earth NOL was a 15 percent credit in the current
year, and the Cook Inlet NOL was at 15 percent but would be
gone the following year. The major point of the NOL was a
loss carry-forward to use against future taxes.
Mr. Alper referred to remarks pertaining to carry-forwards
losing value, and indicated that the only amount used was
that which was required to bring the value down to pay the
minimum tax. He indicated that previous versions of the
bill would have brought the value down to zero, and then
still the minimum tax would be required. He thought the
current bill was clearly written to say that one could
carry forward to only the minimum tax level.
Mr. Alper highlighted a technical issue of the repeal of a
section of the bill that included the NOL credit. Within
the bill section, there was language that fixed a problem
within the integration of the NOL and the gross value
reduction (GVR). He explained that the GVR could be
substracted from a producer's loss, thereby increasing the
size of a tax credit and creating an opportunity for tax
credits in excess of 100 percent of a loss. He thought the
issue was an error from the original language of SB 21 [oil
and gas tax legislation that passed in 2013].
Mr. Alper discussed uplift, which he described as an
interest payment from the state to the company in
possession of the losses, generally used to compensate the
company for the time-value of money. He used an example of
a company that had $1 million in losses it was able to use
two years later, while earning 10 percent compounding
interest per year on the losses. The uplift would be used
to offset future taxes. He mentioned the "rule of 72,"
which would almost double the value of a carry-forward.
9:16:44 AM
Co-Chair MacKinnon asked if there was a different
percentage to consider that would keep a company whole
versus doubling the value of the carry-forward.
Mr. Alper thought the question of "whole" was very
subjective, and that there were many potential metrics to
use. He thought the time-value of money could be viewed as
interest or inflation value, or viewed as the cost of
capital.
Co-Chair MacKinnon asked if the administration had the
definition of what "whole" was, when the state previously
promised to pay tax credits but was not currently doing so.
She wondered if there was a percentage that the
administration was supportive of, in aid of describing
"whole."
Mr. Alper answered in the negative, and stated that the
administration recognized the industry hardship created as
a result of not paying tax credits. He stated that the
administration would like to find a complete solution to be
able to pay off the tax credits in the current year. He
thought there were technical questions that could be
discussed at a later time; such as the effective tax rate.
He discussed the effective tax rate of SB 21, which was
substantially lower than the 35 percent calculated rate.
The carry-forwards were already valued at 35 percent, which
he thought could be considered as a built-in uplift. He
opined that there was probably not a need for additional
interest because of the difference between the value of the
carry-forwards against taxes versus the actual effective
tax rate paid by the companies.
9:18:52 AM
Senator von Imhof referred to the technical issues
highlighted in red on the slide. She asked (if
hypothetically there was no uplift) how the NOL would be
utilized with the GVR. She wondered how it might preserve
an NOL going forward if a GVR was taken first.
Mr. Alper explained that the issues were not related. He
used the example of a company that lost $20 million the
previous year, but had production from a new field that had
a gross value of $100 million. He explained that a GVR
functioned when 20 percent of the gross was subtracted from
the net; which was a provision that was added in SB 21 in
order to lower taxes. With $100 million in profits, a
company would only pay taxes on $70 million to $80 million.
For tax calculation purposes, the company's loss would be
$40 million, which was comprised of the $20 million loss
and an additional subtracted 20 percent. He summarized that
35 percent of the $40 million loss would be $14 million,
and the company's credit became 70 percent of the loss
instead of 35 percent. He explained that the inadvertent
outcome had not been contemplated when oil was at higher
prices, and no one had questioned what would happen when a
producer was losing money. He stated that there had been a
technical fix the previous session.
Mr. Alper continued to speak to Senator von Imhof's
question. He believed the way the bill was written
satisfied the previous committee chair's intent that carry-
forward credits were not wasted. He shared that under the
House version of the bill, a company with $100 million in
profit could use $100 million in carry-forwards to bring
the net to zero, and still pay the minimum tax. After
changes to the Senate version of HB 111, the carry-forwards
would not be used faster than what it would take to get a
company to the minimum tax floor.
9:22:13 AM
Mr. Alper showed slide 12, "Elimination of Cash Credits-
Middle Earth":
Middle Earth credits were generally cut in half by
HB247
• Currently has a 15% NOL. This can be stacked with
either a 10% Qualified Capital Expenditure, a 20% Well
Lease Expenditure, or (through 2021) a 40% Exploration
credit.
• Bill deletes the NOL outright, so state support
decreases from 25%-55% to 10%-40%
• Remaining QCE (023(a)) and WLE (023(l)) credits
continue to be earned and turned into certificates, as
do (through 2021) exploration credits
• Due to time language and fund repeal, these
certificates would no longer be cashable and could
only be either held to use against liability or sold
(transferred)
• No uplift or carry forward, which are limited to
North Slope losses
Mr. Alper explained that Middle Earth credits were not the
primary focus of the bill, but were affected by some
changes being made. The bill would delete the Middle Earth
NOL credit completely. A company doing work in Middle Earth
(areas not in Cook Inlet or the North Slope) would get any
one of the three credits on the slide, but not in addition
to the 15 percent NOL credit. He qualified that overall
state support was decreasing.
9:24:33 AM
Mr. Alper discussed slide 13, "Elimination of Cash Credits-
Credit Fund":
Eliminate the tax credit fund by repealing most of AS
43.55.028
•This has much broader impact than simply eliminating
the NOL credit
oNew Middle Earth credits are no longer cashable
o Credits still outstanding after 1/1/18 would
require specific appropriation to DOR for any
repurchase
o The "corporate income tax" credits (LNG
Storage, Refinery) remain cashable by specific
appropriation until they sunset
o Repeals per-company "cap" language from HB247
One lesson of the 2006-2007 period was that running a
cashable credit program without a fund is cumbersome
Mr. Alper explained that the tax credit fund was the method
by which the legislature appropriated money which the
Department of Revenue (DOR) used to pay off tax credits. He
informed that there needed to be a method to ensure the
remaining cashable credits were cashed, which would require
specific appropriation, and was how it was originally done.
He discussed the history of payment for cash credits.
Section 6 of the bill created a new mechanism by which the
legislature could directly appropriate money to purchase
"corporate income tax" credits until the sunset in the
following three or four years.
Mr. Alper discussed the last bullet on the slide, which
referred to the $70 million per-company cap; and the split
by which the first $35 million was at full value, beyond
which the company would have to take 75 cents on the
dollar. He understood the desire to repeal the tax credit
fund, but recommended that the repeal be delayed a couple
of years to clear the books.
9:27:49 AM
Co-Chair MacKinnon asked if the administration had a
position on the tax credits for the refinery and liquid
natural gas (LNG) storage facilities.
Mr. Alper answered in the negative, and did not personally
have a position on the matter. He thought the credits were
an important tool that were put in place for a reason. He
observed that the LNG storage facility had credits that
were continuously pushed back a year. The project had been
somewhat delayed, and the state was hopeful that the
Interior Gas Utility would buy the large tank to earn the
credit. The credit was modelled on the credit used in the
Kenai to build the successful Cook Inlet Natural Gas
Storage Alaska (CINGSA) gas storage facility. He hoped for
a similar successful project to help with utility prices in
the Interior.
Mr. Alper discussed the refinery credit, which was short-
term and used by companies. He thought the downside to the
state was somewhat capped; since there was a limit on the
number of users, time frame, and dollar amount. He thought
it was an aspect of the system that the state should see to
fruition and hope for positive results. He used the example
of PetroStar's asphalt facility, which was a tangible
example of the refinery credit. It was argued that the
facility made road-building in the state cheaper, and the
tax credit system was responsible in part.
Co-Chair MacKinnon asked if the administration was picking
winners and losers with the tax credits.
Mr. Alper stated that the statutes were written fairly
broadly, and any refinery would be eligible for the credit.
He stated that there had been legislation in 2012
pertaining to the Interior Gas Utility LNG storage
facility, but had affected other utilities.
Co-Chair MacKinnon asked if it was fair to say that the
administration prioritized the refinery credit, the LNG
credit, and the storage facility credit because it was not
making a suggestion that they were repealed.
Mr. Alper stated that the administration had not made a
suggestion to repeal any particular credit. He thought the
particular credits were somewhat encumbered within the
existing system because of the calendar. The NOL credits
earned by most companies were (for the most part) issued in
the month of July because of statutory language. He noted
that credits against the corporate income tax tended not to
get claimed until October, when corporate income tax was
claimed. If the state was short on cash, those credits
missed out on the funds because of the first-in first-out
regulatory language. He furthered that because companies
were not currently eligible to get tax credit certificates,
they were left in a sort of limbo. He recounted working
with a taxpayer on the issue earlier in the year. If the
credits were going to remain, he suggested making them
certifiable, so the credits could be treated more equally
with other credits. He did not think the administration was
showing favoritism, but rather he was pointing out an
existing inequality in the system.
Co-Chair MacKinnon believed that the administration had
been on the record as not supporting cashable credits.
9:32:14 AM
Vice-Chair Bishop suggested that the gas storage credit
(the CINGSA credit) was limited to one project.
Mr. Alper concurred.
Vice-Chair Bishop asked if the credit could go away.
Ms. Alper stated that there had been an internal
conversation with Senate staff on the matter during debate
on HB 247. He elaborated that there was a "claw-back"
provision that stated if the project went out of business
within a certain number of years, there was an obligation
to pay back a certain portion of the credit. He thought it
would be wise to keep the credit on the books until it was
past the provision deadline. He thought that other than the
provision it was possible to repeal the credit.
Vice-Chair Bishop asked about the LNG storage facility
credit, and whether it was for one storage tank project.
Mr. Alper recalled that the credit was broadened from being
targeted from specifically at the Interior Gas Utility. He
thought it was broadened but there was an expectation that
it was for the company that got there first. He thought
there was an expectation that it would be used by the
Fairbanks utility.
Senator Micciche asked about a project in Glenallen. He
thought that sometimes credits were used to encourage the
economics of a project that was unlikely to ever be
uneconomical. He thought Mr. Alper had asserted that the
storage facility credit was for one project, but had also
mentioned another possible project in Glenallen.
Mr. Alper relayed that the matter had been debated in the
House Resources Committee in 2012 when the legislation that
created the credit was being considered. He recalled that
the legislator representing the Glenallen area had wanted
to broaden the language so the Glenallen project would also
be eligible to receive the credit. He had recalled that the
credit was available for more than one project, and
appreciated Vice-Chair Bishop's clarification. He restated
that the credit was only for a single project, but either
potential project could receive it. The Fairbanks project
was much farther along and therefore far more likely to
claim the credit. He added that realistically the size of
the credits ($15 million) was more suited to the size of
tank that a Fairbanks utility would get versus the smaller
tanks that a small-town utility would need.
Co-Chair MacKinnon asked if it was fair that the gas
storage being discussed was closed to new project entrants,
and projects had to begin operations before 2016 to qualify
for the CINGSA credit.
Mr. Alper answered in the affirmative, and stated that
CINGSA was perceived to be a successful project. He thought
the project had done great things for seasonable
availability in the Cook Inlet. He continued that Cook
Inlet was the only area that used native natural gas, so it
was the only place that could plausibly use an underground
storage facility. The intent of the credit (part of the
Cook Inlet Recovery Act in 2010) was to create the seasonal
stability. He did not think there was a broader intent to
include other locations, because it was not needed
elsewhere. The law had been written tightly so as to
preclude unintended uses. He thought if it was the
legislature's desire to make more credits for underground
gas storage, there could be additional dialogue; however,
he could not envision a need for it anywhere in the state.
9:36:59 AM
Vice-Chair Bishop thought the CINGSA storage facility was
interesting, as more gas was found when drilling was done
for the tanks.
Senator Micciche thought many people had claimed ownership
of the gas. He recalled Mr. Alper had stated CINGSA was
related to Cook Inlet, and wanted to clarify that all of
the natural gas being used in the state (including the LNG
being used in the Interior energy project) came from Cook
Inlet and took advantage of the CINGA supply benefits.
Mr. Alper concurred, and stated that because the gas
originated in Cook Inlet, it would naturally be stored
there. He explained that an underground gas storage
facility was for the most part an empty gas field that was
being reinjected. He restated Vice-Chair Bishop's reference
to the gas that was found during the CINGSA project, and
the open question as to who owned the gas. He stated that
the administration did not have a position on the matter.
Co-Chair MacKinnon stated that an LNG credit referred to in
the Revenue Resource Book was available to anywhere in the
state, and thought the legislature could consider a repeal.
The credit stipulated operations must begin before 2020.
Mr. Alper stated that the Cook Inlet underground gas
storage facility was a successful project that satisfied
the mission for which it was created.
9:39:52 AM
Mr. Alper turned to slide 14, "Expanded Ability to Use
Credits- Explorers":
Exploration credits can be used to offset Corporate
Income Taxes in addition to Production Tax
•Limited to company-earned credits and the company's
own taxes. Although not explicit in language, intent
is to not have credits be transferable to other CIT
taxpayers
•As written, potentially impacts about $200 million in
current and pending applications, plus any new Middle
Earth exploration credits earned through 2021
•Most explorers are not Alaska CIT taxpayers, so this
change would not be a material issue for them
•Provides for separate specific appropriations to
purchase remaining Corporate Income Tax (gas storage
and refinery) credits before they sunset
Mr. Alper relayed that the provisions listed on the slide
were added in part to compensate for the limited
availability of cash, to the governor's vetoes, and the
expectation that there might no longer be funding
available. He indicated that there was a lot of highlighted
red areas of text on the slide, as there had been some
uncertainty when initially reading the bill. After spending
time with Co-Chair MacKinnon's office, the administration
was relieved to understand the intent of the bill.
Mr. Alper continued discussing the points on slide 14. He
used an example of an explorer that had a credit with no
access to cash or payment of production tax. If the company
was a corporate income tax payer, it could use the
exploration credit to offset its own corporate income tax.
He noted that the exploration credits had already sunset in
the North Slope and in Cook Inlet; and the issue pertained
to Middle Earth.
Mr. Alper elaborated that many of the explorers doing the
work in the Middle Earth area were regional Native
corporations such as Doyon and Ahtna, which were C
corporations that could be corporate income taxpayers by
meeting certain definitions. He continued that the
corporations could use exploration credits to offset
liability. He thought it was not entirely clear (but was
somewhat clear by omission in the bill) that the credits
were not transferrable. It was not possible to sell the
exploration credits to another company to use against
corporate income tax. He thought there had been initial
concern that the credits could spread to outside the oil
and gas industry.
Mr. Alper continued discussing corporate income tax. He
thought that as it was written, the language would also
apply to the roughly $200 million in existing and pending
applications or certificates for exploration credits,
mostly from the North Slope and Cook Inlet. The existing
certificates would not be usable against corporate income
tax. He expected to see a clarification in the next version
of the bill. He thought many of the smaller companies in
question were not corporate income taxpayers, so there was
a limited scope to the change being proposed. He thought
the real impact would be to provide an alternative
mechanism for the regional Native corporations in the
Interior to be able to monetize their own exploration
credits.
Mr. Alper pointed out that the section addressed on slide
14 provided for a separate appropriation (after elimination
of the tax credit fund) to pay off the remaining corporate
income tax credits before the sunset in 2023.
9:43:30 AM
Co-Chair MacKinnon referred to the second bullet on the
slide, which referred to a potential impact to about $200
million in current and pending applications. She asked if
the new fiscal note reflected an updated understanding of
the intention of the Senate Resource Committee in the
Committee Substitute (CS).
Mr. Alper stated that the $200 million was inclusive of
$150 million in pending applications, and $50 million that
was already in company hands. He stated that the baseline
assumption was assuming the demand for the credits was paid
in the first year. He referred to the Revenue Sources Book,
which showed over $1 billion in expected credit purchases
in FY 18, in which the $200 million was included. Some of
the obligation would be pushed in to the future, but none
of the assumptions of the bill would be changed.
Co-Chair MacKinnon asked for clarification that the fiscal
note did not contain the $200 million of potential impact.
Mr. Alper answered in the negative.
Senator von Imhof considered the second and third bullets
on the slide. She asked if the credit would every be used
because most companies did not pay corporate income tax.
Mr. Alper responded that the companies that would own the
$200 million in current and pending tax credit applications
were generally either not corporate income taxpayers, or
had certificates that were assigned to third parties (such
as a bank). He stated that the administration did not model
based on any assumption that there would be changes to the
circumstances around the $200 million listed on the slide.
9:46:03 AM
Co-Chair MacKinnon thought there had been misunderstanding
that suggested that Alaska Native corporations did not pay
corporate income tax. She referred to emails she had
received. She asked Mr. Alper to elucidate what entities
paid corporate income tax, who did not, and why.
Mr. Alper pointed out that corporate income tax was not his
area of expertise. He stated that corporate income tax was
very similar to federal corporate income tax. He discussed
the difference between "C" corporations and "S"
corporations, and informed that C corporations were
shareholder-based, and the earnings were retained by the
entity. The earnings of an S corporation passed through to
the owners, and therefore it did not have to pay income tax
in Alaska. He qualified that S corporations had to have
less than 100 shareholders. He noted that Alaska's regional
Native corporations were traditional C corporations. If the
corporations were profitable and had a tax liability, they
paid taxes. He pointed out that he could reveal if a
certain corporation paid taxes, because it would reveal if
that entity was profitable, which would constitute a
violation of taxpayer confidentiality.
Co-Chair MacKinnon summarized that the succinct answer was
that Alaska Native corporations were C corporations, and
did pay income tax at the appropriate calculation just like
every other corporate tax payer.
Mr. Alper concurred, and offered to send a sector report
for the member's information.
9:49:14 AM
Vice-Chair Bishop asked about the shareholder limitations
for S corporations.
Mr. ALper felt he was venturing to the limit of his
expertise on the matter. He believed that to qualify as an
S corporation, a company had to have fewer than 100
shareholders.
Co-Chair MacKinnon referred to the aforementioned $200
million in current and pending applications, and asked what
portion was available for cash credits that were being
discussed.
Mr. Alper stated that all of the credits were existing, and
were based on work that was done before the effective date
of any legislation being considered, and would thereby fall
into the preexisting system. He thought it was important to
know that there was $477 million in credits that were in
company hands on January 1, 2017; and the credits were the
next set that would be paid. Whatever the legislature
appropriated in the current year, it would be paid to
credits on a pro rata share basis. If $200 million was
appropriated, everyone would get paid about 15 cents on the
dollar. The next $477 million that was appropriated
(whether it took one year or five years) would go to the
credit-holders. He detailed that within the total, about
$50 million was for exploration credits. The other $150
million was part of the set of credits that were pending
and under review, and would be issued in 2017 and would be
cashable before the effective date of the bill.
Co-Chair MacKinnon thought the description sounded like
bankruptcy court.
9:51:28 AM
Mr. Alper showed slide 15, "Expanded Ability to Use
Credits-Past Liability":
Allows credits to be used to offset older tax
liabilities
•Language appears three times, in Sec. 7 (use of 023
credits), 9 (use of transferred certificates), and 13
(transferred exploration certificates)
•Most older / amended liabilities result from an audit
or other "administrative proceeding;" these taxes are
generally paid to the CBRF so if credits can be used
to offset it means less deposits into the CBRF
•This is the only context in which a credit or similar
benefit is allowed to offset penalties or interest (as
opposed to the tax)
•Could be used to offset conservation surcharges (AS
43.55.200-300) or private royalty tax (AS
43.55.011(i))
•Purchased 023 credits can currently offset only 20%
of a current year tax liability. When used against
past years, this is superseded, allowing use all the
way to the minimum tax floor
Mr. Alper stated that the slide showed a new provision of
the bill which allowed for a company to purchase others'
tax credits certificates to offset a tax liability that
came from a period of time earlier than the credit itself.
It was not currently allowed in statute, and DOR had put
out an advisory bulletin in late 2016 (advisory bulletin
16-01) that had asserted the prohibition. He explained that
the concept of "administrative proceeding" was language
from Article 9, Section 17 of the Alaska Constitution, and
stated that any revenue resulting from an administrative
proceeding relating to resources would get deposited in the
Constitutional Budget Reserve (CBR). He added that the
initial funding that created the CBR came from large
royalty lawsuits the state settled with the industry in the
1980s.
Mr. Alper continued to speak to slide 15. He discussed
audit assessments, and relayed that the department had just
completed an older round of audits with $193 million worth
of total assessments. He informed that potentially, the
money could be paid with purchased tax credits. He thought
the legal status was somewhat unclear, and referenced case
law (Hickel vs. Halford, 1994). It was unclear whether the
administrative proceeding was triggered when the tax was
paid or assessed. It was possible for companies to divert
money from the CBR by purchasing tax credits to offset old
taxes.
Mr. Alper discussed the policy choice around the
allowability of using credits to pay interest and
penalties. He informed that the way the bill was currently
written, purchased credits could also be used backward in
time to offset penalties and interest in addition to the
additional tax found to be due through the administrative
proceeding.
Mr. Alper highlighted the fourth bullet in red, which he
did not think had been the intent of the previous
committee. He detailed that the conservation surcharge was
a nickel-per-barrel tax that went towards the spill clean-
up and recovery program. He thought there would be a
forthcoming version of the bill that would address the
technical concern highlighted in the fourth bullet.
9:56:14 AM
Mr. Alper spoke to slide 16, "Changes to Minimum Tax":
•With NOL credits converted to carry-forwards, those
carry-forwards cannot be used to reduce taxes below
the minimum tax. Hardens floor at very low prices
•Most credits can be used below the minimum tax to
zero per existing statutes, but are limited if the
taxpayer is also using .024(j) (sliding scale per
barrel) credits
•Senate Resources HB111 specifically exempts those
other credits that are currently not cashable (GVR
per-barrel credit in .024(i) and small producer credit
in .024(c)) to be used below the minimum tax, to zero.
This supersedes direction in advisory bulletin 2017-01
•Other credits are still limited by the advisory
bulletin, although exploration credits used against
corporate income tax can also reduce liability to zero
Mr. Alper recounted that the issue of hardness of the
minimum floor had been hotly debated the previous year. He
qualified that "hard" meant what could be done to reduce a
tax payment below the minimum tax, and in what way was a
taxpayer held to pay the minimum tax. He referred to a DOR
advisory bulletin (2017-01) with regulatory language
pertaining to an interaction with sliding scale per-barrel
credits. He discussed the specific floor hardening within
the bill, which was only truly relevant at prices below
about $40/per barrel (bbl). He explained that the provision
would protect a certain amount of revenue to the state at
lower oil prices. He added that most credits could
currently be used below the floor, with the exception of
when the credits were interreacting with sliding scale per
barrel credits.
Mr. Alper continued, noting a couple of exemptions in the
bill that specified certain credits not be hardened to the
floor. The exemptions resulted in small negative numbers on
the fiscal note, which were reflective of a reduction in
revenue from certain provisions in the bill.
Mr. Alper discussed slide 17, "Other Exploration Credit
Changes":
•Exploration credits sunset on 7/1/16 for both North
Slope and Cook Inlet. Credit had been previously
extended for the rest of the state "middle earth"
through 1/1/22
•New timetable to issue exploration credits to 120
days after receipt of application and data. This is
not tied to a specific tax filing deadline, which is
the way the 120 day deadline in the .023 credits is
written
•Require clarification that the required data is
submitted to DNR. Also, they typically take well more
than 120 days to process especially seismic data.
Unclear intent in this circumstance
Mr. Alper referred to frustration that DOR had not turned
around exploration credits quickly enough. He explained
that most other actions had a fixed timetable, so it was
almost inevitable to exploration credits would lag without
a timetable. He detailed that there was some issue as to
how the new timetable for exploration credits proposed in
the bill would interact with the required provision of some
data to the Department of Natural Resources. He thought
that conceptually the addition of a timetable to the
exploration credits was not problematic to the department,
but did not want to put undue burdens on DOR or DNR to rush
the processing of a sizable data set.
10:01:12 AM
Senator von Imhof referred to the third bullet, which was
in red. She thought the 120-day limit was specifically for
seismic credits.
Mr. Alper stated that there was a lot of technical language
in the bill, and thought that if the intent of the bill was
only to put the timetable on the seismic credits, he had
not been fully aware. He stated that there were other
exploration drilling activities taking place in Middle
Earth. If the intent was for the timetable to not apply to
the other activities, he was happy for the clarification.
Co-Chair MacKinnon stated that there may be a 120-day
timetable consideration on another credit as well.
Mr. Alper asked Co-Chair MacKinnon if it was the intent for
the timetable to apply to drilling exploration credits.
Co-Chair MacKinnon stated that the language would come out
in a new committee substitute (CS).
Mr. Alper apologized for his lack of understanding of the
nuances of the current version bill.
Co-Chair MacKinnon clarified that the committee expected
Mr. Alper to speak to the current version of the bill, and
the current version only had a timetable for seismic data
exploration credits.
Mr. Alper moved to slide 18, "Use of Carry Forwards":
Senate Resources version of HB111 provides a partial
or limited "Ringfence" of uplifted value
• The actual carried forward loss can be used to
offset any taxable production tax income, at any time
o So the value could potentially be used without
the project in question being brought into
production
• Use of the interest portion, or uplift, has
additional limitations
o Company must have North Slope production
o Company must have some lease interest in the
property where the expenses were originally
incurred
o Commercial production must have begun on the
lease or property where the expenditure was
incurred
Mr. Alper discussed a hypothetical situation in which a
company that had backlog of a lot of loss carry-forwards,
and then struggled with a failing project. He thought there
could be a scenario under which the producer sold the
project, but in essence was selling the carry-forward
losses that another company could use to offset its own
legacy production from existing fields; thereby costing the
state a lot of potential tax revenue. He thought there was
a partial solution in the bill. He had put the word
"production" in red on the second bullet, as there was some
a technical consideration as to the definition of
"production." He thought there might be a forthcoming
change to align the definitions.
Mr. Alper continued discussing slide 18, and pondered the
issue of whether there was a limitation on the use of
carry-forwards. The applicable sections of the bill
addressed how the limitation was different between the
principal and the interest, as well as how much surety was
the state getting that any field would actually be brought
into production before the state gave it value. He
referenced Section 21 and Section 22 in the bill.
10:05:38 AM
Co-Chair MacKinnon had heard Mr. Alper refer to 'uplift' as
interest, and understood it was one way to define keeping
an entity's value whole. She referenced inflation, and
wondered about an accurate definition of uplift.
Mr. Alper stated that uplift was an excess of inflation,
and DOR's modelling for all economic forecasting assumed a
baseline inflation rate of about 2.25 percent per year. The
uplift provided in HB 111 was 10 percent per year. He
understood that the uplift provision was in order to
compensate the companies for the time-value of money
(expected investment returns, opportunity cost, or weighted
average cost of capital). He informed that most companies
spending money on large oil field were borrowing funds, and
would be compensated by uplift for the cost of carrying
forward the debt into a future year. Currently the bill
provided for 10 percent for up to seven years, and there
were many different inflation rates to consider.
Co-Chair MacKinnon observed that Mr. Alper had stated that
instead of the 10 percent stipulated in the bill, the
administration considered 2.25 percent to be inflation-
proofing.
Mr. Alper agreed.
10:07:53 AM
Mr. Alper explained slide 19, "Interest Rate Changes":
• Removes zero interest provisions that were added in
HB247, and restores oil and gas production to the SB21
rate (3% + fed) although with compound interest, and
makes this change for all taxes
• Current federal discount rate is 1.5%; interest rate
is 8.5% compounding (4.5% simple for other taxes).
Senate Resources HB111 would make it 4.5% compounding
for all
o We testified in 2016 that interest rate should at
least match the expected Permanent Fund rate of
return, which is the state's opportunity cost for
unpaid taxes
o That is currently about 7%, or roughly 5.5% + fed
Mr. Alper informed that the slide had nothing to do with
uplift, but rather with the interest rate paid by taxpayers
to the state tax division when there was delinquent tax
found by an audit. He thought it was important to know that
the provision dealt with a two-way interest rate. If a
company overpaid, it would be paid back with interest. If
the audit was challenged and the company won against the
state, the state would pay back the funds with the same
rate of interest.
Mr. Alper recalled that Alaska used to have a very high 11
percent compounding interest rate related to delinquent
taxes. He believed that SB 21 bill language had
inadvertently removed the compounding provision in a late
amendment, resulting in a 4.5 percent simple interest. With
the passage of HB 247 in the previous legislative session,
the oil and gas production tax was carved out from all of
the underlying interest language, and specified an interest
rate of 7 percent. The interest rate would remain for three
years and then revert to zero. He understood the intent was
the extended timeframe on completion of audits. If there
was an appeal or long court proceeding, there would be no
interest in the outlying years.
Mr. Alper stated that the bill would get rid of the 3-year
interest sunset. The bill would also re-align all the taxes
so that the oil and gas production tax would not have a
separate interest regime from all other taxes. He shared
that the administration believed that the interest rate on
delinquent taxes should roughly reflect the state's
opportunity cost, since the state was most likely going to
be using invested savings to fund ongoing government
operations. Conceptually the administration approved of the
structure of aligning all the taxes and getting rid of the
sunset.
10:11:56 AM
Senator von Imhof asked if Mr. Alper was suggesting all
industries in Alaska should be at the same tax rate for
interest on delinquent taxes.
Mr. Alper stated that it had been so until 2016, and only
since the passage of HB 247 was oil and gas separated from
other taxes.
Senator von Imhof asked if Mr. Alper could repeat what
other industries were paying for interest on delinquent
income taxes.
Mr. Alper shared that other industries were paying simple
interest at the "SB 21 rate," which was 3 percent plus the
fed, to equal about 4.5 percent. He stated that all
industries, with the exception of the oil and gas
production tax, were paying 4.5 percent non-compounded
interest.
Senator von Imhof asked if the administration felt that all
industries should be paying 7 percent.
Mr. Alper stated that before SB 21 (through 2013), all
industries were paying 11 percent, and then the tax was cut
to 4.5 percent. He thought he right amount was somewhere in
the middle, probably at 7 percent.
Co-Chair MacKinnon challenged Mr. Alper on the concept of
opportunity cost. She asked if he could convey the rate of
return on the CBR. She asserted that he had conflated
drawing from the savings accounts with opportunity costs;
while the savings accounts were not drawing what the
Permanent Fund was. She thought it was an unfair
comparison.
Mr. Alper stated that Co-Chair MacKinnon was correct in the
assertion that the CBR had been the primary draw on the
state's savings as it balanced the budget during shortfalls
for the past few years. Previously a portion of the CBR had
been invested similarly to the Permanent Fund, and the
weighted average returns were closer to 5 percent.
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, stated that as of fall
2016, the long-term expected rate of return for the CBR was
2.89 percent.
Co-Chair MacKinnon emphasized that the Permanent Fund
corpus was protected by the constitution of the state,
which was very different than opportunity cost for rates of
return on any other asset the state had. She did not
disagree that interest could be somewhere in the realm that
Mr. Alper had suggested. She thought that Mr. Alper was
leaving state residents with an exceptionally high
expectation. She thought any such increase should be
applied to all industry taxpayers.
Mr. Alper agreed that the same interest rate should apply
to all taxpayers. He did not see a broader public purpose
in carving out one tax type from others. He thought the
conversation was illustrative of what the state was being
paid for delinquent taxes versus what it was paying as the
rate of uplift; and thought the case could be made to align
the two. He stated that the way the bill was written, the
state was getting 4.5 percent interest on delinquent taxes,
but was paying 10 percent.
Co-Chair MacKinnon thought Mr. Alper had made a fair
assertion.
10:16:33 AM
Mr. Alper read slide 20, "Fiscal Analysis." He asked if
committee members had any questions concerning the previous
sections of the presentation.
Co-Chair MacKinnon clarified that there were different
fiscal notes, and the committee was considering the bill
that left the Senate Resources Committee. She informed that
the Tax Division of DOR had issued an advisory opinion that
circumvented state statute and inserted regulation that
defined how to move forward; which was a subject of ongoing
discussion and affected the composition of the fiscal
notes.
Mr. Alper referred to the passage of SB 21, and the
subsequent regulatory process. He referred to an amendment
that hardened the floor to the sliding scale per-barrel
credit. The sliding-scale credit could not be used to
reduce taxes below the minimum tax. He described the
creation of the amendment as a "late-night process" and
asserted that the intent had been to get the minimum tax
from the production no matter what. He questioned whether
the regulation reflected the broader intent of the
legislation. He stated that there were different
interpretations by different sections of DOR as to how the
floor was hardened.
Mr. Alper continued discussing the DOR advisory opinion,
relaying that the department had needed to resolve an
internal difference of understanding between the auditors
and economists. He explained that DOR had wanted to publish
the advisory opinion in time for payment of 2016 taxes. The
advisory opinion iterated that the floor was somewhat
harder than previously understood. If a company was using a
sliding-scale credit, it could not go below the floor. A
company that might earn a small amount of per-barrel
credits could forego all of them and use other credits to
go below the floor.
Mr. Alper continued to discuss the effects of the advisory
opinion. In summary, the credits could not be used below
the floor in the baseline assumptions. When considering the
fiscal note, the specific credits that could go below the
floor looked like negative numbers. He thought that from
the producers' point of view it should be a net neutral.
Considering the interpretation of the law and regulation,
the opinion constituted a reduction in revenue.
10:21:48 AM
Co-Chair MacKinnon discussed different interpretations of
the sliding scale credit, and Mr. Alper's reference to a
late-night amendment. She made the point that the committee
would model against two different scenarios because
taxpayers were interpreting the regulations differently.
She asserted that the committee wanted to understand the
ramifications from a taxpayer perspective. She thought
taxpayers had an opportunity to sue to the state through an
appeals process.
Co-Chair MacKinnon recalled a conversation with Mr. Alper
in committee in which he may have previously misstated how
the sliding scale credits could be used. She wanted to
clarify that in addition to a complex tax structure, the
committee was contemplating two perspectives. She thought
it would be difficult to understand for those not in the
room. She hoped that the committee understood her comments.
Co-Chair MacKinnon asserted that the committee had asked
DOR for figures that had not been provided. The committee
was waiting for data pertaining to the two interpretations
of the sliding scale credits.
Mr. Alper stated that DOR had received clarification the
previous day regarding the alternative scenario analysis
that the committee had requested. He relayed that Mr.
Stickel had worked late the previous day and early in the
morning to provide information. He thought he could provide
the requested information by the following day.
Mr. Alper asserted that the advisory opinion was not a new
interpretation of policy, and considered a difference of
opinion between the auditors and economists at DOR. He
emphasized that the "audit masters" had written the
regulations, and had achieved only partial success in
communicating them in 2013. He articulated that the
advisory bulletin was a plain reading of the regulations.
The regulations had gone through the public review process,
and did not change from the draft to the final.
Co-Chair MacKinnon asked if it was fair to say that
taxpayers may have been treated differently.
Mr. Alper thought it was fair to say that taxpayers may
have understood the rules differently.
10:26:58 AM
AT EASE
10:28:05 AM
RECONVENED
Senator Micciche stated that only in Alaska was a $55
million shift characterized as a "nuance." He asked when
Mr. Alper had become aware of the inconsistency in how the
taxpayers were evaluating the regulation.
Mr. Alper stated that the $55 million he cited was for an
earlier version of the fiscal note, and there was no
negative $55 million in the current note. He furthered that
DOR had made an adjustment based on an understanding
related to an overhanging current operating loss. He
clarified that he personally became aware of the
inconsistency the previous fall when the special session
was over, and he was able to re-engage with some deeper
policy issues. He detailed that it had taken time to
understand the issue, vet it internally, talk with the
commissioner, and decide on a course of action.
Mr. Alper continued addressing Senator Micciche's question.
He recalled that when he learned of the inconsistency, the
fall forecast was issued with the assumption of the softer
floor. He continued that DOR had anticipated $100 million
of exploration credits to be purchased and used against tax
liability in FY 18, which had not been possible due to the
tighter strictures of the advisory bulletin. He informed
that the main reason for the delay of the spring forecast
was that DOR needed to re-do all the assumptions. He
summarized that the department was aware of the
inconsistency in the fall, had brought it up in committee
in late January, and had published the advisory bulletin
and revised the spring forecast in March and April.
Senator Micciche wondered if DOR had given any advice, and
if it had understood the order of the usage of the credits
in every case. He was wondering if there would be
forthcoming court cases.
Mr. Alper stated that the department tried to avoid giving
tax advice. The department had been asked if it had
concerns with people purchasing credits, and the department
had answered in the negative. He referred to a "20 percent
rule" referenced on an earlier slide, under which a company
could use purchased 023 credits to offset 20 percent of its
taxes. Additionally, purchased 025 credits could offset 100
percent of taxes; which was why the department had presumed
there would be a focus on 025 credits. The department had
built the $100 million liability into the system. To his
knowledge, none of the credits were sold with the
expectation of being used, and then were not usable. He
thought the topic was an awkward circumstance if the issue
would end up in court someday.
Co-Chair MacKinnon did not want DOR's team to be working
till the early hours of the morning to produce a product
that may or may not be accurate. She asked for a realistic
time frame for production of the requested alternate
scenarios. Co-Chair MacKinnon discussed the requested data.
10:33:58 AM
Mr. Alper mentioned Co-Chair MacKinnon's reference to post-
advisory-bulletin information. He stated that there were
two things to consider: the underlying change between the
fall and spring forecast, and the addition of the advisory
bulletin into the underlying assumptions and analysis. He
believed that DOR had provided a revised version of the HB
111 (version L) fiscal note. He clarified that the House
Finance Committee had used more of a pre-advisory-bulletin
analysis. He asked if Co-Chair MacKinnon was requesting
that DOR do an analysis of the House Resources CS.
Co-Chair MacKinnon answered in the affirmative. She
understood that there were significant changes to the bill
in the House Finance Committee, and wanted to compare the
final product with the changes that were made in the House
Resources Committee.
Mr. Alper noted that one feature of the current fiscal note
was a breakdown in the carry-forwards to see the value of
the uplift as a separate line item. He stated that the
House Resources Committee version of the bill was the only
other version that had some version of uplift. He stated
that DOR would provide the same additional granularity in
analyzing the House Finance version of the bill as well.
Senator Micciche had reviewed both fiscal notes. He
referenced a $45 million shift, and wondered about the
evaluation of the House version of the bill.
Mr. Alper stated that DOR had recognized that the status-
quo carry-forwards had included a certain amount of loss.
He questioned when companies would use the carry-forwards
and how. He detailed that under the Senate Resources
version of the bill there had been a distortion in how the
carry-forwards were viewed. He discussed changes to the
fiscal note; and stated that the net impact across ten
years was the same, but the numbers had shifted between
years.
10:37:26 AM
Vice-Chair Bishop echoed the comments of Co-Chair MacKinnon
regarding taking time to do quality work. He thought the
Co-Chair had expressed consideration for the well-being of
DOR employees.
Co-Chair MacKinnon concurred, and was aware that the DOR
team was working exceptionally long hours. She wanted to
ensure that the quality of the work remained consistently
high as it had been in the past.
Mr. Alper stated that the economic research group (within
the tax division) was an essential asset to the state. The
group had many different functions but was a front-line
responder during legislative session. He expressed
gratitude for the group's skill and diligence.
Senator von Imhof spoke to slide 22, in which the last
bullet referred to approximately $460 million in accrued
uplift. She thought the point was illustrative of what
could potentially accrue over time. She pondered allowing
the GVR to be taken early on. She asked if it would make
sense to model the cost to the state if the GVR credits
could be taken first, with no uplift; versus allowing a ten
percent uplift.
Mr. Alper did not fully understand Senator von Imhof's
question.
10:39:55 AM
AT EASE
10:47:10 AM
RECONVENED
Co-Chair MacKinnon explained that members should forward
any questions pertaining to the CS to her office. She
referenced a table from page four of the fiscal note, which
had been enlarged for easier viewing. She relayed that the
committee would hear the remainder of the presentation the
following day.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB111 - DOR Senate Finance Presentation - 5.4.17.pdf |
SFIN 5/4/2017 9:00:00 AM |
HB 111 |
| HB111 - DOR Senate Finance Presentation - Slide 24 Copy - 5.4.17.pdf |
SFIN 5/4/2017 9:00:00 AM |
HB 111 |