Legislature(2015 - 2016)BUTROVICH 205
04/09/2016 02:30 PM RESOURCES
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SB 130-TAX; CREDITS; INTEREST; REFUNDS; O & G [Contains discussion relating to HB 247.] 2:59:54 PM CHAIR GIESSEL announced the consideration of SB 130. MARGO WARING, representing herself, Juneau, Alaska, testified in support of SB 130. She said Section 2, Article 8, of the Alaska Constitution, is about the use, development, and conservation of natural resources of the state for the maximum benefit of the people, and the fact is that elected officials are temporary custodians of those resources. She spoke in favor of full transparency regarding oil and gas affairs of the state, "because public accountability has to be more important than anything else." She learned a couple of lessons when she worked in Governor Hammond's Office. One is about public financing of private corporations and that there is no excuse for having oil and gas credits, particularly production credits. They go against another lesson she learned, which is if a business is not profitable, then it shouldn't be propped up by public funds. The state needs to be able to sell its assets at a profit and not at a "disguised cost." MS. WARING concluded that tax rates should be at their higher previous rates to maximize the benefit the Constitution promises. 3:03:55 PM SANDRA UDELHOVEN, representing herself, Wasilla, Alaska, testified against SB 130. She said the State of Alaska is not keeping its word. It has already committed to pay oil and gas tax credits to corporations and not doing so creates an environment that is hostile to private enterprise. She requested the state to be truthful and honest in its dealings with the oil and gas industry and not change its tax policies so frequently. 3:05:31 PM CARL PORTMAN, representing himself, Anchorage, Alaska, testified in opposition to SB 130. He was concerned about the state's current fiscal situation. He said the current oil tax policy has encouraged new industry investment, which has stabilized a long steep slide in production. In fact, it was up 1 percent in the past 12 months, the first increase since 2002. He did not support raising taxes on the oil and gas industry as SB 130 would do. "Alaska cannot increase oil production by raising taxes," he said, "especially considering that North Slope oil now sells for less than it costs to produce." He said the industry is losing hundreds of millions of dollars annually in this downturn and is being forced to cut jobs and expenses. Any tax increase will have a direct impact on future investment in Alaska and, therefore, future production. Even at today's low oil prices, most of Alaska's revenues come from the oil industry through various industry taxes and royalties. Clearly, the industry continues to pay the majority of Alaska's bills. He suggested that the legislature continue cutting state spending to a more affordable level, because despite recent cuts, the state's operating budget is still on an unsustainable path. In addition, he supported coming to terms with using Permanent Fund earnings to help fill the fiscal gap. The earnings need to be part of the long term solution, and the Permanent Fund is the biggest tool in the box to help solve the state's fiscal crisis. He recalled that Governor Hammond's vision for the Permanent Fund included the eventual use of fund earnings to help pay for essential government services. He believes that day is here. 3:08:32 PM MICHAEL FOSTER, representing himself, Mat-Su Valley, Alaska, testified in opposition to SB 130. He spoke in support of extending tax credits in the Copper River Basin, because it and many other places in Alaska need affordable and reliable energy. Ahtna is trying to do this by exploring for natural gas within the basin. One of his companies, North Star Trucking, is currently working for them on the Tolsona 1 natural gas exploration well. They have 14 employees on site and another four employees supporting that project. They are all Alaskans and all support families in Anchorage, Wasilla and Glennallen. If it wasn't for this project, these workers wouldn't be employed. These are Alaskan projects for Alaskan workers. If not for the current tax credits, this project would not be going forward. This is not Prudhoe Bay or Cook Inlet. The risk of exploring in areas like the Copper River Basin is high. There are a lot of unknowns and little infrastructure available to support these exploration projects. He urged the committee to extend the Frontier Basin tax credits to the year 2022 to help companies like Ahtna to investigate underexplored areas in locations that they don't have infrastructure and energy for the supporting population. 3:10:49 PM CHAIR GIESSEL welcomed Senator Wielechowski to the committee. She noted the presence of Jerry Burnett, Deputy Commissioner of the Department of Revenue. 3:11:10 PM BRAD FAULKNER, representing himself, Homer, Alaska, testified in support of SB 130. He has worked in and out of the oil and fishing industries all his life. One of the reasons he supports SB 130 is because an oil rig from Asia is tied to the dock right outside his house and 100 percent of the people on it are from Louisiana. And of the 100 people doing seismic work near Anchor Point only five of them are Alaskan. So, the tax credits are not jobs-related, because the jobs aren't going to Alaskans. Cook Inlet tax credits were paying up to 65 percent of costs, and at best, if oil is discovered many years down the road, it will only bring in 12.5 percent royalty into the state. It's just not a good deal. Production tax credits on the North Slope are entirely different, because that production gets taxed. This is not a good deal for the state and it hasn't done anything to increase production. Production will go up when the price of oil goes up, he said. 3:13:19 PM BRENDON HOPKINS, representing himself, Homer, Alaska, testified in opposition to SB 130. Testifying from work on the North Slope, Mr. Hopkins said he is a lifelong Alaskan. He has had to take a significant cut in his income as a result of the current business environment, but he is happy to work for a well-run company. He pointed out that the state's budget has increased significantly over the years; in 2000 it was roughly $2 billion and now it is $8.6 billion. He said the fiscal problem has to be solved now and by using a balanced approach. Cook Inlet's success in increasing production and jobs over the last several years is due in large part to some of the credits. If they want to repeat the situation of companies shutting down and job loss, taking those credits away is a first step. He agreed with Article 8 of the Alaska Constitution that provides for maximizing the state's resources for the benefit of its people, but "benefit" should not be measured in purely revenue or the size of the bank account. He closed in saying that he appreciated all the hard work the legislature is doing. 3:16:32 PM CHAIR GIESSEL thanked him for taking the time to call in and asked where Mr. Hopkins lives when he is not on the North Slope. MR. HOPKINS answered that he lives on the Kenai Peninsula. CHAIR GIESSEL thanked him for traveling all that distance for work. 3:17:15 PM JOHN STURGEON, representing himself, Anchorage, Alaska, testified in opposition to SB 130 and any new tax on the oil industry. He acknowledged concern about the state's deficit but added that a lot is being done to resolve the issue. However, the state still needs an economy after the fiscal cliff problem is solved, and taxing the industry's success is not the way to keep industry in Alaska and keep the economy strong. MR. STURGEON said he runs the largest timber operation in the state and he can't imagine how he would run that logging operation if their taxes were as high and unpredictable as the oil industry's that has changed almost every other year. CHAIR GIESSEL noted Senator Stoltze was present. 3:19:14 PM JIM PLAQUET, representing himself, Fairbanks, Alaska, testified in opposition to SB 130. He is a 42-year member of the International Union of Operating Engineers, Local 302, and said that Alaskans voted for more oil production in 2014 and since then the oil industry has invested $5 billion and stabilized flow rates through the TAPS. Oil tax policy does not need to be changed again, he said. SB 130 would be the sixth major oil tax change in 11 years. "We need a stable tax system....Alaska needs investment to achieve more through-put in the pipeline." MR. PLAQUET stated that oil prices will rise again and when they do, Alaska will be competing with shale oil in the Lower 48. Alaska is an expensive place to do business and changing tax policy frequently doesn't help attract investment dollars. It doesn't send a message that Alaska is open for business. SB 21 increased production by 1 percent compared to a decline average of 6.6 percent a year under ACES. Now is the time to keep Alaska competitive and open for business by maintaining a tax policy that is stable and balanced. 3:21:28 PM CATHY DUXBURY, representing herself, Anchorage, Alaska, testified in opposition to SB 130. She works in the oil and gas industry and was opposed to changing the oil and gas tax structure. "Higher taxes only discourages investment," she said. She suggested finding ways to increase throughput as opposed to increasing taxes. The private sector is holding its breath every day wondering which jobs are going to go next or what pay cuts are coming. It will just get worse if the industry is taxed more. Let it be and use the earnings from the Permanent Fund; that is what it is there for. She said it was never set up to just hand out money to people. 3:23:45 PM JAMES MCMILON, representing himself, Fairbanks, Alaska, testified in opposition to SB 130. He said he is a 30-year resident of Fairbanks and is currently a business representative for Teamsters Local 959. He noted the wide variety of industries his union represents including the Usibelli Coal Mine, the North Slope, the TAPS, and the Port of Anchorage. They understand the challenges facing Alaska and the tough decisions that need to be made, and support the governor and legislature in reducing the operating budget, using some of the Permanent Fund earnings to help balance the budget, and instituting new taxes. They are concerned with the governor's plan to change the oil tax structure, however. Since SB 21 passed, the oil industry has invested more into Alaskan projects, like CD5 and Shark Tooth, that have put hundreds of Alaskans to work, more oil in the pipeline, and billions of dollars into the economy. Increasing oil taxes and reducing credits that encourage investment at a time when industry is struggling sends the wrong message. He supported maintaining a healthy oil and gas industry in Alaska. 3:26:01 PM DAVE HANSON, representing himself, Anchorage, Alaska, testified in support of SB 130. He said he is a 40-year Alaskan resident and a fiscal conservative. He has the greatest respect for the oil industry and thinks their last 40 years are an amazing success story. However, the crash in oil prices is no one's fault. We're all in it together. MR. HANSON said the state cannot afford the current oil tax credit program. In FY13 the program cost $54 million, but in FY17 it will cost $825 million or over one-fifth of the state's budget. The Tax Division says program costs are headed toward $1-1.5 billion a year. Who will pay for it? The tax credit program made great sense when oil prices were high and oil production taxes were being paid. But no production taxes are paid on an oil price below $73/barrel and now the program doesn't make sense. The BlueCrest representative said the state would get back its tax credit money through oil royalty payments, but royalty payments are what oil companies pay the state for its oil. The amount the state receives should not be discounted to make up for its tax credit program that is related to the oil production tax. He said the credit program is also the most effective way to increase oil production. Some credit money has helped produce oil, some has helped efforts that didn't work, and some is being used to bail out companies from bankruptcy. MR. HANSON said it is time to work together and think a little differently and be creative. He suggested a three-point plan that would be sustainable. Use part of the Governor's generous SB 130 to pay for credits through FY16 even though the credits were subject to appropriation and not guaranteed. They need to be followed through. Two, use Senator Stedman's approach beginning in FY17 to eliminate oil production taxes and credits until the price of oil reaches $72/barrel. Three, expand the Alaska Industrial Development and Export Authority (AIDEA)- direct loan program so that all credible oil company efforts can get financing at a reasonable cost during these tough times. 3:29:26 PM KATE BLAIR, representing herself, Anchorage, Alaska, testified in opposition to SB 130. She said she and her family had lived in Alaska for 10 years and have learned what an important and interesting relationship the oil industry has with the state. She spoke of her family's involvement with the community and the state and said it is their permanent home. She works in the oil and gas industry and her husband is a police officer. They are acutely aware of the state's budget shortfall, but they are also very aware of the effect the low price of oil has on private industry that has already seen layoffs, project and drilling delays, and companies starting to leave the state. These all affect families such as theirs. The oil industry is in the red; they have paid the bills for years, built infrastructure across the state, donated to communities, universities non-profits, schools and buildings, and now the state is going to ask for "another pound of flesh." Raising oil taxes or cutting tax credits will force companies to get their money from capital spend, which will jeopardize even more jobs. She didn't understand why they would even consider cutting Cook Inlet tax credits and sending the Mat-Su Anchorage and Kenai Peninsula Boroughs back to the energy shortages of 2009. MS. BLAIR supported the state reducing its operating budget, using the Permanent Fund, and instituting a broad-based tax, but she will not support going back to a single industry year after year when prices go up or down. 3:33:13 PM MARLEANNA HALL, Executive Director, Resource Development Council (RDC), Anchorage, Alaska, testified in opposition to SB 130. She said increasing taxes on our natural resource industries will decrease production through the TAPS, not encourage the development of new mines in Alaska; it will not attract more tourists or increase more investment in the fishing industry. Higher taxes in this low priced commodity environment will likely deter investment and lead to lower state revenues and a weaker private sector over the long run. Changing the tax structure now will make a bad situation worse. 3:35:58 PM SCOTT HAWKINS, President, Advanced Supply Chain International (ASCI), Anchorage, Alaska, testified in opposition to SB 130. He is a 33-year resident of Anchorage who co-founded his company 17 years ago. There are three reasons he opposed SB 130: incentives matter in encouraging investment. For example, his FedEx Cargo hub development agreement included incentives to reduce some of the disadvantages Anchorage had at that time and his Alyeska Resort agreement included state investments in water and wastewater infrastructure in Girdwood. Another example is eight years ago, Southcentral Alaska was practicing for brownouts due to energy shortages. Then the legislature adopted a package of incentives for Cook Inlet and production turned around becoming a tremendous success story. There is an old principal in economics: if you want more of something, incentivize it. If you want less of something, raise taxes on it. Reason two is that the state's tax policy "desperately" needs to be stabilized. It has changed about five different times over the past 10 years. That many changes in that period of time looks more like a "Banana Republic" than a mature, stable taxing jurisdiction, Mr. Hawkins said. Strengthening that point even further is that Alaskans voted for the current tax policy at the ballot box. They were given the choice of voting for a tax environment that stimulates production or overturning it. Thirdly, Mr. Hawkins pointed out that increasing taxes on oil and gas at a time like this would be going in exactly the opposite direction. His company, an oil field services company, had to cut about 20 percent of its workforce over the past 18 months and is looking at cutting about another 20 percent over the next 12 months. Many other companies have had similar experiences. In fact, his is probably "one of the lucky ones." So, industry is making hard decisions, but by contrast, state government doesn't appear to be making similar hard decisions. The budget is going in the right direction, but it's not decisive enough in adopting a sustainable spending pattern. 3:40:20 PM CURTIS THAYER, President & CEO, Alaska Chamber of Commerce, Anchorage, Alaska, testified in opposition to SB 130. He spoke of the numerous changes in oil taxes and credits and described the benefits of credits and a stable tax environment. He urged them to avoid changing any current tax policy. It has been changed over 30 times since oil was first discovered in 1969 on the North Slope. He mentioned the threatened brownouts in Southcentral Alaska for a lack of natural gas. There were only two players in Cook Inlet and they were harvesters who had the sense to leave the state. When the state put incentives in place, multiple new companies started drilling for natural gas in Cook Inlet. Now a stable supply of natural gas is delivered to Homer and to Fairbanks Natural Gas. Southcentral has also seen additional jobs and two new gas-fired power plants have come on line, because the natural gas is now available. When the voters reaffirmed SB 21, new players came to the North Slope and new fields are being discovered there. 3:44:12 PM TOM LAKOSH, representing himself, Anchorage, Alaska, testified in support of SB 130. He said the bill does not go far enough toward cutting tax credits. He referred to an Alaska Dispatch story about how the current tax credits subsidize the oil companies. He said not to give money away to the oil industry. 3:47:35 PM FAITH MARTINEAU, representing herself, Anchorage, Alaska, testified in opposition to SB 130. She said she had worked in the oil industry for over a year and explained how the bill hurts her family because her employer, Caelus Energy, has just announced a 25 percent reduction in workforce. Caelus Energy came to Alaska because of the benefits offered by SB 21 and these benefits are being retroactively revoked under SB 130. Also, in order for Caelus to return to its previous level of employment the price of oil would have to be much higher under SB 130. She addressed how the bill would negatively affect Alaska's businesses by presenting "yet another change" in a jurisdiction recognized as one of the most unpredictable in the world for how it taxes oil and gas. She asked them to consider the advancements that businesses have made under the existing tax regime. SB 21 attracts investment which allows the current system to work especially in a time of crisis. Enalytica has testified that stability is the most important element in any legal system to fostering steady investment and healthy businesses. How would SB 130 affect Alaska jobs? She has never personally known so many people who have lost their jobs since commodity prices have plunged. Multiple communities and organizations suffer in the face of layoffs. The proposed bill would increase taxes on an industry that already contributes more to unrestricted general fund revenue than any other industry. Because more than one-third of Alaska's jobs are tied to oil and gas, those e additional taxes represent dollars that can't be spent creating jobs through exploration, development or production. 3:50:50 PM JEREMY PRICE, representing himself, Anchorage, Alaska, testified in opposition to SB 130. He disclosed that he is the director of Americans for Prosperity. He maintained that SB 130 is a tax increase on the oil and gas industry, an industry that is now losing money. If the commercial fishing industry was cash flow negative, would they raise taxes on it? Would they consider raising taxes on the timber industry? No. He believes that taxes are being raised on oil, because the public perception is that big oil can afford it. The legislature and the governor would never think of raising taxes on any other industry in this low price environment, which is ironic, because this is the one industry that pays for most of the state's services. The message in the press is that these state services are so sacred that they cannot be eliminated. He noted layoffs in the oil industry are occurring even without this legislation. He said the bill will not increase production or jobs or provide certainty and predictability in the private sector. It is not in our best interests. He cautioned to not pass something that has short-term gain with long-term repercussions. MR. PRICE said he used to work for Flint Hills Refinery and no one thought it would close, but it did, because of the combination of bad economic conditions and poor public policy that drove it into the ground. Now it is going to be sold for scrap metal. He cautioned to not rush the decision. 3:54:29 PM SENATOR WIELECHOWSKI asked if Alaskans for Prosperity believes the state should decrease oil taxes. MR. PRICE answered yes and added that the oil tax burden, as with any other industry, should be stable and predictable. 3:55:38 PM CHAIR GIESSEL found no further comments, closed public testimony and held SB 130 in committee.