Legislature(2005 - 2006)HOUSE FINANCE 519
05/05/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 305 | ||
HOUSE FINANCE COMMITTEE
May 5, 2006
1:52 P.M.
CALL TO ORDER
Co-Chair Meyer called the House Finance Committee meeting to
order at 1:52 p.m.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Carl Moses
Representative Bruce Weyhrauch
ALSO PRESENT
Representative Ethan Berkowitz; Representative Paul Seaton;
Representative Les Gara; Representative Norman Rokeberg;
Representative Ralph Samuels; Representative Carl Gatto;
Robynn Wilson, Director, Division of Tax, Department of
Revenue; Dan Dickinson, Consultant, Tax Division, Department
of Revenue; Robert Mintz, Attorney contracting with the
Department of Law; Larry Dietrick, Director, Spill
Prevention and Response, Department of Environmental
Conservation
SUMMARY
CS SB 305(FIN) am
An Act repealing the oil production tax and the
gas production tax and providing for a production
tax on oil and gas; relating to the calculation of
the gross value at the point of production of oil
and gas and to the determination of the value of
oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the
production tax on oil and gas; relating to the
relationship of the production tax on oil and gas
to other taxes, to the dates those tax payments
and surcharges are due, to interest on
overpayments of the tax, and to the treatment of
the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or
property under the production tax; relating to the
prevailing value of oil and gas under the
production tax; relating to surcharges on oil;
relating to statements or other information
required to be filed with or furnished to the
Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers
of the Department of Revenue, and to the
disclosure of certain information required to be
furnished to the Department of Revenue as
applicable to the administration of the tax;
relating to criminal penalties for violating
conditions governing access to and use of
confidential information relating to the tax, and
to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes
of the production tax, and as the definition of
the term 'gas' applies in the Alaska Stranded Gas
Development Act, and adding further definitions;
making conforming amendments; and providing for an
effective date.
CS SB 305(FIN)am was HEARD & HELD in Committee for
further consideration.
CS FOR SENATE BILL NO. 305(FIN) am
An Act repealing the oil production tax and the gas
production tax and providing for a production tax on
oil and gas; relating to the calculation of the gross
value at the point of production of oil and gas and to
the determination of the value of oil and gas for
purposes of the production tax on oil and gas;
providing for tax credits against the production tax on
oil and gas; relating to the relationship of the
production tax on oil and gas to other taxes, to the
dates those tax payments and surcharges are due, to
interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with
the royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or property
under the production tax; relating to the prevailing
value of oil and gas under the production tax; relating
to surcharges on oil; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers of
the Department of Revenue, and to the disclosure of
certain information required to be furnished to the
Department of Revenue as applicable to the
administration of the tax; relating to criminal
penalties for violating conditions governing access to
and use of confidential information relating to the
tax, and to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes of
the production tax, and as the definition of the term
'gas' applies in the Alaska Stranded Gas Development
Act, and adding further definitions; making conforming
amendments; and providing for an effective date.
1:53
Representative Chenault continued discussion on #24-
GS2052\N, Chenoweth, 5/4/06.
1:53:44
LINDA WILSON, DEPUTY DIRECTOR, PUBLIC DEFENDER AGENCY,
DEPARTMENT OF ADMINISTRATION, continued discussions of the
proposed committee substitute for SB 305. She noted that
page 22 clarifies that activities do not need to be
"physically located on or near the premises of the lease or
property from which oil or gas is recovered in order for the
cost of the activity to be a cost upstream of the point of
production of the oil or gas."
1:56:49 PM.
DAN DICKINSON, CONSULTANT, TAX DIVISION, DEPARTMENT OF
REVENUE, explained, in response to a question by
Representative Kerttula, observed that foreign flagged
vessels cost approximately one-third [the cost of an
American flagged vessel].
1:57:32 PM
Mr. Dickinson observed that value at the wellhead is being
decreased due to higher costs regarding the local content
issue. He recalled an occasion where a system of a ship,
which was purchased abroad had to be torn out and replaced
by an expensive American system because of the domestic
content issue; the question arose as to whether it should be
deductible. He did not think that "those kinds of tests are
really pertinent to what folks are trying to accomplish
here."
Ms. Wilson referred to page 22, lines 26 - 28, which lists
items that are not deductible. Subsection (b) was expanded
to include royalty equivalents.
Representative Hawker referred to deductions "in lieu" of
taxes on page 22 (B).
1:59:38 PM
Mr. Dickinson noted that the Administration supports an
amendment, which would allow payments in lieu of taxes, as
well as the taxes listed since it represents the cost of
doing business in the state of Alaska. Representative Hawker
stated that he would endorse the provision.
2:00:06 PM
Ms. Wilson went on to outline important changes. On Page 23,
line 16 through 18, language from the Senate Bill was
included to address transactions that may not be an arm's
length:
for a transaction that is an internal transfer or is
otherwise not an arm's length transaction, expenditures
incurred that are in excess of fair market value;
Ms. Wilson noted concerns about inter-company transfers, and
explained that they did not believe that amounts in excess
of fair market value would ever be allowed because they are
not "ordinary and necessary". The language clarifies the
excess of fair market value and was included in the Senate
version.
2:01:30 PM
Ms. Wilson reviewed lines 19 through 22, which clarifies
that, if a business is purchased, the purchaser does not
receive a credit for all of the assets. The language was
adopted from the Senate version.
Representative Hawker observed that there is a broad
exclusion. He summarized that the language would exclude the
purchase of intangible assets. He questioned if a producer
or explorer relocated and purchased a company in another
state in order to bring a drill rig to Alaska, would they be
precluded from deducting the cost of bringing the rig on
site. Mr. Dickinson confirmed that the legislation appears
to disallowed such a deduction. He explained that purchases
corporate assets, not the corporation itself, such as for
federal tax purposes, would be disallowed.
Representative Hawker pointed out that if the same company
sold the drill rig it would be deductible, but since drill
rigs are often built on joint venture arrangements, they are
often acquired by buying out the joint venture, solely to
bring a portion of the assets to Alaska.
Mr. Dickinson explained that the language was meant to
address situations where assets changed hands through large
acquisitions, such as when a major corporation is purchased
by another corporation with huge assets. He noted a recent
acquisition where 42 percent of the assets in Prudhoe Bay
changed hands. Representative Hawker noted that he would not
want to allow "rolling purchases", where companies take
turns holding assets for the sake of deductions. Mr. Dickson
confirmed that rolling purchases were disallowed.
2:05:19 PM
Representative Hawker referred to line 3 on page 23, the
issue of negligence. He asked for a clarification of
ordinary negligence vs. gross negligence. He concluded that
an exclusion for simple negligence, such as a bucket of
paint being spilt on a control modular would be disallowed.
He noted that such accidents are ordinary and expected in
the course of conducting business. He questioned the
potential disallowance and suggested that a margin is being
created that is far down the scale of negligence; the intent
is to set a bar on acts of gross negligence, such as oil
spills.
2:06:37 PM
Mr. Dickinson acknowledged that "gross negligence" might be
appropriately used to indicate the intention to prohibit
cases of fraud.
Representative Hawker asked whether catastrophic oil spill
standards should be used such as the ones established in the
House Resource Committee version. He pointed out the severe
level of damage that could be done and the cost of cleanup.
2:07:54 PM
Ms. Wilson noted that House Resources version defined
catastrophic oil spill and addressed marine waters. She
suggested that the language be clarified, if it is the
intent of the Committee to address spills on land or inland
waters. She pointed out that catastrophic has a statutory
definition (100,000 barrels), which was half of the Exxon
Valdez spill. A more recent oil spill was 6,000 barrels.
2:09:25 PM
Representative Kerttula noted that negligence has a broad
range. She pointed out that even simple negligence could be
fairly profound. Mr. Mintz stated that negligence was
associated with behavior that was not reasonable. He
contended that gross negligence was a high standard. He
suggested that it should be considered in terms of the
consequences related to gross negligence. For example, using
terms like "disaster" resulting from gross negligence.
2:11:09 PM
Ms. Wilson addressed Subparagraph (O) on line 23 of page 23,
which clarifies that the progressivity tax is not deductible
for purposes of the PPT. Subparagraph (T) on line 24 through
to page 24, would allow costs incurred for abandonment of
facilities from old production. It provides a ratio
calculation both before and after the effective date and the
amount deductible. The language came from the Senate
version.
2:12:40 PM
Representative Kelly inquired how this version compared in
the world view of taxing authorities and contracts. Mr.
Dickinson observed that a normal situation might typically
include the costs of concluding a business as well as the
costs of conducting business. Responding to a follow-up, he
stated that he was not familiar with another situation
qualified by a ratio pertaining to abandonment. He stated he
could research the question.
2:14:44 PM
Representative Hawker referred to page 24, subsection (e),
determining deductible expenses. He questioned whether
insurance recovery was added back, and suggested adding
language to make that more clear.
2:15:49 PM
Ms. Wilson stated that they believed the language was clear,
but indicated that they would be happy to work on the
language. Mr. Dickinson pointed out that the section was
structured in statute (.160), which looks at typical
industry practice. He felt that the majority owners would
ensure that settlements were not kept by the operators. He
concluded that the language was determined by how business
was actually done on the North Slope and fair industry
practice.
2:16:56 PM
Ms. Wilson referred to Page 26, lines 3 though 5. The
subsection pertains to the Department writing regulations.
Senate language was included, allowing the Department to
apply concepts of Internal Revenue Code: U.S.C. 482. She
then pointed out lines 15 through page 27, referring to a
base allowance credit of $12 million. This provision was
included in HCS 305 (RES) and was modified in the CS on line
20 to "not exceeds one-half of the amount of that
expenditure". This is the "gold platting" fixed previously
discussed.
Representative Hawker contended that the provision did not
seem to help small producers as intended.
2:19:06 PM
Representative Hawker observed the punctuation on page 26,
line 9: "ordinary and necessary" and pointed out that it
differed from page 21, (c): ordinary, and necessary. He
suggested that the interpretation is a different statement
[on page 21] than defined on page 26. He maintained that the
intent on page 21 is to make sure the costs are both direct,
and ordinary, and necessary. He suggested the new
punctuation seemed to separate the terms, rather than join.
2:20:16 PM
Representative Kelly agreed with Representative Hawker on
his concern regarding how credits were affecting the smaller
explorer, non-producers. He proposed that smaller explorer,
non-producers would have difficulty taking advantage of
these credits. Mr. Dickinson stated that they would be happy
to work with legislators and use earlier versions of the
bill.
2:21:07 PM
Ms. Wilson referred to page 27, lines 3 though 6:
application of rolling credits. She noted that if a person
is in production, they can take the credit for 10 years. If
a person is not producing commercial qualities, but will
begin commercial production in two - three years, their 10
years starts at the time they begin commercial production.
The $120 million is the sum of $12 million for ten years;
this is the amount allowable over the entire life of the
credit.
2:22:02 PM
Ms. Wilson referred to page 29, line 5, which changes the
surcharge from $.03 to $.04 per barrel.
Representative Kerttula expressed a lack of clarity about
NGL's, and the mechanical separation of the fluids. Mr.
Mintz explained the treatment of NGL's had not changed from
earlier versions of the bill. He observed that NGL usually
refers to liquid hydrocarbons that are extracted from gas at
a gas processing plant. He stated that under current law,
NGL's were considered gas; as a result of the change in
definition, NGL's would be upstream of the point of
production and would be considered and taxed as oil under
the bill.
2:24:25 PM
Ms. Wilson reviewed the definition of "gross value at the
point of production" on page 5, lines 1 through 5.
Representative Kerttula observed that these were current
regulations. Ms. Wilson went on to refer to the definition
of "gross processing plant" on lines 20 to 29. On page 31,
Ms. Wilson referred to dehydration, and its use, in the
definition of gas treatment. Line 5 to 9 clarifies that gas
treatment does not include dehydration. There is a new
definition on page 31, lines 10 through 16. Private royalty
production has a different tax rate under the bill. There
was a question about surface owners that receive royalties
and how they would be treated under the bill.
2:26:24 PM
Mr. Mintz explained that a royalty was a share of production
from an oil and gas lease. There are two types: one retained
by the owner of the land, usually the State; and overriding
royalties, which the leaseholder sells to someone else. The
latter is subject to the same tax as the rest of the
production, but the bill provides a special and typically
lower tax rate for royalties owned by the land owner. There
are a few situations where a royalty is offered to a surface
owner in exchange for use of the surface for oil and gas
operations. The Committee was asked to extend the same
treatment to that royalty as to lessor royalties. The
definition expands the category of royalties to include the
situation of a surface use agreement.
2:28:19 PM
Ms. Wilson noted that private royalty rates are found on
page 3, section 011 (f). The term "landowner's royalty
interest" has been used rather than "lessor".
2:28:51 PM
Ms. Wilson continued to review the definitions on page 31.
She noted that a definition of "point of production" was
added on line 19 to 32. This does not change the intent. She
drew attention to page 34. The bill in its various forms
provided a transition period of six months, with a seven
month true-up. This did not include oil spill surcharges.
Lines 12 - 23 address the payment of surcharges, and the
rest addresses the filing. They will be handled the same way
as the rest of the PPT provision, with a six month
transition and a 7 month true-up. She noted that page 36
contains an effective date of July 1.
2:30:48 PM
Ms. Wilson referred to slides that outline comparative
revenues (copy on file.) Ms. Wilson reviewed the slide: In
terms of Cumulative Severance Tax, and noted that the status
quo was represented by the blue line, the Governor's bill -
red line, and the House and Senate bills - the yellow and
green lines. She noted the similarity in the latter versions
of the bill.
2:32:17 PM
Representative Kerttula referred to previous testimony that
indicated that $8.33 cents is the fixed barrel lease
deduction and questioned how it was derived. Mr. Dickinson
observed that the testimony was provided by Mr. Marks. He
clarified that $8.33 is the average cost. There are five
different categories of costs. Four models were constructed,
with heavier or lighter oils and their value. He reiterated
that $8.33 was an average capital expenditure per barrel.
2:33:48 PM
Ms. Wilson reviewed the next slide: Regarding the Annual
Severance Tax, and noted that the sudden rise in the line at
2016 was a result of the transition sunset provision. She
referred to the another slide, which pertained to $60 oil
and noted that the rise was not a pronounced at the sunset.
At $70 per barrel oil, there are collections of just under
$2.5 billion.
2:35:45 PM
Ms. Wilson discussion progressivity represented in the slide
by a green line. The top line represented the House
Resources CS, which is the highest. The slope in the HCS
(RES) version is .003, which makes a sudden increase at
$110. The lowest line was the Senate Finance proposal, which
was on a net of .001 and started at a trigger of $45 per
barrel net. The turquoise line represented the Senate
progressivity based on gross. The dark blue line represented
the current HCS (FIN) version, with a slope of .0025, which
would be triggered at $35 per barrel net, which is earlier.
There had been interest in a line with a slope of .0025 and
a later starting point. She explained that the similar point
with $130 would have a progressivity of .00245 per barrel.
She explained that the difference between the blue and
yellow lines was based on using the same slope and moving it
to a lower trigger point. The green line was higher, even
though it is deductible, due to the higher slope with the
deductibility, and the fact that it was on gross vs. net.
She concluded that the green line could be viewed at .003,
which would be .0024 with deductibility. The green line
would remain above the blue line because it would be applied
against gross, which is higher than net in the case of the
blue line.
2:39:17 PM
Mr. Dickinson discussed a chart listing Costs and Prices,
which came from a February 23rd presentation to the House
Resources Committee (copy on file.) The chart listed
parameters in the modeling: $100 million per year in
exploration expenses for the next 25 years; every barrel
produced had a capital cost association as it was produced;
there was a $3.5 development capital on 2/3 of the
convention oil; known "heavy oil" had an $8 per barrel
developmental capital costs; and there is a $3.50
developmental capital cost on new conventional oil. Finally,
he noted that operating costs were $3 for conventional oil
and $5 for heavy oil. He pointed out that for new heavy oil,
the value was discounted. At $70 per barrel oil, heavy oil
would be $56. Costs and prices were in real 2005 dollars. He
concluded that if one calculated the value of a barrel of
oil, with a mix between heavy and light oil, one could
derive an average of $8.33, but it would be just a guess.
2:42:35 PM
Representative Hawker referred to a proposal, which is not
currently in the legislation, to allow the state to buy back
credits from explorers of extremely small producers that are
investing more money than they can recover as credits
against production. Credits would be transferable, but the
state of Alaska would still be responsible for the whole
dollar. The House Resources version had a $10 million buy
back provision. He proposed putting the provision into the
House Finance version of the bill, as an incentive to
smaller producers. He noted that the $10 million level
seemed low, and recommended raising it to $25 to $35
million.
2:44:22 PM
Ms. Wilson responded that the risk, in falling oil prices,
is that the State would be "on the hook", not only for
decreasing PPT revenues, but also to refund tax credits. The
risk at a $10 million would be less than at the higher
level.
2:44:57 PM
Mr. Dickinson agreed and pointed out that at $10 million,
with 8 users, the risk would total $80 million; at $25
million the risk would increase to $200 million. He observed
that the cost to the state could be high if every producer
requested this provision, and there were heavy investment
and a subsequent price correction. He noted that at one time
an amendment was introduced to allow credits to be used
against income tax. He explained that since the state income
tax runs on factors an explorer could owe income tax due to
their worldwide activity even though they have no
production. He noted that an amendment to allow transfer of
credits to purchase other resources failed in the Senate.
2:46:58 PM
Representative Hawker questioned if the response was skewed
to the left hand bar of the chart, where the State is
entitled to such an amount of production tax that not one of
the eight users would be able to utilize their credits. He
proposed that this would require a very small value and was
an unlikely scenario. Mr. Dickinson contended that the price
used in the modeling was substantially higher than the State
received in the 1980's and early 1990's. He observed that at
the time the State was receiving $18 - $19 per barrel oil,
production was 2 million or four times higher. He pointed
out that in 1999, when prices were $12 per barrel, the State
still produced hundreds of millions in revenue, which would
not occur under PPT. He proposed that if prices were to
fall, the scenario he described might be likely.
2:49:04 PM
Representative Hawker referred to multi state organizations
and observed that Alaska would be the first to adopt a net
profits tax, although this was a tool used worldwide. He
asked if other states might interpret the net profit
production tax as a tax on income earnings, rather than a
tax on production. He asked why they would not place a
disclaimer in the bill that this was indeed a production
tax.
2:50:22 PM
Mr. Dickinson responded that the tax would be examined in
detail. He maintained that it is a production tax and not an
income tax. He stated that in measuring production value,
elements have been added that resemble income elements. He
noted that they were measuring the production value in a way
that recognizes the state's greatest problem, which is the
lack of investment incentives.
2:51:38 PM
Representative Hawker observed that the State did not wish
to compromise the industry. Ms. Wilson noted that federal
taxable income is used with an add back for state income tax
in order to provide an equal playing field for all the
states to be proportioned, which is a simple mechanism for
domestic companies. However, since the industry is on a
worldwide basis and deductions are taking place in other
countries, it is more difficult to determine government
take, particularly in Middle Eastern countries. This must be
analyzed on a functional basis. She noted the Supreme Court
case in the Gulf, which dictated that one must examine the
essence of the tax and how it behaves and whether there are
deductions, which she proposed made it an income tax. She
felt that it could be considered an income tax and a
statement that it was not might threaten their position. She
expected other states to examine the intent of the bill and
not just its label.
2:54:53 PM
Representative Hawker did not think that their position
would be compromised by providing a hook for those that
"step up to the plate" with another $2 billion dollars a
year. Ms. Wilson noted a proposed language change to
"severance" rather than "production" tax. She suggested this
would be preferable to stating that it was not an income
tax.
2:55:37 PM
Mr. Mintz stated he did not know the motivation for changing
the label of the tax. He agreed with Ms. Wilson's concerns.
2:56:14 PM
Representative Kelly questioned if making the $200 million
in credits only available to explorers and small producers
would prevent the extreme scenario.
2:57:35 PM
Ms. Wilson responded that limiting potential tax refunds
would limit risk from the Administration's stand point; it
could be done based on levels of production.
2:58:39 PM
Representative Kerttula asked what rights would apply, and
noted the proposed change to $.04 per barrel contained in
the current bill. She also asked if the liability ought to
be limited to catastrophe.
LARRY DIETRICK, DIRECTOR, SPILL PREVENTION AND RESPONSE,
DEPARTMENT OF ENVIRONMENTAL CONSERVATION, responded to
questions. He began by addressing the surcharge issue. He
explained that there are two surcharge accounts. Both are
based on crude oil production, not the price per barrel. The
first account is the Response Account, with a surcharge of
$.02 per barrel; it is a $50 million cash reserved used for
response to catastrophic spills. The $.02 surcharge that
fuels the account only incurs when the account drops below
$50 million. The account was created in 1995. The surcharge
was implemented for approximately three months before the
account rose above $50 million and it was discontinued and
has not been implemented since.
Mr. Dietrick explained that the second account: Investment
Account, is used as a revenue source for the state of
Alaska's operating costs for spill and prevention programs.
There is a $.03 surcharge based on crude oil production,
which fuels the annual operating costs. Production has
dropped from 1.65 million to 850,000 barrels a day, since
the surcharges were created.
3:01:37 PM
Mr. Dietrick noted that general funds would be used to fill
the budget shortfall [from the drop in production]. The
Senate did not support the use of the General Fund and has
proposed a look at a long-term fix. The Senate proposal
would change the surcharge from $.03 to $.04 or $.05 cents
to avoid the use of general fund revenues.
3:02:52 PM
Co-Chair Meyer observed that most oil spills don't pertain
to the oil industry. He suggested that the entities causing
the spills should be charged. He pointed out that the Alaska
Railroad, Department of Transportation and Public Facilities
and others have been responsible for spills. He suggested
that funding could be switched from the Response Account,
since it is inactive, to operations. He concluded that an
additional $.02 to operations would be sufficient to support
costs.
3:04:25 PM
Mr. Dietrick noted that the House proposal set the surcharge
at 4 percent and observed that it would be sufficient for
one to two years. He noted that there are approximately
2,000 spills a year that can be broken down by crude and
refined oil and by source. Spills in the refined category
come from a variety of vessels and others in the
transportation sector.
3:06:41 PM
Representative Kerttula questioned if spills are generally
catastrophic. Mr. Dietrick clarified that there has only
been one catastrophic spill in the state. In response to a
question by Representative Stoltze, Mr. Dietrick noted that
the cost of the cleanup on the North Slope was incurred by
the entity that caused the spill. State costs for oversight
are estimated at $200 to $250 thousand.
3:08:21 PM
Representative Kerttula WITHDREW her OBJECTION to the
adoption of the CS. There being NO OBJECTION, it was so
ordered.
Discussion occurred regarding the timing of amendments and
the need to hear from consultants.
CS SB 305(FIN) am was HEARD & HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 3:10 p.m.
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