Legislature(2005 - 2006)SENATE FINANCE 532

04/18/2005 09:00 AM FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 139 EXTENSIONS OF OCCUPATIONAL BDS/AGENCIES TELECONFERENCED
Moved CSSB 139(L&C) Out of Committee
+ SJR 11 REPEAL TELECOMMUNICATIONS TAX TELECONFERENCED
Moved SJR 11 Out of Committee
+ SB 69 APPROP: GRANT TO ARCTIC POWER FOR ANWR TELECONFERENCED
Moved CSSB 69(FIN) Out of Committee
Bills Previously Heard/Scheduled
+= SB 151 DECOUPLING FROM FED TAX DEDUCTION TELECONFERENCED
Heard & Held
+= SB 70 CRIMES INVOLVING CONTROLLED SUBSTANCES TELECONFERENCED
Scheduled But Not Heard
+= SB 110 POLLUTION DISCHARGE & WASTE TRMT/DISPOSAL TELECONFERENCED
Moved CSSB 110(FIN) Out of Committee
= SB 147 SPORT FISHING FACILITY REVENUE BONDS
Moved CSSB 147(FIN) Out of Committee
9:31:47 AM                                                                                                                    
                                                                                                                                
                                                                                                                                
     SENATE BILL NO. 151                                                                                                        
     "An  Act excepting  from  the  Alaska Net  Income  Tax Act  the                                                            
     federal  deduction  regarding  income attributable  to  certain                                                            
     domestic production  activities; and providing for an effective                                                            
     date."                                                                                                                     
                                                                                                                                
                                                                                                                                
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
JUDY BRADY,  Executive  Director,  Alaska Oil  and Gas Association,                                                             
spoke about  the non-profit  trade association  that represents  the                                                            
majority  of the  companies  that produce,  explore,  transport  and                                                            
refine oil and gas products  in Alaska. She introduced Mr. Williams.                                                            
                                                                                                                                
9:34:05 AM                                                                                                                    
                                                                                                                                
TOM WILLIAMS, Chair, Tax Committee, Alaska Oil and Gas Association                                                              
(AOGA), read his testimony into the record as follows [editorial                                                                
notations made by author].                                                                                                      
                                                                                                                                
     AOGA is a private  trade association whose 18 members companies                                                            
     account  for  a  majority  of  the  oil  and  gas exploration,                                                             
     development,    production,   transportation,    refining   and                                                            
     marketing  activities  in Alaska.  On  behalf of  AOGA and  its                                                            
     members, I thank you  for this opportunity to testify on Senate                                                            
     Bill 151.                                                                                                                  
                                                                                                                                
     AOGA  opposes  this legislation  for  two reasons.  First,  the                                                            
     justification  for it has been misstated to you  and its fiscal                                                            
     impacts  have been significantly  overstated. Second,  the bill                                                            
     represents  yet another tax increase  on the oil industry  from                                                            
     this Administration.                                                                                                       
                                                                                                                                
     To explain  our reasons  for opposing  this bill, let  me first                                                            
     provide  you briefly with some  background. Last year  Congress                                                            
     passed  the federal Jobs  Act creating,  among other things,  a                                                            
     tax incentive  to improve the competitiveness  of manufacturing                                                            
     in  the  United   States,  which  currently  is  disadvantaged                                                             
     relative  to the rest of the world because national  income tax                                                            
     rates on  such activity overseas are generally  lower. This tax                                                            
     incentive takes the  form of a new deduction that is equal to a                                                            
     percentage  of  a  taxpayer's  "qualified  production  activity                                                            
     income"  ("QPA Income") from  manufacturing activity  occurring                                                            
     in the United  States. The tax deduction equals  3% of this QPA                                                            
     Income  initially; it increases  to 6% in 2007 and reaches  its                                                            
     full size  of 9% beginning in 2010. In order  to make this work                                                            
     as an incentive  to create and keep jobs in the  United States,                                                            
     Congress  specifically   limited  QPA  Income  to  income  from                                                            
     domestic, U.S. - only activity.                                                                                            
                                                                                                                                
     Alaska's  state income  tax automatically  adopts sections  1 -                                                            
     1399 and  6001 - 7872 of the  Internal Revenue Code,  including                                                            
     new sections  within these number  ranges as they are  enacted,                                                            
     amendments  as they  are made  to existing  sections, and  even                                                            
     repeals  of any of these sections  in the federal Code.  Alaska                                                            
     picks up these federal  changes unless the Legislature enacts a                                                            
     law  to prevent such  a federal change  from taking effect,  or                                                            
     modify  its effect for  state purposes.  The new deduction  for                                                            
     QPA  Income in  Section 199 of  the Internal  Revenue Code  and                                                            
     hence  has been picked up for  state purposes. Senate  Bill 151                                                            
     proposes  to undo this  automatic adoption  of Section  199 and                                                            
     keep it from taking effect for state income-tax purposes.                                                                  
                                                                                                                                
     In  the fiscal  note for this  legislation,  the Department  of                                                            
     Revenue claims that  letting Section 199 take effect for Alaska                                                            
     purposes  would  cost  the State  between  $94.88  million  and                                                            
     $104.84  million  in  total over  the  FY 05  - FY  10  period.                                                            
     Further,  Department of  Revenue's fiscal  note states  it cold                                                            
     cost more than half  a million dollars a year for Department of                                                            
     Revenue to administer  Section 199 if it takes effect for state                                                            
     purposes.                                                                                                                  
                                                                                                                                
     Both  of  these estimates  are,  in  AOGA's  opinion,  severely                                                            
     overstated  because  of  a  faulty  premise  in  Department  of                                                            
     Revenue's  analysis. This premise is stated in  the fiscal note                                                            
     as follows:                                                                                                                
                                                                                                                                
          In  order to  avoid impermissible  discrimination  against                                                            
          economic  activity outside of the state, taxpayers will be                                                            
          allowed  the  QPA  [Income]  deduction  on  their  Alaskan                                                            
          return  for all  production profits  whether the  activity                                                            
          occurred   in Alaska,  another  state,  or  in  a  foreign                                                            
          country.  Production activity conducted in-state, domestic                                                            
          out  of state, or in a foreign country  will be awarded an                                                            
          equal deduction.                                                                                                      
                                                                                                                                
     In  other  words, in  assessing  the  state revenue  impact  of                                                            
     letting Section  199 take effect, Department  of Revenue looked                                                            
     at  potential "production  activity income"  everywhere  in the                                                            
     world. It did not  look just at "qualified" production activity                                                            
     income as defined  by Congress, which is only that income which                                                            
     comes from production activity inside the United States.                                                                   
                                                                                                                                
     Despite what  Department of Revenue asserts to  the contrary in                                                            
     its  fiscal  note,  when  Alaska  passively  adopts  a  limited                                                            
     federal  deduction,  it does  not legally  or logically  follow                                                            
     from  this fact  that  Department of  Revenue  must, under  the                                                            
     Foreign  Commerce Clause of the  U.S. Constitution,  completely                                                            
     remove  the  limitation  in the  course  of  administering  the                                                            
     deduction  for state  tax purposes.  There  is ample  precedent                                                            
     where  a  geographically  limited  federal   provision  remains                                                            
     limited in precisely  the same way when it is applied under the                                                            
     Alaska income tax.  For instance, expenditures for enhanced oil                                                            
     recovery ("EOR") give  rise to a federal tax credit that Alaska                                                            
     also allows, and the  federal credit is limited to expenditures                                                            
     for EOR  projects in the United  States - in administering  the                                                            
     EOR credit  for state purposes, Department of  Revenue does not                                                            
     impute  a hypothetical  credit  for  EOR projects  outside  the                                                            
     United    States   "[I]n   order    to   avoid   impermissible                                                             
     discrimination   against  economic  activity   outside  of  the                                                            
     state[;]"   instead,  Department  of  Revenue   uses  the  same                                                            
     domestic  territorial limitation as the federal  credit has. We                                                            
     do not see  how the domestic territorial limitation  in the new                                                            
     QPA Income  deduction would be  any different from the  one for                                                            
     EOR   in   terms   of   its   potential   for   "impermissible                                                             
     discrimination."  In other words,  since Department  of Revenue                                                            
     isn't  applying  the EOR  credit on  a worldwide  basis, it  is                                                            
     inconsistent  for Department  of Revenue  to say it must  apply                                                            
     the QPA Income deduction on a worldwide basis.                                                                             
                                                                                                                                
9:39:36 AM                                                                                                                    
                                                                                                                                
Mr. Williams deviated from his written testimony to state the                                                                   
following.                                                                                                                      
                                                                                                                                
     There's  another reason too.  I'm going to depart briefly  from                                                            
     the  prepared  comments  here. For  foreign  income,  taxpayers                                                            
     basically  have three  possible ways of  reporting that  to the                                                            
     state. One is to look  at their overseas activities and restate                                                            
     the   income  and   expenditures  under   federal  income   tax                                                            
     principals,  as if  those companies  were going  to file  a tax                                                            
     return  with the IRS.  For state purposes  they make the  state                                                            
     modifications that  we have, but basically that's reporting and                                                            
     paying  as if they  were federal taxpayers.  That's called  the                                                            
     "as if federal basis" that they use.                                                                                       
                                                                                                                                
     But,  especially  for large  international  corporations,  that                                                            
     restatement to an  "as if federal basis" can be very cumbersome                                                            
     and time  consuming and often for a relatively  small amount of                                                            
     tax.  So  the Department  allows  taxpayers  to use  two  other                                                            
     options.  For their  control foreign  operations, they  can use                                                            
     what's called an "earnings  and profits" that they report on an                                                            
     information  return to  the IRS. Alternatively,  taxpayers  may                                                            
     use  financial   statement  income  under  generally   accepted                                                            
     accounting   principals    in   the   country   where   they're                                                            
     headquartered.                                                                                                             
                                                                                                                                
     We basically  then have the three choices: the  "as if" federal                                                            
     income,  the earnings  and profits  income,  and the  generally                                                            
     accepted  accounting principals, or GAP, income.  Taxpayers get                                                            
     to choose those.                                                                                                           
                                                                                                                                
     If a taxpayer voluntarily  reports on the basis of earnings and                                                            
     profits there'll  be no QPA Income in there because  QPA Income                                                            
     is not  part of the definition  of earnings and profits.  There                                                            
     won't  be any deduction  for it; the  income will be there  but                                                            
     there  won't   be  this  deduction.  Similarly,   if  you  have                                                            
     financial  accounting income  as your basis for reporting  your                                                            
     non-US   operations  income,   generally  accepted   accounting                                                            
     principals  don't  have a  deduction  for QPA  Income. So  that                                                            
     deduction  won't show up there. The taxpayers  will voluntarily                                                            
     use either of those  two methods, voluntarily abandon the claim                                                            
     for  a  deduction  with  respect to  the  non-US  QPA  activity                                                            
     income.                                                                                                                    
                                                                                                                                
     Even if there  were theoretically a constitutional  issue here,                                                            
     there's no foul, there's no harm.                                                                                          
                                                                                                                                
9:42:05 AM                                                                                                                    
                                                                                                                                
Mr. Williams resumed reading his written testimony as follows.                                                                  
                                                                                                                                
     Because of its faulty  premise about how broadly the QPA Income                                                            
     is deduced  must be applied for  State purposes, Department  of                                                            
     Revenue's estimated  revenue impacts are overstated by at least                                                            
     a factor  of two or three or  more, depending on how  much QPA-                                                            
     ish  income  it  foresaw  from non-US  production  activities.                                                             
     Similarly, the estimated  administrative cost of half a million                                                            
     dollars  a  year is  entirely  a  result  of this  same  faulty                                                            
     assumption.  The  IRS will  audit  taxpayers'  QPA Income  from                                                            
     activities  in  the US,  and  there will  be nothing  left  for                                                            
     Department of Revenue  to audit and enforce. The half a million                                                            
     dollars a year should, in other words, disappear.                                                                          
                                                                                                                                
     AOGA also disagrees  with Department of Revenue's conclusion in                                                            
     the fiscal note that  the anticipated beneficial effects of the                                                            
     QPA  Income   deduction  at   the  federal  level  "cannot   be                                                            
     replicated  at the state level."  At least with respect  to oil                                                            
     and  gas, the  two principal  regions of  qualified  production                                                            
     activity  in  the United  States  are  the deep-water  Gulf  of                                                            
     Mexico and Alaska.  With only two "hot spots" for the action to                                                            
     occur  in, it seems  likely that Alaska  would be ahead  of the                                                            
     game  when   the  incentive  works  in  attracting   production                                                            
     activity  to the  US. Given  Department  of Revenue's  contrary                                                            
     conclusion   about  these   benefits   for  Alaska,  it   seems                                                            
     improbable that Department  of Revenue made any serious attempt                                                            
     to estimate  and include  the increases  in State tax  revenues                                                            
     from  the  production   activities  in  Alaska  that  this  tax                                                            
     incentive would help attract to this state.                                                                                
                                                                                                                                
     Thus,  both  on policy  grounds  as  well as  potential  fiscal                                                            
     impacts,  the  justification  that  Department of  Revenue  has                                                            
     given  for  this  legislation  has  been  both  overstated  and                                                            
     misstated.                                                                                                                 
                                                                                                                                
     This  brings  me to  AOGA's  second  reason for  opposing  this                                                            
     legislation: it represents  yet another tax increase on the oil                                                            
     industry  from  this  Administration.  It  is  a  tax  increase                                                            
     because   Section  199  of  the   Internal  Revenue   Code  was                                                            
     automatically  adopted for state  purposes as of January  first                                                            
     of  this  year,  when it  took  effect  for  federal  purposes.                                                            
     Section 199 is, in  other words, already the status quo. SB 151                                                            
     proposes  to change this status quo by undoing  the adoption of                                                            
     Section  199, and in  doing so it will  raise corporate  income                                                            
     taxes  for our industry and every  other industry in  the state                                                            
     having "qualified production activity."                                                                                    
                                                                                                                                
     Department  of  Revenue's  just-released  Spring  2005  Revenue                                                            
     Sources  Book  predicts  future  state  oil  and  gas  revenues                                                            
     through  FY 15 based  on assumptions that  tens of billions  of                                                            
     dollars of new investments  will be made during that time which                                                            
     will hold  oil production at  the projected levels and  keep it                                                            
     from declining  at it otherwise  will. Fortunately for  Alaska,                                                            
     the  opportunities   for making   these  investments,  and  the                                                            
     possibility  that  they will  indeed result  in the  production                                                            
     being hoped for, are  not some wild pipe dream, but a plausible                                                            
     expectation.  The  key to  fulfilling this  bright expectation                                                             
     lies  in  winning  the  competition  for funding  so  that  the                                                            
     potential  Alaskan investments will become actual  investments.                                                            
                                                                                                                                
     Raising taxes  does not make Alaska's investment  opportunities                                                            
     more competitive. It makes them less competitive.                                                                          
                                                                                                                                
     Some have  said that, with today's high oil prices,  Alaska can                                                            
     and should  raise its oil taxes  - the producers can  afford to                                                            
     pay a larger share  of this "windfall" they say. This reasoning                                                            
     misses the  real issues here. From the industry's  perspective,                                                            
     the  question is not  about how  much it can  afford to  pay to                                                            
     Alaska,  but  how  much  it can  afford  to  invest  in  Alaska                                                            
     relative  to opportunities elsewhere.  Fifty-dollar  oil is not                                                            
     $50 just  for Alaskan oil, but  for all oil wherever  produced.                                                            
     High  oil prices to  not change the fact  that Alaska  is among                                                            
     the most  expensive places in the world to operate  and produce                                                            
     oil.                                                                                                                       
                                                                                                                                
     From the  State's perspective  as well, the question  is not so                                                            
     simplistic as to be  only about what the industry might be able                                                            
     to pay. There  is a trade-off between, on the  one hand, taking                                                            
     a larger  share now and having  less available to be  shared in                                                            
     the  future because  some investments  cease to be competitive                                                             
     enough to  win funding, and on the other hand,  taking the same                                                            
     or perhaps  even a more modest share and having  more available                                                            
     to  be shared  in the future  because more  investments  become                                                            
     competitive  enough to win funding.  Or to put it another  way,                                                            
     which  gives the State  more -  taking a wider  slice out  of a                                                            
     smaller pie, or a  narrower slice out of a larger pie? And what                                                            
     is the  optimum width  for that slice  so that it has  the most                                                            
     fiscal "weight"?                                                                                                           
                                                                                                                                
     Some simplistically  believe that $50 oil will  justify any and                                                            
     all  of  the investment  opportunities   that industry  has  in                                                            
     Alaska,  despite  raising taxes  as proposed  in  this bill  or                                                            
     raising  them by  lumping satellite  fields  with their  parent                                                            
     field   for  ELF  purposes.   Such  reasoning  apparently   led                                                            
     Department  of Revenue and Department  of Natural Resources  to                                                            
     advise  the Governor to  introduce this  bill, and to  make the                                                            
     Prudhoe  Bay ELF decision. The  Governor was, no doubt  assured                                                            
     in both  situations that neither  action would actually  change                                                            
     investment decisions.                                                                                                      
                                                                                                                                
     The advice  that the Governor  received about the ELF  decision                                                            
     has already  been proven wrong. The Orion field  in the western                                                            
     region of  the Prudhoe Bay Unit, for example,  is a development                                                            
     that  industry has been  diligently pursuing  to help  stem the                                                            
     decline of  North Slope production. The producers  have already                                                            
     stated that,  because of the tax increase under  that decision,                                                            
     they will not be able  to proceed with the planned expansion of                                                            
     the  Orion field as  it is currently  proposed. This  expansion                                                            
     would have  been a $650 million project to develop  viscous oil                                                            
     in the  Prudhoe Bay Unit. An  associated casualty is  the I-100                                                            
     Well  for  viscous oil  development  that  was on  this  year's                                                            
     drilling  schedule for  Prudhoe Bay, but  now has been  removed                                                            
     and indefinitely deferred.                                                                                                 
                                                                                                                                
     The advice that the  Governor has been given about this bill is                                                            
     also  wrong, for the  same reasons. Because  it has not  become                                                            
     law, there is no hard,  empirical evidence to offer you to show                                                            
     that  this bill  is  ill-advised  for the  State. Fortunately,                                                             
     however,  this same circumstance  means it is not too  late for                                                            
     you,  the Legislature,  to avoid repeating  the mistake  of the                                                            
     Governor's  advisors. You are in the position  of being able to                                                            
     refrain from acting, and you should.                                                                                       
                                                                                                                                
     AOGA has  long said, and we need  to say again now,  any change                                                            
     to Alaska's  existing fiscal  regime for our industry  needs to                                                            
     be  carefully  evaluated   for  its  impacts  on  each  of  the                                                            
     different  kinds of investments there are for  getting more oil                                                            
     produced.  Otherwise,  there  is a  substantial  risk that  the                                                            
     anticipated  negative effects of that change  on other kinds of                                                            
     oil investments.                                                                                                           
                                                                                                                                
     We  believe that  raising oil taxes  now, as  SB 151 would  do,                                                            
     will  send precisely  the wrong message  to the industry  about                                                            
     making the investments  that Alaska is so desperately needs and                                                            
     is counting  on for  its own fiscal  future. Accordingly,  AOGA                                                            
     opposes  this bill and  respectfully urges  that you oppose  it                                                            
     too.                                                                                                                       
                                                                                                                                
9:50:17 AM                                                                                                                    
                                                                                                                                
LARRY HOULE, General Manager, The Alaska Support Industry Alliance,                                                             
testified via teleconference from Anchorage in opposition to this                                                               
bill. He read a statement into the record as follows.                                                                           
                                                                                                                                
     The Alliance  this year is celebrating  its 25th. We  are a 501                                                            
     C6  non-profit statewide  trade association  representing  over                                                            
     380 businesses,  organizations and individuals.  The collective                                                            
     workforce  represented  by Alliance membership  exceeds  30,000                                                            
     Alaskans that live in your districts.                                                                                      
                                                                                                                                
     The Alliance  is very much opposed to this legislation  because                                                            
     we see it  as yet another industry tax that will  further erode                                                            
     Alaska's  competitive position as [an] oil and  gas province in                                                            
     an  ever increasing  competitive  global market.  In short,  it                                                            
     represents  another tax increase  on the oil industry  from the                                                            
     Murkowski Administration.                                                                                                  
                                                                                                                                
     Raising taxes  does not make Alaska's investment  opportunities                                                            
     more  competitive.   It  simply  and  plainly  makes   Alaska's                                                            
     investment  climate  less  competitive.  A  lot of  people  are                                                            
     saying  these days  that  in a world  where  oil companies  are                                                            
     getting  $50 a  barrel that  they can  all afford  to pay  more                                                            
     taxes. But we forget  that $50 oil in Alaska is the same as $50                                                            
     oil in the Middle East, South America or Indonesia.                                                                        
                                                                                                                                
     In the  oil and gas industry,  it is not the price of  oil that                                                            
     matters, but the cost  to produce that particular barrel of oil                                                            
     that  really  matters.  Less  expensive  oil  will  always  get                                                            
     produced before more  expensive oil. The reality is relative to                                                            
     other  oil and gas providences  in the  world, Alaska's  oil is                                                            
     extremely  expensive  to  produce.  I  believe  this  fact  was                                                            
     recently validated  the Wood Max [spelling not verified] study.                                                            
                                                                                                                                
     We think  that SB 151  simply adds to  the production  costs of                                                            
     Alaska's oil.                                                                                                              
                                                                                                                                
     When we first read  through this bill, let me give you a simple                                                            
     sort of metaphoric  [indiscernible] of how we talked about this                                                            
     particular  bill.  I  live in  the  Anchorage  neighborhood  of                                                            
     College Village. We  just received the good news that there was                                                            
     a $5,000  property tax  exemption or  tax credit that  everyone                                                            
     who  owns  a home  in  Anchorage  in College  Village  gets  to                                                            
     benefit from. However,  all of a sudden, the mayor or maybe the                                                            
     local  assembly  passed an  ordinance  that says  "no this  tax                                                            
     exemption  is only for  those houses -  you can only have  this                                                            
     tax exemption if your  house is painted white." And I happen to                                                            
     live in a white house  in College Village. How welcome should I                                                            
     feel?  How  welcome  should  an industry  feel  when  they  are                                                            
     continually the subject  of increased taxes. And also I want to                                                            
     point out  this is an increase tax at a time  of a $500 million                                                            
     surplus.                                                                                                                   
                                                                                                                                
     We  agree  with  Tom in  the  fact  that the  advice  that  the                                                            
     Governor  received  on the recent  field  aggregation to  raise                                                            
     taxes  on the Prudhoe  Bay satellites  was wrong. The  Alliance                                                            
     has  been  very  aggressive   in its  statements   against  the                                                            
     Governor's actions.  We clearly see that the aggregation of the                                                            
     fields in  Alaska up on Prudhoe Bay will probably  eliminate 20                                                            
     to 40,000  barrels of oil that will never get  the tax pipeline                                                            
     because  of  the  faction  unless  it's  overturned.   Already,                                                            
     Alliance contractors,  specifically in the area of engineering,                                                            
     are experiencing a slowdown in work.                                                                                       
                                                                                                                                
     Senate Bill  151 is, like Tom said, a piling  on of another tax                                                            
     for this industry.  I've said it before and I will probably say                                                            
     again,  that no  project has  ever been  taxed into  existence.                                                            
     State  officials,  the  legislature  and  the  public  need  to                                                            
     remember  what  some  of  them seem  to  have  forgotten,  that                                                            
     companies  wisely invest shareholder money. Corporate  officers                                                            
     look  to invest  in areas  where there  is  an opportunity  for                                                            
     reasonable  profits and those  investments can be made  without                                                            
     undue risk.                                                                                                                
                                                                                                                                
     The problem is that  most recently, if you take this particular                                                            
     SB  151 you take  the arbitrary  Administrative  action by  the                                                            
     Governor  to aggregate Prudhoe Bay satellites.  It's becoming a                                                            
     high-risk province.                                                                                                        
                                                                                                                                
     Senate  Bill 151,  we believe  is ill-advised  legislation.  It                                                            
     sends  a wrong  message to  Alaska's largest  investors and  if                                                            
     passed it  would most certainly cost Alaskans  that work in oil                                                            
     [indiscernible  -  patch?] jobs.  We respectfully  urge you  to                                                            
     oppose this particular legislation.                                                                                        
                                                                                                                                
9:55:30 AM                                                                                                                    
                                                                                                                                
DAN  DICKINSON,  Director,  Tax  Division,  Department  of  Revenue,                                                            
testified that  the AOGA gave two reasons against  this legislation.                                                            
The first claimed  that the Department  misstated or overstated  the                                                            
impact  with  "faulty premises".   Mr. Dickenson  pointed  out  that                                                            
"fundamentally",  the  Department  asserted this  legislation  would                                                            
have "a hundred  million dollar affect  over the next decade."  AOGA                                                            
calculated  the amount  to be half  that, or even  $30 million.  The                                                            
dispute is  over the size of the affect  and AOGA does not  question                                                            
that there would  be an affect. He noted this information  could not                                                            
be verified, as the courts would decide the issues.                                                                             
                                                                                                                                
Mr. Dickinson  cited an article  in the Alaska  Budget Report  [copy                                                            
not provided], which asked  members of AOGA their intentions if this                                                            
legislation  did not  pass. The  members responded  that they  would                                                            
take advantage of any tax allowances permitable by law.                                                                         
                                                                                                                                
Mr. Dickenson predicted  resolution of the matter would take several                                                            
years, although  the Department  is confident  that the State  would                                                            
prevail. He told  of a court decision issued in 1992  [specifics not                                                            
provided]  establishing  rules, which  the Department  has  followed                                                            
since. The "commerce clause  issue" that pertains to the "ability to                                                            
draw extra-territorial lines" has not been permitted.                                                                           
                                                                                                                                
Mr.  Dickenson  directed attention  to  the  example given  by  AOGA                                                            
relating to  credits. Credits are  "very different from determining                                                             
income." He  surmised that company  would not sue the State  because                                                            
of the  manner  in which  credits are  treated. He  noted a  circuit                                                            
court decision  on the treatment of credits that,  although does not                                                            
directly apply to Alaska, is an indicator.                                                                                      
                                                                                                                                
9:58:51 AM                                                                                                                    
                                                                                                                                
Mr. Dickinson  spoke to the assertion that prices  of $50 per barrel                                                            
of oil has  the same value  in Alaska as in  the rest of the  world.                                                            
This is  untrue. This price  has more value  in a regressive  regime                                                            
than  in a  progressive  regime.  He  explained  that Alaska  has  a                                                            
regressive  regime, in that when prices  are low, a high  percentage                                                            
of "economic  rent" is  taken, and  as prices  rise an "ever  lower"                                                            
percentage is taken. At  the price of $50 per barrel, Alaska "is one                                                            
of the  best  places in  the world  to do  business."  As the  price                                                            
increases  in a progressive  regime,  the host  government takes  an                                                            
ever-larger percentage.                                                                                                         
                                                                                                                                
9:59:45 AM                                                                                                                    
                                                                                                                                
Mr. Dickinson  next addressed the  second statement made  by AOGA in                                                            
opposition  to this bill,  that "this is  just another tax  increase                                                            
that's been  passed on by the Murkowski  Administration."  He read a                                                            
portion of Mr.  Williams' testimony to indicate this.  Mr. Dickenson                                                            
reminded  the  Committee  members  that  at the  conclusion  of  the                                                            
previous legislative  session, the  federal government "changed  the                                                            
rules and those rules will  flow through to the state laws." This is                                                            
the first opportunity for  the legislature to address the matter and                                                            
determine whether Alaska  should "go along" with those opportunities                                                            
provided  by the federal  government  to attempt  to return  certain                                                            
industrial  development  to America  from abroad.  He surmised  that                                                            
Alaska would likely  not receive a significant share  of investment.                                                            
He explained that the federal  legislation pertains to manufacturing                                                            
and  refining  activities  rather  than  resource   extraction.  The                                                            
legislature  must  determine whether  this  is an  unfunded  federal                                                            
mandate and if  it is appropriate for the State to  lower its taxes.                                                            
                                                                                                                                
10:01:48 AM                                                                                                                   
                                                                                                                                
Senator  Stedman  characterized   the  title  of  the  American  Job                                                            
Creation Act as a stimulus  effort to increase manufacturing jogs in                                                            
the country.  He asked  if the State  opting to  participate  or not                                                            
participate would generate additional jobs.                                                                                     
                                                                                                                                
10:02:45 AM                                                                                                                   
                                                                                                                                
Co-Chair Green asked if this has that been analyzed.                                                                            
                                                                                                                                
10:02:54 AM                                                                                                                   
                                                                                                                                
Mr. Dickinson  qualified  the federal Act  affects many provisions,                                                             
including the  creation of special depreciation rules  for a natural                                                            
gas pipeline. Many of the  provisions would "encourage" job creation                                                            
in  Alaska. The  Department  is not  recommending  decoupling  those                                                            
sections. This  legislation addresses  one provision only  and would                                                            
not reduce any of the federal tax benefit.                                                                                      
                                                                                                                                
Mr. Dickinson  explained  that the State  has historically  followed                                                            
the federal  income tax guidelines  rather than developing  separate                                                            
guidelines.  This legislation  is necessary  to address the  reduced                                                            
federal taxation rates.                                                                                                         
                                                                                                                                
10:04:28 AM                                                                                                                   
                                                                                                                                
Co-Chair Green  indicated the fiscal  note would receive  additional                                                            
review.                                                                                                                         
                                                                                                                                
The bill was HELD in Committee.                                                                                                 
                                                                                                                                

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