Legislature(2013 - 2014)HOUSE FINANCE 519
04/07/2013 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| HB193 | |
| HB76 | |
| HB193 | |
| HB129 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| += | HB 129 | TELECONFERENCED | |
| + | HB 76 | TELECONFERENCED | |
| + | HB 193 | TELECONFERENCED | |
| += | SB 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 7, 2013
1:34 p.m.
1:34:16 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Michael Pawlowski, Advisor, Petroleum Fiscal Systems,
Department of Revenue; Dan Stickel, Assistant Chief
Economist, Department of Revenue; Bruce Tangeman, Deputy
Commissioner, Tax Division, Department of Revenue;
Representative Lance Pruitt, Sponsor; Johanna Bales, Deputy
Director, Tax Division, Department of Revenue; Daniel
Moore, City Treasurer, Municipality of Anchorage; Diane
Blumer, Commissioner, Department of Labor and Workforce
Development; Paul Dick, Director, Division of Employment
Security, Department of Labor and Workforce Development;
Cathie Roemmich, CEO, Juneau Chamber of Commerce; Barbara
Huff Tuckness, Director, Legislative and Governmental
Affiars, Teamsters Local 959; Paul Grossi, Alaska Pipe
Trades and Iron Workers of Alaska, Juneau; Dennis Dewitt,
National Federation of Independent Businesses, Juneau; Don
Etheridge, Alaska AFL-CIO, Juneau; Joe Balash, Deputy
Commissioner, Department of Natural Resources.
PRESENT VIA TELECONFERENCE
Andy Rogers, Self, Anchorage; Rachel Petro, CEO, Alaska
State Chamber of Commerce.
SUMMARY
HB 76 UNEMPLOYMENT; ELEC. FILING OF LABOR INFO
HB 76 was HEARD and HELD in committee for further
consideration.
HB 129 OIL & GAS EXPLORATION/DEVELOPMENT AREAS
CSHB 129(FIN) was REPORTED out of committee with
a "do pass" recommendation and with one new
fiscal impact note from the Department of Natural
Resources.
HB 193 MUNICIPAL TAXATION OF TOBACCO PRODUCTS
CSHB 193(FIN) was REPORTED out of committee with
a "do pass" recommendation and with one new
fiscal impact note from Department of Revenue and
one previously published zero note: FN1 (CED).
CSSB 18(FIN) am
BUDGET: CAPITAL
CSSB 18(FIN) am was SCHEDULED but not HEARD.
CSSB 21(FIN) am(efd fld)
OIL AND GAS PRODUCTION TAX
CSSB 21(FIN) am(efd fld) was HEARD and HELD in
committee for further consideration.
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; relating to the oil and gas production
tax rate; relating to gas used in the state; relating
to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax
credits for certain losses and expenditures; relating
to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on
production; relating to the oil and gas tax credit
fund; relating to annual statements by producers and
explorers; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
1:34:26 PM
Co-Chair Stoltze discussed the meeting agenda.
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, presented the PowerPoint
presentation: "Fiscal Impact HCS CSSB 21(RES)." He noted
that the analysis focused on a long-term policy goal to
increase oil production in Alaska in the near-term and into
the future.
DAN STICKEL, ASSISTANT CHIEF ECONOMIST, DEPARTMENT OF
REVENUE, communicated that the department had identified 15
areas included in its fiscal analysis. The department would
provide information about each of the areas and would
conclude with a summary table showing the total fiscal
impact of the bill over the upcoming 6 years compared to
the fall 2012 forecast. He added that the fiscal note did
not consider potential additional production that could be
incentivized by the legislation. The presentation would
also look at revenue sensitivity under Alaska's Clear and
Equitable Share (ACES) and various versions of SB 21
specifically for FY 15.
Mr. Stickel pointed to slide 3: "1. Repeals Progressive
Surcharge." Under the current ACES system the surcharge
was the additional tax that applied when the production tax
value was in excess of $30 per barrel. The fiscal impact of
the repeal ranged up to $1.8 billion per year.
1:40:26 PM
Co-Chair Stoltze asked what the price of oil had been when
ACES was implemented. Mr. Stickel believed the price had
been in the $60 range.
Representative Gara asked Mr. Stickel to repeat his
comments about the impact of the elimination of
progressivity. Mr. Stickel replied that the repeal of
progressivity would have an impact of up to $1.8 billion
per year.
Mr. Stickel moved to slide 4: "Impact of Progressive
Surcharge." The slide showed revenues from the ACES 25
percent base tax and on the progressive tax portion from FY
08 to FY 19. He pointed out that going forward the
progressivity revenue was in the $1.8 billion to $1.5
billion range between FY 13 and FY 19. He noted that under
the current rates the department forecasted larger revenues
from the base tax than from the progressive tax.
Mr. Stickel turned slide 5: "Increases Base Production Tax
Rate." He explained that under the legislation the base
rate would increase from 25 percent to 33 percent (a
decrease from 35 percent was included in the prior bill
version CSSB 21). He elaborated that the change would bring
a revenue increase to the state of up to $875 million per
year. He noted that the difference between the 33 percent
and 35 percent base rates would be between $200 million to
$250 million annually.
1:42:21 PM
Vice-Chair Neuman wondered how the elimination of
progressivity would mean that oil and gas would be taxed
separately. He had been told that removing a BTU
equivalency section of the current law and eliminating
progressivity would have a decoupling effect. He stated
that progressivity was a multiplication function on the tax
and the BTU equivalency functioned to ensure that a tax
rate was followed for the producer's average monthly
production tax.
Mr. Stickel responded that under the ACES system the
progressivity surcharge factored in oil and gas and was
brought down by the lower gas value. He expounded that when
a producer had different commodity values there were
varying impacts on the surcharge. He explained that by
eliminating progressivity and taxing at a flat rate, gas
production would no longer change the tax rate. Under HCS
CSSB 21(RES) the base production tax would be 33 percent
for gas and 33 percent for oil.
1:44:56 PM
Vice-Chair Neuman stated that under ACES there was a
standard allowable deduction on capital and operating
expenses at the wellhead value. He clarified that the flat
rate under the legislation would include the same
components. Mr. Stickel agreed and stated that the
underlying calculation of the production tax value was not
changed in the legislation.
Co-Chair Austerman asked the department to review the
material as clearly and simply as possible for the benefit
of the committee and the public. He pointed to the
information on slide 3 stating that the fiscal impact would
be up to $1.8 billion. He asked what the fiscal impact
pertained to.
Co-Chair Stoltze requested simplicity and asked for other
department staff to augment with detail on slides as well.
1:47:29 PM
Mr. Pawlowski explained that the progressivity surcharge
was a tax that was added to the 25 percent base tax rate;
its elimination would have a revenue impact on the state.
The department endeavored to look at each revenue piece
separately given that some provisions had fiscal impact to
the state whereas others did not. He referenced slide 4 and
stated that while progressivity was a large piece of
revenue generated under ACES, the base tax rate also
generated significant revenue. For example, under the FY 14
forecast the base tax rate was estimated to generate $2.775
billion and progressivity was estimated at $1.55 billion.
He clarified that the slide showed the impact of revenue
raised prior to the application of credits.
Representative Wilson asked whether $1.8 billion would be
subtracted [potential loss related to the elimination of
progressivity] and $875 million would be added as a result
of the base tax rate increase from 25 percent up to 33
percent (slide 5).
Mr. Pawlowski answered in the affirmative.
Mr. Stickel expounded that the presentation included a
summary table showing the collective fiscal impact of the
provisions.
1:50:31 PM
Representative Gara looked at high revenues earned under
ACES in FY 08 and FY 12 (slide 4). He wondered if FY 12 was
the year that oil reached $140 per barrel and if
retroactive taxes had caused the high number in FY 08.
Mr. Stickel replied that oil prices had reached $140 per
barrel in FY 08. He detailed that the state had taken in
close to $1 billion in a specific month in FY 08.
Co-Chair Stoltze believed the retroactive provision had
expired after two or three years.
Representative Gara asked if the high revenue in FY 12 was
a result of high oil prices as well. Mr. Stickel replied in
the affirmative; prices had consistently been above $100
per barrel throughout FY 12.
Co-Chair Austerman pointed to slide 5 and asked for
verification that the state's revenue would increase up to
$875 million annually [due to an increase in the production
tax rate].
Mr. Stickel responded that the $875 million revenue growth
referred to an increase in the base production tax (based
on the fall 2012 forecast), which would vary by year. He
elaborated that the $875 million reflected a change in the
FY 16 forecast due to an increase in the base tax from 25
percent up to 33 percent.
1:52:55 PM
Mr. Pawlowski moved forward to slide 21: "Provisions in HCS
CSSB 21(RES) and Their Estimated Fiscal Impact as Compared
to Fall 2012 Forecast ($millions)." He noted that the slide
showed revenue impacts without a change in production.
Provisions in HCS CSSB 21(RES) were numbered on the left of
the slide. He believed it was pertinent to focus on FY 15
as it would be the first full fiscal year impacted by the
legislation.
Co-Chair Austerman noted that slide 21 showed a reduction
in $875 million; whereas slide 5 showed an increase in $875
million. He assumed the numbers were not the same.
Mr. Pawlowski replied that the number on slide 5 was
related to the upper maximum in the table on slide 21. He
elaborated that the elimination of progressivity would mean
a maximum loss in revenue per year of $1.8 billion (shown
in the FY 17 forecast); the revenue increase of $875
million was shown on line 2 in FY 16 (slide 21).
Co-Chair Austerman asked for clarification on the $1.8
billion impact shown on slide 3. He wondered if the impact
was a gain or loss in revenue to the state. He reiterated
his earlier comment about providing clarity for the public.
1:55:28 PM
Mr. Pawlowski answered that the overall fiscal impact would
be best described by the FY 15 analysis (tax was determined
in a calendar year). He pointed to slide 21, line 1 showing
that the elimination of progressivity would result in a
loss of $1.5 billion in FY 15 based on the fall 2012
forecast. Line 2 showed that an increase in the base tax
rate to 33 percent would increase income by $850 million in
FY 15. Line 3 included an increase of $700 million in
revenue as a result of the limitation on credits for
qualified capital expenditures for the North Slope (20
percent spending credit). He noted that line 3 only
pertained to taxpayers who directly took credits to offset
their production tax liability. Line 4 showed a minimal
revenue impact for the net operating loss (NOL) credit
increase from 25 percent to 33 percent. He detailed that
the NOL credit was available to small explorers who were
spending more than they were earning through production;
the change would impact the operating budget where credits
would go through the credit fund.
Mr. Pawlowski moved to line 5 that showed a $25 million
decrease in FY 15 revenue related to the gross revenue
exclusion for oil production in new units and new or
expanded participating areas. The provision eliminating the
requirement for credits to be taken over two years would
only have a fiscal impact in FY 14, which was projected at
an increased $250 million (reflecting credits that would
have normally been taken in FY 15). He explained that the
fiscal impact was limited to FY 14 because the obligations
created by companies spending in calendar year 2013 were an
obligation to the state. He furthered that when a company
made a qualified capital expenditure it earned a credit
based on 20 percent of the expenditure; under current law
the company had to divide the credit over a two-year
period. He expounded that the intent of the legislation was
to close out the fiscal obligation to the state.
Mr. Pawlowski continued on slide 21, line 7 showing no
fiscal impact of an amendment to the community revenue
sharing fund. He detailed that the item was linked to the
corporate income tax receipts under the legislation, but it
did not change the functioning of the program or the
legislature's authority to appropriate. Line 8 pertained to
a $5 per taxable barrel sliding scale credit, which was
based on the price of oil. The change would result in a
reduction in state revenue of up to $825 million in FY 15
based on the forecast production. He noted that if
production was higher the credit rate would increase. Line
9 showed the qualified oil and gas industry expenditure
credit, which was a corporate income tax credit for
manufacturing or modification of tangible personal property
(e.g. modules, truck and pipe improvements, and other). The
impact of the credit was indeterminate, but had an upper
range of $25 million per year in decreased revenue. He
detailed that the credit was limited to a company that paid
tax and could only be used to reduce the company's
individual tax liability.
Mr. Pawlowski addressed slide 21, line 10 pertaining to the
reduced interest rate for late payments and assessments on
most taxes; it showed an indeterminate fiscal impact with a
possible $25 million loss in revenue per year. Line 11
showed zero fiscal impact resulting from the removal of the
3-mile requirement for the Frontier Basin tax credit (the
change had been made in the House Resources Committee). He
communicated that the change showed no fiscal impact
because the Middle Earth [Interior Alaska] exploration
credit was included in the department's current production
forecast. Line 12 addressed the extension of the fixed $12
million small producer credit to 2022; the credit applied
to companies producing less than 100,000 barrels BTU
equivalent per day. He noted that there was no fiscal
impact in the near-term; in FY 17 through FY 19 there was a
loss in revenue projected as a result of new production
from new qualifying entities. Line 13 referred to the 2016
required report to the legislature from the department. He
remarked that the report requirement was in lieu of the
competitive review board. The report requirement cost would
be absorbed by the department and would generate zero
additional cost to the state.
Mr. Pawlowski moved to line 14 related to a requirement to
consider joint interest billings in the audit process. The
fiscal impact of the requirement was indeterminate; it was
challenging for the department to determine how the
requirement worked through the current audit process. Line
15 showed zero fiscal impact for Alaska Industrial
Development and Export Authority (AIDEA) bonding authority
to finance oil and gas processing facilities. He
communicated that the total revenue impact to the state
including all 15 items was projected at a loss of $800
million to $850 million per year.
2:04:06 PM
Representative Costello referred to prior testimony that a
tremendous amount of revenue was brought in through the
progressivity feature under ACES and that a significant
portion of the revenue was distributed in capital credits.
She had been told the number was approximately $850
million. She wondered where the amount was reflected on
slide 21 and noted the numbers seemed lower on the slide.
Mr. Pawlowski replied that there were two tiers in relation
to companies eligible for the qualified capital expenditure
credit. One tier included companies with a tax liability
that used the credit to reduce their liability. The other
tier included companies without a tax liability that were
issued a credit; the credit came through the state's
operating budget via the oil and gas credit fund. The
impact on the operating budget was $150 million in FY 15;
whereas the combination of the two tiers equaled the $850
million.
2:05:37 PM
Representative Gara stated that the base tax rate of 33
percent was misleading. He pointed to lines 2 and 8 and
surmised that a 33 percent tax rate would generate $450
million more than a 25 percent tax rate, but with the $5
sliding deduction $425 million out of the $450 million was
lost.
Mr. Pawlowski pointed out that the state would also gain
$300 million from the capital credit elimination. He noted
the numbers pertained to FY 14 (slide 21). He detailed that
when comparing the progressivity between the two, the
number would be a negative $525 million.
Representative Gara asked if the department could provide
different variations of the data on slide 21 assuming
various oil prices. Mr. Pawlowski directed attention to a
chart on slide 30: "Production Tax Revenue, Less North
Slope Refunded and Carried-Forward Credits." The data
pertained to FY 15 only, given that it would be the first
full year the legislation would impact. The impact was
shown across a range of prices ($50 to $150) and for
various versions of the legislation (from left to right:
ACES was shown in blue, SB 21 was shown in red, CSSB
21(FIN) was shown in yellow, and HCS CSSB 21(RES) was shown
in purple).
Representative Gara spoke to a ConocoPhillips projected
production decline of 3 percent for legacy fields beginning
in FY 17. He stated that the DOR forecast used a steeper
rate of decline and requested data using a 3 percent
decline from FY 17 going forward. Mr. Pawlowski was happy
to work with the committee on forecasted decline. He noted
that Conoco's 3 percent decline rate was limited to legacy
fields under its operation (the Colville River and Kuparuk
River units).
Representative Gara responded that an article using the 3
percent decline beginning in FY 17 included all of the
legacy fields operated by Conoco, BP, and Exxon. He noted
that Conoco estimated that its decline rate would be less
than 3 percent beginning in FY 17 given its other oil
fields.
Co-Chair Stoltze relayed that ConocoPhillips would have a
chance to present to the committee in the future.
2:10:35 PM
Co-Chair Austerman looked at slide 21, line 2, which showed
the 33 percent base tax. He pointed to FY 15 and asked if
the $850 million was representative of the 33 percent tax
and what the number would be under the current 25 percent
rate.
Mr. Pawlowski replied that the $850 million was the
difference between a 25 percent and 33 percent base tax
rates.
Representative Munoz followed up on a question by
Representative Costello related to how companies received
the capital expenditure credit. She wondered why the entire
amount was not reflected on slide 21.
Mr. Pawlowski replied that only looking at revenues brought
in by tax payers would have ignored the obligation created
by credits paid through the operating budget; therefore the
items had been broken out to clarify the expenditure by the
state. The total revenue impact (only factoring in revenue)
would be underestimating the bill's fiscal impact by $150
million. He remarked that it was difficult to represent the
two items in the fiscal note.
2:13:01 PM
Representative Munoz asked for verification that there was
an additional $400 million or $450 million not reflected in
bill's bottom line impact to the state. Mr. Pawlowski
replied that the total revenue impact was shown below line
15 on slide 21. The impact on the operating budget was
shown below and included in the bottom line total fiscal
impact on slide 21.
Representative Gara pointed to slide 21, line 8 and
observed that the tax rate would not reach 33 percent until
oil reached a price of $150 to $160 per barrel. Mr.
Pawlowski agreed that the impact on line 8 did reflect an
offset against the increase.
Vice-Chair Neuman asked what the cost of the gross revenue
exclusion (GRE) would be to the state. He wondered what the
cost to the state would be under the current standard
allowable deduction system.
Mr. Pawlowski replied that the GRE impact was represented
on slide 21, line 5. The estimated impact in FY 15 was
approximately $25 million. He noted that qualifying
production had been strictly limited to new oil that had
not been forecasted at present.
Representative Costello observed that the fiscal impact of
the GRE was projected at $50 million, but that it was also
listed as indeterminate. She wondered how the department
had approached the estimate and the unknown factors
involved. She assumed the worst case scenario had been used
in the assumption.
2:16:58 PM
Mr. Stickel replied that the GRE took the forecasted
production from the barrels and fields that would qualify
for the new unit and expanded participating areas. He
believed the number was 2 percent to 3 percent of the total
production for FY 15. The department also looked at the
forecasted production tax revenue with and without the GRE
applied to the barrels for the qualifying fields, which was
how the $25 million cost had been determined for FY 15. He
believed $25 million for the HCS CSSB 21(RES) version of
the bill was a good estimate; there was little uncertainty
about which barrels would qualify. He noted that the prior
version had included a more liberal definition about what
qualified as new oil. The uncertainty had been higher under
the prior version and the department had provided a range
of revenue estimate.
2:18:45 PM
Representative Edgmon pointed to slide 21, line 7 and
surmised that it was unlikely the community revenue sharing
fund would exceed $60 million given its tie to corporate
income tax unless a large uptick in activity occurred.
Mr. Stickel replied that the total corporate income tax
collections from oil, gas, and other corporations had been
over $500 million in each of the past eight years and
collections were continued to be forecasted at over $500
million per year for the length of the fiscal note. He
added that the $60 million threshold would easily be
reached.
Representative Edgmon questioned whether there would be a
decrease to the current $60 million. He believed an
additional $20 million to $25 million added to the revenue
sharing program in the last couple of years. He was
interested in the impact of tying revenue sharing to the
corporate income tax provision of the bill.
Mr. Pawlowski believed it was illustrative to look at the
progressivity piece (slide 4) because that was where
community revenue sharing dollars were softly dedicated to
the revenue sharing fund. He discussed language that was up
to 20 percent of the progressive portion or $60 million to
$180 million. He furthered that given the $500 million
annual corporate income tax revenue the department was
comfortable that plenty of revenue would be available for
the revenue sharing program. He stressed that the
legislation did not attempt to change how much would be
appropriated to the fund. The intent was to locate a
revenue stream that would meet the $60 million to $180
million to meet the obligation under the statute.
2:21:38 PM
Representative Edgmon relayed that an interactive
presentation demonstrating how changing numbers around
would impact the data. He wanted to be prepared for
unexpected events such as decreases or increases in various
areas. He referred to the importance of stress testing.
Co-Chair Austerman referred to his earlier question related
to $850 million. He clarified that the spring revenue
forecast was based on the ACES 25 percent production tax.
Mr. Stickel replied in the affirmative. He detailed that
the spring forecast was based entirely on the current ACES
production tax. He noted that slide 21 was based on the
fall forecast.
Co-Chair Stoltze made a remark about tying government
growth to production.
Mr. Pawlowski relayed that slide 21 was included on page 4
of a department fiscal note [FN10 (DOR), 4/8/13]. The
department felt the slide integrated the bill's provisions
without factoring in any changes to production or price. He
referred to a presentation by Econ One from the previous
day and to the importance of long-term decisions beyond the
timeline shown on the fiscal note.
Co-Chair Austerman asked whether the fiscal note reflected
the fall 2012 or spring 2013 revenue forecast. Mr.
Pawlowski replied that the note reflected fall data; the
department was currently working to update it for the
spring forecast.
2:24:35 PM
Representative Edgmon referred to a news article discussing
that the reduction of oil taxes should be thought of as an
investment to increase production. He wondered if a
projection of the potential increase in production
resulting from the legislation would be provided to the
committee. Mr. Pawlowski pointed to slide 22: "Production
Scenarios." He cautioned that any methodology looking at
increased production had flaws. The department had
attempted to provide a scenario method that examined
different production increase profiles.
Scenario A:
· New 50 Million barrel field developed by small
producer without tax liability
· Peak production = 10 thousand bbls/day
· Development costs = $500,000,000
· Qualified for GRE and NOL
Mr. Pawlowski relayed that ACES and the legislation used a
net tax. He expounded that it was important to also
consider the cost of reaching the production, which would
have a fiscal impact. Scenario A represented the addition
of one new 50 million barrel field.
2:27:25 PM
Mr. Pawlowski discussed Scenario B on slide 23: "Production
Scenarios." He communicated that the scenario provided the
most reasonable expectation for the near-term. He
emphasized that the scenarios were not meant to be
predictive.
Scenario B:
· Operators of existing units add 4 drill rigs to
current plans
· Each rig adds 4,000 bbls/day in new production
each year
o Which each then decline at 15% per year
· Does not qualify for GRE
Mr. Pawlowski elaborated that it was important to factor in
a decline rate when looking at oil production. He looked at
Scenario C on slide 24: "Production Scenarios."
Scenario C:
· Operator of existing legacy unit builds new drill
pad
· Development cost = $5 billion
· Adds 15,000 bbls/day in 2014 increasing to peak
rate of 90,000 bbls/day in 2018
· Does not qualify for GRE
Representative Holmes wondered about development costs
associated with Scenario B. Mr. Pawlowski pointed to page 5
of the fiscal note [FN10 (DOR), 4/8/13] and relayed that
the development cost for each well was estimated at $20
million. The figure was on the high side of current cost on
the North Slope, but he believed it was indicative of
future development costs.
Representative Gara expressed a concern related to Scenario
A (slide 22). He agreed that incentivizing new field
production was necessary. He asked for verification that
the GRE or the reduction in tax for a new field was 20
percent. Mr. Pawlowski replied in the affirmative.
Representative Gara asked whether the 20 percent GRE would
reduce the base tax rate by more than 20 percent. Mr.
Stickel replied that the 20 percent GRE was based on the
gross oil value and was subtracted from the net value. He
agreed that the impact of subtracting 20 percent of gross
would be a reduction of greater than 20 percent of net. He
explained that the exact percentage would depend on the
price of oil.
Representative Gara addressed tax rates of future new
fields. He stated that at $110 per barrel oil companies
would not pay a 33 percent tax due to the $5 sliding scale
[slide 21, provision 8]. He asked for a rough tax rate
estimate for FY 15 before the GRE.
Mr. Pawlowski asked for clarification on which presentation
Representative Gara was referencing.
2:32:55 PM
Representative Gara pointed to slide 21 of the DOR
presentation. He noted that line 2 assumed a 33 percent tax
rate, but the $5 per taxable barrel credit meant that
companies would pay less than 33 percent. He stated that
based on the chart the $5 credit would mean a reduction of
$825 million from the $850 million in gained revenue
resulting from the base tax rate increase to 33 percent. He
assumed that the actual tax rate on companies was closer to
26 percent or 27 percent with the inclusion of the $5 per
barrel credit. He wondered if the assumption was fair.
Mr. Stickel replied that at the forecast price the base tax
increase from 25 percent to 33 percent was roughly offset
by the per taxable barrel credit. He stated that the
effective tax rate factoring in only the two provisions
would be approximately 25 percent. He offered that the
department could provide more specific calculations that
encompassed all of the components.
Representative Gara pointed to the GRE, which subtracted
roughly 35 percent from the 25 percent tax rate. He
surmised that the tax rate would be approximately 17
percent when factoring in the GRE. Mr. Stickel answered
that the amount was roughly in the ball park.
Representative Gara understood that companies needed to
make up for sunk costs in the development of new fields,
but he wondered if the department had thought about a time
limit for the GRE. He did not know what the state would be
able to fund if it had to live off of a 17 percent tax
rate.
Mr. Pawlowski responded that a time limit on the GRE had
been discussed in multiple committees; the department was
concerned that it could create distorting effects on
behavior. Specifically, how investment behavior would
change if taxes were increased at the end or partway
through the useful life of a well. The department was more
comfortable with the more narrowly defined definition of
new oil in the current bill. He elaborated that DOR did not
see all of the new oil in the foreseeable future coming
from GRE eligible barrels because it did not apply to the
basic legacy production. He relayed that Mr. Stickel would
speak to the forecast related to non-GRE eligible
production.
Representative Gara understood that the GRE did not apply
to everything. He discussed areas that would qualify for
the GRE including new geological units in legacy fields,
Umiat, Nakiachuk, Oooguruk, CD5, and other oil. He stressed
that the provision would apply to a significant amount of
oil. He wondered if the state could fiscally sustain a 17
percent tax rate on the oil that would be included.
Mr. Pawlowski replied that the department had looked at
what the state could afford to offer in credits
particularly when it would not receive equal royalty into
the future. He believed CD5 was largely on non-state land;
the state paid through the credits and the deduction in
ACES. He furthered that the state invested, but did not
have the other components to provide the revenue to pay
back. The department was concerned about the state not
receiving the full royalty from the production and paying
for it upfront. The administration was more comfortable
with inspiring increased production in a way that did not
have the state as invested in the upfront development,
particularly when there was not the full balance of the
royalty to support the state.
2:38:40 PM
Representative Gara believed that the ACES tax system would
be eliminated in the near future. He asked about the pros
and cons of a significant amount of new oil being taxed at
a rate of approximately 17 percent and approximately 25
percent. He wondered why a 7-year to 10-year time limit on
the lower tax should not be imposed.
Mr. Pawlowski answered that when incentives changed
behavior also changed. He stated that the concern was
related to how tax increases would impact declining
production; costs would rise and increased taxes may cause
incentive to shut in the production. The fear was that the
change would discourage production in the future.
Representative Kawasaki asked if the production scenarios
provided were likely and how they were developed (slides 22
through 24).
Mr. Pawlowski replied that the scenarios had initially been
developed based on how something works without trying to be
predictive. He stated that predicting the magnitude of the
change was very difficult. He furthered that each scenario
was a realistic concept, but they were intended to be
illustrative. He pointed to Scenario B and relayed that
[operators of existing units] adding 4 new drill rigs was
not necessarily realistic. The department wanted to avoid
doing a direct correlation between increases in spending
and a direct percentage increase in production. He remarked
that it cost money to develop oil, production happened, and
then production declined; the items needed to be built into
a model given a net system in order to provide a realistic
picture for policy makers.
Representative Kawasaki believed there would be more value
to the scenarios if they were in a current development plan
under the Division of Oil and Gas.
2:42:53 PM
Mr. Pawlowski replied that the department had worked with
its economic research group to go through current DOR data
to get ideas on cost, development, and projects and had
built the data into the models. He relayed that the models
were not based on any individual opportunities.
Representative Kawasaki wanted to ensure that the public
understood that the scenarios were illustrative in nature.
Mr. Pawlowski stressed that DOR had attempted to move away
from anything that was not indicative of what actual
developments and projects would look like. The intent was
to produce something reasonable to show the public related
to the types of production.
Representative Holmes referred to the CD5 oil field. She
pointed to the department's concern that under ACES the
state may not collect royalties on developments off of
state land; therefore, production tax would make up the
entire revenue for the state on those areas. She furthered
that in the existing system there was interplay of the
state paying credits and the way the tax ran; she noted the
state could end up under water. She asked how the situation
would look under the proposed legislation and whether the
state would be on safer ground.
Mr. Pawlowski replied that the removal of the buy-down
effect had the largest impact. He elaborated that under the
net system the state support for company spending was at
the 25 percent rate plus the buy-down effect. He remarked
that PFC Energy and Econ One had talked about state support
for a project in the 80 percent range. The spending was
different under the current system because it was limited
to the basic tax rate (33 percent in the current bill); for
an existing company developing a field, the state supported
at 33 percent. The state would take a production tax
equivalent to the tax rate minus the GRE effect and the per
barrel future credit. He furthered that the scenario was
different than the buy-down effect and the capital credits
that came out up front in the current tax system. He stated
that there would be less potential for the state to go
negative in the situation than there was under ACES. He
referred to the decoupling effect and a previous PFC Energy
presentation. He detailed that the impact to the state
could be negative if a high value resource such as
conventional oil was combined with a low value resource
like viscous or high cost oil; the proposed system would
not create the same effect, but it was primarily linked to
the buy-down effect and not the credit structure. Under the
current system moving into the field, a company would have
the ability to write off expenditures against its taxes and
to receive 33 percent support. The company would receive a
per barrel production credit and the GRE for new fields.
The department saw the royalty being dramatically different
in comparison to the current system.
2:48:25 PM
Representative Wilson asked if the state could continue to
fund its budget with oil as the main resource. She observed
that oil is not a renewable resource and believed a change
needed to be made to stretch its production lifespan out in
Alaska.
Mr. Pawlowski focused on the power of production. He
referred to various presentations by departments showing
that Alaska was resource rich; approximately 3.5 billion
barrels of oil remained in the legacy fields and an
additional 3 billion barrels were waiting to be discovered.
He explained that roughly 10 percent of the resource needed
to be developed to continue to drive the revenues seen
under ACES with forecasted declines. He stated that in the
long-term the issue was about production being able to
sustain vital revenues to the state. He noted the
importance of discussing the relationship of state revenues
and the value being created. He pointed out that the state
received revenues in multiple ways in addition to the
production tax. The scenarios provided in the presentation
looked at production compared to the current system. He
suggested looking at the scenarios as underestimates. He
wanted to focus on what the production could do to drive
the long-term sustainability of Alaska as opposed to
looking at other revenue sources.
Representative Wilson understood that Alberta had recently
changed its tax structure. She wondered if the change had
made a difference. Mr. Pawlowski replied that DOR would
provide the committee with benchmarking data from prior
presentations that showed a dramatic increase in investment
and production in Alberta. He noted that Alberta was
currently experiencing some significant challenges due to
low oil prices caused by stranded production.
Representative Wilson remarked that Alaska could look to
other locations that had experienced similar issues to gain
information about outcomes.
2:51:54 PM
Representative Gara referred to the possibility that the
Alberta tax cut had raised the value to equalize the
offset. He relayed that the province was facing $2 billion
to $3 billion budget deficits. He stated that when too much
was spent on tax breaks it was possible to lose money.
Mr. Pawlowski referred to a Wall Street Journal article
from the past December that indicated there was oil at $50
per barrel if tankers were available to transport it. He
stated that there was a significant amount of oil produced
in Alberta with very little infrastructure to transport it.
He discussed various pipeline proposals. He understood that
the increased production was largely due to the decline in
price. He agreed that Alberta was facing a fiscal deficit.
Mr. Pawlowski continued to discuss Scenario C on slide 24:
"Production Scenarios." The scenario included a large drill
pad development with multiple wells, increased production,
and billions of dollars in spending. He furthered that the
scenario was an aggregate of the small field, the rigs, and
the addition of the large pad. He moved to slide 25:
"Production Profiles of Production Scenarios." The slide
illustrated production numbers associated with Scenarios A
through C. He pointed to FY 14 and noted that the blue bar
to the left represented forecasted production; Scenario A
did not add new oil, Scenario B increased production from
539 to 555 thousand BoPD, Scenario C increased production
to 570 thousand BoPD. The chart provided data for FY 14
through FY 19 including decline curves with production
layered on top.
Representative Gara asked whether actual projects had been
identified under Scenario C that would go online as a
result of the bill. Mr. Pawlowski answered that the
scenarios were hypothetical based on the department's
understanding of the type of spending that would occur. The
information was intended to be illustrative of realistic
elements that could occur.
2:55:46 PM
Mr. Pawlowski discussed slide 26: "Projected Revenues under
Production Scenarios at $90/Barrel ANS." The slide showed
rounded unrestricted general fund revenue at various prices
for the different production scenarios. The goal was to
present the sensitivity level of a new revenue system on
production. The chart provided a time limited (FY 14
through FY 19) illustrative scenario based on production
figures shown on slide 25.
Mr. Pawlowski turned to slide 27: "Projected Revenues under
Production Scenarios - at $100/Barrel ANS." The bar in
black on the far right showed ACES at the forecast
production (other scenarios were shown for comparison). He
pointed to Scenario B in FY 16, which showed that $5
billion would be raised under the proposal and $5.2 billion
would be raised under ACES.
Representative Gara recalled testimony that it would take
roughly seven years from the start to bring new production
online. He wondered why the chart showed new production
coming online within three and four years.
Mr. Pawlowski replied that adding a new rig to the legacy
fields could offer near-term opportunity and provide a
quick turnaround in production. He reiterated that the
slides were illustrative. He furthered that adding a new
rig could be done quickly; therefore, it was not GRE
eligible under the analysis.
Representative Gara asked for verification that there were
no commitments from any company that developments would
occur as a result of the bill. Mr. Pawlowski responded that
the oil industry was better equipped to answer the
question.
2:58:43 PM
Representative Costello observed that Scenario C preformed
the best. She asked the department to carry the analysis
beyond FY 19. She stated that the bill had a short-term
cost with the hope of a long-term gain. Mr. Pawlowski
replied that there were various requests that the
department could work with committee members on in order to
provide the desired information.
Mr. Pawlowski moved to slide 29: "Projected Revenues under
Production Scenarios - at Forecast ANS Price." The slide
showed how sensitive the scenarios were to moderations of
the decline curve to potentially create revenues that could
offset the revenue reduction under ACES.
Representative Edgmon discussed department comments that
U.S. oil production was at historic high levels. He noted
that production was increasing globally as well. He
wondered if a lack of infrastructure would provide a
limitation on the production scenarios.
Mr. Pawlowski replied with a reference to work done by Econ
One related to how much resource needed to be developed
over the long-term. Econ One had looked at what would
happen if Alaska trended along with its peer group
following 2006; it had examined what spending would be like
at present and how much resource there would be. Econ One
had also looked at the relationship between government take
and potential drilling and how many wells would need to be
developed over what period of time. He stated that when
considering the longer-term, it was necessary to look at
the opportunity to exceed the break even. He furthered that
the availability of capital as opposed to infrastructure
was the bigger question; whether companies had the capital
to reallocate quickly to develop resources in Alaska. He
encouraged members to ask the industry questions about its
ability to reallocate capital. He expounded that the change
would not happen immediately, but the attractiveness of the
tax system would make companies decide to reallocate
capital to Alaska to be competitive.
3:04:17 PM
Representative Holmes discussed slide 21 and the difference
between an impact on revenue and on the operating budget.
She pointed to slides 26 through 29 that showed projected
revenues under various scenarios. She asked whether the
slides also considered the impact of credits paid out under
the existing system on the state's operating budget.
Mr. Pawlowski believed the revenue projections factored in
the credits that would be paid out.
Representative Gara queried what 5.5 stood for in FY 19
(slide 29). Mr. Pawlowski answered that the figure was $5.5
billion in GFUR [General Fund Unrestricted Revenue]; the
bars represented revenue forecasts under the various
scenarios.
Representative Gara referred to testimony by the major oil
companies that technology was preventing the production of
massive amounts of heavy oil in Alaska. He recalled a BP
testifier who had said that the issue was technological and
not fiscal. He stated that Conoco had said it planned to
increase production, which would decrease its rate of
decline to approximately 3 percent. He was concerned that
the department was applying a 17 percent tax rate to new
oil, which was likely to be produced under the current ACES
system anyway. He was worried the state would unnecessarily
incentivize some items.
3:07:16 PM
Mr. Pawlowski replied that it was related to what the state
assumed would happen. He agreed that Conoco had made
comments about its specific production and decline rate. He
addressed the question about new oil and what would happen
and looked at projects that were on the horizon, but did
not happen (e.g. Liberty). He surmised that the root
question was about relying on the revenue forecast to
determine what would actually happen in the future and
using that to define new versus old oil. The department was
concerned that much of what was projected to occur under
ACES would not occur. He pointed to testimony from Ken
Thompson (of Brooks Range Petroleum) that the company had
been to over 200 potential investors to pitch its 40
million barrel project under the current system; it had
been unsuccessful and had asked the state to finance the
project.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, TAX DIVISION,
DEPARTMENT OF REVENUE, relayed that the department had
incorporated information it learned from producers about
expected decline rates into its fall revenue forecast (2012
Fall Revenue Forecast, page 43).
Co-Chair Stoltze referred to a phrase "we're not fine with
decline."
Mr. Pawlowski agreed. He could provide committee members
with a transcript of the Conoco analyst presentation. He
added that the company had included that it saw an
opportunity to reverse the decline if tax reform occurred.
He pointed to the opportunity of production to provide a
long-term sustainable base for the state.
3:10:29 PM
Vice-Chair Neuman referred to slide 29 and the committee's
discussion the prior day on well amortization running at
about five years. He wondered whether the value resulting
from the potential addition of four wells per year was
included in FY 19.
Mr. Pawlowski replied in the affirmative. The rig drilling
under Scenario B would cost $20 million per year; the money
would be spent up front and the production would come on
and decline within the model. He added that 1,000 barrels
per day had been used based on the current average
productivity of a well in the Prudhoe Bay unit.
Mr. Pawlowski pointed to slide 30: "Production Tax Revenue,
Less North Slope Refunded and Carried-Forward Credits." The
slide showed the fiscal impact of ACES and various versions
of the legislation on production revenue for FY 15.
Mr. Stickel explained that slide 30 illustrated the total
impact of ACES and various versions of the legislation on
production revenue for FY 15 including credits paid out.
The amount of expected credit refund payments for the North
Slope under each of the tax systems had been subtracted
from the total production tax number. There were carry-
forward credits at $50 per barrel in excess of the tax
liability for major producers. He noted that the slide only
looked at major provisions of the bill; an assumption for
the corporate income tax and the reduced interest rate for
late payments or assessments had not been included, which
represented an impact ranging from $0.00 to $50 million.
3:13:46 PM
Representative Gara asked which fiscal year slide 30
pertained to. Mr. Stickel responded that the chart
pertained to FY 15.
Mr. Pawlowski moved to slide 31: "General Fund Unrestricted
Revenue, Less North Slope Refunded and Carried-Forward
Credits." The slide related to FY 15 and attempted to
incorporate other sources of state revenue outside of the
production tax including royalty, property tax, and
corporate income tax; it included the impact on revenue at
oil prices ranging from $50 to $150 per barrel.
3:15:16 PM
Representative Gara hoped to see the state to receive a
more substantial share of the revenue when oil prices were
high and oil companies were making record profits. He did
not believe the state would have sufficient revenues to
fund schools and other projects over the next 10 years. He
wondered about an option that would allow the state share
in the benefits when oil prices were high. He asked if DOR
had modeled a scenario that would provide the state with a
more substantial share as oil prices increased. He
suggested an increase in revenue to the state when
companies made $50-plus per barrel profit. He referred to a
proposal the prior year to include a stair-stepped
progressivity feature and wondered if the administration
had considered it as a possibility.
Mr. Pawlowski replied that under the legislation the
effective tax rate and government take increased as prices
rose. He stated that whether the bill increased the
government take to levels preferred by committee members
was a policy call the administration was willing to work on
with the legislature. He furthered that the state's share
increased with higher prices without the problems
associated with the progressivity mechanism.
Mr. Tangeman stated that if the current decline path
continued the state would be limited in its ability to fund
basic services 5 to 10 years in the future. He pointed to
page 43 of the 2012 Fall Revenue Source Book, which
projected production of 250,000 barrels per day in 2022. He
stressed that it was critical to show an upside and
potential in the state in order to layer on new oil to the
legacy fields. The department believed it was critical to
turn the decline rate around in order to fund basic
services in 10 years.
3:20:06 PM
Representative Gara communicated that every committee
member wished to reverse the decline rate; he noted that
there were varying views on how to meet the goal. He
understood the department wanted to move away from the
current progressivity mechanism. He stated that the bill
would reduce tax rates down between 17 percent and 25
percent and would cap out at 33 percent even if prices
reached $200 per barrel. He wondered if there were
proposals that would allow the state to share in the
profits in a way that would not damage oil production. He
believed a 17 percent tax on new oil was low.
Mr. Pawlowski believed the administration had been open to
all input from each committee throughout the process. He
agreed that government take was an important concept; at
what point production and economics would not be hurt was
taken into account. He stated that the administration was
willing to work with the committee and its members.
Representative Gara replied that he would schedule a
meeting with the department.
Representative Costello commented that she received emails
from constituents who did not want changes made to ACES.
She believed there was a compelling reason and need to
explain what would happen if nothing was done [to decrease
the current decline rate]. She appreciated the department's
offer to work with committee members on the bill.
Co-Chair Austerman pointed to slide 21. He discussed that a
prior version of the bill passed by the Senate had included
a 35 percent tax rate. He wondered if the department's
model could insert the 35 percent tax to show what it would
look like. He requested a breakout between the flat $5 per
barrel and the sliding scale based on the department's
projections related to volume and dollar value.
Mr. Pawlowski agreed. He noted that Mr. Stickel could
provide a verbal answer related to the difference between
the 33 percent and 35 percent tax rates.
Co-Chair Austerman requested the information in writing for
all committee members.
3:24:21 PM
Representative Gara pointed to a provision added in the
prior committee [House Resources Committee] that would mean
the state would rely on company and joint billing
statements in auditing companies. He recalled that in the
past most Democrats had wanted a gross tax because it was
relatively straight forward. He pointed to concern that
under the profits tax some companies could overstate their
costs, understate revenue, or qualify something for a tax
credit that should not qualify. He wanted DOR to have the
most power possible to ensure that the state was receiving
its intended return under the legislation. He wondered
whether the department was more comfortable with the
current auditing system than it was with the proposed
auditing provision.
Mr. Tangeman replied that the department had access to and
used the joint interest billings; many other "tools" were
also available to the department. He furthered that from an
audit perspective it was necessary to rely on all available
tools in order to get a job done.
Representative Gara asked whether Mr. Tangeman would prefer
the current auditing system or the one included under the
legislation that was limiting. Mr. Tangeman answered that
the provision had not been in the governor's original bill
and had been added by the previous committee.
3:27:49 PM
Vice-Chair Neuman looked at a provision related to lease
expenditures and a change on pages 26 through 28. He
discussed past concern related to "gold plating" and items
allowable under lease expenditures. He observed that there
were considerable changes in the legislation and asked for
an analysis from the department.
Mr. Tangeman replied that joint interest billings could be
very lengthy and were shared between two companies. He
expounded that the department did have access to the
billings, but they were not used by all companies. He asked
for clarification on the request.
Vice-Chair Neuman referred to a subsection (B)(3) in the
legislation, which stated that costs must be direct costs
for exploring, developing, and producing. He stated that
each producer was different; current statute included
direct cost per individual for standard allowable
deductions for production value. He stated that a new
section included an arms-length clause that made it
possible to be owner of the pipeline. He wondered about the
best way to get the actual cost to the state. He understood
the department had become fairly comfortable with the
current system; he wondered how all of the changes would
impact the department.
Mr. Tangeman answered that it was the state's
responsibility to have a relationship with every tax payer;
any insights provided through the documents helped the
department do its job. He relayed that relying exclusively
on a document between two companies limited the
department's insight into the information needed. He
stressed the importance of the one-to-one relationship
between the state and individual tax payers.
3:31:54 PM
Vice-Chair Neuman surmised that Mr. Tangeman preferred the
existing system. Mr. Tangeman answered that the department
had developed the existing system over years and was
comfortable where it was and where it was going under the
net tax system.
Co-Chair Stoltze remarked that the related thought process
and conversation would be ongoing.
Representative Edgmon looked at slide 21 and asked for a
ballpark sketch on how a base tax increase from 33 percent
to 35 percent would impact the data. Mr. Stickel replied
that once the tax was put in place the difference would be
in the $200 million to $250 million per year range.
Representative Edgmon noted he had misunderstood earlier
comments and had thought the difference in the base rate
from 25 percent to 33 percent was $200 million to $250
million.
Co-Chair Stoltze asked the department to clarify the
information. Mr. Stickel answered that line 2 of slide 21
showed the increase in revenue to the state from the base
tax. He detailed that moving from a base rate of 25 percent
up to 33 percent would increase revenue in FY 15 by $850
million. He furthered that moving from a rate of 33 percent
up to 35 percent would increase revenue by approximately
$200 million to $250 million on top of the $850 million.
The impact of moving from a base rate of 25 percent up to
33 percent would be slightly over $1 billion in increased
revenue.
Representative Munoz understood that a close relationship
existed between changes to the base rate tax and the $5 to
$8 per barrel credit. She asked for the per barrel credit
impact to be included in the department's modeling of the
change between a 33 percent and 35 percent base rate.
SB 21 was HEARD and HELD in committee for further
consideration.
3:35:41 PM
RECESSED
4:08:05 PM
RECONVENED
HOUSE BILL NO. 193
"An Act relating to the joint administration of
tobacco taxes by the state and a municipality."
4:09:50 PM
Representative Costello MOVED to ADOPT the proposed
committee substitute for HB 193, Work Draft 28-LS0714\U
(Bullock, 4/5/13).
Co-Chair Stoltze OBJECTED for discussion.
REPRESENTATIVE LANCE PRUITT, SPONSOR, shared that the bill
had come to him at the request of the municipality of
Anchorage. He clarified that the bill did not increase
taxes; it was about communication and potentially lowering
property taxes. He stated that the legislation would allow
communication between municipalities and the state
regarding tax returns, audits, etc. He detailed that
currently the state could share the information with the
federal government, other states, and the Canadian
government, but not with municipalities within the state.
He noted that the City of Anchorage treasurer [Daniel
Moore] was available via teleconference to discuss the
issue.
Representative Pruitt relayed that the second piece of the
legislation allowed the Department of Revenue (DOR) to
partner with cities to create a stamp tax on tobacco. He
explained that currently the state received tobacco tax
from wholesalers and cities received the tax from
retailers. The bill would enable the city to partner with
the state and the tax would be administered at the
wholesale level, which would eliminate the potential for
tax evasion at the retail level. The bill's language
assured that the money would be provided by a municipality
to cover the costs. He shared that if 5 percent of tax
evasion could be recovered it would equal approximately $1
million for the City of Anchorage.
4:13:37 PM
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Work Draft 28-LS0714\U was ADOPTED.
Representative Wilson asked whether people could buy
cigarettes online to avoid the tax. Representative Pruitt
deferred the question to DOR.
JOHANNA BALES, DEPUTY DIRECTOR, TAX DIVISION, DEPARTMENT OF
REVENUE, replied that the state currently had a cigarette
tax stamp that was purchased by distributors. She detailed
that individuals who purchased cigarettes online were
required to pay tax to the department; individuals had the
same tax liability as distributors.
Co-Chair Stoltze noted that DOR had provided testimony
related to the tracking of cigarette taxes in the past. He
asked how the department tracked the tax and about measures
it had used. Ms. Bales relayed that federal law required
internet sellers to provide the department with information
when individuals purchased cigarettes online. She stated
that over 2,000 Alaskans had purchased cigarettes online;
the department had sent the individuals tax bills that they
were required to pay.
Co-Chair Stoltze asked whether the process had been under
an amnesty program. Ms. Bales replied that the department
had waived all penalties and had generous payment plans.
DANIEL MOORE, CITY TREASURER, MUNICIPALITY OF ANCHORAGE,
spoke in support of the legislation. He relayed that the
city's tobacco tax was currently collected without a tax
stamp. He stated that in the future the city may want a
tobacco tax stamp. The city was aware the state already had
a tobacco stamp. The private tobacco distribution industry
had strongly recommended that if Anchorage had a tobacco
stamp that it should be a joint single combination stamp
that would require the city to work through the state to
distribute and sell the stamps to distributors.
4:18:43 PM
Representative Munoz asked for an explanation about the
meaning of stamp relating to cigarettes.
Co-Chair Stoltze asked Representative Thompson to provide
an example. Representative Thompson read a tax stamp on
pack of cigarettes to the committee.
Representative Thompson asked whether the bill would change
the City of Anchorage's retail tax system to a wholesale
level. Mr. Moore replied that currently the tax was done at
a wholesale level; it was an excise tax applied to any
volume of cigarette product that came into Anchorage for
sale. He stated that the retailers were at the other end of
the distribution chain; Anchorage did not directly tax
retailers. The tobacco stamp would create a more
identifiable trail showing that the tax had been paid; the
stamp would eliminate situations where an entity bought a
product in Anchorage, claimed it would be sold outside of
the city, and then brought the product back into the city
for sale to retailers. The goal was to discourage the
potential for tax evasion.
Representative Thompson had been concerned about the
possibility of sales outside of Anchorage. He appreciated
Mr. Moore's explanation.
4:21:15 PM
Representative Kawasaki wondered about examples of similar
tax collections that involved municipal and state tax
collections. Ms. Bales answered that the department did not
currently collect taxes for other localities. She explained
that taxes were collected through revenue sharing. She
pointed to fish tax as an example; a portion of the tax was
shared with the location where the fish was caught. She
stated that the form of taxation was utilized in other
states, specifically for sales tax.
Representative Kawasaki asked whether the bill would impact
revenue sharing or caps on local tax or revenue. Ms. Bales
replied that cigarette tax was not included in revenue
sharing. The Municipality of Anchorage and seven other
localities within the state had their own cigarette taxes.
She did not believe the cigarette tax would work into the
tax cap for Anchorage. She deferred the question to Mr.
Moore for additional detail.
Co-Chair Stoltze clarified that the bill related to the
broader category of tobacco taxes and was not limited to
cigarette taxes. He detailed that cigarette taxes provided
$31.4 million in unrestricted general fund (UGF) revenue;
whereas non-cigarette tobacco taxes provided $14.4 million.
He noted that the taxes brought in more UGF revenue than
the commercial fishing industry.
Mr. Moore relayed that tobacco tax fell under the tax cap
in Anchorage. He stated that any type of additional revenue
received as a result of tightening enforcement would be a
dollar for dollar tradeoff with property taxes; a dollar
more in tobacco tax would mean a dollar less in property
tax.
Representative Holmes asked for clarification on the fiscal
note from DOR. She pointed to the total cost of $135,100
coming from statutory designated funds. She observed that
because the state could be reimbursed by municipalities the
total cost to the state would be $0.00. She asked for
verification that the funds would be reimbursed to the
state.
Representative Pruitt replied that the CS would have a new
fiscal note showing program receipts.
Representative Holmes asked for confirmation that there
would be no fiscal impact to the state. Ms. Bales replied
that the forthcoming fiscal note would show that revenue
would come from program receipts. The fiscal note would
show an increase related to the creation of one new
position, but the total state expenditure would be zero;
the additional fees would be collected from participating
municipalities.
4:27:35 PM
Co-Chair Austerman asked whether the $135,000 would cover
all municipalities with a cigarette sales tax that wanted
to participate. Ms. Bales answered that the state would
continue to issue same number of cigarette tax stamps as it
did currently; there would be additional fees and new
designs if all municipalities chose to participate. She
furthered that most of the costs would be associated with a
position tasked with tracking all of the cigarette tax
stamps. The goal was to have a limit of one tax stamp per
pack of cigarettes to prevent additional costs incurred by
distributors. The department expected that the total cost
would not exceed $135,000.
Co-Chair Austerman asked for verification that there would
be one state/municipal stamp given to each of the
participating communities. Ms. Bales replied in the
affirmative.
Co-Chair Austerman asked for confirmation that DOR would
collect the fees and distribute them back to
municipalities. Ms. Bales answered in the affirmative. She
elaborated that revenue was collected when stamps were sold
to distributors; there would be different inventories of
stamps for sale and DOR would track which portion of the
sale was for either state or municipal revenue.
Co-Chair Austerman looked at page 2 of the CS and observed
that the bill indicated that the department "may" collect
funds from municipalities; there was nothing in the bill
that required the department to collect funds. He assumed
the intent was for DOR to collect the funds.
Representative Pruitt replied that he had worked with the
department on the bill language and it was the intent for
the state to have no financial burden.
Co-Chair Austerman asked whether the sponsor would object
if the word "may" was changed to "shall." Representative
Pruitt was agreeable to the change if no unintended
consequences were identified by DOR.
Co-Chair Stoltze did not see a problem with the current
language. He furthered that participation would be
initiated by municipalities and it would be in their best
interest to work with the state. He wondered if changing
the language to "shall" would create a burden. He was more
comfortable with the word "may."
4:31:58 PM
Representative Pruitt asked the department to weigh in on
the issue. Ms. Bales replied that the department would have
no problem with the change to shall and saw no unintended
consequences that would result from the change. The
department would ensure that costs to municipalities would
be predicated on the number of stamps sold in the area.
Co-Chair Stoltze asked whether the change would force a
municipality into a relationship with the state.
Co-Chair Austerman looked at line 4 on page 2 of the bill,
which included language related to the agreement between
DOR and a municipality. He was more concerned about line 12
related to reimbursement. He did not have a problem with
"may" in line 4.
Representative Pruitt confirmed that the intent was to
ensure that a municipality willingly and knowingly took on
the cost burden.
Co-Chair Stoltze communicated that the amendment would be
offered at a later portion of the meeting.
Representative Kawasaki referred to testimony from the city
and municipality [of Anchorage] about lost revenue due to
tax evasion. He asked about the department's record related
to tax collection. Ms. Bales answered that the state did
not have a tax stamp until 2004. She shared that there had
been a 24 percent increase in cigarette tax revenue in the
first full year after the stamp's enactment. She referred
to discussions with the Municipality of Anchorage related
to dealing with tax evasion; following the trail of
cigarette tax sales through invoices had been unsuccessful.
She relayed that the tax stamp had allowed for successful
enforcement.
4:35:01 PM
Representative Wilson asked what would happen if Anchorage
was the only municipality interested in participating. Ms.
Bales replied that the department would continue to issue a
state-only cigarette tax stamp for cigarettes sold outside
of the municipality and would have a joint stamp for
cigarettes sold within the municipality. She added that
there would be no problem if a municipality did or did not
want to have the tax stamp.
Representative Wilson wanted to make sure the state would
not need to hire a position if only one community decided
to participate.
Co-Chair Stoltze asked Mr. Moore about conversations with
other jurisdictions. He noted that Mat-Su had a
cigarette/tobacco tax. Mr. Moore replied that he had not
had recent conversations with other jurisdictions on the
subject; conversations had been primarily with private
sector wholesalers. He surmised that if Anchorage was the
only entity in the state pursuing a joint tobacco tax stamp
it would receive a disproportionate share of the costs. He
furthered that the municipality would work with the state
to determine whether a full-time or part-time person would
be needed. He continued that there would be a joint
agreement between the state and the municipality to
determine the terms. He elaborated that the state was in
the driver's seat and would tell the jurisdiction what the
cost would be; the municipality would then decide whether
it agreed to the terms. The municipality would look at the
cost and potential revenue that would be generated from the
stamps prior to a decision.
Co-Chair Stoltze commented that Anchorage should hope that
other cities would choose to participate because DOR would
hire a person if authorized by the legislature.
Representative Thompson discussed that Fairbanks had a
former similar tax; there had been no tax charged on
cigarettes shipped out of the city. He wondered if a
municipal stamp would be required on the packets sold in
stores such as Costco. He thought the issue could become
confusing.
Mr. Moore answered that the municipality had asked major
tobacco distributors including Sam's Club, Costco, Northern
Sales, and others about how the change would impact the
stores. The entities had responded that a joint stamp would
be necessary. He furthered that some of the member
wholesalers (e.g. Costco) would need to have two separately
managed secured inventories for the state-only stamp and
the joint state/city stamp.
4:39:20 PM
Representative Kawasaki stated that there were currently
six municipalities that taxed tobacco. He wondered if the
bill would encourage other municipalities to tax tobacco,
given that the state would take on the most expensive
aspect of administering the tax.
Representative Pruitt replied that some municipalities may
make the decision to begin taxing tobacco. He noted that in
Anchorage there was currently substantial revenue set in
place that was not obtained, which meant others throughout
the city had to pick up the costs through property tax or
other methods. He acknowledged that the bill may make it
easier for other municipalities to tax tobacco and
recognized that many people would benefit in communities
currently levying tobacco tax as well.
Representative Thompson could see where the change would
work for Anchorage, but he did not know if it would work in
Fairbanks. He explained that the Fairbanks North Star
Borough had a cigarette tax, within city limits there was a
separate sales tax, and there was also a state tax.
Ms. Bales commented on the concerns. She stated that there
was nothing currently that would preclude a municipality
from enacting a cigarette tax or from having a cigarette
tax stamp. She pointed to the concern that without a
cooperative agreement with the state every municipality
could enact its own stamp, which would put a requirement on
distributors. The bill would provide a mechanism to make it
easier (particularly for distributors) if more
municipalities decided to tax tobacco.
4:42:20 PM
Co-Chair Stoltze CLOSED the public testimony.
Co-Chair Austerman MOVED to ADOPT a conceptual amendment on
page 2, line 12 that would change the word "may" to
"shall." There being NO OBJECTION, it was so ordered.
Representative Costello requested to amend the replacement
fiscal note. She discussed that page 2 of the DOR fiscal
note specified that $50,000 would be used annually to
purchase cigarette stamps. She pointed to a services line
of $54,700 and believed that $50,000 of the amount should
be moved to the commodities section of the note.
Co-Chair Stoltze clarified that general fund program
receipts should be changed to statutory designated
receipts.
Representative Costello responded that the updated note did
reflect the change to statutory program receipts. She
discussed the zero note from the Department of Commerce,
Community and Economic Development and the Department of
Revenue replacement note [FN3], which showed $135,100 for
FY 14 through FY 19 in statutorily designated funds.
Representative Costello MOVED to REPORT CSHB 193(FIN) as
amended out of committee with individual recommendations
and the accompanying fiscal notes. There being NO
OBJECTION, it was so ordered.
CSHB 193(FIN) was REPORTED out of committee with a "do
pass" recommendation and with one new fiscal impact note
from Department of Revenue and one previously published
zero note: FN1 (CED).
4:46:25 PM
AT EASE
5:03:54 PM
RECONVENED
HOUSE BILL NO. 76
"An Act relating to electronic filing of certain
information with the Department of Labor and Workforce
Development; relating to surcharges, rate increase
reduction, prohibition on the relief of certain
charges, the unemployment trust fund account, and the
offset of certain unemployment compensation debt under
the Alaska Employment Security Act; relating to the
definition of 'covered unemployment compensation debt'
in the Alaska Employment Security Act; and providing
for an effective date."
DIANE BLUMER, COMMISSIONER, DEPARTMENT OF LABOR AND
WORKFORCE DEVELOPMENT (DLWD), introduced department staff.
She explained that the bill did four things: (1) allowed
for electronic filing of reports and documents, (2)
improved the ability to recoup fraudulent unemployment
insurance (UI) payments, (3) adopted minor changes bringing
the department into compliance with federal law governing
the UI program, and (4) changed how UI tax rates were set
in order to keep more money in the hands of Alaskan
employers and employees. The bill would keep more money
circulating in the state's economy while protecting the
integrity of the trust fund.
PAUL DICK, DIRECTOR, DIVISION OF EMPLOYMENT SECURITY,
DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT, provided a
sectional analysis of the bill.
Section 1 adds a new section, AS 23.05.055,
authorizing the commissioner to allow the use of
electronic filing methods in place of paper filing.
Section 2 adds a new section, AS 23.20.021,
authorizing the legislature to appropriate money into
the unemployment trust fund account.
Section 3 adds a new section, AS 23.20.279, to bring
the state into conformity with federal law, Public Law
112-40, by prohibiting the relief of charges to
employers when an erroneous payment of unemployment
insurance benefits is made due to an established
pattern of the employer, or an agent of the employer,
for failing to respond timely or adequately to a
documented request for information relating to a claim
for unemployment compensation. This section defines
"erroneous payment" as a payment made that would not
have otherwise been paid, but was due to the failure
of the employer to respond timely or adequately. This
section also defines "pattern of failing" as two or
more times or 2% or more of all requests, whichever is
greater, during the prior year.
Section 4 amends AS 23.20.290(c) by adding the word
"surcharge" following the words "fund solvency
adjustment".
Section 5 repeals and reenacts AS 23.20.290(f),
replacing a table method for determining fund solvency
adjustment surcharges with a more precise calculation
method. It also eliminates the 0.3 limitation on fund
solvency adjustment surcharge decreases in a single
year.
Section 6 adds a new section, AS 23.20.291,
authorizing the commissioner to suspend, in whole or
in part, increases in unemployment tax rates when the
"average high cost multiple," a measure of solvency
calculated by the U.S. Department of Labor, Employment
and Training Administration, is 0.8 or greater and
after consultation with the department's actuary.
Section 7 amends AS 23.20.390(f) to bring the state
into conformity with federal law, Public Law 112-40,
by removing the department's authority to waive the
collection of a penalty established due to
misrepresentation and requires that a minimum of 30%
of the unemployment insurance penalties collected due
to misrepresentation be deposited into the state's
unemployment trust fund account.
Section 8 adds new section, AS 23.20.486 to authorize
the department to offset unemployment compensation
debt against a claimant's federal income tax refund.
This section would allow the state to participate in
the federal treasury offset program.
Mr. Dick elaborated on Section 7 and relayed that currently
the department was required to put 100 percent of the
penalty collections into the unemployment trust fund
account (the figure would be changed to 30 percent under
the legislation). He pointed to Section 8 and shared that
there were 19 other states currently participating in the
federal treasury offset program; the program would enable
the department to collect $500,000 per year and to allocate
more money to the trust fund.
5:09:14 PM
Mr. Dick continued with the sectional analysis:
Section 9 amends AS 23.20.520, by adding a new
paragraph to define "covered unemployment compensation
debt" in accordance with the federal statutory
definition.
Section 10 effective July 1, 2018 repeals AS
23.20.291, added by section 6 of this bill.
Section 11 amends state uncodified law by specifying
that AS 23.20.279, added by section 3 of this bill,
applies to overpaid benefits established after October
21, 2013.
Section 12 specifies that the department will adopt
necessary regulations to implement changes.
Regulations will not be effective prior to July 1,
2013.
Section 13 establishes that section 12 takes effect
immediately.
Section 14 establishes the effective date for the
remaining sections of this Act as July 1, 2013.
5:10:08 PM
CATHIE ROEMMICH, CEO, JUNEAU CHAMBER OF COMMERCE, spoke in
support of the legislation. She read from a statement:
Thank you for all of your efforts to keep our state
strong by working for small business growth. It's not
often these days we find ways to lower the cost on
anything, so we applaud the governor for bringing
forward the solvency of Alaska's Unemployment Trust
Fund Account. The Juneau Chamber of Commerce
represents nearly 400 business members and their
employees. It is our job to promote and support a
positive business climate, not only in Juneau, but
throughout the state. Our members support legislation
that updates and clarifies laws as they relate to
doing business in an effort to improve Alaska's
business environment. Therefore, we would like to add
our support to House Bill 76. We are pleased that this
legislation will ensure that business owners as well
as Alaskan workers are not paying more to state
government in unemployment insurance taxes than
necessary. The Juneau Chamber also understands the
importance of compliance with the federal unemployment
insurance laws. Maintaining a significant federal
Unemployment Tax Act credit that our employers
currently receive is another critical piece of
responsible taxation. The federal compliance
components of House Bill 76 ensure that Alaskan
businesses will not be sending any more money to
Washington D.C. than necessary for the unemployment
insurance program. We are also supportive of the
greater efficiencies that the Department of Labor will
be able to provide by allowing electronic filing of
our unemployment claims. Thank you all for the work
you do on behalf of Alaskans.
5:11:56 PM
BARBARA HUFF TUCKNESS, DIRECTOR, LEGISLATIVE and
GOVERNMENTAL AFFIARS, TEAMSTERS LOCAL 959, discussed the
organization's membership. She referred to an opposition
letter from the Fairbanks Chamber of Commerce (copy on
file). She relayed that the organization had paid
approximately $36,000 in unemployment taxes in 2012;
employees had paid slightly over $8,000. She shared that
Alaska was one of three states where employee and employer
contributions went into the fund. She communicated that the
organization had concern related to Section 6 of the House
Labor and Commerce Committee CS. She detailed that the
concern with Section 6 related to the amount of money
employers and employees would pay into the fund. She had
sent DLWD questions related to how the rate was calculated
and how the change would impact employers and employees.
She read a specific question that had been raised followed
by a response from DLWD:
Q: If the rate increases are suspended as referenced
in Section 5 [Section 6 in the current CS] of the bill
and the average high cost multiple falls below the
trigger, won't employers and employees subsequently be
required to pay more than what they would have had the
earlier rate increase not been suspended.
A: If rate increases are suspended employers and
employees would be required to pay slightly more in
subsequent years than they would have if the increases
had not been suspended in the earlier years. Over the
long-term, the amount paid by employers and employees
would be about the same or slightly less if increases
were never suspended. Any suspension would have the
effect of deferring suspended taxes that would be
absorbed over a multiple of years following.
Ms. Huff Tuckness was not concerned with any other sections
of the bill.
5:16:21 PM
Ms. Huff Tuckness stressed that the current formula had
worked well since the 1980s. The concern related to a
potential impact on a fund that was currently running well.
She encouraged the committee's consideration related to
Section 6.
Representative Holmes asked what the organization's
preference was related to Section 6. Ms. Huff Tuckness
replied that the organization would prefer that the section
was removed from the legislation. She noted that the
removal of the section would mean there would not be any
suspensions of what employers or employees would pay.
Representative Gara asked whether Section 6 could be
rewritten so that the regular rate would go back into
effect when the fund's surplus dissipated. Ms. Huff
Tuckness felt that she was not the appropriate person to
respond to the question. She referred to a question by the
organization about how a surplus in the fund would be
defined. She believed the questions fell under the purview
of the department or the creator of the original formula.
She added that the UI fund paid for some great educational
programs throughout the state and made contributions to
unemployed individuals.
Representative Gara wanted to ensure the fund was able to
continue paying for items it funded. He asked if Ms. Huff-
Tuckness disagreed that the fund currently had a surplus.
5:20:02 PM
Ms. Huff Tuckness did not agree that there was a surplus.
She elaborated that fund contributions were based on a
formula that had been established in the 1980s that had
successfully ensured adequate contributions when economic
times in the state were bad or good. She discussed rates
over the past 10 or 20 years and referred to a chart
showing slight increases and decreases over the years. She
noted that the current formula ran smoothly.
Vice-Chair Neuman asked whether the issue had been
addressed in the House Labor and Commerce Committee and if
so, why the committee had decided to keep the section. Ms.
Huff Tuckness replied that she had brought the concern to
the prior committee. She believed a sunset provision
amendment passed by the prior committee was a way to
address any negative issues should they occur. She surmised
that if the bill passed with the provision intact and none
of the concerns came to fruition there may be an effort to
either extend or remove the repeal.
Representative Costello requested that the bill be held
after public testimony for further review. She offered her
time to help resolve the issue.
5:23:26 PM
PAUL GROSSI, ALASKA PIPE TRADES AND IRON WORKERS OF ALASKA,
JUNEAU, followed up on testimony provided by Ms. Huff
Tuckness related to Section 6 and stated that there may be
a surplus in the fund currently, but there was no way for
him to know. He surmised that the Legislative Finance
Division director was probably the expert. He stated that
there may be a way of tweaking the formula if the fund was
over funded in order to give employers a break; the fund
had been in effect for over 30 years and had worked close
to perfectly. He cautioned to be careful with changing the
formula because if there was a relief of an increase and a
downturn in the economy caused the fund to become insolvent
the employers would be on the hook. He explained that the
federal government would have to pay the benefits and would
require reimbursement with interest and the fund would need
to be made solvent again. He did not believe the sky was
falling, but the current system had worked for a long-time.
He suggested that the committee look further into the
issue.
5:26:42 PM
Representative Wilson observed that Section 6 appeared to
have checks and balances. She furthered that if the formula
were to be changed it would be looked at again in the first
year and subsequent years to ensure it was running
smoothly.
Mr. Grossi agreed that there were checks included the
Section. He communicated that when the formula had gone
into effect in 1979 or 1980 there had been significantly
fewer employers and employees. He stated that it may be
possible to tweak the formula to give employers a break for
a long period of time. He noted that the financial analysts
would be better equipped to provide that information.
5:28:45 PM
DENNIS DEWITT, NATIONAL FEDERATION OF INDEPENDENT
BUSINESSES, JUNEAU, shared information about the
organization. He spoke in strong support of the legislation
including Section 6. He shared that the organization's
national consultant had looked at the section and was
comfortable that the slight formula tweak would not cause
any trouble for employers. He detailed if no employer were
able to pay any UI taxes the fund would still have the
ability to pay out funds equal to those paid in the last
year for another 1.75 years. The organization believed the
amount was sufficient for a trust fund. Additionally, the
organization believed that continuing to increase the trust
fund assessment was taking money out of employers' and
employees' pockets and putting it into a state savings
account at an inappropriate and unneeded level.
Representative Gara pointed to Section 6, page 4, line 26.
He believed the bill's provision requiring a reduction to
last for a one-year period in the event of a surplus was
inflexible. He wondered whether the section could be
modified to allow for a lower rate on a month to month
basis.
Mr. Dewitt replied that continued changes of tax rates
created problems for employers related to payroll. Changing
the rate on a monthly basis would require computer systems
to be reprogrammed on a monthly basis, which would become
expensive. He stated that Public Employees' Retirement
System (PERS) was concerned about when retirees were
elderly; however, the UI fund was concerned about setting
rates for the present and three years out. The organization
believed an annual setting was sufficient and the
likelihood of the fund being expended during that time
period was very unlikely.
Representative Gara assumed that the rate would not need to
be looked at every month. He believed that if a surplus was
identified the rate could be reduced and once there was no
longer a surplus it could be dropped the following month.
5:33:30 PM
DON ETHERIDGE, ALASKA AFL-CIO, JUNEAU, supported the
majority of the legislation but had concerns about Section
6. He shared that declining revenues was the primary reason
for concern.
5:34:29 PM
ANDY ROGERS, SELF, ANCHORAGE (via teleconference), spoke in
support of the legislation. He spoke from the perspective
of an employer and did not see the bill as a game changer.
He was encouraged by the state's work to conduct business
efficiently. He looked at Section 6 and opined that the
ability for the commissioner to give employers a break when
the fund did well was a good way for the state to help
employers. He did not believe a break on a potential
increase would save the solvency of the fund in a major
economic downturn.
Co-Chair Stoltze asked if Mr. Rogers was a small business
owner. Mr. Rogers replied in the affirmative. He and his
wife owned a physical therapy clinic with multiple
locations.
5:36:54 PM
RACHEL PETRO, PRESIDENT and CEO, ALASKA STATE CHAMBER OF
COMMERCE (via teleconference), spoke in support of the
legislation. She stated that most of the provisions were
straight forward. She asked for the system to remain
compliant, efficient, and fair. She relayed that the
chamber did support Section 6 of the legislation.
Co-Chair Stoltze CLOSED the public testimony.
HB 76 was HEARD and HELD in committee for further
consideration.
AT EASE
5:39:06 PM
RECONVENED
5:42:48 PM
HOUSE BILL NO. 193
"An Act relating to the joint administration of
tobacco taxes by the state and a municipality."
5:43:10 PM
Co-Chair Stoltze brought previously reported out CSHB
193(FIN) back before the committee upon advice from legal
counsel related to an amendment.
Representative Costello MOVED that the committee RESCIND
its action to report CSHB 193(FIN) out of committee. There
being NO OBJECTION, it was so ordered.
Co-Chair Austerman MOVED to RECIND action on amending CSHB
193(FIN). There being NO OBJECTION, it was so ordered.
Co-Chair Austerman pointed to page 2, line 12, and MOVED
Amendment 2 that would replace the word "may" with "must."
Co-Chair Stoltze OBJECTED for discussion.
Co-Chair Austerman explained that Legislative Legal
Services had communicated that the proper replacement of
the word "may" was "must" (instead of "shall") in order to
accomplish the amendment's intent.
Co-Chair Stoltze WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 2 was ADOPTED.
Representative Costello MOVED to REPORT CSHB 193(FIN) out
of committee with individual recommendations and the
accompanying fiscal notes.
CSHB 193(FIN) was REPORTED out of committee with a "do
pass" recommendation and with one new zero impact note from
Department of Commerce, Community and Economic Development
and one new fiscal impact note from Department of Revenue.
5:45:51 PM
AT EASE
5:46:30 PM
RECONVENED
HOUSE BILL NO. 129
"An Act relating to approval for oil and gas or gas
only exploration and development in a geographical
area; and providing for an effective date."
Representative Costello MOVED to ADOPT the proposed
committee substitute for HB 129, Work Draft 28-GH1970\U
(Bullock, 4/5/13). There being NO OBJECTION, it was so
ordered.
5:47:12 PM
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES (DNR), relayed that the department had worked on
changes to the substantive portion of the bill in Section
2. He noted that Section 1 included a lengthy set of
findings and determinations in response to a recent Alaska
Supreme Court decision [Sullivan v. Resisting Environmental
Destruction on Indigenous Lands]; the language directed DNR
to follow the existing statutory guidance in AS
38.05.180(a) in order to adopt regulations to implement the
court's finding in terms of the state's interests (public
and otherwise) for the advancement of exploration and
development.
Mr. Balash pointed to Section 2 and relayed that
Legislative Legal Services had recommended a couple of
clarifying changes. The department had no concerns with the
changes.
Co-Chair Stoltze noted that the bill was heard previously
and that public testimony had been closed.
Mr. Balash added that DNR staff was available online for
technical questions.
5:49:12 PM
Representative Costello pointed to the findings section and
wondered if it was common for the legislative branch to
mention a decision made by another branch of government.
Mr. Balash believed the language was appropriate. He
communicated that the agency was addressing a decision by
the Supreme Court, which determined that it was the
legislature's prerogative related to how DNR would
implement the aspect of the case requiring that DNR take a
continuing hard look at decisions beyond the leasing phase.
The language was modeled on language that had been adopted
by the legislature approximately 12 years earlier.
Co-Chair Stoltze agreed that the language was not unique.
He recalled fighting a past effort by the Alaska Railroad
to overturn an Alaska Supreme Court decision related to a
Native village in his district.
5:51:41 PM
Representative Gara wanted to ensure that the bill would
not extend the amount of time a company with an oil and gas
lease would have to develop the land. He stated that
currently companies were provided a specific amount of time
under a lease to develop; if the lease was not acted upon
the state had the right to lease the area to another party.
Mr. Balash replied a lease could be held no more than 10
years unless the terms specified a shorter period. The only
way for a party to continue to hold the lease was through
production, a certified well, or unitization. The
legislation would not impact the existing requirements; the
language related to the decisions made by DNR when granting
permission to explore or develop the lease.
Representative Gara asked for verification that current law
provided three public comment periods (when the lease came
out, when the development plan was released, and in one
other circumstance), but the legislation reduced the number
down to one.
Mr. Balash replied that after the leasing phase there would
be an opportunity for public notice and comment for
exploration and another opportunity for comment on the area
in question for development. He stated that under current
practice there may be multiple public notices/comments for
each one of the phases; the change to one public comment
period per phase would provide more efficiency in
considering decisions. He furthered that DNR wanted to hold
public comment on the frontend in order to have a more
meaningful decision making process.
Representative Gara asked for verification that the bill
would maintain the two levels of public comment, but a
broader combination of leases would be combined into one
public comment period.
Mr. Balash responded in the affirmative. He explained that
the intent was to enable a given decision to affect more
than one lease, rather than having lease-by-lease
decisions. He detailed that the number of leases included
in a decision would be dependent on the circumstances; some
leasing areas lent themselves to larger geographic scopes.
For example, DNR would be more discerning related to public
comment on the east side of Cook Inlet, which was more
populated than the west side.
5:56:21 PM
Representative Gara noted that he tended to want to speed
up development on most of the leases rather than letting
them lag. He understood that residents in some communities
wanted to proceed with caution. He stated that when the
system was lease by lease the development plan would be
known; however, if many leases were combined it would be
harder to meaningfully comment on leases that may be at
different stages. He wondered how the department would deal
with the potential issue.
Mr. Balash pointed to a distinction between exploration and
development. He explained that the exploration activity was
likely to be on a broader scope than the development
decision; exploration and development would have separate
decisions associated with various phases of development. He
shared that currently leases were sold to companies coming
to the state for exploration. Under the bill there would be
a public notice and decision document affecting leases;
once a resource was located there would be a separate
decision that would likely narrow the scope from the larger
body of leases to those under which the resource had been
found. He furthered that the details on the implementation
of decisions would be determined under DNR regulations.
5:59:08 PM
Co-Chair Stoltze handed the gavel to Co-Chair Austerman.
Co-Chair Austerman pointed to legislative findings in
Section 3 and asked if the direction to continue analyzing
the cumulative impact of a project was already addressed
within current DNR regulations.
Mr. Balash replied that the examination of multiple factors
beyond the cumulative impacts was undertaken in the
department's 10-year best interest finding conducted for
the leasing phase. He expounded that each year DNR
conducted a call for additional information, which allowed
the public and communities to bring items to the
department's attention; other departments frequently
brought new reports, studies, and findings to DNR. The
items were all taken into account before the department
moved forward with annual lease sales. He relayed that the
Supreme Court decision mandated that DNR could not stop
considering the impacts.
Co-Chair Austerman asked whether the cumulative effect was
included. Mr. Balash replied in the affirmative.
Co-Chair Austerman asked whether the cumulative effect was
included in new regulation. Mr. Balash replied that DNR
considered cumulative effects as part of the best interest
finding in the leasing stage; the department continued to
look at the information as time went by as the face and
speed of development changed in a given area. He furthered
that DNR was considering the items, but the regulations
would direct it to specify when or where the consideration
took place.
Representative Kawasaki asked for the impact of each of
court's legislative findings under the legislation. Mr.
Balash asked for a specific example.
Representative Kawasaki pointed to Section 5 related to
consideration and analysis by the department, Section 7
related the department's continued look at new information
and changing circumstances, and Section 8 related to
meaningful public notice by the department. He believed the
items were subjective and asked for comment.
Mr. Balash replied that Sections 5 and 7 fell under the
prior topic discussed with Co-Chair Austerman. He
elaborated that the best interest finding was done on a 10-
year cycle for each sale area; the document was
comprehensive and considered a multitude of items specified
in statute. He stated that 10 years was a long time between
findings; therefore, DNR did a call for information each
year in order to make sure findings remained relevant. He
elaborated that the call was publicly noticed and provided
an opportunity for other agencies and the public to
comment. He explained that Section 7 related to the annual
call and Section 5 acknowledged that the department's
current process made the creation of an entirely new
finding for decisions unnecessary.
6:04:51 PM
Representative Kawasaki asked for an explanation of the
changes included in Section 2 and about their necessity.
Mr. Balash answered that the changes made had not been due
to the Supreme Court case. He relayed that the changes
helped bring clarity to the meaning of the substantive
section. He pointed to a write up of specific changes
included in member's packets (copy on file), which
referenced the page and line numbers from the original
bill. He detailed that the words "without regard to
individual lease boundaries" had been deleted because the
topic was related to area-wide decisions. He communicated
that DNR had no problem with the change. He furthered that
per a recommendation by Legislative Legal Services the
sentence had been revised to read "an approval applies to
an exploration or development commencing during a period
for up to 10 years. The language created an upper limit and
pertained to decisions that were made in an exploration or
development context; the decision would define the length
of time.
Mr. Balash continued to explain the changes in Section 2.
He addressed a clarifying change from the language
"specified period" to "a period specified under the
approval." The length of time would not automatically be 10
years and would be determined in the decision made. He
relayed that the department had no problem with any of the
changes. The fourth change added the language "or group of
leases" to follow the word "leases" in the bill. He noted
that the word "area" was mistakenly used twice in a
sentence and subsequently had been deleted.
Vice-Chair Neuman discussed a gas well that had been
drilled in Big Lake. He explained that the company had
drilled some monitoring wells in response to concern from
locals; the lease had subsequently transferred to another
company. He noted that commitments had been made to check
for contaminates over time. He wondered who was responsible
for transfers and whether it was associated with the lease
contract.
6:09:09 PM
Mr. Balash replied that each case was different; however,
the obligations of the lease or any permits would change
hands from lessee to lessee. He relayed that transfers of
interest in a lease had to be approved by the Division of
Oil and Gas. The department looked to see whether the
company taking over a lease would take on the existing
obligations (e.g. obligations on older properties with
abandonment liabilities).
Vice-Chair Neuman cited language on page 3 of the
legislation: "the director may approve exploration for
development for all or part of an area previously approved
for oil and gas leasing." He further discussed the drilled
area at Big Lake and relayed that the cleanup had not been
ideal. He pointed to the 10-year lease maximum under the
legislation and wondered if a similar scenario could happen
again; if so, he doubted it would be approved by DNR.
6:09:46 PM
Mr. Balash answered that the bill's language addressed the
different phases regarding a previously approved leasing
area. He discussed circumstances when DNR had determined it
was in the state's best interest to dispose of property
interest on a piece of land; the division would still need
to make a decision for exploration and development phases,
but in order for property to be disposed of DNR was
required to do a best interest finding.
Vice-Chair Neuman continued to speak to the issue in Big
Lake. He shared that the drilling had been approved by DNR
on private property and the property owner had been
concerned about the situation.
Mr. Balash answered that Alaska had a split estate where
the mineral interest was reserved for the state and the
surface area could be sold to private individuals in some
cases. The state had the ability to make decisions that
affected private owners, but DNR had regulations and
processes that governed under the circumstances. He
furthered that DNR would be required to provide public
notice that a lease was in question if the lease was on
private land. He relayed that the department's decision
would be subject to appeal and/or litigation if an
individual was concerned about the area in question.
6:14:46 PM
Vice-Chair Neuman surmised that the Big Lake land owner had
not wanted to go to the expense of suing the state.
Representative Munoz commented that the purpose was to look
holistically at a geographical area to determine the
parameters of development that would be allowed. She
believed the goal was to provide the public with a better
understanding of what types of activity would occur within
a certain area.
Mr. Balash replied in the affirmative. He communicated that
DNR wanted its process to be more meaningful and to engage
the public in a way that would allow the department to
guide its decisions on the front-end as opposed to a piece-
meal process. He pointed out that the North Slope Borough
had provided a letter of support for the legislation. The
department believed that engaging the borough would be
holistic and would help everyone involved to reach an
affirmative decision in a better way.
Representative Costello discussed the fiscal impact note
from Department of Natural Resources that included $134,000
in FY 14 for one non-permanent position.
Representative Costello cited language from the fiscal note
analysis section: "without regard to individual lease
boundaries." She believed the language had been removed
from the bill and wondered about the impact. Mr. Balash
replied that there would not be a fiscal impact.
Representative Gara stated that the bill would result in
fewer public hearings. He surmised that subsequently there
would be less employees required. He remarked that the
state was facing fiscal challenges and he was not convinced
the fiscal note made sense.
Mr. Balash answered that the department was asking for a
non-permanent employee to maintain current work done and to
help compile regulations that would guide the new program.
Once the transition was made, the division expected to be
able to perform its job more efficiently. He could not
quantify the change, but the goal was for the department to
make preparations to do more with less.
6:19:58 PM
Representative Gara noted that the division had existing
staff to handle multiple hearings. He believed the
development of regulations could be done with its current
staff and with the help of the Department of Law (DOL). He
did not believe a new position was necessary.
Mr. Balash answered that DNR would have to reimburse DOL
for work done. He clarified that public notice and comment
periods were held, but there were not a tremendous number
of public hearings held on the decisions. He furthered that
the department would continue to review plans once an
exploration decision had been made. He explained that the
public comment period would be truncated.
Representative Gara OBJECTED to the fiscal note. He MOVED
to AMEND the fiscal note to zero. He stated that there were
DOL attorneys who worked specifically on regulations. He
believed the work could be done with existing employees
with some potential overtime work.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Kawasaki
OPPOSED: Munoz, Holmes, Neuman, Wilson, Costello, Thompson,
Stoltze, Austerman
The MOTION FAILED (2/8).
Representative Costello MOVED to REPORT CSHB 129(FIN) out
of committee with individual recommendations and the
accompanying fiscal note. There being NO OBJECTION, it was
so ordered.
CSHB 129(FIN) was REPORTED out of committee with a "do
pass" recommendation and with one new fiscal impact note
from the Department of Natural Resources.
CS FOR SENATE BILL NO. 18(FIN) am
"An Act making, amending, and repealing
appropriations, including capital appropriations,
supplemental appropriations, reappropriations, and
other appropriations; making appropriations to
capitalize funds; and providing for an effective
date."
CSSB 18(FIN) am was SCHEDULED but not HEARD.
Co-Chair Stoltze discussed the schedule for the following
day.
Representative Munoz asked which bills were scheduled for
the following morning. Representative Costello replied that
the bills on the schedule included SB 21, HB 63, HB 102, HB
134, and HB 195.
Co-Chair Stoltze noted that not all bills would be heard
and that the schedule had been compiled to provide
sufficient public notice.
ADJOURNMENT
6:27:16 PM
The meeting was adjourned at 6:27 p.m.