Legislature(2015 - 2016)
04/08/2016 03:07 PM House FIN
| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Amendments | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
April 8, 2016
3:07 p.m.
3:07:47 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 3:07 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue;
Representative Andy Josephson; Representative Liz Vasquez;
Representative Dan Ortiz.
SUMMARY
HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G
CSHB 247(FIN) was REPORTED out of committee with
individual recommendations and with one new zero
impact fiscal note from the Department of Natural
Resources and one new fiscal impact note from the
Department of Revenue.
HOUSE BILL NO. 247
"An Act relating to confidential information status
and public record status of information in the
possession of the Department of Revenue; relating to
interest applicable to delinquent tax; relating to
disclosure of oil and gas production tax credit
information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage
facility tax credit, and the qualified in-state oil
refinery infrastructure expenditures tax credit;
relating to the minimum tax for certain oil and gas
production; relating to the minimum tax calculation
for monthly installment payments of estimated tax;
relating to interest on monthly installment payments
of estimated tax; relating to limitations for the
application of tax credits; relating to oil and gas
production tax credits for certain losses and
expenditures; relating to limitations for
nontransferable oil and gas production tax credits
based on oil production and the alternative tax credit
for oil and gas exploration; relating to purchase of
tax credit certificates from the oil and gas tax
credit fund; relating to a minimum for gross value at
the point of production; relating to lease
expenditures and tax credits for municipal entities;
adding a definition for "qualified capital
expenditure"; adding a definition for "outstanding
liability to the state"; repealing oil and gas
exploration incentive credits; repealing the
limitation on the application of credits against tax
liability for lease expenditures incurred before
January 1, 2011; repealing provisions related to the
monthly installment payments for estimated tax for oil
and gas produced before January 1, 2014; repealing the
oil and gas production tax credit for qualified
capital expenditures and certain well expenditures;
repealing the calculation for certain lease
expenditures applicable before January 1, 2011; making
conforming amendments; and providing for an effective
date."
3:08:19 PM
Co-Chair Thompson discussed the meeting agenda. He noted
that the House Finance Committee had been tasked with a
very serious decision. He spoke to the importance of
deciding on a balance that kept encouraging industry in
Alaska, while protecting the state. He relayed that the
committee would take up amendments.
^AMENDMENTS
3:09:49 PM
Co-Chair Thompson MOVED to ADOPT Amendment 1, 29-
GH2609\F.41 (Nauman/Shutts, 4/7/16) (copy on file). [Note:
due to the length of the amendment it has not been included
in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Co-Chair Thompson explained that the amendment maintained
the status of the tax cap on Cook Inlet oil. He had been
concerned about the effect of a 35 percent tax rate, which
he believed needed further evaluation. He stated that the
working group should be looking at the issue. He had
concerns about quelling the development in Cook Inlet, but
the working group would be tasked with coming back to the
legislature with its recommendations.
Representative Gara spoke in opposition to the amendment.
He detailed that the state was currently facing its largest
budget deficit ever. He objected to waiting another year to
take action. He specified that oil in Cook Inlet paid no
production taxes. He continued that when the law had been
established the intention had been to provide relief to
locally used natural gas for Alaska consumers; it had never
been intended to provide zero production taxes on oil. He
had agreed with a previous Committee Substitute (CS)
because it had imposed a profits tax on oil in Cook Inlet.
He noted that if a company was not making profits, it would
not be taxed. Additionally, companies were receiving a
multitude of tax credits in Cook Inlet. He believed the net
operating loss (NOL) credit the tax credits were over $175
million for alone. He stated that when the companies were
losing money, the state gave them money; therefore, when
the companies were making money, the state should receive
production tax. He surmised that the topic under discussion
equated to about $10 million in taxes; there was not
significant oil production in Cook Inlet, but the law had
never intended for the state to give credits and receive no
production taxes. He discussed that the governor's bill
probably saved about $750 million in the first year and
$450 million in the second year in terms of credit
reductions and tax changes. With the amendment, the bill
only reduced the state's deficit by about $170 million. He
did not believe the tax the amendment would remove hurt
business. He stressed that companies were receiving a
substantial amount of money from the state; he noted that
the committee had been told the money given to companies
was higher than in any other state. He reiterated that the
tax would only apply when companies were profitable. He
added that companies could always apply for royalty relief
if a tax was too high for a new development.
3:13:34 PM
Representative Kawasaki testified against the amendment. He
specified that some of the committee members had been
around in 2011 and other years for discussions about
natural gas in Cook Inlet, particularly when the Cook Inlet
Recovery Act and the Cook Inlet Natural Gas Storage Act had
passed. He recalled that all of the discussions had been
about natural gas and whether there was natural gas in the
Cook Inlet. He did not believe the legislature had ever
intended something similar for Cook Inlet oil. He spoke to
expensive fuel and utility costs in Fairbanks. He stated
that Cook Inlet currently had a plentiful supply of natural
gas, while Fairbanks did not. He reiterated that
discussions surrounding Cook Inlet taxes had been based on
natural gas. He believed the amendment would mean a $10
million per year giveaway on oil produced in Cook Inlet. He
did not believe the legislature ever meant to provide that
type of benefit.
Vice-Chair Saddler stated that there was a significant
public interest in maintaining a supply of natural gas for
the state's residents for homes and businesses. He noted
that his district relied on natural gas to heat homes.
Likewise, individuals in the Interior were looking at the
gas as a potential heating source. He had attended the
Anchorage mayor's taskforce on natural gas shortages and he
recalled the dire consequences of potentially running out
of gas. He believed the state's tax policy and incentives
had been helpful.
Co-Chair Thompson noted that the current amendment
pertained to oil in the Cook Inlet.
3:16:07 PM
Representative Guttenberg was concerned that the amendment
would maintain the status quo. He believed the amendment
would kick the issue down the road for another committee to
deal with over the interim. He discussed that an interim
committee had dealt with all of the credits and he was
concerned that the work done had been for naught if the
amendment passed.
3:17:08 PM
Representative Wilson spoke in support of the amendment.
She did not have sufficient information to know whether the
tax was appropriate. She reminded the committee of the
Flint Hills facility that had stopped refining. She
detailed that the facility had begun importing and had made
more profit than it had as a refinery. She questioned
whether adding taxes tipped the scale and meant there would
no longer be in-state refineries. She stressed the
importance of in-state refineries. She supported waiting a
year for a workgroup to do a study and determine the right
amount. She wanted to establish a "sweet spot" where
revenue continued to come in for the state and business was
not killed off.
Representative Pruitt appreciated the amendment. He asked
to be added as a cosponsor. He remarked that the CS had
represented a substantial policy change in Cook Inlet. He
continued that the change would potentially occur without
modelling or understanding the ramifications of the full
impact. He detailed that the change would have meant going
from a 65 percent state participation to possibly 20 to 30
percent with a 35 percent tax. He elaborated that the tax
would have been similar to the one on the North Slope and
would not have included the well lease expenditure (WLE)
credit, which was a key part of the North Slope credit. He
did not believe the legislature should move forward with
quickly adding the tax. He stressed that the CS would mean
a direct tax to his community and to anyone utilizing fuels
from Tesoro. He emphasized that all of the oil produced in
the Cook Inlet went to Tesoro and was refined in-state. The
change would have meant an increase in the cost of refined
products to consumers throughout the Railbelt, Fairbanks,
rural communities, and across the state. He believed the
amendment was appropriate, which would take a step back and
allow time for evaluation by a workgroup formed in the
legislation.
3:20:20 PM
Representative Edgmon spoke in support of the amendment for
the time being. He hoped the issue would come before the
legislature again in the future after being studied by a
workgroup. He spoke to cheaper energy for Southcentral
(which was not quite cheaper energy for rural Alaska) that
would result in cheaper services extending out to the rest
of the state (i.e. fuel at the Anchorage International
Airport, the railway station, and other). He pointed out
that the Power Cost Equalization Endowment Fund was
incredibly important to him. He stressed that he would
include rural Alaska in the conversation when the committee
started talking about cheaper energy for the Anchorage,
Southcentral, and the Interior.
Co-Chair Neuman WITHDREW his OBJECTION.
Representative Gara OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Pruitt, Gattis, Wilson, Edgmon, Saddler,
Thompson, Neuman
OPPOSED: Kawasaki, Munoz, Gara, Guttenberg
The MOTION to adopt Amendment 1 PASSED (7/3). There being
NO further OBJECTION, it was so ordered.
Representative Guttenberg asked about Amendment 3.
Co-Chair Thompson replied that he had withdrawn Amendment
3.
3:22:34 PM
Co-Chair Thompson MOVED to ADOPT Amendment 2, 29-
GH2609\F.25 (Nauman/Shutts, 4/7/16) (copy on file):
Page 17, lines 12 - 14:
Delete ",if the producer or explorer had, before
January 1. 2017, taken a credit under this subsection
for an expenditure incurred in the Cook Inlet
sedimentary basin"
Co-Chair Neuman OBJECTED for discussion.
Co-Chair Thompson explained that Amendment 2 corrected
ambiguous and redundant language that attempted to limit
Net Operating Loss (NOL) credits in the Cook Inlet for
companies that had already received a credit. He stated
that pursuant to testimony from Corrie Feige with the
Department of Natural Resources [Division of Oil and Gas
director], the language was not needed due to limited
acreage in the Cook Inlet basin.
Representative Gara asked for further explanation.
Co-Chair Thompson answered that the language did not impact
anyone; no additional acreage would be eligible under the
provision. The amendment merely removed ambiguous and
redundant language.
Representative Kawasaki remarked that the state was
offering a 25 percent credit if expenses had been incurred
at a certain point in time. The state was giving 10 percent
of a carry-forward annual loss if the production happened
prior to the end of 2016 [2017]. He believed the amendment
would remove language "before the end of this year." He
thought the amendment had substantive impact because
without the language, the credit would go on in perpetuity.
He pointed to page 17 of the bill for reference.
Co-Chair Thompson read from page 17, lines 11 through 14 of
the bill:
...a producer or explorer may elect to take a credit
in the amount of 10 percent of a carried-forward
annual loss, if the producer or explorer had, before
January 1, 2017, taken a credit under this subsection
for an expenditure incurred in the Cook Inlet
sedimentary basin.
Co-Chair Neuman remarked that he believed it was correct.
Co-Chair Thompson stated that hardly anyone would be
eligible for the credit.
Representative Kawasaki relayed that he had not seen the
amendments before the meeting. He wanted confirmation on
the meaning of the amendment. He thought that by removing
the date, producers and explorers could elect to use the 10
percent carried-forward loss even if they did not have any
production or had not explored prior to the end of 2017.
Co-Chair Thompson stated that the amendment did not change
the credit. There was not enough acreage in Cook Inlet for
a party to be eligible.
3:26:40 PM
Representative Gara had a hunch that the amendment was a
small thing; however, he could not tell if the amendment
would increase or decrease credits.
Co-Chair Thompson replied that it did not increase or
decrease credits.
Representative Gara noted that the committee had heard no
testimony on the amendment.
Co-Chair Neuman WITHDREW his OBJECTION.
Representative Gara OBJECTED and noted that he would look
at the item after the bill moved from committee. He
WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 2 was ADOPTED.
3:27:40 PM
Co-Chair Thompson MOVED to ADOPT Amendment 4, 29-
GH2609\F.22 (Nauman/Shutts, 4/7/16)(copy on file). [Note:
due to the length of the amendment it has not been included
in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Co-Chair Thompson explained that the amendment was a
technical change. He specified that the previous bill
version had provided for a bond without a process for
applying the proceeds of the bond. The amendment used
language similar to a contractor's bond, providing a
mechanism for payment of claims. The amendment clarified
how the payments would occur.
Representative Wilson asked if the amendment addressed
bankruptcies in business.
Co-Chair Thompson replied that the amendment would cover a
bankruptcy. There were suppliers who were owed money; the
amendment set out to put a $250,000 bond in place for
purchase. The amendment clarified the bond language as to
how claims would be paid.
Vice-Chair Saddler recalled situations in which local
businesses had provided services to a rig in Southcentral
and were not able to get to a pass. He believed it was a
good protection for smaller businesses in Alaska. He asked
if the language was consistent with other contractor bonds
elsewhere in state law.
Co-Chair Thompson replied in the affirmative.
Representative Kawasaki discussed that the amendment laid
out conditions for the promises to pay taxes or
contributions due to the state. He understood the provision
in the case of a drill rig mentioned by Vice-Chair Saddler.
He asked if there was an order in which the payments would
be collected or due.
Co-Chair Thompson replied in the affirmative.
Co-Chair Neuman WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment 4 was ADOPTED.
3:30:22 PM
Representative Gattis MOVED to ADOPT Amendment 5, 29-
GH2609\F.30 (Nauman/Shutts, 4/7/16) (copy on file):
Page 26, line 9:
Delete "lease or property"
Insert "well"
Delete "five"
Insert "10"
Page 26, line 11:
Delete "lease or property"
Insert "well"
Page 26, line 12:
Delete "lease or property"
Insert "well"
Page 26, line 13:
Delete "2021"
Insert "2026"
Page 26, line 31, through page 27, line 1:
Delete "lease or property"
Insert "well"
Page 27, line 1:
Delete "five"
Insert "10"
Page 27, line 2:
Delete "lease or property"
Insert "well"
Page 27, lines 3 - 4:
Delete "lease or property"
Insert "well"
Page 27, line 4:
Delete "2021"
Insert "2026"
Co-Chair Neuman OBJECTED for discussion.
Representative Gattis explained the amendment in a prepared
statement:
This amendment extends the GVR provision from five
years to ten, as well as redefines when the GVR clock
starts by changing the language to "well" rather than
"lease" or "property." The GVR or "new oil" provision
is one of the principal drivers of Alaska's tax
structure. We included it in SB 21 to incentivize new
oil production and new players with new ideas to come
to Alaska. Eliminating the new oil provision five
years after production is a change from SB 21 and it
would significantly impact investment decisions of
companies. This is a big change in this CS that as far
as I know was never discussed in any of our meetings.
We haven't asked our consultant to model this. We
haven't heard any testimony from industry on this CS
before us. The way I read it, the new language in this
CS acts as a disincentive to business because it will
lead to slower time bringing production online as
companies try to maximize the advantage of the tax
code that we pass. By defining when the five year
clock on the new oil reduction starts by lease rather
than well, we're making a policy call that punishes
companies that want to drill more wells. If production
from one hole in the ground on the entire lease starts
the clock, who would be incentivized to drill more
holes? We're effectively saying the same thing the
federal government said to Shell about drilling in the
Arctic - you get one hole in the ground so good luck.
The proposed language, while it would appear to
protect the state has the real world impact of
delaying production, increasing refundable credits we
would need to pay, which are available only during the
development buildup and up to 50,000 barrels per day.
We wanted the benefits of new oil once commercial
production begins. This amendment would put us back on
course. In closing, our own consultants told us we
shouldn't mess with SB 21, and I agree.
Co-Chair Neuman stated that SB 21 [oil and gas tax
legislation passed in 2013] had allowed incentives for Cook
Inlet gas exploration because the state had been facing
rolling brownouts at the time and the state had not known
the amount of its gas supplies; SB 21 had included language
to incentivize gas exploration in Cook Inlet, which had
been successful. He elaborated that there was currently
good exploration underway and 12 years of known gas
reserves. He added that found discoveries were still ample,
and thought-to-be reserves were still fairly high. He
believed the credit costs could exceed $600 million. He
believed that new oil production had been about 8,000
barrels. He asked why the state would continue to put out
$600 million in credits if there were known reserves.
3:34:35 PM
Representative Gattis replied that the state had a tax
regime that had been put in place one year earlier. She
stated that there had not been modelling or discussion and
until the issue was examined she believed it was bad
policy.
Co-Chair Thompson thought the language was inconsistent
with existing language. He pointed to the language in the
gross value reduction (GVR) based on the lease or
properties to change to per well. He thought the language
change could cost the state significantly more money. He
was concerned by the amendment.
Representative Gattis stated it could also gain the state
much more money.
Representative Edgmon spoke in opposition to the amendment.
He was concerned about the careful balance the state needed
to achieve. He believed it was necessary to put limitations
in place. He was concerned about the GVR, its impact with
the NOL, and the money that would accumulate annually,
which the state would eventually owe. He reasoned that
there may be an extended period of low oil prices where the
state did not receive revenue back, but continued to have
the obligations to pay money out.
3:36:35 PM
Vice-Chair Saddler opposed the amendment. He remarked that
the goal of SB 21 had been to incentivize oil production.
One of the bill's primary goals had been to incentivize new
oil production due to decreased production that had
occurred. He reasoned that the state had offered very
generous provisions in its tax code to achieve that goal.
Based on information provided to the committee, reservoir
pressure was the highest, production was highest, and the
biggest benefit to the state during the first five years at
the front end of production. He believed the five-year
accommodation was reasonable, but 10 years was too long. He
thought there needed to be a point at which new oil became
old oil.
Representative Gara spoke against the amendment. He
discussed that the state was currently living on a 4
percent tax, which extended up to $76 per barrel. He
reasoned that it was not sustainable if the state was going
to have any sort of construction or school budgets. He
agreed with the comments of the last three speakers. The
compromise reached in the House Finance Committee CS was to
grant a holiday from the profits-based tax for five years;
while companies got to recoup costs and did not pay very
much in taxes. He elaborated that the same companies had
been receiving cash or deductible payments from the state
for credits. He reasoned that at some point it needed to
come back the other way. He surmised that the state should
not merely get back what it gave out. He stressed that at
some point it was Alaska's oil and it was needed to support
the state. He spoke to projects, which needed money for
funding. He stated that at a $4.4 billion deficit, the
compromise reached in the CS was one that he could accept.
Representative Guttenberg testified against the amendment.
He did not think it was the state's job to make sure any
industry had a chance to maximize something the state put
on the table. Historically, he believed the state had a
problem making sure things got done in a timely way (that
when the state put a lease sale on the table that
exploration, development, and production happened as
quickly as possible). Ensuring those things occurred was in
the state's best interest. He clearly did not think
extending the credit out to 10 years was in the state's
best interest. He stated that the committee had not heard
anyone ask for the change. He reasoned that companies would
take more time if it was given, which was not in the
state's interest. He detailed that when a company took a
lease, the state wanted it to be developed. He did not
support extending the credit out another 5 years when the
state was already strapped; there needed to be a timeline
on credits and some return shown on production. He thought
the amendment was a delay, which was in the best interest
of industry.
3:41:25 PM
Co-Chair Thompson clarified that the amendment was in
reference to North Slope oil. He asked for verification
that the amendment language related to leases and
properties, not a well, was inconsistent with SB 21.
Representative Gattis replied in the affirmative.
Representative Kawasaki testified in opposition to the
amendment. He spoke to a well versus a lease and reasoned
there could be a producing well that was shut in early. He
believed the reason for addressing leases and properties on
the North Slope was for the holistic idea of producing more
oil. He stated that determining when new oil became old oil
it was a balancing act. He believed the 5-year timeline was
reasonable. He thought that although the amendment would
not result in an immediate revenue impact, there would be
an impact in several years to decades into the future. He
specified that with a 10-year lookback, it was extremely
hard to decide how much it would cost the state of Alaska
in terms of monetizing its barrel of oil.
Representative Pruitt spoke in support of Amendment 5. He
pointed out that SB 21 was specific to the North Slope and
that a discussion about Cook Inlet was not germane to the
conversation, given that SB 21 did not pertain to Cook
Inlet. He noted that another similar amendment would be
offered later. The current amendment took the lease in the
property, substituted in "per well," and added 5 additional
years. The later amendment would add 10 additional years
for a total of 15 for the lease of the property. He stated
that the committee had seen presentations showing the state
could strike too early on requesting the claw-back and
prevent the investment from taking place. He believed 10
years would work and was a compromise. He thought that a 5-
year timeframe was too short and would potentially be a
disincentive to investment because of the 35 percent
[production tax]. He detailed that it also highlighted that
the state was focusing solely on production tax and not on
the fact that significant revenue would result. He asked if
the state wanted to potentially lose out on a field that
would bring a royalty, property tax, and other ancillary
costs to the state for the life of the field. He agreed the
state needed to pay for schools and other things, but he
believed the amendment provided an incentive to investment.
He noted that SB 21 had been opened up as soon as the
language had been added to the CS. He stressed that the
spirit of SB 21 was to encourage new development, which he
believed should be maintained. He thought giving a little
more time could potentially be the difference between a
project going forward or not.
3:46:27 PM
Co-Chair Thompson WITHDREW his OBJECTION.
Representative Guttenberg OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Gattis, Pruitt, Wilson
OPPOSED: Munoz, Edgmon, Saddler, Gara, Guttenberg,
Kawasaki, Thompson, Neuman
The MOTION to adopt Amendment 5 FAILED (3/8).
3:47:20 PM
Representative Gattis MOVED to ADOPT Amendment 6, 29-
GH2609\F.28 (Nauman/Shutts, 4/7/16) (copy on file). [Note:
due to the length of the amendment it has not been included
in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Gattis explained the amendment in a prepared
statement:
This amendment will allow the Department of Revenue to
suspend taxes on a company that can prove that total
government take for them has exceeded 105 percent.
Just to be clear, government take in this case
includes royalty, production tax, corporate income
tax, property tax, and even the 5 percent per barrel
tax. It seems when prices are low, we seem to ask for
more money because we don't have enough and when
prices are high, we ask for more money because the oil
companies can afford to pay more. So where does it
stop? Do we stop when government take is 150 percent
or 200 percent? What business would stick around for
that? As a state, we take our royalty right off the
top. So we get value for our oil right off the top.
Ultimately, we must get a fair value for our oil being
produced. That's fair enough. But we also must take a
long view about what Alaska's gonna look like in 10
years or 20 years from now based on some of the
policies and decisions that we're discussing right
here today. We want all kinds of private businesses to
be operating in Alaska and developing our resources.
Businesses will come here only if they think they can
make a profit just like anywhere else. So I'd ask for
folks, let's keep the lights on and let's be open for
business because when we talk about our taxes we don't
talk about the whole government take and I think it's
important when we talk about this that we literally
talk about what we as the government take. So a lot of
times we talk about production taxes but we talk about
it as if they're separate pieces of the whole pie. We
take that whole pie and what this amendment does, is
it basically recognizes that at what point do we stop
taxing business to go somewhere else?
Representative Gattis understood that the committee had a
significant amount to address during the meeting and that
the amendment had a challenge from bill drafters. She
WITHDREW the amendment.
3:50:13 PM
Representative Pruitt MOVED to ADOPT Amendment 7, 29-
GH2609\F.33 (Nauman/Shutts, 4/7/16) (copy on file):
Page 16, line 11:
Delete "10 [20]"
Insert "20"
Co-Chair Neuman OBJECTED for discussion.
Representative Pruitt explained that the amendment would
restore the qualified capital expenditure (QCE) credit back
to the amount in the House Resources Committee bill
version. He was concerned the Cook Inlet credit was being
pulled too quickly and could create a complete reversal of
the current policy. He agreed with some changes made in the
previous committee and he believed the amount was
appropriate. The amendment represented a ramp-down approach
as opposed to a "knee-jerk" reaction. He believed the state
should manage its way out of the credits.
Co-Chair Thompson asked for verification that the amendment
pertained to incentives in the Cook Inlet.
Representative Pruitt replied in the affirmative.
Co-Chair Thompson stated that he looked at the amendment
with a question mark. He detailed that currently there was
significant gas in Cook Inlet (several years' worth). He
reasoned there was currently not a market for new gas if it
was discovered and developed. He questioned how much more
gas needed incentivizing in Cook Inlet at present.
Representative Pruitt responded that the workgroup should
be able to provide an indicator on the issue that the
legislature could address in the coming year. He agreed
that gas had been identified, but it did not mean there was
a hole drilled to extract it all. He continued that the
state used up to 200-plus million cubic feet per day and it
needed to ensure production of that amount. He believed
that the legislation meant that no new players would invest
in Alaska. He opined that the state would need to live with
what it had and that it needed to ensure that current
companies would continue to invest. He stated that the bill
totally changed the policy that had been implemented to
bring a rush of investors into Cook Inlet. He reasoned that
if the credits were eliminated too quickly the producers
may not have the money to continue investing at their
current level. He stated that just because the gas was
currently being produced, it did not mean they were
producing the total amount to be used. He stressed that
Fairbanks had a project to use gas in Cook Inlet, which
meant an increased need for available gas. He understood
some people did not believe the project would move forward,
but he was more optimistic. He wanted to give the workgroup
a chance to provide recommendations instead of acting too
quickly.
3:55:21 PM
Representative Gara remarked that the committee was that
group. He understood a small group of legislators would
meet over the interim, but the bill had been in front of
the committee for two weeks. He had also followed the House
Resources Committee hearings, which had lasted
approximately one month. Additionally, all experts had been
available to the House Finance Committee. Testimony to the
committee had been that there was no oil production tax in
Cook Inlet (after the passage of an earlier amendment); no
gas tax; the state was paying $175 million to companies in
NOL credits; and companies received QCE credits or WLE
credits. He stressed that the state was very heavy on the
credits it paid out, but did not receive any production
taxes in return. He referred to earlier testimony by
Representative Pruitt that oil prices would decrease by
eliminating a small tax on oil in Cook Inlet. He disagreed
with the statement.
Co-Chair Thompson interjected.
Representative Gara apologized if he had mischaracterized
earlier testimony. He explained that Amendment 1, which
deleted the oil tax would not change the price of oil
because a company would then buy the oil from North Slope
producers; it was a market price. He stressed that the
state was overly generous on credits (more so than any
other location) for oil fields that paid no production tax.
If anything, he believed the state was too generous in its
credits. He did not believe it made sense to pay out
another $30 million. He stated that no companies went out
to explore when there was no buyer looking for gas. He
recalled testimony that when buyers were looking for gas
they would get paid the highest prices in the country for
the gas (at $7 to $9 in Cook Inlet compared to $2). He
emphasized that the high prices were an incentive to
exploration. He added that it was not clear any of the
credits were needed, but there were numerous credits
outside the amendment.
3:58:30 PM
AT EASE
4:26:52 PM
RECONVENED
Co-Chair Thompson noted that the committee was addressing
Amendment 7.
Vice-Chair Saddler opposed the amendment. The committee had
heard from its analyst enalytica that Cook Inlet credits
were among the most generous in the world. He detailed that
supply currently met demand and there was also stored gas
in Cook Inlet. In the absence of a larger market he thought
phasing out the QCE at 10 percent was appropriate. He
reasoned that perhaps he could see the benefit of the
amendment if Agrium was chomping at the bit to open. He
noted that the CS did not eliminate the QCE, but dialed it
back. The Cook Inlet Recovery Act had been an "all hands on
deck" effort to ensure the state had a supply of gas, which
had been successful. He continued that there were other
steps including changes in the Regulatory Commission of
Alaska (RCA) process reflecting the need to ensure a supply
of gas. The challenge was to strike a balance between
incentives and other elements, which he believed the CS
did.
Representative Kawasaki spoke against the amendment. He
countered the statement that the CS contained a knee-jerk
reaction to the industry. He did not believe the bill
should be considered a knee-jerk reaction to anything. He
detailed that the state was facing an unprecedented budget
gap between $3 billion and $4 billion. As the state looked
to determine ways to reduce the size of the gap, it was
appropriate to talk about oil and gas tax credits. He
recalled that during his first year in office in 2007 there
had been zero tax credits going to the industry. He
detailed that some of the QCE credits on the North Slope
equated to $50 million total. Since that time the
legislature had created the Cook Inlet Recovery Act, which
seemed to have been advantageous. Additionally, the
legislature had established the Cook Inlet Natural Gas
Storage Act, which had created an incredible supply of gas.
He elaborated that the Department of Natural Resources
(DNR), Division of Oil and Gas estimated reserves of 1.2
and 1.6 trillion cubic feet of known supply currently in
Cook Inlet, which was commercially available. The amount
would last for 12 years with Anchorage's current demand of
80 billion cubic feet per year and with potential growth
from the Fairbanks area of another 4 billion cubic feet per
year. He believed the region should continue to be
explored, but disagreed that the change was a knee-jerk
reaction. He stressed that the state could not afford the
credits it had not anticipated, which amounted to hundreds
of millions of dollars. He pointed out that when Swanson
River had started production there had been no oil
production tax; there was currently no production tax in
Cook Inlet. As a person from the Interior, he had seen
numerous benefits going to the Anchorage area and it
bothered him that the state would continue a substantial
amount of credits for one region at the expense of other
regions.
4:31:14 PM
Representative Wilson testified in support of the
amendment. She remarked on comments that the bill had been
introduced due to the budget gap. She believed policy
should not be changed in response to a budget gap; she
believed policy should be changed because it was not
providing the desired results. She discussed that current
statue offered a 20 percent QCE credit for Cook Inlet. The
amendment would restore the credit and maintained the House
Resources Committee sunset in 2022. She stated that
currently the QCE credit in Cook Inlet was an important
factor into the economics of many businesses including the
two new big developments by Furie and Bluecrest Energy. She
stressed that the state wanted the businesses to continue.
She continued that with a 10 percent NOL and a 20 percent
QCE there was 30 percent state support in Cook Inlet, which
represented a large reduction from current support of 65
percent or more and was nearly as low as the governor's
proposed 25 percent. She continued that every company
should be on notice that the legislature would completely
overhaul the Cook Inlet tax system in the near future. She
noted that the workgroup would begin its review over the
coming summer. She opined that while the legislature worked
on large changes it should make moderate changes to how
much support it pulled back. She emphasized the QCE credit
helped companies doing the needed work and not just
companies receiving NOL credits that may not have
production or fields under development. She believed
maintaining the 2022 sunset should be an indicator that the
legislature intended for the credit to end with bigger
pending changes to the Cook Inlet regime. She stressed that
it was about looking at whether or not what the legislature
put in place was working at present and in the future. She
stated that the issue did not only pertain to Anchorage.
She referred to a major project in the works for Fairbanks.
She noted they had discovered the North Slope would not
work despite money they had invested. She believed gas for
Fairbanks would have to come out of Cook Inlet and she
wanted to ensure the legislature did not do something it
regretted later.
Representative Guttenberg spoke in opposition to the
amendment. He referred to talk about looking at tax credits
because they were high, looking at tax credits because the
state did not have gas, and looking at tax credits because
the price was low. He discussed that the state's oil
structure, tax credits, and exploratory incentives were in
place for a purpose. He believed the legislature should
look at the issue annually because the incentives and
structure were so much a part of the state and its budget.
He did not mean the statute should be opened up annually,
but he believed an annual review was needed. He stated that
the legislature had thrown a significant amount of money at
Cook Inlet to ensure there were no brownouts and "we're at
that place." He stressed that the state was not responsible
for the price of natural gas and oil in the U.S.; the
prices were up to the market. He emphasized that prices had
plummeted worldwide. He believed the state was just
throwing money at the oil and gas companies with some of
the credits. He reasoned that if the legislature wanted to
ensure sustained supply, it should manage the question and
not just throw money at the industry hoping it would do
what the legislature wanted. He continued that it was
possible to task DNR and the Department of Revenue (DOR)
with telling the state what it would need and to devise a
production schedule to determine when to explore, develop,
and other. He believed the state had an inherent interest
to do that for Cook Inlet, Southcentral, Fairbanks, rural
Alaska, Southeast, and throughout the state. He did not
support simply raising the credits because the state wanted
the companies to do work in Alaska. He thought the
appropriate question was to consider what was working for
the state and what it needed to do to maintain its level of
gas production in Cook Inlet. He observed that the state
seemed to be throwing credits at the industry to try to
keep companies working in Alaska. He opined that changing
the number and percentages was not appropriate. He thought
many of the credits were designed in the hope that industry
would stick around. He stressed that "the rocks are here;
this is where they're going to come."
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Pruitt, Gattis, Wilson
OPPOSED: Saddler, Edgmon, Gara, Guttenberg, Kawasaki,
Munoz, Neuman, Thompson
The MOTION to adopt Amendment 7 FAILED (3/8).
4:38:05 PM
Representative Wilson MOVED to ADOPT Amendment 8, 29-
GH2609\F.32 (Shutts, 4/7/16) (copy on file):
Page 26, line 9:
Delete "five"
Insert "15"
Page 26, line 13:
Delete "2021"
Insert "2032"
Page 27, line 1:
Delete "five"
Insert "15"
Page 27, line 4:
Delete "2021"
Insert "2032"
Representative Gara and Co-Chair Neuman OBJECTED.
Representative Wilson explained that the amendment made
changes to the timeline for "new oil." She addressed when
new oil was no longer considered new oil. She did not
believe it was new forever and was concerned that 5 years
was not correct. She referred to a presentation by
Bluecrest Energy, which had specified [oil qualified as
new] 10 to 15 years after sanctions. She referred to
language on page 26, line 10 through 11 of the bill:
...after the commencement of production in commercial
quantities of oil or gas from that lease or property.
Representative Wilson did not know what the date would be
on anything from the commencement of production in
commercial quantities; she was not familiar with the
language. She referred to an earlier amendment pertaining
to a field with numerous wells. She provided a scenario
where the state wanted the company to put its wells on as
soon as production began for each individual well. The
amendment would change the timeline to 15 years instead of
5. She further explained that if a company turned a well on
and 4 years later it began production on another well the
new well would only qualify for 1 year because it was on a
field that had been producing for 4 years. She did not
believe that was the intent of SB 21. She emphasized that
the provision applied only if oil was being produced. She
highlighted that the state would receive the royalty from
the oil and more oil down the pipeline, which would result
in less maintenance. She stressed that it was one of the
biggest incentives of SB 21. She specified the state had
wanted to ensure its credits would work so the legislature
had based it on oil. She detailed that new oil had to go
through a process in DNR. She reiterated that the companies
only received the credit if they produced.
Representative Kawasaki opposed the amendment. He referred
to his recent birthday and had been told that the 40s were
the new 30s. He spoke to how new and old were defined. He
believed Amendment 8 moved away from the direction the
state should go. He opined that classifying oil as new for
5 years was appropriate and that 10 and 15 years was too
long. He noted that Bluecrest Energy was a producer in Cook
Inlet, but the provision pertained specifically to North
Slope assets.
Representative Gattis spoke in support of the amendment.
She believed there was a disincentive to producing oil from
another well (on a field with existing production) when a
company only had one year or so remaining on its new oil
credit. She stated that if she was in charge she would wait
to turn all of the wells on at one time in order to
maximize the 5-year credit. She believed changing the limit
to 15 years was appropriate. She did not want to
disincintivize what the state was already incentivizing.
Representative Gara testified against the amendment. He
pointed out that if the amendment passed, the GVR oil tax
rate, which was minimal and could not sustain the state,
would persist for 15 years. He detailed that Point Thomson
would come online in the coming year or two and would enjoy
the minimal GVR tax rate until 2031. He stressed that a
state could not be run on that kind of tax rate. He
remarked that the late former Governor Jay Hammond had
often reminded him of Alaska's Constitution, which stated
that the public was entitled to the maximum benefit of its
resources. He elaborated that the maximum benefit of the
state's resource was not limited to the maximum taxes; it
was the maximum of which combination of taxes and
production would be the most productive for the state. He
believed that waiting until 2031 on Point Thomson - a field
that should have been developed years ago - pointed out the
problem with the amendment.
Co-Chair Thompson believed the date was actually 2032.
4:44:15 PM
Vice-Chair Saddler spoke in opposition to Amendment 8. He
stated that current law did not allow new oil to be defined
and had no limit. He believed the 5-year limit in the CS
was appropriate. He clarified that the start of commercial
quantity was when oil started flowing and when it began
making money (after initial wells had been drilled and the
production and processing facilities were operating). The
CS offered a loss credit for the first 5 years when
production was highest; the production profile was on the
upswing at the peak and declined for a long period of time.
He believed a 15-year time period was too far out on the
decline curve.
Representative Pruitt noted that there had not been time to
hear testimony on the CS. He spoke to the provision on page
26 and did not believe there was a definition of commercial
quantities, which he believed could be questionable in the
future. The amendment pertained to [oil or gas produced]
per lease or per property. He specified that a well could
be drilled several years after the first commercial
quantity of oil became available on the property. The goal
was for a company to continue to drill on the piece of
property and to continue to bring in revenue. The amendment
would mean the clock would not be immediately started on
the very first well. He believed 15 years was an
appropriate timeframe because it applied to each individual
property instead of an individual well. He stated that the
amendment would continue to make operations on the North
Slope more profitable. He emphasized the expense of
extracting oil on the North Slope such as heavy crude and
other. He detailed that extracting oil cost much more money
at present than it had in the 1970s. The goal had been to
incentivize companies to invest in expensive projects. He
believed that making the credit too short would be a
disincentive to investing in the heavy oil. The amendment
would give the opportunity to make sure an entire field was
producing fairly well when the production tax credit began.
He reminded the committee that it was currently addressing
the production tax credit. He emphasized that there was a
multitude of other taxes and government take; he did not
want to lose out by disincentivizing investment.
4:48:38 PM
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Wilson, Gattis, Pruitt
OPPOSED: Saddler, Edgmon, Gara, Guttenberg, Kawasaki,
Munoz, Thompson, Neuman
The MOTION to adopt Amendment 8 FAILED (3/8).
4:49:29 PM
Representative Pruitt MOVED to ADOPT Amendment 9, 29-
GH2609\F.31 (Nauman/Shutts, 4/7/16) (copy on file). [Note:
due to the length of the amendment it has not been included
in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Pruitt explained that the amendment would
sunset the WLEs in the Cook Inlet in 2019. Currently, the
item ramped down, but did not actually sunset. He believed
it was appropriate to offer the item as a credit the state
could potentially remove.
Co-Chair Neuman asked for an explanation of the repealers
and dates changed in AS 43.55.023.
Representative Pruitt stated that the repealer applied to
the WLE in Cook Inlet.
Vice-Chair Saddler spoke in opposition to the amendment. He
believed it was important to allow for the step-down
process that had been recommended by the legislative
workgroup and by legislative consultants. He shared the
desire to encourage oil and gas production, but he had a
difference of opinion on how the pace of the incentive
should occur. He did not believe the intent of the
amendment was clear. He supported a gradual step-down out
to 2022, which was when the legislature had told the
industry to anticipate the credits would end. He referred
to testimony by the industry in support of predictability
and its ability to accommodate the sunset in 2022.
Representative Wilson spoke in support of the amendment.
She stated that the amendment maintained a 40 percent WLE
credit through 2016, stepped it down to 30 percent in 2017,
20 percent in 2018, and sunset the credit in 2019. She
agreed that credits needed to be stepped down, but some
were more costly and needed to be terminated. She detailed
that the amendment included a gradual step-down in Cook
Inlet, which provided companies with several years to
adjust. She referred to testimony in the committee that the
state should stop giving credits in Cook Inlet. She noted
that the credit had been in response to brownouts, which
was no longer an issue. The amendment acknowledged that the
state could not continue to be as generous as it had been,
but it maintained two other credits in place until 2022.
4:53:44 PM
Representative Edgmon testified against the amendment. He
believed the WLE credit also applied to oil, which did not
pertain to brownouts in Cook Inlet. He noted there was a
compromise in place and he spoke to the balance the
legislature needed to achieve between the budget and
refundable credits offered. Additionally, there was a
legislative workgroup that would review the entire tax
structure; he did not want to get too ahead of the group's
work. He preferred to stay with the compromise that was in
place.
Representative Munoz asked for verification that the
current language in the CS called for the WLE credit to
phase out in January 2022 and the amendment proposed to
change it to 2019.
Representative Wilson replied in the affirmative.
Representative Gara opposed the amendment. He believed the
state had an overly generous tax credit system it could not
afford in Cook Inlet. He detailed that producers knew they
could sell their gas for the highest price in the nation
(and at one of the highest prices in the world for non-
liquefied natural gas) if they conducted exploration and
production in the area. Additionally, the companies were
able to take all of their losses and the state paid for 10
percent. He stressed that the credits were stackable on a
WLE or capital expenditure credit. He emphasized that
natural gas and oil paid no production tax in the area. He
characterized it as a one-way street that did not favor the
people of Alaska. He observed that at high prices, when a
buyer of gas needed new gas, someone would take on the
exploration; the gas was $7 to $9 in Cook Inlet compared to
$2 in the Lower 48.
Representative Kawasaki asked for verification that the
statues listed in the amendment (AS 43.55.023(l), (n), and
(o)) were related to WLEs anywhere south of Prudhoe Bay,
which would include Middle Earth.
Representative Pruitt replied that the intent had been Cook
Inlet.
Representative Kawasaki asked if there was a value of
return if the expenditures were repealed in 2019.
Representative Pruitt did not have a specific value.
Co-Chair Thompson stated that cutting the WLE was much more
of a disincentive than other items. He elaborated that
there were producers on the verge of having some production
that would be taxed eventually, which would make the state
some money. He did not support the amendment.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Wilson, Gattis, Pruitt, Kawasaki, Munoz
OPPOSED: Edgmon, Gara, Guttenberg, Saddler, Neuman,
Thompson
The MOTION to adopt Amendment 9 FAILED (5/6).
4:59:19 PM
Representative Pruitt Representative Pruitt MOVED to ADOPT
Amendment 10, 29-GH2609\F.35 (Shutts, 4/7/16) (copy on
file). [Note: due to the length of the amendment it has not
been included in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Pruitt explained the amendment. He discussed
that currently Cook Inlet and Middle Earth were grouped
together in statue (with the exception of some credits for
Middle Earth only). He noted that some of the credits
expired in the current year, although the 30 to 40 percent
alternative credit for exploration continued through 2022.
He remarked that the CS cut numerous credits, but for some
reason some of the credits had been added back in for
Middle Earth. He thought it was inappropriate for
additional credits to be added back in. He elaborated that
creating too many credits in another basin was essentially
asking for the same problem the state was currently facing
in Cook Inlet. He reasoned that if the goal was to save the
state money, the committee should not be adding credits
back in. He believed there were some great opportunities in
Middle Earth, but he thought the same policy should apply
to all three regions.
Co-Chair Thompson explained that the CS held Middle Earth
harmless. He explained that the Frontier Basins had the
potential to bring energy to rural areas; the credits
incentivized smaller areas where the large oil companies
were not interested in working because there was not
sufficient commercial quantities for them. However, it was
sufficient to bring down the energy cost in rural areas. He
reiterated that the CS held Middle Earth harmless. There
was some exploration that would hopefully be completed and
successful in the current year, which would be stopped
prematurely if the amendment passed.
Representative Wilson asked for verification that if the
credits were extended it was possible the state could
experience the problem it was currently facing [in Cook
Inlet] where it was faced with paying out more and more in
credits.
Representative Pruitt replied in the affirmative.
Representative Guttenberg spoke in opposition to the
amendment. He stated that he had been consistent on his
position related to the Frontier Basins. He remarked that
the cost of doing business had declined; there were upsides
and downsides to the prices of petroleum products. He
detailed that unlike the other credits, the state knew what
credits in Middle Earth (Nenana Basin and Ahtna region)
were doing. He stressed that the legislature was informed
on work in the area; the projects were the most expensive,
not in terms of value, but due to risk. He believed the
state needed to support high-risk projects were the chance
of success was moderate. He wished there was more
exploration in the Frontier Basins, which he believed would
be healthy for the state. He believed the first oil well in
Alaska was in Karluk outside of Cordova. He noted that
there was not oil in the area any longer - the facilities
had shut down. He specified that there were oil and
hydrocarbons statewide, which he believed needed to be
discovered. He reasoned that the state needed to determine
a grid for Alaska that would drive the cost of energy down
for everyone (not just in Cook Inlet and Prudhoe Bay). He
stressed that finding gas or oil in the Nenana Basin would
be a game changer for the state. He construed that if the
quantity was significant it would require substantial
investment by companies. He reasoned that the projects
would occur long-term and the legislature would be
revisiting the tax policies once or twice before that
point.
Representative Guttenberg continued to address Amendment
10. He believed supporting exploratory credits in Middle
Earth was a smart move and was in the state's best
interest. He reiterated that the companies in the region
had kept the state in the loop on their activities because
they wanted the state's help; whereas, the state did not
know the production value for the return on its credits in
other regions. He believed the basins were very important
at any hydrocarbon market price.
Representative Kawasaki was against the amendment. He
referred to prior testimony by Ken Alper (director of the
DOR Tax Division) who had shown aggregated charts due to
the few producers within the Cook Inlet region and other
regions outside the area. He had asked how many of the tax
payers were dedicated to Frontier Basins (Middle Earth) out
of the $384 million in refundable tax credits the state had
provided the previous year. He relayed that Mr. Alper had
answered that the number was very small; he referred to
work conducted by Doyon in the Nenana Basin. He discussed
that the state continued to have production on the North
Slope and in Cook Inlet, but there was still much uncharted
territory across the state. He referred to recent testimony
(several weeks earlier) by DNR related to Prudhoe Bay.
There had been 2,000 exploratory and side wells drilled in
Prudhoe Bay. He continued that Prudhoe Bay was roughly the
size of Montana, which had 20,000 wells. He elaborated that
Montana knew where the oil was because it had explored;
whereas, the State of Alaska did not know what was out
there. Therefore, he listened when people in the Copper
River Basin vocalized their desire to find oil and natural
gas to support their region. The same thing applied for the
Nenana Basin, which had experienced some good findings in
recent years. He hoped the findings could be capitalized in
future years; therefore, he stood in opposition to the
amendment.
5:08:02 PM
Representative Gara could not consistently vote to reduce
tax credits for Cook Inlet at the expense of the rest of
the state without looking at the credits the state could
not afford across Alaska. He believed it was not about
whether a credit benefited his region over another region,
it was about whether the state could afford the credit. He
surmised that the amendment did not eliminate the credits,
but brought them to the Cook Inlet level. He asked to be
corrected if his understanding was incorrect. He stressed
that the state was spending over $1 billion in credits; it
was spending more in credits than it was getting back in
production taxes, royalties, and other. He opined that the
system had made sense when the state had been flush with
money at high prices. He relayed that he could support the
amendment if he received clarification that the amendment
matched the credits in Cook Inlet.
Vice-Chair Saddler testified against Amendment 10. He
believed it was clear that regional needs were different
due to Alaska's large size, numerous hydrocarbon regions,
varying geology, and different stages of exploration and
production. He detailed that in Cook Inlet the state had
accommodated the special geology, markets, and population
needs in Southcentral Alaska. Under SB 21, the legislature
had accommodated the state's economic needs recognizing the
North Slope as the primary producer of wealth for the
state. He believed it was appropriate to offer incentives
for Middle Earth; the legislature had heard frequently
about the need for cheaper energy in the Interior. As much
as he respected the desire for consistency, he did not
believe one-size-fit-all in Alaska. He believed the
provision should remain in the CS.
Co-Chair Neuman spoke in opposition to the amendment. He
remarked that the Cook Inlet gas credits had been
implemented under SB 21 when rolling brownouts had occurred
and people had faced the possibility of losing gas in the
middle of the night. He stressed that those things would
have significantly disrupted the system; therefore, the
state had created large credits to incentivize gas
exploration in the region. He elaborated that the credits
had been successful and better than expected, which had
been a good thing because there were currently 12 years of
known reserves. He added there were reserves in the area
that were yet to be discovered, but he did not believe
there was currently significant gas exploration underway
due to the known reserves. He believed it was different;
the legislature was opting to draw back the credits a bit
because the Cook Inlet Recovery Act had worked well. He
believed it was time to reduce the credits a bit. However,
he wanted to continue to work on determining how to bring
gas to the Interior Alaska to lower their costs. He
believed the current plan was to continue to truck gas from
Cook Inlet to the region; there was plenty of gas in Cook
Inlet to provide or Fairbanks (the needed amount was fairly
small). He added that hopefully the state could get Donlin
online and there would still be plenty of gas. The
legislature had heard loud and clear from residents in
Fairbanks - for years the legislature had been trying to
help bring relief for energy costs in Fairbanks. He
believed a large portion had been to get into Middle Earth
(the term for the center of the state had been coined a few
years back). He spoke to incentivizing gas and keeping
costs lower because natural gas prices were very high in
Cook Inlet. He stated that gas was expensive in Cook Inlet
compared to Henry Hub and the Lower 48. He believed there
were wells under exploration that could supply Fairbanks
and the Interior region. He believed it was important to
continue to try to help the region by maintaining the
credits a little longer. He knew there were companies
currently working that may be dependent on the credits; he
suspected that companies would discontinue work if the
credits were withdrawn.
5:14:09 PM
Representative Edgmon opposed Amendment 10. He recalled the
resource assessment Paul Decker (acting director of the
Department of Natural Resources Division of Oil and Gas)
had given the committee on all areas in the state. He
referred to testimony about the Frontier Basins (which were
synonymous with Middle Earth) that had been partially
assessed at present. From an undiscovered, technically
recoverable resource standpoint, there was no question
there were hydrocarbons in the region. He thought it was
worthy to maintain the credits given the early stages of
exploration and the testimony the committee had heard from
Ahtna and Doyon in reference to work done in the Yukon
Flats, the Nenana and Copper River Basin. He noted that the
legislature would review the credits again in the future.
Representative Pruitt relayed that the amendment did not
get rid of the credits. He clarified that the amendment
would maintain the current credits; whereas, the CS
actually increased the credits. He stated that the
amendment would go back to the currently existing law. He
added that SB 21 had nothing to do with Cook Inlet.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gattis, Pruitt, Wilson, Gara
OPPOSED: Edgmon, Guttenberg, Kawasaki, Munoz, Saddler,
Thompson, Neuman
The MOTION to adopt Amendment 10 FAILED (4/7).
5:17:18 PM
Representative Wilson MOVED to ADOPT Amendment 11, 29-
GH2609\F.37 (Shutts, 4/7/16) (copy on file). [Note: due to
the length of the amendment it has not been included in the
minutes.]
Representative Guttenberg and Co-Chair Neuman OBJECTED for
discussion.
Representative Wilson explained the amendment with a
prepared statement:
Current statute includes a hard 4 percent gross
minimum tax floor against a sliding scale per barrel
credit, which is a progressivity mechanism. Net
operating loss credits, the small producer credit, and
new oil reductions and credits can reduce a tax
liability below the 4 percent gross minimum floor, but
never below zero. The House Finance CS eliminates this
step down in minimum gross taxes at very low oil
prices setting a firm floor of 4 percent gross at all
low oil prices. The CS allows certain credits to
reduce a tax payer's liability beneath the 4 percent
gross minimum but only to 2 percent of gross. Credits
are education tax credits, small producer credits, new
oil credits, and net operating loss credits. The
amendment removes these House Finance CS changes,
restoring the terms of SB 21.
Representative Wilson reminded the committee that
constituents had voted to keep SB 21 in place. She
continued reading from a statement:
SB 21 was carefully crafted and balanced the state's
take on the high end and on the low end. To take more
on the high end we give up some on the low end. That
was our decision. Enalytica testified very clearly
that they do not think that SB 21 regime needs changes
right now.
Representative Wilson noted that the legislature had asked
the adminstration if the conversation would be taking place
if oil prices were higher and if government spending was
not as high. She relayed that the administration had
replied in the negative. She did not believe the situation
was the fault of the oil companies. She continued reading
from a statement:
We can't take more from an industry that is losing
money. Really? We want them to keep investing in our
future production even when times are tough? Well,
we're sending the wrong message. The North Slope is
where our revenue will come from once prices rebound.
We don't want to jeopardize that with our actions
today. SB 21 started working as soon as it passed and
was upheld by voters. SB 21 is working now too, and it
will work in the future, unless we keep changing it.
We can't keep increasing taxes when prices are low and
increasing taxes when prices are high or we will drive
industry out of this state.
Representative Wilson asked if the committee could imagine
doing business in a state where the leaders could not make
up their minds. She stressed that the state wanted more
[money] during high and low oil prices. She spoke to asking
industry for more money even when the industry was not
doing well because the state could not manage its finances.
She elaborated that the legislature had tried removing
credits, stepping credits down, and other. She noted that
the legislature was currently vocalizing it needed to quit
changing the tax structure repeatedly. She remarked that if
her parents tried to run a business in Alaska they would
never make a profit because of the need to hire numerous
staff to determine what they owed on their taxes. She did
not understand. She specified that the legislature had
heard from the administration and industry about how often
it had changed the tax system. She believed DOR could not
keep up with audits because of the numerous tax systems
(i.e. Petroleum Profits Tax (PPT), Economic Limit Factor
(ELF), Alaska's Clear and Equitable Share (ACES), SB 21,
and other). She asked "when do we stop?" She reiterated
that the voters had maintained SB 21. She believed it was
wrong for the committee to try to decide "why one voter did
or didn't do what they did." She countered earlier
statements that the CS represented a compromise. She
emphasized that the legislature needed to stop making
changes or it would run its biggest industry out (an
industry that paid the state's bills).
5:22:38 PM
Co-Chair Thompson remarked that the amendment would return
the [tax] floor to a "loose" 4 percent, which maintained
current statute. The CS included a 2 percent hard floor.
Under the 4 percent loose tax, credits could drop the floor
to zero. He felt that the 2 percent was a compromise.
Representative Gara spoke in opposition to the amendment.
He had been present for the debate on SB 21. He recalled
the statements that the bill reduced taxes at high prices
and included a small 4 percent minimum floor at low prices.
He noted that the gross tax was smaller than in other
states. He stressed that the current system was low on both
ends. He recalled being told that the state would be
protected by a 4 percent gross tax; he had never been told
the number could go to zero. Under current law, in FY 18
through FY 21, the state would make less in production
taxes than it would in fish and game license fees. He
continued that in FY 18, production taxes would be $16
million; a current fish and game licensing bill would bring
in $31 million. Currently the state was collecting $18
million in fish and game licensing fees. He stressed that
it was not possible to run a society with production taxes
that low. He explained that the projected production tax
revenue dropped to $11 million the following year as a
result of large NOL credits. He emphasized that the state
was paying a substantial amount of money to companies - he
believed the benefit companies received was too high. He
reasoned that companies invested based on geology and on
price; Alaska's geology was still good, but the price was
bad worldwide - the state could not change the price. He
explained that the 4 percent minimum tax had been
advertised as something that would protect the state on the
low end with production tax income; however, the state did
not receive the money due to the credits it gave to
companies. He stressed that the NOL credit was over $1
billion in the coming year.
Representative Pruitt remarked that SB 21 had only been in
place for three years and the legislature was now trying to
change it. He detailed that the governor's bill had
initially dealt with credits, with the exception of the
current item under discussion. The amendment addressed a
fundamental change to SB 21. He specified that the state
lived the high-life when oil prices were high because there
was a high net profits tax. Enalytica had testified that
part of what made the net profits tax work (especially at
35 percent, which was higher than the ACES base number) was
the NOL credits. The difference between moving from a loose
floor to a 2 percent floor could be the difference between
a rig operating or shutting down. He reasoned that if the
conversation pertained to needing money immediately, he
wondered what money would be lost in the next couple of
years because companies had to "lay down a rig." He
stressed that whatever oil the state lost in production at
present would not come back. He continued that currently,
companies were drilling merely to keep at a level pace. He
elaborated that there was a natural rate of decline that
because of companies' investment (even though they were
losing money), maintained the level rate. He stressed that
if the companies did not invest, the state would lose the
decline. He reiterated that it was not coming back. He
explained that the CS included a fundamental policy shift
that would change the tax system after only three years and
indicated that when the state was in a financial problem it
would go after companies to fill its deficit.
Representative Pruitt asked if the state would do the same
thing to other industries (i.e. fishing, mining and
tourism) in Alaska when it no longer had oil coming through
the pipeline because of poor decisions and discouraging
investment. He opined that the state should avoid
disincentivizing the industry currently paying the majority
of its bills. He reiterated his earlier statement that the
bill sent a message to industry that it would have to
determine whether to invest in a regime that increased tax
at a time when no other regimes in the U.S. and few
worldwide were looking to make increases. He stressed that
Alaska would be known for increasing taxes when the rest of
the world was trying to incentivize oil development. He
supported the amendment and wanted to revert back to the
provision passed in SB 21.
5:30:00 PM
Vice-Chair Saddler spoke against the amendment. He recalled
that he had been on the House Resources Committee when SB
21 had gone through the legislature. He noted that the
previous tax regime did not have a [tax] floor. He did not
believe anyone had wanted to see Alaska collect tax based
on that floor; however, the prices had fallen farther and
faster than anyone anticipated. The comfort he had taken
from having a floor had been significantly diminished when
he discovered that credits multiplied as they had. He
remarked that the industry employed clever people who
pursued its interests. He reasoned that legislators had
concomitant obligations. He understood that the oil
industry was hurting, that it was difficult to incentivize
production, and that it was hard to make a profit; however,
a floor that did not block the value from declining below
that amount, was not a floor. He believed provision was
reasonable.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gattis, Pruitt, Wilson
OPPOSED: Gara, Guttenberg, Kawasaki, Munoz, Saddler,
Edgmon, Thompson, Neuman
The MOTION to adopt Amendment 11 FAILED (3/8).
Co-Chair Thompson noted that the 5:00 p.m. meeting was
canceled.
5:32:28 PM
AT EASE
5:56:03 PM
RECONVENED
Representative Wilson MOVED to ADOPT Amendment 12 29-
GH2609\F.40 (Nauman/Shutts, 4/7/16) (copy on file):
Page 3, line 18:
Delete "ill"
Page 3, lines 23 - 28:
Delete "and
(ii) after the first four years after a tax
becomes delinquent, in each calendar quarter at a
rate of five percentage points above the annual
rate charged member banks for advances by the
12th Federal Reserve District as of the first day
of that calendar quarter"
Insert "no interest shall accrue after the first four
years after a tax becomes delinquent"
Co-Chair Neuman OBJECTED for discussion.
Representative Wilson explained the amendment. She
clarified that she was not arguing about the first 4 years
when it came to charging compounded and quarterly interest
for audits to be completed; however, she was concerned that
audits were taking 6 years (based on testimony to the
committee). She reminded the committee that audits were
determined by the department (similar to federal audits
conducted by the Internal Revenue Service). One reason the
department conducted numerous audits was due to the state's
unclear system. She did not believe the state should charge
interest after the first 4 years. She did not believe
companies filing on time should be charged interest if the
state could not get its business done. The state charged
significant interest, which was sometimes larger than the
amount owed.
Co-Chair Thompson believed the CS included compounded
interest that would go to simple interest.
Representative Wilson agreed.
Co-Chair Thompson pointed out that it was a two-way street;
if the companies had overpaid, there was no interest to go
to the companies.
Representative Gara opposed the amendment. He understood
the amendment sponsor's point. He emphasized that the way
to get audits done quicker was to have auditors. He
remarked that many legislators had worked to increase the
number of auditors, but he believed others did not want the
auditors. He stated that auditors did a number of things
including ensuring tax returns were accurate. He detailed
that in a profits tax a company may have the incentive to
take deductions and credits it was not really entitled to.
Companies paying as fairly as possible were entitled to
having their return audited more quickly. He believed in
order to protect the state and be fair to companies playing
by the rules, the state should look at hiring needed
auditors. He surmised the state would earn the money back
much more quickly in audits that probably save the state
money. He believed it was a budget discussion.
5:59:41 PM
Representative Gattis spoke in support of the amendment.
She agreed that the state needed employees auditing on a
much quicker basis. She believed state auditors were paid
$200,000 to $300,000 per year. She thought the state did
not necessarily need more auditors, but could hire
individuals to help put the package together. She believed
there was a huge problem if it took the state six years to
complete the audits. She thought there had to be some
incentive for the department to get the audits done. She
opined that 4 years was sufficient; if the audit was not
complete in 4 years the compounding interest should not
continue to accumulate - she believed it was a disincentive
for the department to get the work done.
Vice-Chair Saddler believed it all came out in the wash if
there was underpayment or overpayment by the state or
filers of the returns. He was inclined to support the
amendment. He did not know if the process could be easily
sped up or if the work was highly technical. He added that
the state did have complex oil tax laws. He supported
incentivizing the state to accomplish audits quickly with
compounded interest for the first 4 years and no interest
thereafter.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gattis, Saddler, Munoz, Pruitt, Wilson,
OPPOSED: Guttenberg, Kawasaki, Edgmon, Gara, Thompson,
Neuman
The MOTION to adopt Amendment 12 FAILED (5/6).
6:02:48 PM
Representative Gara MOVED to ADOPT Amendment 13, 29-
GH2609\F.39 (Nauman/Shutts, 4/7/16) (copy on file):
Page 16, line 30, following "January 1, 2016,":
Insert "and before January l, 2017,"
Page 17, line 1, following "loss.":
Insert "For lease expenditures incurred after December
31, 2017, to explore for, develop, or produce oil or
gas deposits located north of 68 degrees North
latitude, a producer or explorer may elect to take a
tax credit in the amount of 20 percent of a carried-
forward annual loss."
Co-Chair Neuman OBJECTED for discussion.
Representative Gara explained the amendment. He discussed
that over the past few months the legislature had learned
the state was paying much more in NOL credits than it had
ever anticipated. In FY 17 the state was paying $1.025
billion in NOL credits at a time when production taxes were
forecasted in the $16 million range (decreasing to $11
million to $13 million). Due to the large size of the NOL
credits $618 million would be carried forward into the
future. He detailed that even as prices went from a
forecast of $38 per barrel to $60 per barrel, the state's
production tax revenue was decreasing from $59 million at
present to $33 million in 5 years. He specified that $82
million of the NOL credits on the North Slope were deducted
from production taxes, which brought taxes down to zero in
many cases; $325 million were made in cash payments by the
state. He stressed that the system was not sustainable.
Currently the CS contained a 35 percent NOL credit for the
North Slope; the state was paying 35 percent of a company's
operating and capital costs. Meanwhile, the state was
living at a 4 percent tax that could drop to zero, with a
production tax that was essentially nonexistent over the
next several years. He remarked that the NOL credit did not
include the Cook Inlet credits and all of the money the
state was paying. He believed the state should try to
incentivize oil, but it was not going to convince a company
to start producing a small field when oil prices were $36
per barrel. He explained that it had nothing to do with the
credit and tax system; it was the low price. He supported a
sustainable level of credits; the amendment would move the
North Slope NOL credit to a 20 percent credit down from a
very generous 35 percent. The change would save the state
about $150 million per year. He continued that the system
would still be very generous to companies; there were not
many states currently giving companies 20 percent to pay
for their losses. Additionally, there were not many states
providing the credit when they were receiving a tax of zero
to 4 percent.
Representative Gara stressed that if the taxes were not
reduced, the carry-forward credits would carry forward in
perpetuity. He explained that so many of the credits were
carried forward because companies could not deduct their
taxes below zero. He detailed that as prices almost double
over the next 5 years, the state's production tax went from
$55 million in the current year to $33 million in 5 years
and to $11 million and $16 million in intervening years. He
specified that because the NOL credit was so high, the tax
was a bit low, and companies would be rolling forward NOL
credits for many years to come. As a result, a future
legislature would inherit a budget that was even more
unsustainable. He believed the 20 percent payment under the
amendment was still generous. He added that the credit was
provided in the first year; whereas most companies
receiving a deduction had to amortize the amount over many
years.
6:08:09 PM
Representative Munoz asked the amendment sponsor to clarify
the amount spent NOL carry-forward credits. She thought the
amount was closer to $300 million for the North Slope, but
expected to continue to grow to approximately $1 billion in
the next two years. [Representative Gara nodded.] She
agreed that 35 percent was too high given the state's
revenue situation; however, she believed reducing the
number to 20 percent was too drastic. She MOVED to AMEND
Amendment 13 by allowing a producer or explorer to elect to
take a tax credit in the amount of 25 percent of a carried-
forward annual loss.
Co-Chair Neuman OBJECTED.
Representative Munoz asked if Amendment 13 should be
presented first and a second conceptual amendment should be
offered later. She asked for Co-Chair Thompson's
preference.
Co-Chair Thompson preferred to address Amendment 13 prior
to addressing the conceptual amendment.
Representative Munoz WITHDREW her amendment to Amendment
13.
6:10:32 PM
AT EASE
6:11:23 PM
RECONVENED
Representative Gara relayed that he would not object to
passing a 25 percent amendment. He communicated that of the
NOL credits that would accrue in FY 17 for the North Slope,
$325 million were cashable, $82 million was deducted from
companies' 4 percent tax, and $618 million would be carried
forward into future years. The $618 million carried forward
would leave the state with no production tax in future
years. He specified that about $1 billion in credits would
accrue in FY 17.
Co-Chair Neuman OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki
OPPOSED: Munoz, Pruitt, Saddler, Edgmon, Wilson, Edgmon,
Thompson, Neuman
The MOTION to adopt Amendment 13 FAILED (3/8).
6:13:33 PM
Representative Gara MOVED to conceptually AMEND Amendment
13, which would move the NOL credit from 35 percent to 25
percent. [Note: the amendment was actually a conceptual
amendment to the bill, not to Amendment 13. Co-Chair
Thompson clarified this point later in the meeting - see
6:55 p.m. for detail.]
Co-Chair Neuman OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Kawasaki, Munoz, Gara, Edgmon, Guttenberg
OPPOSED: Pruitt, Saddler, Gattis, Wilson, Neuman, Thompson
The MOTION to adopt the conceptual amendment FAILED (5/6).
6:16:05 PM
Representative Gara MOVED to ADOPT Amendment 14, 29-
GH2609\F.19 (Shutts, 4/6/16) (copy on file):
Page 19, lines 12 - 14:
Delete all material.
Reletter the following subparagraphs accordingly.
Page 19, line 15:
Delete "20"
Insert "10"
Page 19, line 16:
Delete "2017"
Insert "2016"
Page 19, line 19:
Delete "2017"
Insert "2016"
Co-Chair Neuman OBJECTED for discussion.
Representative Gara explained that the amendment pertained
to Cook Inlet where there were currently no production
taxes on gas or oil. He elaborated that the state paid
companies for a variety of credits including a 10 percent
NOL credit, which could be added to a 10 percent capital
expenditure credit or a 20 percent WLE credit. He opined
that at some point the credit costs became too expensive
and unsustainable. The amendment would reduce the WLE
credit from 20 percent to 10 percent, which would mean a
difference to the state of about $10 million to $15
million. He remarked that the committee had spent hours
trying to find a way to cut the budget by that amount
without hurting the state. He explained that the money
mattered to the state and it was fair to industry; even
when industry paid no production taxes it still received
the highest price for natural gas in the country. He
reiterated the credits paid to companies in Cook Inlet. He
stressed that the amendment still provided an incentive to
companies; the state would still be paying cash credits.
Representative Wilson observed that the amendment resembled
an amendment she had offered that had been voted down. She
was frustrated that the committee was being asked to make
decisions without modelling and real numbers to determine
how things would affect the industry. She believed it was
the wrong approach. She asked why a member would vote
against the earlier amendment, but vote in favor of the
current one.
6:19:22 PM
AT EASE
6:19:46 PM
RECONVENED
Representative Wilson asked how many companies the
amendment would impact. She wondered how the $15 million
[in savings to the state] had been determined.
Representative Gara believed the amendment he had voted
against had included a 40 percent credit, which declined to
30 percent and then 20 percent. He could not vote for a 40
percent credit when the state was facing a $4.4 billion
deficit. The current amendment would maintain the 10
percent NOL credit, but companies would have to choose
between a 10 percent QCE credit and a 10 percent WLE
credit. The only change was decreasing the WLE credit from
20 percent down to 10 percent.
Representative Kawasaki highlighted that prior to 2010
(before the implementation of the Cook Inlet Recovery Act)
the state had provided zero credits to non-North Slope
producers in Cook Inlet. He recognized the need for the
credits when they had been put in place and perhaps in the
future; however, he believed the incentives were no longer
necessary when there 1.6 trillion cubic feet of gas, which
was enough to supply Anchorage in a growth state for 12
years (according to the DNR Division of Oil and Gas). He
added that the state could not afford the incentives.
Additionally, Legislative Budget and Audit had contracted
with consultant enalytica for the past several years to
specifically address oil and gas taxes. He relayed that the
consultants had questions and comments about credits and
taxes in Alaska's oil patch, specifically in Cook Inlet. He
read past testimony from enalytica related to 2015:
Principal among these credits paid to Cook Inlet
producers, our estimated account for around half the
state's spending on credits. Since the state does not
levy a profit-based production tax in the Cook Inlet,
these essentially constitute a subsidy to the Cook
Inlet producers rather than an investment in future
tax revenue.
Representative Kawasaki specified that the statement had
been related to discussion the legislature had on SB 21 and
North Slope producers. He explained that the amendment
would reduce credits in the Cook Inlet slightly, which he
believed was reasonable when the state was facing a $4.1
billion budget deficit and it was expected to provide over
$400 million in credits to non-North Slope producers.
Representative Munoz clarified that the state had been
offering exploration credits outside the North Slope since
2004 under ELF. Additionally the 20 percent carry-forward
credits had begun under PPT, the small producer credit had
been $12 million, and the qualified capital expenditure had
been 20 percent for non-North Slope beginning in 2007.
Co-Chair Thompson stated that when WLE credits reached 20
percent they essentially went away. He added that qualified
capital expenditure credits were at 20 percent.
6:24:39 PM
Representative Gara clarified that WLE credits would not go
away. He detailed that at 10 percent they would be close to
the QCE credit. He noted that a company would likely choose
the QCE credit as it would probably be worth slightly more.
The amendment would save the state money because at 20
percent, a WLE credit was worth a bit more. He reiterated
that nothing would be eliminated under the amendment.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki, Wilson, Edgmon
OPPOSED: Munoz, Pruitt, Saddler, Gattis, Thompson, Neuman
The MOTION to adopt Amendment 15 FAILED (5/6).
6:26:07 PM
AT EASE
6:54:42 PM
RECOVENED
Co-Chair Thompson clarified that Amendment 13 had failed to
pass. He corrected that the conceptual amendment [offered
by Representative Gara] had been to the bill as a whole and
had failed to pass.
Representative Gara MOVED to ADOPT Amendment 15, 29-
GH2609\F.21 (Shutts, 4/6/16) (copy on file):
Page 22, line 4:
Delete "$100,000,000"
Insert "$25,000,000"
Page 22, line 12:
Delete "$100,000,000"
Insert "$25,000,000"
Co-Chair Neuman OBJECTED for discussion.
Representative Gara explained that the original bill
version had contained a $25 million cap per company on
reimbursable credits. He detailed that without a cap,
especially with the NOL and other credits, approximately $1
billion or more in credits would be carried forward. He
stated that the CS moved the cap to $100 million; however,
it was ineffective because almost no companies claimed that
much in reimbursable credit. Whereas, the administration
had determined that a $25 million cap would limit the
state's exposure and give years with some revenue for the
state. The hope was that [oil] prices would increase at
some point, which would bring in sufficient revenue to make
the state's budget sound. He stressed that the state was
not currently sound; it was in a financial crisis. He
believed it was appropriate to limit the payments the state
made. The $25 million cap went forward; he believed the
governor wanted to pay the owed credits with an
appropriation. He disputed that a cap of $100 million was a
cap; testimony had been that almost no companies claimed
the amount. The amendment would change the cap to $25
million per company; if there were three companies on an
oil field the cap would be $75 million. He emphasized that
the amendment was still generous. He specified that the
state gave a higher proportion of credits to companies
(compared to its production taxes) than any other location
worldwide, which the state could not afford.
Vice-Chair Saddler spoke against the amendment. He believed
$25 million was too low. He added that he hoped the oil
industry would invest in Alaska.
6:59:10 PM
Representative Guttenberg remarked that the state was
hemorrhaging credits and needed to gets his fiscal house in
order. He believed the most important thing was that the
state had the natural resources. He commented that
sometimes the legislature thought everything revolved
around it and that industry hung on its every word. He
stressed that a tax or credit policy that was too high was
unstable, just like one that was too low. He supported
taking control of the maximum credits that were still
expandable to other business partners. He observed that it
would not be a bad thing if people were using the credits
because it would mean they were spending money. He thought
a $100 million cap was too high. He stated that a $25
million cap was as arbitrary as $100 million, but he
believed it was more appropriate for the state given the
current fiscal times. He supported tightening credits and
getting the state's fiscal house in order. He noted that
the state may be unable to afford a $100 million credit
year after year. Additionally, the credits would roll
forward year after year if the state could not afford them.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki
OPPOSED: Pruitt, Saddler, Wilson, Edgmon, Gattis, Munoz,
Neuman, Thompson
The MOTION to adopt Amendment 15 FAILED (3/8).
7:02:02 PM
Representative Kawasaki MOVED to ADOPT Amendment 16, 29-
GH2609\F.4 (Shutts, 4/6/16) (copy on file). [Note: due to
the length of the amendment it has not been included in the
minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Kawasaki explained that the amendment sought
to lower some of the initial amounts companies and people
creating development projects could redeem. He referred to
a theoretical example provided to the committee from DNR in
which a field the size of Armstrong Oil and Gas's Pikka
could cost the state as much as $800 million per year. He
explained that many companies or people could request the
same credit for one development project. The amendment
protected the state in those cases.
Co-Chair Thompson pointed to lines 16 and 17 of the
amendment specifying a person could be eligible for $50,000
[$50 million] and $200,000 [$200 million] for each unit. He
noted that as drafted, the amounts could be added together.
He asked if that was the amendment's purpose.
Representative Kawasaki replied that Legislative Legal
Services had drafted the amendment so that payments could
not exceed $50,000 [$50 million] for each person or company
or $200 million for each unit.
Co-Chair Thompson believed the way the amendment was
drafted made it appear the amounts could be added together.
He thought the language needed to be clarified.
Representative Gara asked if it was the lesser of [the two
amounts].
Representative Kawasaki relayed that the amendment was
similar to one offered in the House Resources Committee. He
explained that the intent was $50 million for each person.
He requested an "at ease."
7:04:56 PM
AT EASE
7:09:22 PM
RECONVENED
Representative Kawasaki clarified the intent of Amendment
16. He explained that if there was a large project
involving five partners on a unit that cost $200 million,
the most each partner would receive was $40 million. The
limit was $200 million per unit and a cap of $50 million
for each company.
Co-Chair Neuman asked for verification that three partners
could only receive up to $150 million. Alternatively, he
asked if there was a $200 million cap on the field.
Representative Kawasaki replied that if the unit cost $200
million the most a partner could receive was $50 million.
Representative Kawasaki relayed that there had been only 1
time a company had received more than $200 million in a
single year for the repurchase credits; there had been 5
times one company had received between $100 million and
$200 million; and 11 times companies had received between
$50 million and $100 million in one year. He explained it
was infrequent that the $200 million cap would be reached -
probably even more so in the future. The amendment did not
impact the timing in which a company could redeem the
credits. Additionally, the amendment reflected twice the
amount the governor had requested, which had been set to
$25 million per person/company with a $125 million cap.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki
OPPOSED: Saddler, Wilson, Edgmon, Gattis, Munoz, Pruitt,
Thompson, Neuman
The MOTION to adopt Amendment 16 FAILED (3/8).
7:13:04 PM
Representative Gara MOVED to ADOPT Amendment 17, 29-
GH2609\F.42 (Nauman/Shutts, 4/8/16) (copy on file). [Note:
due to the length of the amendment it has not been included
in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Gara explained that the amendment would
adjust the minimum tax floor of 4 percent (currently the
bill's minimum floor was 2 percent), which lasted up to $76
per barrel. The CS would generate $16 million in production
taxes in the coming year, $11 million the year after, and
$13 million the following year. He remarked that due to a
couple of adjustments in the bill the numbers would be
slightly different. He spoke to the governor's proposal of
a 5 percent hard floor. He believed the approach had made
some sense, but the response had been that when oil prices
were low ($20 to $40 per barrel; the average company on the
North Slope became profitable at about $45 per barrel) 5
percent was too high. The amendment aimed to address the
issue by protecting investment on the North Slope and by
providing fairness to the oil industry and the people of
Alaska. He believed the price of oil would not always be as
low as $35 to $38 per barrel; if prices remained at that
level, there would not be substantial oil revenue in
Alaska. Under the amendment, when companies become
profitable (at an average of $46 per barrel - bigger
companies at a lower price and smaller fields at a higher
price) the state would receive a tax that was better than 4
percent. The Department of Revenue projected the average
field would pay the 4 percent tax up to $76 per barrel; oil
prices were forecasted to not exceed $76 per barrel. He
stressed that the state would be stuck with the amounts for
the next decade.
Representative Gara continued that on big fields the tax
floor would move from 4 percent at $60 per barrel to 5
percent. The governor had proposed moving the tax to 5
percent at $1 per barrel or more. The tax would increase 1
percent at every $5 interval and would max out at 10
percent at $85 per barrel. He referred to a 12.5 percent
floor proposal by a senator from Sitka. The amendment was
not nearly as aggressive; he believed 12.5 percent was
probably too harsh at low oil prices. He believed a floor
tracking company profits made sense. He detailed that at
$60 per barrel each percent would raise about $60 million
to $70 million according to DOR. He reasoned that the money
could go to infrastructure in Alaska. At $70 per barrel the
tax would be 7 percent and would probably raise about $210
million or so. He emphasized that the increase in tax would
be delayed until companies were making profits. He spoke to
GVR fields (post 2002) and a company producing less than
35,000 barrels per day; the fields were more challenging
and the lifting costs were higher. He explained that the
tax would not reach 5 percent for those fields until $75
per barrel; the companies would receive an extra $15 in
profits before the tax would increase to 5 percent and for
every $5 increase in oil price the tax would increase up to
a maximum of 10 percent at $100 per barrel. He stated that
in comparison to the gross taxes and royalties normally
paid to private parties in the Lower 48, the amendment
would still leave taxes much lower. He reasoned that the
amendment would enable the state to fund schools,
infrastructure projects, maintenance, and protect seniors
and children. He stressed that the amendment would only be
a portion of a fiscal plan; it would only kick in when oil
prices started to rise. He reiterated his explanations. He
stated that the amendment was a fair way to protect the
public and the oil industry.
Representative Wilson stated that the amendment reflected a
huge policy change. She relayed that it would have been
helpful to see the amendment sooner to learn how the
changes worked with the rest of the bill. She did not know
at what oil price a company became profitable. She did not
know if the amendment had negative effects or how it
compared to the Lower 48. She was opposed to the amendment
without having the information.
7:21:04 PM
Co-Chair Neuman MAINTAINED his OBJECTION.
Representative Gara responded to a question by
Representative Wilson. The committee had been told that on
average a company on the North Slope became profitable at
about $46 per barrel. Additionally, the committee had seen
charts of company profits for various sized fields at $60
and $80 per barrel. He reminded members that the tax system
had been written in a way that allowed companies to apply
for royalty relief if the production tax system
accidentally overshot. He noted that the last three
applications for royalty relief had been granted for
Caleus, Oooguruk, and Nikaitchuq. He emphasized that if the
state accidentally overshot, a company could request
royalty relief, which could reduce a company's tax burden
by a much greater level than the amendment increased their
tax burden. However, he stated that the amendment was
fairer to the industry than the governor's proposal, which
had included an increase even at low prices. In order for a
company to receive royalty relief it had to demonstrate its
oil field would not be economic under the tax. He believed
it was a smart provision in statute. He emphasized that no
one tax was perfect for every field, which was the purpose
of royalty relief. He believed the amendment made sense.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki
OPPOSED: Wilson, Edgmon, Gattis, Munoz, Pruitt, Saddler,
Neuman, Thompson
The MOTION to adopt Amendment 17 FAILED (3/8).
7:23:37 PM
Representative Kawasaki MOVED to ADOPT Amendment 18, 29-
GH2609\F.2 (Nauman, 4/6/16) (copy on file):
Page 6, line 23:
Delete "[(A)] four"
Insert "five [(A) FOUR]"
Page 6, lines 24 - 27:
Delete ", except that a credit authorized under this
chapter may reduce the tax under this subsection to
less than four percent, but not to less than two
percent of the gross value at the point of production"
Page 6, line 30:
Delete "four"
Insert "five"
Page 6, line 30, through page 7, line 2:
Delete ", except that a credit authorized under this
chapter may reduce the tax under this subsection to
less than four percent, but not to less than two
percent of the gross value at the point of production"
Page 34, line 18, following "APPLICABILITY.":
Insert "(a)"
Page 34, following line 19:
Insert a new subsection to read:
"(b) The limitations on the use of tax credits added
in AS 43.55.019(e), as amended by sec. 13 of this Act,
AS 43.55.020(a), as amended by sec. 14 of this Act, AS
43.55.023(c), as amended by sec. 17 of this Act, AS
43.55.024(±), as amended by sec. 21 of this Act, AS
43.55.024(g), as amended by sec. 22 of this Act, and
AS 43.55.025(q), added by sec. 25 of this Act, apply
to credits applied to reduce a tax liability for a tax
year starting on or after the effective date of secs.
13, 14, 17, 21, 22, and 25 of this Act."
Co-Chair Neuman OBJECTED for discussion.
Representative Kawasaki discussed that one of the primary
provisions in the governor's bill had been the concept of a
5 percent floor for oil prices and production on the North
Slope upon recommendation by a Senate workgroup. Currently,
the unintended consequence of having a large NOL, was that
the current floor was no longer hard. He explained that it
meant a barrel of oil was providing the state with
royalties and very little production tax income. He
explained that he had taken some time to compare oil tax
structures in other states because of recent testimony to
the committee that most state's had a gross tax on oil and
did not offer nearly as many credits driving their
production tax to zero. He pointed to Louisiana's onshore
production, which had an oil tax rate of 12.5 percent of
its value at the time of severance; incapable oil rates
were taxed at 6.25 percent. Montana's tax on pre-1999
vertical wells was 12.5 percent and post-1999 wells were
taxed at 9 percent. Production in North Dakota was taxed at
a 5 percent floor. Utah had a 3 percent floor for the first
$13 per barrel and a 5 percent for anything above that
amount. Wyoming had a 6 percent floor on production. When
the legislature had looked at production taxes and credits,
he did not believe anyone had considered that oil prices
would be as low as they currently were. The amendment
corrected an error when legislators passed SB 21 and did
not do modelling at low prices of oil.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki
OPPOSED: Edgmon, Gattis, Munoz, Pruitt, Saddler, Wilson,
Neuman, Thompson
The MOTION to adopt Amendment 18 FAILED (3/8).
7:27:05 PM
Representative Gara MOVED to ADOPT conceptual Amendment
18.a, which would read the same as Amendment 18, but with a
4 percent hard floor.
Co-Chair Neuman OBJECTED.
Representative Gara stated that the committee was not
making significant progress during the current meeting. He
remarked that the bill was not doing much to "stop the
bleeding" in terms of the state paying out so much in tax
credits and receiving so little back in production taxes.
The conceptual amendment would implement a hard tax floor
of 4 percent, which was what the state thought it had
accomplished with the passage of SB 21. He remarked that he
had not been a fan of SB 21, but the one major promise in
the bill was the tax floor of 4 percent; however, it had
not occurred. He explained that with the carry-forward NOL
credits, the production tax raised less money than a
proposed fish and game license fee bill.
Representative Gattis remarked that the committee was not
meeting to address anyone else's bill. She did not believe
it was appropriate.
Representative Gara continued that in FY 18 the state was
projected to take in $16 million in production taxes, which
was less than the state currently brought in with fish and
game licenses. He continued that the number was projected
to decrease to $11 million in FY 19. Under current law the
state made $18 million on the sale of fish and game
licenses. The amendment was consistent with what most
people believed SB 21 had accomplished, which was a 4
percent protection for the state at low prices. He surmised
that perhaps some legislators believed the governor's
proposal of 5 percent was too high, but the amendment was
consistent with everything said publicly about SB 21.
Representative Kawasaki agreed that no one saw the current
environment coming. He referred to the Senate oil and gas
tax workgroup that had worked the entire past summer on
particular issues. He read from the workgroup's section of
findings related to protecting the production tax floor:
A lot of attention has been paid to the refundable tax
credits; however, Senate Bill 21, a floor of 4 percent
was instituted against the North Slope producers. This
was meant to prevent credits from taking the
taxpayer's liability effectively down to zero, which
the older tax system ACES really could have done.
However, the group learned during its meeting
deliberations there was potential for an unintended
scenario to occur, for a producer to incur a carried-
forward annual loss or net operating loss that was
great enough to drop the tax liability below the
floor. Although there is disagreement on the proposals
to increase the floor, at the minimum the floor
installed in Senate Bill 21 should be hardened up and
protected.
Representative Kawasaki elaborated that many people in the
building (some who had been for and against SB 21) who
agreed with the governor...
Co-Chair Thompson interjected that it was not possible to
say whether other people agreed or how they felt about the
topic.
Representative Kawasaki replied that he agreed with the
Senate workgroup's recommendation dated December 2015 to
harden the current floor and ensure the production tax
floor was protected.
Vice-Chair Saddler remarked that the point had been made
numerous times that more was being offered in credits to
the oil industry than is being provided in production
taxes. He agreed that it may be true, but he thought it was
less than fully relevant. He stressed that incentives
resulted in the production, development, and delivery to
market of the state's royalty oil. Additionally, the state
received corporate income tax and property taxes on the
pipeline and production facilities. He emphasized that the
net income to the state was positive. He added that oil was
kept in the pipeline and the state had the prospects for
the long-term ability to deliver oil from the Alaska
National Wildlife Refuge (ANWR) or anyplace to markets. The
state also received royalty revenue, which paid for K-12
education, the University of Alaska, Medicaid, state
workers, and other.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Guttenberg, Kawasaki, Munoz, Edgmon
OPPOSED: Gattis, Pruitt, Saddler, Wilson, Thompson, Neuman
The MOTION to adopt conceptual Amendment 18.a FAILED (5/6).
7:35:31 PM
Representative Guttenberg MOVED to ADOPT Amendment 19, 29-
GH2609\F.38 (Shutts, 4/7/16) (copy on file). [Note: due to
the length of the amendment it has not been included in the
minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Guttenberg explained that the gist of the
amendment was on page 2, line 12, subsection (m). He
observed that during the meeting about half of the
committee members had spoken about modelling. He discussed
that taxes paid by companies were confidential; he did not
want to open taxes to show what companies paid, how they
paid, justifications, credits, reductions, and other.
Companies did not have to apply for credits, but they did
because they provided an economic advantage. He continued
that if companies were going to apply for credits, they
would sign an understanding that the documents submitted
for credits were public. The purpose was to create the
ability for the state to do modelling in order to
understand what companies were doing in Alaska. The
transparency would enable the state to determine whether
companies should receive more or less credits. He surmised
that perhaps the state could adjust the model to ensure it
was receiving production and not spending money where
inappropriate. He reasoned it may be a consequence of
offering the wrong kind of credits. He detailed that the
commissioner and director had addressed the committee
related to the data, but the numbers were aggregated and it
was not possible to determine exactly what happened. He
explained that the situation did not occur with Ahtna or
Doyon because they were making their numbers public. He
stressed that the amendment pertained to modelling and the
ability to understand what the state was doing.
Representative Guttenberg stressed that the state was
throwing money at the wall and hoping for an outcome. He
continued that legislators had justifications for what they
were doing and arguments about whether something was
appropriate, too much, too little, and other. He
underscored that at the end of the day, the state did not
have a clear, concise picture. He spoke to aggregate
numbers and assumptions that production was up due to
credits. He emphasized that there had been numerous
comments around the committee table about the lack of
modelling. He stressed that the lack of modelling was due
to confidentiality. He reiterated that companies did not
have to apply for the credits; the program was voluntary,
whereas other taxes were not. He reasoned that if companies
wanted the credits, he wanted to see what they were being
used for. He wanted to see if the credits would result in
increased production and would be beneficial for the state.
He was frustrated by not having a defined picture of what
the state was actually doing. He stressed that the state
was putting hundreds of millions of dollars on the table
and was in a fiscal deficit. He believed the state should
have a picture of what was taking place in the oil and gas
fields and should understand what people were doing. He
spoke to the need to heat residents' homes. He emphasized
that credits were draining the state's bank account and he
believed it was important to have an accurate picture.
7:40:52 PM
Representative Wilson hoped the department was doing
exactly what the amendment sponsor had talked about. The
modelling she had referred to pertained to the bill. She
hoped the committee would have its own economists with
knowledge of multiple tax regimes, who would know how
making specific changes would impact the state. She stated
"shame on the Department of Revenue" for not making sure
companies were accountable if there were credits going out
that were not legitimate. She explained that SB 21 changed
the law to enable the state to see barrels of oil going
down. She reiterated that the legislature had experts to
provide the information. She clarified that it was the
responsibility of the Department of Revenue to make
justifications for credits and outgoing money.
Representative Kawasaki discussed that the legislature was
the appropriating body of government. He stated that the
only thing the legislature was required to do annually was
pass a budget. He spoke about numbers from DOR requesting
$825 million in oil and gas tax credits in the next year.
He relayed that constituents asked where the money went,
but he had no idea. He did not have transparency on the
individuals benefitting from the credits. He believed it
was a problem. He stressed that the legislature "needled"
every department and agency individually; the legislature
tried to discuss whether a department should have two or
three deputy commissioners in an agency at the cost of
$100,000, yet DOR could not provide the legislature with
information when the department asked for $825 million in
the current year to pay for the state's tax credit
liability owed to North Slope and Cook Inlet producers. The
amendment sought to make the information more transparent
in order for legislators and the public to understand where
the credits were going. He believed the issue for every
budget item boiled down to "what are we getting for what
we're giving?" He reasoned that the legislature expected
the Department of Labor and Workforce Development (DLWD) to
do a job if the legislature appropriated money to the
department. He believed not knowing what was going on with
the credits was a black hole. The Department of Revenue
received and could release some of the information in an
aggregated method, but there was no transparency.
Co-Chair Thompson had concerns with the amendment related
to antitrust issues. He thought becoming too transparent
would cause big problems. He thought the amendment could
deter competition.
Representative Gara understood the concern, but stressed
that the amendment would not cause antitrust issues. He
stated that it would be one thing if the legislature was
invading a company's books; however, the amendment aimed to
merely determine where the state's money was going. He
explained that when the state gave someone money it could
include a condition that it would get to see where the
money was spent. The provision would enable the state to
know whether something was working and whether it was going
to a company that would have developed a field anyway or if
the credit had tipped the company towards making an
investment. He reasoned that when the state spent money it
was entitled to know where the money went. A company did
not have to accept the money if it was worried the state
would see what it was doing. He believed the amendment
would help the legislature develop a smarter tax credit
system and was perfectly legal. He reiterated that the
state could always condition a grant of state money on
something the other party could choose to accept or reject.
7:46:10 PM
Vice-Chair Saddler spoke in opposition to the amendment. He
agreed that openness in public service and executive
agencies was desirable and there were many laws to protect;
however, private business was a different matter. He
believed equating the same desire for transparency in
public activities, in a private activity it could be
counterproductive. He explained that the purpose was to
incentivize private investment in Alaska; private business
was competitive. He elaborated that many of the companies
operated globally, had narrow margins, and were intensely
competitive. He did not want to discourage companies from
investing in Alaska and taking advantage of the state's
incentives by the prospect that information shared with
state tax auditors could be used to be publicly
discoverable to the detriment of their business interests.
He understood the desire for transparency, but if the
state's goal was to incentivize business investment in
Alaska, he believed the amendment would be
counterproductive.
Representative Guttenberg emphasized that applying for
credits was voluntary. He equated the credits to grants. He
stated that if a company qualified for the credits and the
aggregated numbers include three companies, the department
was required to pay them. He stressed that if two of the
companies were doing good work and one was not, the
department could not tell the legislature. He emphasized
that there was no transparency. He spoke to legislative
debate on whether a credit was good or not; however, he
believed no one really knew due to a lack in transparency.
He elaborated that the legislature had no idea whether
companies were using credits in the intended way. He
reiterated that companies did not have to apply for the
credits; the money was put on the table because the
legislature expected companies to do something in the
state's best interest. He reasoned that DOR knew one way or
another, but it could not divulge the information to the
legislature. He had a problem making public policy with the
high amount of money without knowing what it went to and
how well it was working.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Guttenberg, Gara, Kawasaki
OPPOSED: Gattis, Munoz, Pruitt, Saddler, Wilson, Edgmon,
Neuman, Thompson
The MOTION to adopt Amendment 19 FAILED (3/8).
7:50:51 PM
Representative Kawasaki MOVED to ADOPT Amendment 20: 29-
GH2609\F.11 (Nauman/Shutts, 4/6/16) (copy on file). [Note:
due to the length of the amendment it has not been included
in the minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Kawasaki explained the amendment relating to
taxpayer confidentiality and disaggregating some of the
information received by DOR in order for the public and
legislators to understand what the state was getting in
return for credits it provided. The amendment would enable
DOR to provide confidential information to legislators
under strict confidentiality agreements (similar to
agreements signed by DOR and DNR). There was a longstanding
tradition through AKLNG, ACES, and AGIA [Alaska Gasline
Inducement Act] where legislators were able to see
confidential information in order for legislators to make
better decisions on behalf of the state and industry.
Representative Wilson spoke in opposition to the amendment.
She surmised that the legislature must not trust the
governor and administration because work was their
responsibility. She hoped the legislature would receive the
accurate numbers. She elaborated that the administration
had told the legislature that SB 21 was working and that
the governor would not have submitted the bill if it were
not for the low price of oil and the state's large budget.
She believed the administration seemed informed on existing
credits. She could not imagine the administration would
make the clear statements about what was and was not
working if they did not have the facts to back the
statements up. She stated that the legislature had also
heard from the administration that there were issues
related to Cook Inlet; the legislature had been told the
same thing from its legislative economist. She believed it
was the responsibility of the administration to bring the
information to the legislature in terms of what was and was
not working. She hoped the legislature did not have to
address the issue annually. She supported establishing a
legislative workgroup to consider the information provided
from the administration and the legislature's economist.
She stressed that it was about the bigger picture; she did
not want to get into the weeds on each individual company.
She supported receiving the facts on what the state was
getting for its money. Additionally, she wanted to know
about the taxes, royalty, and the entire picture of revenue
coming into the state at present and in the past. She
detailed that the state had received benefits from many of
the items in the past and not necessarily in the same year
the state was paying for them. She trusted that the
legislature was receiving accurate information.
7:55:16 PM
Representative Gara clarified that there had not been
administration testimony that SB 21 was working. He
detailed that one of the consultants who had helped write
SB 21 had testified that he liked it. He stated that every
field that was coming online under the current tax system
was a field where investment had started before 2013
(before the passage of SB 21). He discussed that to
determine whether the credits were working it was necessary
to consider whether they were too expensive, not expensive
enough, how it related to the tax the state received in
return, and the balance between the two. He believed the
administration had been clear that it would like to change
the system to make the things work better.
Representative Guttenberg remarked on an earlier question,
which he believed needed an answer. The amendment would
enable legislators to sign a confidentiality agreement to
see the information [provided by companies to DOR].
Currently, a company received a credit if they qualified;
it was not based on whether a company was doing the right
thing or whether it was actually beneficial for the state.
He emphasized that nothing had shown specifically what was
going on with the credits in slides presented to the
committee because the information was aggregated. He
stressed that the individuals who had presented the
information were tax experts, but were not telling
legislators what they did not want to tell them.
Representative Gattis commented about the previous and
current amendments. She believed the last thing the state
should do was let information about a highly competitive
businesses get out. She was strongly against the
amendments.
Co-Chair Neuman opposed the amendment. He stated that he
saw numbers when he saw the throughput through the Trans-
Alaska Pipeline System (TAPS) with more or less oil
production. He saw numbers from DLWD showing more or less
jobs in the oil and gas industry. He saw DOR reports on oil
and gas production and revenue. He believed the legislature
used the information as a gauge to determine how the
industry was doing; an industry supporting the largest
percentage of the state's revenue. He did not need to see
the finite details, which he was unsure he would
understand. He noted that he was not an accountant dealing
specifically with oil and gas. He believed he saw the
numbers he needed to see as a legislature (e.g. how many
jobs were created and what the economy looked like). He
added that the information under discussion was very
confidential; there were hundreds of millions of dollars at
stake.
Co-Chair Thompson discussed confidential information that
was not disclosed unless someone had signed a
confidentiality agreement or the information was provided
in executive session. He referred to a legal opinion
barring any legislator from being kept out of an executive
session. He was concerned about the door the amendment
would open.
Representative Kawasaki noted that the amendment included
permissive language that the "department may disclose
confidential tax information" that he believed the
legislature should use in making educated and informed
decisions. He referred to an earlier remark that it was the
department's and governor's responsibility to provide the
legislature with information it sought. He reasoned that if
a person trusted the current governor than maybe a person
was good with that. However, he would prefer to get the
information directly. He recalled a recent situation where
Ken Alper [DOR Tax Division director] was not able to
disclose the specifics and value around the Cook Inlet or
the non-North Slope tax credits. He added that Mr. Alper
had not been able to separate out Middle Earth versus Cook
Inlet. He believed it was problematic during oil and gas
tax policy discussions and when the legislature talked
about the $300 million to $400 million in non-North Slope
tax credits in the coming year. He believed the legislature
should have the information. He disputed earlier statements
that it was the governor's responsibility to provide the
legislature with the information. He opined that it should
be the legislature's responsibility to become more
informed. He stated that the amendment language was fairly
boiler-plate, which had been added into ACES in 2008 and
into other legislation. He reiterated that the legislature
should be making informed decisions and could not be making
informed decisions on tax policy without the information.
Representative Munoz spoke against the amendment. She could
not imagine a group of legislators sitting around a table
analyzing confidential tax information. She did not think
it was appropriate. There were many ways success could be
measured (i.e. increased production, a stable workforce,
whether investments were occurring or not, and other).
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Guttenberg, Kawasaki, Gara
OPPOSED: Munoz, Pruitt, Saddler, Wilson, Edgmon, Gattis,
Thompson, Neuman
The MOTION to adopt Amendment 20 FAILED (3/8).
8:04:18 PM
AT EASE
8:14:44 PM
RECONVENED
Representative Gara MOVED to ADOPT Amendment 21, 29-
GH2609\F.23 (Shutts, 4/7/16) (copy on file). [Note: due to
the length of the amendment it has not been included in the
minutes.]
Co-Chair Neuman OBJECTED for discussion.
Representative Gara stated that the amendment was small. He
did not believe it was a game changer, but that it was the
right thing to do. He believed Cook Inlet tax credits which
cost the state too much. He discussed that currently a
company in Cook Inlet was allowed to take the NOL credit,
small producer credit, 30 to 40 percent exploration credit,
and the QCE credit or the WLE credit. He stressed that the
state was paying about 80 percent for the cost of a field
that it received no production taxes from. He detailed that
some of the credits would disappear including the
exploration credit; the state would be paying the small
producer tax credit for the next decade or so - a company
could no longer apply for the credit beginning in the
coming year. The amendment specified that a company would
have to choose between the NOL credit, QCE credit and the
WLE credit. He surmised that a company would probably
select the NOL credit because it was the most lucrative -
the state paid a part of the company's losses. Currently a
company could use the NOL credit and could select either
the QCE credit or WLE credit. He noted that it was not
possible to prevent a company from also receiving their
remaining small producer tax credits and exploration
credits. He estimated the amendment would save around $15
million. The amendment would leave companies with
incentives that went beyond what the Legislative Budget and
Audit consultant had specified as an incentive; the price
in Cook Inlet would bring companies to explore, given that
gas went for the highest price in the country.
Co-Chair Thompson surmised that the amendment was an
attempt to unstack the NOL, QCE, and WLE credits. He stated
that current law prohibited a company from taking a WLE
credit without taking a QCE credit for that expenditure or
other exploration credit provision. He stated that a
company had to choose between the three. He asked for
clarification.
Representative Gara answered that currently a company could
combine the QCE or WLE credit with the NOL credit. The
amendment would limit a company to selecting one of the
three credits. He surmised a company would choose the most
valuable credit. He clarified that a company could not
currently stack the WLE credit and the QCE credit in Cook
Inlet.
Co-Chair Thompson asked for verification that a company
could pick one [of the three credits].
Representative Gara nodded.
Co-Chair Neuman MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Kawasaki, Guttenberg, Gara
OPPOSED: Munoz, Pruitt, Saddler, Wilson, Edgmon, Gattis,
Neuman, Thompson
The MOTION to adopt Amendment 21 FAILED (3/8).
8:19:59 PM
Co-Chair Thompson MOVED to ADOPT conceptual Amendment 22,
29-GH2609\F (copy on file):
Page 6, line 25, following "chapter":
Insert", excluding a credit under AS 43.55.024(j),"
Page 6, line 31, following "chapter":
Insert ", excludin2 a credit under AS 43.55.024(j),"
Co-Chair Neuman OBJECTED for discussion.
Co-Chair Thompson explained the amendment. He detailed that
many sections of the CS created a tax floor at 2 percent of
the gross value. He specified currently credits could
reduce a tax payment to zero; the CS changed that ability
and implemented a hard 2 percent floor. However, the
sliding scale, per-barrel credit (of zero to $8.00) in
existing law [established in SB 21] had been set to not
drop below the current 4 percent floor. The credit had been
included in SB 21 to ensure that legacy production from the
North Slope paid the 4 percent tax unless there was some
other credit, such as an NOL. The CS currently would enable
the per barrel credit to go down to 2 percent. The
amendment clarified that the existing 4 percent hard floor
for the per barrel credit would remain in place on the
North Slope. Only the other credits, which could currently
reduce tax payments to zero, were hardened at 2 percent.
The amendment would save the state about $125 million if
approved.
Representative Gattis was unclear on the amendment. She
needed further explanation.
Co-Chair Thompson noted that the item had only just been
discovered. The current CS established that the North Slope
4 percent floor could be reduced to 2 percent with the per
barrel credit of zero to $8.00. The amendment reinforced
that SB 21 legacy production from the North Slope paid the
4 percent tax unless there was some other credit, such as
an NOL. The amendment would reinsert the 4 percent floor;
without it the CS reduced the floor to 2 percent.
Representative Wilson asked for verification that if a
company was already at the 4 percent tax without taking the
price per barrel credit, the amendment would prevent them
from doing so.
Co-Chair Thompson replied in the negative. The amendment
pertained to the zero to $8.00 sliding scale credit, which
had a hard 4 percent floor. The CS would lower the sliding
scale credit to a hard 2 percent floor. The amendment would
maintain the 4 percent floor for the specific credit.
Representative Pruitt surmised that the sliding scale
credit had an existing floor of 4 percent. He stated his
understanding that the CS had accidentally reduced the
floor to 2 percent for the specific credit. He deduced that
the amendment would accomplish the goal of maintaining the
intent of SB 21.
Co-Chair Thompson agreed. He expounded that without the
change it could cost the state $125 million. The 2 percent
hard floor would lower the zero to $8.00 sliding scale
credit. The amendment would maintain the current 4 percent
floor.
Representative Gara believed the zero to $8.00 credit under
SB 21 worked when there was a profits tax. The profits tax
existed until it got so low that it was smaller than the
minimum tax; at that point the gross minimum tax kicked in.
He believed the zero to $8.00 only impacted the rate paid
for the profits tax. He did not understand how the profits
tax sliding scale mechanism could impact the gross tax.
Co-Chair Thompson explained that the sliding scale credit
could allow the 4 percent floor to drop to a 2 percent hard
floor. The amendment would maintain the 4 percent hard
floor on the North Slope.
Representative Gara remarked that the amendment sponsor had
stated the amendment would restore the floor to a hard 4
percent. He did not think that was accurate because the
bill had a 2 percent hard floor. He believed the sponsor
meant the floor would not drop below 2 percent.
Co-Chair Thompson answered in the negative.
8:26:31 PM
AT EASE
8:30:10 PM
RECONVENED
Co-Chair Neuman WITHDREW his OBJECTION. There being NO
further OBJECTION, Amendment 22 was ADOPTED.
8:31:10 PM
AT EASE
8:52:08 PM
RECONVENED
Vice-Chair Saddler addressed the three forthcoming fiscal
notes from DNR Division of Oil and Gas, DOR Tax Division,
and Fund Capitalization to the Oil and Gas Tax Credit Fund.
Co-Chair Thompson asked DOR to address the committee.
Representative Gattis asked what was meant by forthcoming
fiscal notes.
Co-Chair Thompson answered that the department would
explain.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
replied that he was not entirely certain about the meaning
of the term forthcoming; however, he believed it meant that
the fiscal notes would need to be modified due to changes
made during the meeting. The clarified the fiscal notes had
been written to the CS before it had been amended.
Co-Chair Thompson stated that some of the notes would be
reduced and others would increase. Mr. Alper replied in the
affirmative.
Representative Gara pointed to a fiscal note (OMB Component
Number 2894) that included an $800 million. He asked for
verification that the governor had proposed the $800
million to pay accrued tax credits at a time when the bill
would have substantially reduced tax credits and raise some
revenue.
Mr. Alper replied that the governor's initial appropriation
request in the fund capitalization fiscal note had been
$926 million; the difference between the number in the
operating budget and $1 billion. The intent had been to
"clear the decks" to pay all accrued credits including
those accruing between the present day and the effective
date of the bill. The expectation was that the program
would be sufficiently smaller in future years and the
appropriation would not be as substantial.
Representative Kawasaki pointed to page 2 of the same
fiscal note. He asked if the fiscal note reflected the
change in Amendment 1.
Mr. Alper replied that the fiscal note did not reflect
changes made during the current meeting. He spoke to
revenue line item 3: $0.00 to $10 million in FY 17 through
FY 19, $5 million to $15 million in FY 20, etcetera. He
detailed that the particular item was associated with the
elimination of the tax cap for oil in Cook Inlet. The cap
had been restored by Amendment 1; therefore, he anticipated
that the updated amendment would remove the $0.00 to $10
million from the bottom line.
Representative Kawasaki stated that the FY 17 change had
been closer to $20 million in the House Resources Committee
version of the bill. He added that in a version of the
fiscal note from the previous day, the impact had been $10
million to $50 million. He asked for verification that with
the $10 million for the tax limitation on Cook Inlet oil,
the outlay appeared to range from $5 million to $20
million.
Mr. Alper answered that the fiscal note brought to the
committee earlier in the week had been "on the fly" and he
had relayed that there may be corrections. Specifically,
the department had reversed the direction of the small
extension of the exploration credit in the frontier areas
(the number had been negative, but it had been reversed to
a positive number as it would cost a bit more). He
explained that it was really not possible to look at FY 17
because the effective date of almost all of the changes in
the bill was not until January 2017. Therefore, the great
bulk of the credits that otherwise would have been paid in
FY 17 will have been paid before the bill's effective date.
Representative Kawasaki believed the bill version prior to
the CS had been modelled after the House Resources
Committee; in that version the total savings to the state
would be between $770 million and $805 million and in year
two the savings would range from $420 million to $455
million. Under the CS, excluding changes made during the
current meeting, the savings would range from $5 million
and $30 million the first year and between $90 million and
$165 million in the second year. He asked if his statements
were accurate.
8:58:11 PM
Mr. Alper answered that the statements were technically
correct, but he put the more appropriate comparison on the
FY 18 numbers. He explained that the governor's original
version of the bill had a more imminent effective date,
which dramatically changed the FY 17 numbers.
Representative Kawasaki remarked that the total effective
revenue change for FY 18 was around $120 million to $130
million. Whereas, the amount was closer to $430 million in
the governor's original bill. Mr. Alper replied that he did
not have the original fiscal note on hand, but he believed
the number sounded correct.
Representative Gara referred to page 2 of the fiscal note,
which specified the value to the state ranged from $5
million and $30 million in FY 17 and between $90 million
and $165 million in the second year. He asked if the amount
factored in no longer receiving tax from oil in Cook Inlet.
Mr. Alper answered that line 3 on page 2 of the fiscal note
included the Cook Inlet tax restoration of $0.00 to $10
million. The low end of the range would not change, but the
high end would be reduced by $10 million.
Representative Gara asked why the loss of $10 million would
not impact the low end of $90 million.
Mr. Alper explained that the statute contained some
inherent vagueness, especially related to how different
features may interact with each other. The economist who
had prepared the chart included a range to factor in
uncertainty. He explained that the ranges for FY 18
including $0.00 to $10 million, $70 million to $100
million, $15 million to $25 million were added; the bottom
line ranges included the sum of the low end amounts and the
sum of the high end amounts. He elucidated that because
they were moving a $0.00 to $10 million, the low end was
$0.00.
9:00:31 PM
Representative Munoz observed that according to the spring
forecast numbers for FY 17 the total credit was about $975
million and $655 million in FY 18. She referred to changes
for FY 18 shown in a DOR fiscal analysis the prior evening,
which included approximately $190 million (subject to minor
change). She asked for verification that the state was
looking at credits of around $500 million.
Mr. Alper answered that did not have all of the documents
in front of him. He explained that the department's spring
forecast numbers included the refunded credits and credits
that would be taken against liability. The portions of the
bill that reduced the credit outlay also reduced the credit
spend. To a certain extent the increased revenue items
(primarily related to the partially hardened floor) would
be a reduction in credits used against liability. He
detailed that the credits would not be used against
liability and instead would be received as taxes. It was
fair to say the great majority of the impact in the bill
would adjust the chart going forward.
Representative Gara noted that the fiscal note (OMB
Component Number 2894) included an $800 million figure that
he believed was not included in the bill. He believed it
had been the governor's hope when he introduced the bill
that the state would pay off existing credits for $800
million. He asked for verification that the bill did not
contain the provision.
Mr. Alper agreed that the item was not included in the
bill, but he clarified that it had not been in the
governor's original bill either. He believed the $800
million figure would appear in the fiscal note section of
the operating budget.
Representative Gara asked how much the state was obligated
to pay in tax credits for FY 17. Mr. Alper answered that
the number had been $73.4 million when the budget had been
constructed the previous fall; the number was included in
the [FY 17] operating budget based on DOR's estimate of
production tax after adding back any credits against
liability multiplied by 15 percent. The calculation was
somewhat different at present because the forecast was
lower; the number had recently been adjusted in a
presentation he had prepared for the other body. He
believed the figure was around $30 million.
Representative Wilson remarked that the state owed $800
million, but the $73 million was the state's statutory
obligation [in FY 17]. She was trying to discern whether
the House Finance Committee had asked for the fiscal note
to the $800 million or if the amount had been included at
the governor's request.
Mr. Alper answered that in the governor's original version
of the bill, the governor had requested $900 plus million;
however, that fiscal note had been made indeterminate and
had not come to the House Finance Committee from the
previous committee. He believed the fiscal note under
discussion had been put together by the chair of the House
Finance Committee [Co-Chair Neuman] or the Legislative
Finance Division. The note had not come from DOR.
Representative Wilson referred to the DOR Tax Division
fiscal note (OMB Component Number 2476). The note included
a change in revenue from $20 million [FY 17] to $90 million
[FY 18 and FY 19] to $95 million [FY 20] to $145 million
[FY 21] to $210 million [FY 22]. She assumed the revenues
were close to those the bill would generate.
Mr. Alper replied that the specific fiscal note had been
generated by DOR. He explained that the number was also
included in the table attached both fiscal notes the
committee had been speaking to (OMB Component Numbers 2476
and 2894). He explained that the top half of the table
pertained to additional revenue (lines 1 through 8) and
lower portion of the table included the total revenue
impact of credits the state repurchased. He pointed to the
revenue impact, which primarily showed changes from
hardening the floor as well as the changes to the Cook
Inlet tax, which had been added and subsequently removed.
The impact showed a range of numbers $10 million to $30
million, $70 million to $110 million, and $70 million to
$110 million. The DOR fiscal note showed the midpoint of
the ranges. He added that it represented the additional
revenue anticipated to be brought into the state treasury
due to the changes in the bill.
9:06:22 PM
Representative Wilson remarked that numbers in the out
years were usually estimates, especially when it came to
tax credits, because it depended who cashed the credits in.
She asked why the fiscal note did not include a future cost
projection.
Mr. Alper responded that the original version of the fund
cap fiscal note had included negative numbers beginning in
FY 18, which had reflected the savings portion of the tax
credit bill. The comparable numbers on the bottom portion
of the chart would be about $35 million to $40 million in
FY 18; and about $60 million in FY 19. He explained that
how the numbers were presented was up to the Legislative
Finance Division, but there were negative numbers on the
operating side through grants and benefits in FY 18 through
FY 22; the numbers could be included in the note.
Representative Wilson was not in favor of paying $800
million in the current year. She believed the committee had
made it clear to the companies that it would be great if
the state could pay the amount in its entirety in the
coming year, but it was not the state's obligation. She
could not support reporting the bill out of committee with
an $800 million appropriation. She could support including
the $73 million with an explanation indicating the state
would owe the remainder in future years (i.e. FY 18 through
FY 20); she mentioned the possibility of paying the owed
credits with potential new revenue.
Vice-Chair Saddler referred to the total fiscal impact
shown on the fiscal note table. He asked if the amount
should be between $5 million to $20 million when backing
out the elimination of the Cook Inlet tax cap. He furthered
that the table would read $110 million to $170 million in
FY 20. He asked if it was accurate to subtract the high and
low.
Mr. Alper replied in the affirmative.
Representative Edgmon recapped his understanding of the
actions taken on the CS during the current meeting. He
summarized that the CS included a 2 percent hardening of
the tax floor, which represented the vast majority of the
savings; and the Cook Inlet cap was removed. He surmised
that the 2 percent hard floor would lower the hundreds of
millions of dollars in obligations that would be stacking
up in short order (as they were already doing).
Mr. Alper answered that the hardening of the floor at 2
percent would bring in a bit more to the state, but it did
not change the credit spend obligation. He pointed to the
bottom half of the table and explained that the largest
portion reflected the Cook Inlet credit changes (i.e.
reduction in the NOL and WLE credits). He pointed to FY 19
related to the NOL and QCE/WLE credits, which included
savings of $10 million to $20 million and $15 million to
$25 million respectively. Below that information the table
included savings and spending related to the comingling of
the GVR with the NOL credit, which was where the reduction
in the future year's credit spend would be. He remarked
that it was a somewhat esoteric technical correction made
on the North Slope. The hardening of the floor would bring
in a bit more revenue. He directed attention to the bottom
three rows of the table related to non-refundable carry-
forward credits. He detailed that the top of the three rows
related to operating loss credits in the possession of
major producers, which were not cashable; by law they were
not able to get money for their credits. The numbers ($618
million in FY 17, $751 million in FY 18, $732 million in FY
19, and so on) represented credits the companies would hold
until the price of oil increased; at that point the
companies would use the credits to offset their taxes.
Under the CS the companies would be carrying more credits
forward because the credits would not be offsetting the
floor so completely; they would only be offsetting half the
floor. The hardened 2 percent floor actually increased the
future liability of carry-forward credits. He pointed to
the second to last row ($676 million in FY 17, $941 million
in FY 18, $1.065 billion in FY 19), which became the
adjusted estimate for carry-forward credits.
9:11:51 PM
Representative Edgmon remained concerned that the CS did
not do enough. He detailed that there would be significant
obligations down the road, some of which were already in
place. He stated that he would not hold the bill up, but he
was not certain the committee had done the job it should
have done.
Representative Pruitt asked if the governor had originally
intended to have the $800 million or so in current
liability paid off in the coming year.
Mr. Alper answered that the governor's intent had been to
put a large sum of money from the Constitutional Budget
Reserve into the tax credit fund in advance of the
liability. The expectation had been that by the time the
credits ramped down later in 2016 that the obligation would
be about $1 billion.
Representative Pruitt asked how much the state would have
to pay if the legislature had decided to only pay off the
state's obligation for the current year.
Mr. Alper answered that the current year had an estimated
obligation of $700 million; the number had been reduced to
$500 million by the governor's veto, which left an
estimated $200 million of the FY 16 obligation unpaid. The
FY 16 obligation rolled forward into the FY 17 obligation;
therefore, the DOR spring forecast of $775 million included
$575 million in new obligation and $200 million in past
obligation.
Representative Pruitt stated that the veto had put off
paying $200 million of the state's obligation for the
current year [FY 16]. He surmised that because the CS
lowered the floor to 2 percent it would potentially mean
the state would push off liability into the future. He
asked how future liabilities would be managed. He wondered
if the legislature would have to appropriate money annually
to cover the amount owed in the given year, which would
increase the unfunded liability. He remarked that the
governor had at least a couple more years in his role to
make the decision. Alternatively, he asked if the governor
would ask the legislature to appropriate the full amount
the state owed to the tax credit fund in order to pay
obligations as they came due.
Mr. Alper answered that he could not speak for the governor
and how he may choose to approve appropriations in future
years. The appropriation number in the budget would
decrease because of the reforms made by the CS. He referred
to the $400-plus million estimate in two years; the number
would be reduced by roughly $50 million to $60 million
based on the changes in the bill. Additionally, the
hardening of the floor caused the non-refundable carry-
forward NOL credits (held by the major oil companies) to
increase. The companies would offset as much as they could
against their taxes; the amount would be small as long as
oil prices remained low. He detailed that the amount would
be 2 percent of the gross, the per barrel credit would get
companies to 4 percent, and the NOL credits would get
companies from 4 percent down to 2 percent. He furthered
that once the price of oil increased there would be a delay
of 3 months to a year from the increase in the price of oil
and when material amounts of production tax revenue were
generated. He explained that first, companies would use the
carry-forward credits to reduce their production taxes.
9:16:49 PM
Representative Wilson did not understand why the DOR fiscal
note (OMB Component Number 2894) included the $800 million.
She did not believe the amount was part of the bill. She
agreed that it reflected the state's outstanding debt and
included the $73 million the state owed in FY 17.
Mr. Alper answered that it was not part of the bill. For FY
17, when factoring out the $73 million in the operating
budget, the state's credit obligation was about $702
million; the number in the fiscal note was $800 million,
but the bill did not specify there would be an
appropriation.
Representative Wilson understood. She believed that
normally fiscal notes for a piece of legislation were
related to the legislation. She opined that the amount the
state chose to pay in the operating and/or capital budgets
did not follow the bill. She believed the notes associated
with the bill should reflect the actual savings or costs it
contained. She stressed that the bill did not include
anything to account for the particular fiscal note. She
wanted to avoid confusion about what the committee was
voting on for the bill versus an obligation outside the
bill.
9:18:42 PM
Co-Chair Neuman believed the fiscal note was appropriate
because it represented the state's debt for oil and gas tax
credits. He relayed that the credit number had not been
known when the operating budget when the committee had
worked on the operating budget. He continued that the
committee had just received the final number the previous
week; it was currently the first opportunity the committee
had to look at past debt the state owed. The DOR
commissioner had confirmed in a conversation earlier in the
day that the $800 million would be about what it would cost
to cover the state's debt associated with the credits. He
believed it was very important for the state to pay the
debt. He specified that the credits were part of the
contracts companies had entered into with lending agencies.
He thought it was logical for the note to travel with the
bill; it also paid off the state's debt on credit owed [$73
million in FY 17].
Representative Pruitt asked for verification that with the
fiscal note, the $4.1 billion budget passed by the
legislature increased to $5 billion.
Co-Chair Neuman replied in the negative. He believed the
cost would be outside the operating budget and would come
from the CBR. He did not believe the cost was intended to
be imbedded in the budget cycle.
Representative Pruitt respectfully disagreed. He reasoned
that if the amount was added to the budget for FY 17 it
would be a part of the recently passed budget. He detailed
that the $900 million plus the $4.1 billion would make the
budget $5 billion. He wanted to be sure to be clear when
talking to people that the budget was $5 billion.
Co-Chair Neuman replied that the operating budget produced
by the legislature to run state government services was
$4.1 billion.
Representative Pruitt remarked that the operating budget
had included the $73.4 billion for the tax credits. He
reasoned that the fiscal note added another $800 million
and it was not possible to separate the two items. He
believed it was appropriate to include the amount. He added
that the operating budget included the $73 million;
therefore, he estimated the total budget at about $4.9
billion with the inclusion of the remaining tax credits
owed.
Representative Gara OBJECTED to the fiscal note from the
House Finance Committee [OMB Component Number 2894]. He
believed a fiscal note should reflect action taken in a
bill.
9:22:55 PM
AT EASE
9:24:05 PM
RECONVENED
Co-Chair Thompson relayed that even though the fiscal note
reflected what the state owed, it could be dealt with at a
later time. Therefore, he WITHDREW fiscal note OMB
Component Number 2894.
Co-Chair Neuman MOVED to REPORT CSHB 247(FIN) out of
committee as amended with individual recommendations and
the forthcoming fiscal notes.
Representative Gara OBJECTED.
Co-Chair Thompson clarified that fiscal note OMB Component
Number 2894 had been withdrawn.
Representative Gara did not want to slow down the bill and
thought it should be voted on by the entire House of
Representatives. He remarked that a number of members had
voiced their desire to see a different bill in various
ways. He did not support the current version of the bill.
He detailed that filling a $4.4 billion deficit required a
significant number of components. He remarked that some of
the components were not universally liked within the
legislature. He believed some components in the governor's
bill needed fixing, but it had also included savings and
revenue of around $500 million. However, the CS brought
savings of potentially $90 million. He did not know where
the legislature would locate the extra $400 million. He
surmised that it would require adding the amount to future
debt, the Permanent Fund Dividend, an income tax, or other,
which he was not thrilled about. He detailed that the bill
had contained the easiest savings it had in a way that
could protect the state and treat industry fairly. He
committed to doing his best to work with other legislators
over the upcoming days to hopefully come out with a better
bill.
Representative Edgmon thanked Co-Chair Thompson and his
staff Jane Pierson for their work on the bill. He reasoned
the bill was complicated from every possible angle. He
believed the first thing was to set a fair structure that
provided the proper incentive to the primary industry
funding government in Alaska since 1980. He spoke to doing
what the state should be doing in terms of the massive
revenue shortfall and trying to find a balance point. He
was not sure the bill found the appropriate balance. He
remarked that the bill would go to the other body and that
more work would be done. He noted that perhaps some of the
work would be delayed when the legislative workgroup
provided a more comprehensive understanding of the give and
take, cause and effect, and how actions in the bill would
look over time.
Representative Kawasaki thanked Co-Chair Thompson for his
communication on the bill and the procedures. He discussed
that the governor's bill had come to the committee with
major disagreements between committee members about whether
the policy was good or bad. The governor's expected fiscal
impact had been around $800 million savings in the first
year, $440 million in year two, and $400 million in year
three. He remarked that the savings coming out of the CS
were significantly different ($24 million in the first
year, $140 million the next year, and $160 million the
following year); he did not believe the bill had anywhere
near the budget impact he or the governor had anticipated.
He detailed that in the coming year the state would be
giving $135 million more in credits than it received in
royalties and production tax.
Representative Kawasaki continued that the committee had
heard from enalytica and Legislative Budget and Audit
analysts who had relayed the taxes provided by the state in
the Cook Inlet region in particular were nothing more than
a subsidy since the state did not levy a profit-based
production tax in the region; he referred to an associated
report filed in 2015 related to the Cook Inlet subsidies.
He stressed the need for locating cuts in the budget and
believed that the bill seemed like a reasonable starting
point. He noted that many legislators had talked about
revenue options in recognition of the huge deficit facing
the state. He wholeheartedly agreed that action needed to
be taken. He had thought the committee would agree on the
bill. He highlighted bills pertaining to income tax and a
restructuring of the Permanent Fund, which would hurt and
impact individual families. He explained that it was very
hard for him to justify supporting any of those measures
when Cook Inlet and North Slope producers were held
harmless in the budget cycle in the future. He had hoped
the bill would be better. He did not support the bill.
9:33:04 PM
Representative Wilson believed the legislature needed to
decide if the state was or was not open for business. She
recalled a past Institute of Social and Economic Research
(ISER) presentation, which had shown potential revenue and
how the state's budget gap would continue to increase. The
ISER presentation had illustrated that investment by the
oil and gas industry was changing because the industry had
known if the gap became large enough the state would look
to it for reprieve. She observed that the industry had been
correct. She reasoned that everyone had to pay and the
industry had been paying. She asked members where they
thought the state's money had been coming from. She
answered that the funds had come from the oil industry. She
addressed gas, which had been primarily utilized by
companies bringing up more oil; there had been some things
to help Southcentral and Interior Alaska also benefitted
because much of its electricity came from the area. She was
disappointed that there had been no explanation of all of
the changes in the CS. She referred to the final amendment,
which had fixed an error in the bill. She was concerned
there may be other mistakes existing in the current version
of the bill. She remarked that no industry or public
testimony had been heard on the current bill version, which
she believed was considerably different and contained
numerous policy changes.
Representative Wilson was primarily disappointed that she
kept hearing the oil and gas industry needed to pay. She
stressed it was likely the legislature would not be looking
for more money from industry if government spending was not
out of control and the state's deficit was not as high. She
furthered it was the reason the legislature was not looking
for as much out of the mining or fishing industry or the
box stores. She did not see anything easy about the bill.
She referred numerous testimony in opposition to changing
the tax structure. She emphasized that the bill would
change the tax structure again, but she did not know to
what extent. She believed many of the committee members
agreed for different reasons that their expectations on the
bill had not been met. She remarked that many legislators
had fought hard for SB 21 because they believed in it; she
still believed in it. She had heard the number of projects
had and production had increased. She noted there had been
job losses on the North Slope on in the past year. She
spoke to her son's experience working for an independent
contractor on the North Slope and about how much had
changed in the past year. She detailed that people were
getting laid off throughout the state. She stressed that
individual families were being effected by the budget and
by the current bill. She did not believe oil prices would
remain at their current low prices. She added that she did
not believe it would rebound to $100 per barrel, but it
would improve over current prices. She believed the
committee had just sent a major message to the oil and gas
industry that the state would change the tax system every
time it got into an issue.
9:36:59 PM
Representative Gattis stated that there were already over
1,000 people hurting due to the loss of jobs. She spoke to
changing another tax regime. She remarked that the
legislature had only impacted between 50 and 75 state jobs.
She stated that the majority of the individuals working or
who had worked on the North Slope were from the Mat-Su. She
stressed that no business would have the ability to stay in
business as the state continued to change the tax system.
She recognized the state was in a budget deficit, but she
did not believe the legislature was being equal across the
board. She struggled with the bill and would allow it to
move, but reluctantly.
Vice-Chair Saddler spoke to the complex nature of Alaska's
oil and gas tax system. He considered the substantial
mission facing the committee, which included addressing the
policy goals of maintaining a net profits tax at a time
when there was no profit to tax, maintaining production,
continuing to obtain royalties to pay the state's bills,
incentivizing oil exploration and production at present,
and preventing oil from drying up in the future. In terms
of cash flow, he observed it was difficult to resist the
desire to get short-term revenue, but it would mean selling
the future short at long-term costs. He remarked that each
person came to their own conclusions about what the bill
was, which were all accurate. He agreed that the bill did
not do everything everyone wanted it to do (e.g. it would
not pay all of the state's bills and did not do everything
possible to incentivize production). He surmised that if
everyone was unhappy it may be a good mix. He reasoned that
the bill would be addressed by other legislators as well.
He noted that the bill was only one element of a complete
response to the unprecedented oil price decline.
9:40:30 PM
Representative Guttenberg thanked Co-Chair Thompson and his
staff for their work on the legislation. He discussed that
the price of oil had collapsed worldwide. He noted that
economists had stated it may represent the end of "oil as
king." He discussed that the oil companies working in
Alaska were some of the richest corporations in the world.
He emphasized that the companies were investing in Alaska
because of the state's oil and gas resources; resources
making the companies rich. He disputed the claim that oil
field workers and the support industry were being laid off
because of what the legislature was doing, albeit the
legislature would be blamed for it. He believed the workers
were being laid off due to the price of oil. He surmised
the oil industry was renegotiating its contracts with
suppliers and subcontractors due to the decline in oil
price. He noted there was nothing wrong with the strategy;
it was what happened [in times of price decline]. He
remarked that apparently it was wrong if the legislature
did the same thing. He stressed it was difficult to support
a bill asking Alaskans to subsidize the oil industry. He
equated the credits to grants and the legislature did not
know what they were actually doing. He continued that the
legislature received aggregate numbers from the
departments. He referred to an earlier conversation on the
House floor about separation of powers. He noted the
committee was relying on the departments to do significant
work. He reasoned at the end of the day the legislature had
to do the people's work. He stressed that the state's
natural resources were the people's resources. He did not
support subsidizing companies to take oil out of the
ground. He believed credits offered to companies were much
too high. He continued that the legislature was asking
Alaskans to come to the table and he believed the bill
should be fair and equitable for Alaskans and industry. He
opined that the bill was not at that place and he
questioned whether it would get there.
Co-Chair Thompson thanked his staff his staff Jane Pierson
for all of her work. Additionally, he thanked Pete Ecklund
(staff to Representative Mark Neuman) and others. He noted
the challenging work and observed the bill was probably not
where it should be. He highlighted that SB 21 had been
passed when oil was around $100 or more per barrel. He
detailed that no one had modelled oil prices at $60 or
below to determine what would happen. He did not believe
the situation would be different if there was a different
tax regime; he believed it was the economics. He stressed
that no one had predicted oil prices would drop as low as
$26 per barrel. He opined that oil companies would still
lay down their rigs because they did not want to pull oil
out of the ground and sell it for $26 per barrel. He
continued that there was a long way to go. He questioned
whether the committee had done the right thing in the bill
and reasoned that maybe it had not. However, the committee
had put tremendous work and thought into the legislation;
it was not possible to satisfy everyone. He thanked the
committee for its work.
Representative Gara WITHDREW his OBJECTION.
Representative Munoz thanked Mr. Alper for his work. She
relayed that he had helped the committee understand the
complexities of the state's tax system.
There being NO further OBJECTION, CSHB 247(FIN) was
REPORTED out of committee with individual recommendations
and with one new zero impact fiscal note from the
Department of Natural Resources and one new fiscal impact
note from the Department of Revenue.
Co-Chair Thompson discussed the meeting for the following
day.
ADJOURNMENT
9:45:56 PM
The meeting was adjourned at 9:45 p.m.
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