Legislature(2011 - 2012)HOUSE FINANCE 519

03/17/2011 01:30 PM FINANCE


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01:46:49 PM Start
01:49:27 PM HB110
03:29:59 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
Dr. Scott Goldsmith, University of Alaska's
Institute for Social & Economic Research
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 17, 2011                                                                                            
                         1:46 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:46:49 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 1:46 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Mark Neuman                                                                                                      
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Reggie Joule                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Mike Hawker; Senator Cathy Giessel; Dr.                                                                          
Scott Goldsmith, Institute of Social and Economic Research,                                                                     
University of Alaska Anchorage.                                                                                                 
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
                                                                                                                                
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Vice-chair Fairclough discussed the merits and success of                                                                       
the "Pick. Click. Give." program and thanked Co-Chair                                                                           
Thomas for introducing the bill.                                                                                                
                                                                                                                                
HOUSE BILL NO. 110                                                                                                            
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
1:49:27 PM                                                                                                                    
                                                                                                                                
DR.  SCOTT  GOLDSMITH,  INSTITUTE  OF  SOCIAL  AND  ECONOMIC                                                                    
RESEARCH (ISER), UNIVERSITY OF  ALASKA ANCHORAGE, provided a                                                                    
PowerPoint    presentation   titled    "Alaska's   Petroleum                                                                    
Industry:  Transformative, But  is it  Sustainable?"(copy on                                                                    
file). The  presentation had two  objectives, the  first was                                                                    
to   demonstrate  the   transformative   impact  that   that                                                                    
petroleum  had on  the economy;  the second,  was to  answer                                                                    
whether petroleum  as an industry  could sustain  itself and                                                                    
the  prosperity that  Alaskans had  come to  expect for  the                                                                    
next 50 or more years. He  looked back 50 years to provide a                                                                    
view of Alaska's  economy at statehood. He  explained it was                                                                    
important to help  understand how far Alaska had  come as an                                                                    
economy; however, it was difficult  for many Alaskans to see                                                                    
back to 1959 because they were  either too young or had more                                                                    
recently arrived  to the state. Approximately  90 percent of                                                                    
the  state's citizens  had only  known  the current  Alaskan                                                                    
economy and  viewed it  as "normal."  He emphasized  that it                                                                    
was anything  but normal.  He provided  a list  of important                                                                    
features  that pertained  to Alaska's  economy at  statehood                                                                    
("1960 Economic Structure," Page 2):                                                                                            
                                                                                                                                
   · Small: 90 thousand jobs                                                                                                    
   · Thin: Limited support businesses                                                                                           
   · Seasonal: Summer private jobs 2x winter                                                                                    
   · Transient: Seasonal and temporary                                                                                          
   · Federal Domination: 1/2 jobs with fed                                                                                      
   · Infrastructure underdeveloped                                                                                              
   · Limited Tax Base                                                                                                           
   · Poor: Income 10-20% below US average                                                                                       
                                                                                                                                
Dr.  Goldsmith explained  that the  economic characteristics                                                                    
on Page 2 were largely  the result of the economic structure                                                                    
of  the time  or the  "economic base."  The activities  that                                                                    
brought money  into Alaska from  "outside" were  the driving                                                                    
forces behind the economy. Although  there was a belief that                                                                    
natural resources  provided the  economic foundation  of the                                                                    
state, in  1960 it was possible  to trace 80 percent  of all                                                                    
market jobs directly or indirectly  to the activities of the                                                                    
federal  government. The  federal government  provided money                                                                    
for military payroll, for a  large construction program that                                                                    
supported  private  construction  and  other  infrastructure                                                                    
workers, and for  the management of federal  lands and other                                                                    
programs. He  delineated that most  trade and  services jobs                                                                    
were supported by the payrolls  of federal workers and their                                                                    
private  infrastructure partners.  Seafood  was the  largest                                                                    
private  natural resource  industry; however,  together with                                                                    
mining and  timber, natural resources only  accounted for 15                                                                    
percent  of  jobs on  an  annual  basis. He  expounded  that                                                                    
because  fishing   was  seasonal  that  most   activity  was                                                                    
concentrated  during the  summer  months.  Tourism was  only                                                                    
just beginning in 1960 and  there were not many other things                                                                    
going on.                                                                                                                       
                                                                                                                                
Dr.  Goldsmith  presented  a   depiction  of  what  Alaska's                                                                    
current economy would have looked  like without the presence                                                                    
of the petroleum industry ("Alaska Today: No Oil" Page 3):                                                                      
                                                                                                                                
   · Small: 187 thousand jobs                                                                                                   
   · Thin                                                                                                                       
   · Seasonal                                                                                                                   
   · Transient                                                                                                                  
   · Federal domination                                                                                                         
   · Infrastructure underdeveloped                                                                                              
   · Limited tax base                                                                                                           
   · Poor: Income 10-20% below US average                                                                                       
                                                                                                                                
Dr. Goldsmith  delineated that although no  two people would                                                                    
conduct the experiment  in the same way,  the broad outlines                                                                    
of the  absence of petroleum  on the economy were  clear. He                                                                    
shared that  there would  be 187,000  jobs, which  was twice                                                                    
the number  in 1960;  however, the other  characteristics of                                                                    
the economy  would be very similar  to those at the  time of                                                                    
statehood.  He explained  that the  economic characteristics                                                                    
would be  similar because the  economic structure  would not                                                                    
have   changed  significantly   (Page   4:  "2007   Economic                                                                    
Structure  Without  Petroleum").   The  economy  would  have                                                                    
benefited  from the  following:  private  sector job  growth                                                                    
that  would  have  come  from   natural  resources  such  as                                                                    
fishing, mining,  and timber; the  rise in tourism;  and the                                                                    
state's location  that would have  resulted in an  air cargo                                                                    
industry. Growth would not have  come easily and the economy                                                                    
would still  be dominated  by federal spending  for military                                                                    
and civilian  programs. He contended that  without petroleum                                                                    
Alaska  would currently  look similar  to  Maine, which  was                                                                    
dependent  on   natural  resources,  tourism,   and  federal                                                                    
spending,   with   a   limited    tax   base,   and   ageing                                                                    
infrastructure and population.                                                                                                  
                                                                                                                                
1:54:45 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith  reasoned that  Alaska's economic  picture did                                                                    
not look more  positive because it was  an "island" economy.                                                                    
He moved to  Page 5 titled "Alaska: An  Island Economy," and                                                                    
discussed that  similar to other islands,  Alaska was remote                                                                    
and  had a  small population.  The state's  remoteness meant                                                                    
that the  cost of transporting  goods in from  suppliers and                                                                    
out to  markets was  high compared  to other  locations, and                                                                    
the state's small population meant  that there was a lack of                                                                    
"economies of scale" in the  production of goods for export.                                                                    
The  two   characteristics  put  Alaska  at   a  competitive                                                                    
disadvantage  that was  almost impossible  to overcome  with                                                                    
the  exception of  some "niche"  markets that  could include                                                                    
seafood,  tourism, and  mining. He  detailed that  strategic                                                                    
location  could also  work to  an island's  advantage. Niche                                                                    
markets  were  not  typically large  enough  to  financially                                                                    
sustain  an entire  population;  therefore, subsistence  and                                                                    
foreign aid  were also necessary  for the well being  of the                                                                    
economy. He  asserted that Alaska  was an island  economy at                                                                    
statehood, and because of geography,  had remained an island                                                                    
economy.                                                                                                                        
                                                                                                                                
Dr.  Goldsmith  discussed  three components  of  petroleum's                                                                    
contribution to  the state's economy  that doubled  the size                                                                    
of  the  economy  and   significantly  changed  the  state's                                                                    
characteristics.  First, was  its  contribution through  oil                                                                    
patch  activity ("Petroleum  Jobs: Oil  Patch Related"  Page                                                                    
6).  He  relayed that  a  recent  study had  estimated  that                                                                    
42,000 jobs  were a result  of oil patch activities  such as                                                                    
exploration,  development,  production, transportation,  and                                                                    
processing. He opined that the  study had underestimated the                                                                    
number  of jobs  by approximately  20,000 for  a variety  of                                                                    
reasons. He  elaborated that the petroleum  payroll was much                                                                    
larger than  the job  count suggested. The  graph on  Page 7                                                                    
compared the petroleum payroll (in  black) to other resource                                                                    
industries such  as fishing and  tourism that were  the next                                                                    
largest  payrolls on  the graph  and directly  employed many                                                                    
more workers  ("Petroleum Jobs:  Oil Patch  Payroll (Million                                                                    
$)"). Petroleum  jobs were the  highest paying in  the state                                                                    
and  averaged over  $100,000 per  year, whereas  the average                                                                    
annual tourism  wage was $29,000. He  contended that because                                                                    
many tourism jobs lasted approximately  four months that the                                                                    
wage  for each  individual  job was  closer  to $10,000.  He                                                                    
communicated  that high  wages meant  high purchasing  power                                                                    
filtered through the rest of  the economy and supported jobs                                                                    
in the trade and service sectors.                                                                                               
                                                                                                                                
Dr.    Goldsmith   discussed    that   petroleum's    second                                                                    
contribution to  the economy  was due to  a small  number of                                                                    
petroleum  producer jobs,  such  as BP,  Conoco, and  Exxon,                                                                    
that sustained a  larger number of oil and  gas support jobs                                                                    
in  drilling companies,  etc.  The  smaller businesses  were                                                                    
then   able   to  support   a   more   expansive  range   of                                                                    
transportation,    engineering,   warehousing,    utilities,                                                                    
financial,  legal,  fabrication,  and  camp  businesses.  He                                                                    
explained  that  the  petroleum industry  job  configuration                                                                    
resembled  an  upside down  pyramid  and  that the  top  was                                                                    
represented  by  businesses  that   were  supported  by  the                                                                    
payrolls from  the large oil  companies at the  bottom (Page                                                                    
8: "Petroleum  Jobs: Oil Patch  Support"). On Page  9 titled                                                                    
"General Fund  Oil Revenues," he  discussed that  the second                                                                    
component of the petroleum contribution  to the economy came                                                                    
from  revenues  that  it  generated   for  state  and  local                                                                    
governments.  The  red bars  on  the  graph represented  oil                                                                    
revenues  that  were  currently $5  billion  to  $6  billion                                                                    
annually and the black line  represented the petroleum share                                                                    
of  total  general fund  revenues,  which  was currently  90                                                                    
percent. He relayed that 90  percent was an underestimate of                                                                    
oil's importance to state general  fund revenues. The number                                                                    
was closer  to 95 percent  with the inclusion  of activities                                                                    
that  supported  petroleum  production,  such  as  corporate                                                                    
taxes paid by drillers,  construction and engineering firms,                                                                    
etc.  He  reported  that 98  percent  of  Alaska's  resource                                                                    
revenues had come from petroleum since statehood.                                                                               
                                                                                                                                
2:00:45 PM                                                                                                                    
                                                                                                                                
Representative  Gara  wondered  how  many  support  industry                                                                    
companies  paid   corporate  taxes.  He  discussed   that  a                                                                    
significant  number  of  companies,  doctors,  lawyers,  and                                                                    
businesses in  the state avoided  paying corporate  taxes by                                                                    
avoiding the  "C corporation" classification.  Dr. Goldsmith                                                                    
could not provide  a specific number. He  disclosed that the                                                                    
share  of businesses  that  actually  paid corporate  income                                                                    
taxes was  less than 10  percent. The Department  of Revenue                                                                    
(DOR)  did   not  provide  a  breakout   that  showed  which                                                                    
companies were paying corporate income tax.                                                                                     
                                                                                                                                
Dr.  Goldsmith addressed  Page  10  titled "Petroleum  Jobs:                                                                    
Funded  by Petroleum  Revenues."  He discussed  that the  $5                                                                    
billion to  $6 billion annual  oil revenues created  jobs in                                                                    
state  and local  government,  construction,  and for  other                                                                    
businesses that  worked with the state  government. The jobs                                                                    
tended  to be  year-round and  high paying  and the  payroll                                                                    
filtered  through  the  economy to  provide  support  sector                                                                    
jobs.  He estimated  that approximately  50,000 jobs  in the                                                                    
state  were  attributable  to state  spending  of  petroleum                                                                    
revenues  and  with  the inclusion  of  the  Permanent  Fund                                                                    
Dividend (PFD), the total was close to 60,000.                                                                                  
                                                                                                                                
Dr.  Goldsmith  introduced  the  third  category  he  called                                                                    
"spinoffs from oil wealth"  ("Spinoffs from Petroleum," Page                                                                    
11). He  mentioned four spinoffs  that accounted  for 60,000                                                                    
additional jobs: a light tax  burden on resource industries;                                                                    
public   spending  in   support  of   economic  development;                                                                    
services  to senior  citizens;  and  seasonal stability.  He                                                                    
moved to  Page 12 titled "Alaska  Petroleum Revenues," where                                                                    
he estimated that  60,000 jobs had been created  as a result                                                                    
of the  $157 billion in  oil revenues and that  the majority                                                                    
went  to  businesses,  to the  reduction  of  household  tax                                                                    
burdens,  and to  expand public  spending. Approximately  24                                                                    
percent had  been saved and  had consisted of  PFD deposits,                                                                    
accumulations  in the  Constitutional  Budget Reserve  (CBR)                                                                    
and in the general fund.  Page 13 titled "Petroleum Spinoff:                                                                    
Lite  Tax Burden  on Households,"  showed  that the  current                                                                    
household tax burden in the  absence of petroleum could have                                                                    
been $2,300 per  capita based on national  average rates for                                                                    
state income tax and state sales tax.                                                                                           
                                                                                                                                
Dr. Goldsmith  turned to Page 14  titled "Petroleum Spinoff:                                                                    
Lite  Resource  Industry  Tax   Burden."  He  observed  that                                                                    
household  taxes  would  not   generate  enough  revenue  to                                                                    
support a level of public  spending that compared with other                                                                    
states. The  resource industries  would receive  pressure to                                                                    
increase  their  contribution  to  the  cost  of  government                                                                    
because it was  not possible to tax  the federal government.                                                                    
He  expounded  that  the non-petroleum  resource  industries                                                                    
would  have  to  increase  their  tax  contribution  by  400                                                                    
percent above current levels. He  opined that an increase of                                                                    
that  amount  was unrealistic  but  that  an increase  above                                                                    
current levels would  be likely. He added  that higher taxes                                                                    
tended  to drive  away business  and  without petroleum  the                                                                    
non-petroleum resources  would have suffered.  The existence                                                                    
of petroleum  had taken some  of the  tax burden off  of the                                                                    
shoulders of  the other  resources. He moved  on to  Page 15                                                                    
titled  "Petroleum Spinoff:  Enhanced  Public Spending."  He                                                                    
detailed that  increased public spending  had been  good for                                                                    
business and for Alaskans' quality  of life. Public spending                                                                    
had  reduced   costs  and   increased  customer   bases  for                                                                    
businesses  and had  helped  to keep  labor  costs down  for                                                                    
employers.  The  goods  and services  made  the  state  more                                                                    
appealing to  senior citizens  who used  to leave  the state                                                                    
when  they  retired,  but  currently  made  up  the  fastest                                                                    
growing  segment of  the population.  He equated  seniors to                                                                    
year-round  tourists that  did not  leave during  the winter                                                                    
months.                                                                                                                         
                                                                                                                                
2:07:27 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith  discussed the  fourth important  spinoff from                                                                    
petroleum  called seasonal  stability  (Page 16:  "Petroleum                                                                    
Spinoff:  Stability").  He  reiterated his  earlier  remarks                                                                    
that  when Alaska  first became  a  state there  had been  a                                                                    
significant  number of  jobs  in the  summer,  but that  the                                                                    
economy   essentially  closed   down  in   the  winter.   He                                                                    
communicated  that under  the circumstances  businesses that                                                                    
supported  the resource  industry had  a hard  time becoming                                                                    
established. Page  16 showed  the monthly  employment levels                                                                    
from  2007  in the  seafood  dominated  Bristol Bay  Borough                                                                    
(upper left graph) and the  tourism dominated Denali Borough                                                                    
(lower left graph). He highlighted  that employment was high                                                                    
in the boroughs only during  the summer months and that non-                                                                    
residents accounted for a large  share of the jobs. He added                                                                    
that  the  seasonal industries  were  still  a part  of  the                                                                    
state's economy;  however, oil  and public sector  jobs were                                                                    
year-round and supported businesses throughout the state.                                                                       
                                                                                                                                
Dr.   Goldsmith   addressed   Page  17   titled   "Petroleum                                                                    
Transforms Alaska  Economy." He  pointed out  that currently                                                                    
oil  patch, petroleum  revenue,  and  spinoff jobs  combined                                                                    
made up half  of the 375,000 jobs in Alaska.  A pie chart on                                                                    
the right-hand side  of the page showed  that petroleum made                                                                    
Alaska's  economic  structure   much  more  diversified.  He                                                                    
explained  that the  graph illustrated  the  concept of  the                                                                    
"three   legged  stool,"   with  one-third   represented  by                                                                    
petroleum  jobs,   one-third  represented  by   the  federal                                                                    
government jobs, and one-third  represented by the remainder                                                                    
of  jobs including  the seafood,  mining, timber,  and other                                                                    
industries.  The  economic  characteristics were  much  more                                                                    
positive:                                                                                                                       
                                                                                                                                
   · Depth; lots of support businesses                                                                                          
   · Non-seasonal                                                                                                               
   · Less transient                                                                                                             
   · No federal domination                                                                                                      
   · Rich infrastructure                                                                                                        
   · Large tax base                                                                                                             
   · Prosperous                                                                                                                 
                                                                                                                                
Dr.  Goldsmith turned  to Page  18: "A  Troubling Indicator:                                                                    
Oil Barrels per  Capita." The graph indicated  in per capita                                                                    
terms that during the  positive economic transformation, the                                                                    
production  of oil  had been  declining.  He explained  that                                                                    
news  of the  decline  had  been slow  to  emerge for  three                                                                    
reasons. First,  despite the  decline, state  employment had                                                                    
continued  to  grow;  therefore, people  had  underestimated                                                                    
petroleum's  importance for  the economy.  Second, the  high                                                                    
price  of oil  had  diverted attention  from the  production                                                                    
decline.  Third,  official   state  production  and  revenue                                                                    
projections only  looked forward  one decade;  therefore, it                                                                    
was easy to pretend that  the future looked "rosy" ("Looking                                                                    
Ahead: The Official Story (Extended),"  Page 19). A graph on                                                                    
Page  19  showed the  production  decline  that would  occur                                                                    
beyond 2020.  He questioned  whether the  production decline                                                                    
was a signal that Alaska  would return to its island economy                                                                    
status and  that revenue,  employment, and  spinoff benefits                                                                    
would decline.                                                                                                                  
                                                                                                                                
2:11:56 PM                                                                                                                    
                                                                                                                                
Representative   Doogan  asked   what  the   purple  section                                                                    
represented on Page 18: "A  troubling Indicator: Oil Barrels                                                                    
per Capita" [Note:  The "purple" section appears  in blue in                                                                    
the   presentation  available   on  BASIS].   Dr.  Goldsmith                                                                    
answered that the purple section  represented Cook Inlet and                                                                    
the section  in gray represented  the North Slope.  He added                                                                    
that at the peak there were  four barrels per capita per day                                                                    
and that currently there was one barrel per day.                                                                                
                                                                                                                                
Dr. Goldsmith  discussed five commonly  suggested strategies                                                                    
related  to the  decline beginning  on Page  20: "Strategies                                                                    
Moving  Forward #1:  Gasline." He  argued that  none of  the                                                                    
strategies  that  he  would   cover  would  have  sufficient                                                                    
strength  to   offset  the  petroleum  decline.   The  first                                                                    
strategy  was the  commercialization  of  gas. He  contended                                                                    
that a gasline  would generate jobs, but  its revenues would                                                                    
not be  able to  replace oil revenues  because the  tax base                                                                    
for gas was much smaller than the  tax base for oil on a BTU                                                                    
basis.  The chart  on Page  20 compared  the current  market                                                                    
value of  oil that was  $14.00 and gas  that was $6.00  on a                                                                    
one million  BTU basis. He  explained that the  energy value                                                                    
of oil was  worth much more than that  of gas. Additionally,                                                                    
it would  cost approximately $1.00 to  transport one million                                                                    
BTU of  oil through TAPS [Trans-Alaska  Pipeline System] and                                                                    
approximately $4.00  to transport gas through  a $30 billion                                                                    
to  $40 billion  gasline.  He underlined  that  there was  a                                                                    
significant  difference between  the  value of  oil and  the                                                                    
value of gas  and that revenues from a gasline  would not be                                                                    
able to offset the decline in petroleum revenue.                                                                                
                                                                                                                                
2:15:39 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith  relayed that  the second  strategy identified                                                                    
that  non-petroleum  natural  resources would  fill  a  void                                                                    
created  by an  oil production  decline: "Strategies  Moving                                                                    
Forward #2  Non-Petroleum Natural  Resources" (Page  21). He                                                                    
looked  at job  growth over  the  past 20  years in  mining,                                                                    
tourism,  and seafood  and applied  the same  growth looking                                                                    
forward 20  years; the  majority of  the very  modest growth                                                                    
was in  tourism. Mining had  a growth of 1000  jobs, tourism                                                                    
had  growth of  10,000  jobs, and  there  was no  additional                                                                    
growth in the seafood industry  job market. He used the page                                                                    
to indicate  that the other  economic drivers did  not "pack                                                                    
the revenue punch" that oil  did. He reported that the state                                                                    
would  need to  bring  in  $2,000 per  tourist  in order  to                                                                    
replace $3 billion of petroleum revenues.                                                                                       
                                                                                                                                
Co-Chair Stoltze  asked whether  taxes comprised  the $2,000                                                                    
per tourist  figure. Dr. Goldsmith  replied that  it related                                                                    
to taxes and fees.                                                                                                              
                                                                                                                                
Dr.  Goldsmith noted  that  it was  more  than each  tourist                                                                    
currently spent during their visit  to the state. The figure                                                                    
would equate  to a tax of  $20 per salmon and  $4,000 in tax                                                                    
per one ounce of gold.                                                                                                          
                                                                                                                                
Co-Chair Stoltze asked whether it  would equate to $4,000 in                                                                    
tax  on gold  that  was currently  selling  for $1,400.  Dr.                                                                    
Goldsmith replied in the affirmative.                                                                                           
                                                                                                                                
Co-Chair Stoltze  remarked that  the numbers  were sobering.                                                                    
Dr.  Goldsmith agreed.  He reminded  the committee  that the                                                                    
figures  were representative  of  the amount  that would  be                                                                    
required  from  tourists to  make  up  the $3  billion  from                                                                    
petroleum revenue.                                                                                                              
                                                                                                                                
Co-Chair Stoltze wondered  how much the state  would have to                                                                    
charge for  a pack of  cigarettes. Dr. Goldsmith  thought it                                                                    
would be around $1,000.                                                                                                         
                                                                                                                                
2:18:34 PM                                                                                                                    
                                                                                                                                
Representative Doogan asked for  clarification that it would                                                                    
be necessary to  charge an amount equal to  the revenue that                                                                    
was  generated  by oil.  Dr.  Goldsmith  replied that  using                                                                    
tourism as the  only resource to make up for  the loss of $3                                                                    
billion in  oil revenue would  mean that $2,000  per tourist                                                                    
would be necessary.                                                                                                             
                                                                                                                                
Representative Doogan  determined that  the number  would be                                                                    
lower  when mining,  tourism,  and  seafood industries  were                                                                    
combined to share the amount generated by petroleum.                                                                            
                                                                                                                                
Co-Chair Stoltze clarified that  the chart was hypothetical.                                                                    
Mr. Goldsmith agreed.                                                                                                           
                                                                                                                                
Dr.  Goldsmith  discussed the  third  strategy  on Page  22:                                                                    
"Strategies   Moving   Forward  #3:   Traditional   Economic                                                                    
Development." He  observed that  Alaskans had been  lured in                                                                    
the  past  into the  pursuit  of  value added  and  economic                                                                    
diversification development  strategies that  were typically                                                                    
supported by outside  experts and that usually  had not been                                                                    
successful. Examples  included, fish processing  plants, the                                                                    
Alpetco  petrochemical  plant,  aluminum  reduction,  server                                                                    
farms, dairy farming, etc. He  reported that past experience                                                                    
and economic  realities would not and  should not discourage                                                                    
economic  boosters;  however,  the   state  should  be  very                                                                    
cautious  about  spending  its  revenues  on  projects  that                                                                    
promised  to replace  petroleum. A  Google search  on Alaska                                                                    
economic development strategic plans  had 374,000 results or                                                                    
one   for  every   two  Alaskans.   He  emphasized   that  a                                                                    
significant amount of  economic development strategizing had                                                                    
occurred, but that it had  not produced any revenues for the                                                                    
state general fund.                                                                                                             
                                                                                                                                
Dr.  Goldsmith  examined the  fourth  strategy  on Page  23:                                                                    
"Strategies  Moving  Forward  #4:  Speculatively  Invest  in                                                                    
Infrastructure."   The  strategy   was  modeled   after  the                                                                    
Norwegian   economy   and    argued   that   investment   in                                                                    
infrastructure  would   reduce  the  price  of   energy  and                                                                    
transportation  and  open  the   door  for  profitable  non-                                                                    
petroleum  resource  investment opportunities.  He  observed                                                                    
that it was dangerous to  invest in something that could not                                                                    
provide certainty of a long-term  return in the form of jobs                                                                    
or revenues  to the state.  He addressed the  fifth strategy                                                                    
that  related to  the development  of the  state's renewable                                                                    
energy sources  on Page 24:  "Strategies Moving  Forward #5:                                                                    
Develop Renewable  Energy." The  strategy would be  good for                                                                    
the environment, help to stabilize  prices for consumers and                                                                    
businesses,    and     temporarily    generate    employment                                                                    
opportunities, but it would not create revenue for Alaska.                                                                      
                                                                                                                                
Dr. Goldsmith offered three possibilities  for the future of                                                                    
the state based on the  petroleum decline and the experience                                                                    
of the past 30 years (Page  25: "What is the Economic Future                                                                    
of  Alaska?").  The first  possibility  titled  "We Are  the                                                                    
Chosen Ones,"  was that Alaska's  luck had saved the  day in                                                                    
the past  with the  Prudhoe Bay oil  discovery and  high oil                                                                    
prices  and that  luck  would continue  in  the future.  The                                                                    
second possibility  titled "The Big Crash,"  recognized that                                                                    
the  mid-1980s oil  price crash  could happen  again in  the                                                                    
future and  have a devastating  impact on  Alaska's economy.                                                                    
The  third possibility  was titled  "The  Slow Squeeze."  He                                                                    
discussed  that  the  economy had  experienced  a  moderate,                                                                    
steady growth  in the  1990s, but that  flat oil  prices and                                                                    
falling production had diminished  oil revenues. Without the                                                                    
CBR  that was  used to  balance  the state's  budget in  the                                                                    
1990s,  dramatic budget  cuts and  tax increases  would have                                                                    
damaged the economy.  He opined that state  spending and the                                                                    
economy  could  drop off  in  the  event of  flattening  oil                                                                    
prices and diminished exploration and development.                                                                              
                                                                                                                                
2:25:11 PM                                                                                                                    
                                                                                                                                
Dr.  Goldsmith relayed  that there  was at  least one  other                                                                    
future  scenario  (Page  26: "Undiscovered  Potential  North                                                                    
Slope  Resources:   Technically  Recoverable").   Under  the                                                                    
fourth scenario  the state was  still rich in  petroleum and                                                                    
the  production decline  figures  were  based on  production                                                                    
only  on state  lands  in  Cook Inlet  and  the North  Slope                                                                    
between  the Colville  and Canning  Rivers. Production  from                                                                    
the state  lands had been  approximately 16  billion barrels                                                                    
and there  were DOR  forecasts of  4.5 billion  barrels that                                                                    
remained  in known  and unknown  fields; however,  the total                                                                    
market   value  of   the  16   billion  barrels   was  worth                                                                    
approximately  $500 billion  in 2010  and the  average price                                                                    
was between  $25 and $30  per barrel. He professed  that the                                                                    
market value of the remaining  oil may be approximately $450                                                                    
billion;  therefore the  state  may have  been only  halfway                                                                    
through its inventory.                                                                                                          
                                                                                                                                
Representative Hawker wondered about  the large dollar value                                                                    
for gas  that was shown on  Page 26. He believed  that there                                                                    
would need  to be a  substantial shift in  world commodities                                                                    
market prices  in order  to gain  a significant  increase in                                                                    
income  from gas.  He referred  to  Dr. Goldsmith's  earlier                                                                    
testimony that gas would not  replace oil and that currently                                                                    
gas prices  were approximately $4.  The cost of  getting the                                                                    
gas to  market was  close to $4,  which indicated  there was                                                                    
not  currently a  substantial margin  remaining in  gas. Dr.                                                                    
Goldsmith  responded  that between  technically  recoverable                                                                    
barrels of  oil and TCFs  [Trillion Cubic Feet] of  gas that                                                                    
the action  in the  short run  would be  in oil.  He relayed                                                                    
that  the state's  potential gas  resources were  impressive                                                                    
looking forward a couple of generations.                                                                                        
                                                                                                                                
Dr. Goldsmith continued to discuss  Page 26. He communicated                                                                    
that   the    4.5   billion   barrel   oil    estimate   for                                                                    
Colville/Canning (first  cell, middle  column of  the graph)                                                                    
was "conventional"  oil. In addition, there  were 34 billion                                                                    
to 35 billion  of technically recoverable barrels  of oil on                                                                    
federal  lands  including  ANWR  [Alaska  National  Wildlife                                                                    
Refuge],  OCS -  Beaufort [Outer  Continental Shelf],  OCS -                                                                    
Chukchi,  and  NPRA   [National  Petroleum  Reserve-Alaska].                                                                    
There were unconventional reserves  in heavy and viscous oil                                                                    
and  shale oil  that were  not  included on  the chart.  The                                                                    
chart showed that there was  still significant petroleum and                                                                    
gas development  potential on the North  Slope. He cautioned                                                                    
that it was  important to remember that the  movement of oil                                                                    
and  gas  to  market  was still  very  expensive  (Page  27:                                                                    
"Alaska's North Slope"). The market  price needed to support                                                                    
the high cost of transportation  in order for the production                                                                    
of the  potential resources to  occur. He  discussed several                                                                    
factors that  contributed to transportation  cost including,                                                                    
size,  distance,   and  physics.  He  elaborated   that  new                                                                    
conventional  production  on  state   lands  would  be  from                                                                    
smaller oil  fields that  lacked the  economies of  scale of                                                                    
Prudhoe  Bay.  Production  from federal  lands  would  occur                                                                    
farther away from  TAPS and OCS drilling  would be offshore.                                                                    
He   explained  that   heavy  and   viscous  oil   would  be                                                                    
technically challenging  to produce  and transport  and that                                                                    
shale  oil was  too  new to  speculate about.  Additionally,                                                                    
extracting  more  out of  the  legacy  fields would  involve                                                                    
expensive new technologies.                                                                                                     
                                                                                                                                
Co-Chair Stoltze noted that  Tom Barrett, President, Alyeska                                                                    
Pipeline Service  Company, would speak to  the committee the                                                                    
following day  and that the  committee should  inquire about                                                                    
the  challenges   of  moving   smaller  quantities   of  the                                                                    
different grades of oil.                                                                                                        
                                                                                                                                
Dr. Goldsmith continued  on Page 27 and  explained that some                                                                    
analysts believed  the costs  would be  too high  to justify                                                                    
further  production; however,  the  opportunity for  further                                                                    
production was  clearly available. He asked  what production                                                                    
of some of the oil and  gas could mean for jobs, income, and                                                                    
public revenues in the future  on Page 28 titled: "Daily Oil                                                                    
Production   per  Worker   (Barrels)."   He  conveyed   that                                                                    
historically, production per  employee had fallen (indicated                                                                    
on the  large graph),  but total  employment had  grown over                                                                    
time (shown on  the small graph on the lower  left). The bad                                                                    
news was that the cost of  getting each barrel of oil out of                                                                    
the ground had  increased in terms of  worker time; however,                                                                    
the good  news was  that employment  had not  fallen despite                                                                    
production decline.                                                                                                             
                                                                                                                                
2:31:58 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith addressed  that in the future  it was possible                                                                    
that    development    of   additional    resources    could                                                                    
significantly add  to employment ("One  Petroleum Employment                                                                    
Projection,"  Page 29).  The graph  was a  petroleum related                                                                    
jobs projection  from a recent  ISER study on  the potential                                                                    
impacts of OCS development on  employment from 2008 to 2050.                                                                    
It showed  that the employment generated  by OCS development                                                                    
could  impact  total  employment similarly  to  Prudhoe  Bay                                                                    
development and  span more than  a generation.  He discussed                                                                    
Page  30  titled: "How  to  Get  Those Petroleum  Jobs."  He                                                                    
relayed that  the jobs were  not guaranteed and in  order to                                                                    
maximize the chance  of achieving the jobs  it was important                                                                    
to work to open federal  lands to development including OCS,                                                                    
ANWR, and NPRA, which would  help make the national security                                                                    
and the economic health of  the nation better. He noted that                                                                    
the  argument that  the oil  would not  be available  for 10                                                                    
years  had been  made in  the past  and had  been incorrect.                                                                    
Additionally,  it  was important  to  adopt  a rational  and                                                                    
positive  attitude  with  the   oil  industry  to  cultivate                                                                    
continued development on state lands.                                                                                           
                                                                                                                                
Representative  Hawker asked  how  the oil  and gas  economy                                                                    
would  sustain   the  substantial   decline  in   daily  oil                                                                    
production per  worker (shown on  Page 28) with  an increase                                                                    
in 40,000 jobs  in oil field support (shown on  Page 29). He                                                                    
wondered  how   the  cost  per  barrel   was  impacted.  Dr.                                                                    
Goldsmith explained that the graph  on Page 29 only provided                                                                    
an  overlay of  the additional  jobs associated  with strong                                                                    
oil  and gas  development  over  the next  40  years in  the                                                                    
Chukchi  and Beaufort  Seas. He  clarified  that the  bottom                                                                    
purple  section  on  Page  29   represented  the  oil  field                                                                    
employment.                                                                                                                     
                                                                                                                                
Representative Hawker  asked whether  the purple  section on                                                                    
Page 29  that represented  direct employment  from petroleum                                                                    
was the  number that  correlated to  the previous  page. Dr.                                                                    
Goldsmith  replied   in  the  affirmative.  He   added  that                                                                    
everything on  top of the  oil field employment  was related                                                                    
to indirect jobs generated elsewhere  in the economy or jobs                                                                    
generated by the revenues from OCS activity.                                                                                    
                                                                                                                                
2:36:00 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   wondered  what  the   required  oil                                                                    
production per  worker would  be in  2020 when  factoring in                                                                    
the  charts from  Pages  28  and 29.  He  surmised that  the                                                                    
petroleum employment  projection on Page 29  increased up to                                                                    
10,000  in 2020.  Dr.  Goldsmith was  not  certain what  the                                                                    
number would  be in  2020. He opined  that the  prospects of                                                                    
the OCS  would have to  be large and  potentially profitable                                                                    
before  the  oil industry  would  invest  in production.  He                                                                    
believed that  the productivity per  worker in terms  of the                                                                    
oil produced  would be larger on  the big fields in  the OCS                                                                    
than  it was  currently  on production  of  state lands.  He                                                                    
doubted it  would reach the productivity  level that Prudhoe                                                                    
Bay had at the beginning of its lifetime.                                                                                       
                                                                                                                                
Representative Hawker  surmised that  the chart  titled "One                                                                    
Petroleum     Employment    Projection,"     presumed    the                                                                    
"hypothetical"   that  the   state  would   bring  on   very                                                                    
significant   volumes    of   production    from   currently                                                                    
undeveloped   and   prohibited  resources.   Dr.   Goldsmith                                                                    
responded  that he  was correct.  Dr. Goldsmith  pointed out                                                                    
that the number of jobs  generated by oil patch activity was                                                                    
currently approximately  60,000; however, the chart  on Page                                                                    
29  showed  that  the  peak  was  approximately  50,000.  He                                                                    
explained  that the  chart showed  a picture  of the  upside                                                                    
potential that would be presented  given OCS development and                                                                    
economically  producible  discoveries.  He  added  that  the                                                                    
analysis had  begun two  and a half  years earlier  and that                                                                    
the schedule for  OCS had slipped two and a  half years, but                                                                    
the picture was the same.                                                                                                       
                                                                                                                                
Representative  Doogan asked  whether the  chart on  Page 29                                                                    
showed  the  total  jobs generated  by  oil  production.  He                                                                    
remarked that the chart was  confusing and made it look like                                                                    
there  were 50,000  direct employment  jobs from  petroleum.                                                                    
Dr.  Goldsmith explained  that the  chart had  four separate                                                                    
sections  and  that  the  bottom  section  shown  in  purple                                                                    
represented  the  jobs that  were  directly  related to  the                                                                    
production, exploration, development,  and transportation of                                                                    
oil. The analysis that had  been conducted a couple of years                                                                    
earlier included gas production because  the cost of gas had                                                                    
been higher and projected to increase.                                                                                          
                                                                                                                                
Representative Doogan wondered whether  the bulk of the jobs                                                                    
on  the   chart  were   support  positions.   Dr.  Goldsmith                                                                    
responded  that  they  were various  support  functions  and                                                                    
included drillers, truckers,  engineering firms, in addition                                                                    
to all of  the jobs in Anchorage that  resulted from workers                                                                    
buying homes and spending money in urban areas, etc.                                                                            
                                                                                                                                
Representative  Doogan  wondered  whether it  would  include                                                                    
workers such as baristas, etc. Dr. Goldsmith responded yes.                                                                     
                                                                                                                                
2:40:40 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith voiced  that the current challenge  was how to                                                                    
get the petroleum jobs. He  asked whether the development of                                                                    
resources  could generate  the public  revenues that  Alaska                                                                    
had  grown  accustomed  to ("Fiscal  Terms,"  Page  31).  He                                                                    
relayed that  the answer  was "no."  He used  a hypothetical                                                                    
oil  field  in the  "matrix"  on  Page 32  ("State  Revenues                                                                    
(million$/year): Hypothetical Field")  to determine what oil                                                                    
revenues would  be generated  from production  under various                                                                    
scenarios and conditions. He compared  a field on state land                                                                    
(far left hand column)  that generated $838 million annually                                                                    
to a federal  field in the OCS more than  six miles offshore                                                                    
(far right  hand column) that generated  $0.00. He clarified                                                                    
that  the  state would  receive  revenue  from the  economic                                                                    
activity; however,  it would have  to capture  revenues from                                                                    
onshore activity.                                                                                                               
                                                                                                                                
Vice-chair Fairclough wondered whether  he had done research                                                                    
to  determine  the  existence of  increased  exploration  on                                                                    
state versus  federal property following  the implementation                                                                    
of the  new tax [Alaska  Clear and Equitable  Share (ACES)].                                                                    
She had asked  the Department of Natural  Resources, but had                                                                    
not received a clear answer.  Dr. Goldsmith had not done any                                                                    
research. He  thought it  was possible  that the  Alaska Oil                                                                    
and Gas Conservation Commission had the data.                                                                                   
                                                                                                                                
Vice-chair Fairclough  was interested in analyzing  the ACES                                                                    
structure. She believed  that there had been  a migration of                                                                    
development  from  state  land  to  federal  land  that  had                                                                    
followed  the adoption  of ACES  in order  to avoid  the new                                                                    
tax.                                                                                                                            
                                                                                                                                
2:43:55 PM                                                                                                                    
                                                                                                                                
Dr.  Goldsmith focused  on the  ability  to maintain  public                                                                    
spending from  petroleum and jobs created  from the spending                                                                    
with  increased  oil  production and  employment  with  less                                                                    
petroleum  revenues ("Petroleum  Wealth  (Billion $),"  Page                                                                    
33). He  argued that  the way  people think  about petroleum                                                                    
revenue needed  to be changed  and that the state  could not                                                                    
continue to "mindlessly collect  the revenues, pat ourselves                                                                    
on the  back when  we put  a few dollars  away in  a savings                                                                    
account,  spend a  few dollars  when  we have  a short  term                                                                    
surplus, and just  hope for the best."  The petroleum wealth                                                                    
needed to  be inventoried and  managed as an asset.  Page 33                                                                    
showed  his present  value estimate  of the  state's wealth,                                                                    
which  was $126  billion that  consisted of  $45 billion  of                                                                    
financial assets  that were derived from  past revenues, and                                                                    
$81  billion  in potential  tax  and  royalty revenues  from                                                                    
undeveloped petroleum.  He discussed  how the  wealth should                                                                    
be managed  ("What is My  Annual Share," Page 34).  He cited                                                                    
the  common  belief  that   the  state's  natural  resources                                                                    
belonged to  all Alaskans;  with that  belief in  mind every                                                                    
Alaskan  should have  an equal  share of  the net  worth. He                                                                    
provided  a calculation  that  assumed  that Alaskans  cared                                                                    
about  all future  generations of  Alaskans, that  petroleum                                                                    
was annually growing one percent  sustained by the petroleum                                                                    
industry, and that future generations  of Alaskans would not                                                                    
be  richer  or  poorer   than  the  current  generation.  He                                                                    
calculated  that $7,200  was the  maximum  amount of  wealth                                                                    
that  could  currently  be   distributed  annually  to  each                                                                    
Alaskan,  while   the  value  for  future   generations  was                                                                    
maintained. He explained that with  a distribution of $7,200                                                                    
that each  Alaskan would receive  the same  amount, adjusted                                                                    
for  inflation,  each  year   in  perpetuity  until  another                                                                    
economic driver could replace petroleum jobs and revenues.                                                                      
                                                                                                                                
Dr.  Goldsmith  estimated  that the  state  could  spend  $5                                                                    
billion in the current year  and could preserve Alaska's net                                                                    
worth   for   future   generations   ("Wealth   Preservation                                                                    
Strategy:   Implementation  =   Spending  Cap,"   Page  35).                                                                    
Additional spending would need  to come from sources outside                                                                    
of  petroleum wealth.  He ascertained  that "if  spending is                                                                    
preserving our  net worth, then whatever  petroleum revenues                                                                    
are not  spent must go into  income generating investments."                                                                    
He  opined  that  movement  away  from  the  present  budget                                                                    
strategy  focused on  current  petroleum  revenues would  be                                                                    
required  in  response  to  a  shift  to  net  asset  fiscal                                                                    
management. He  highlighted several advantages of  the shift                                                                    
that  included:  the ability  to  avoid  an economic  crash,                                                                    
which otherwise  seemed inevitable; the fiscal  burden would                                                                    
not be passed  on to the following  generation, because each                                                                    
generation  would  receive an  equal  share  of the  wealth;                                                                    
those who  benefited from public expenditures  also paid for                                                                    
the  public expenditures;  the state  would  show the  world                                                                    
that it could handle its  wealth responsibly; and the fiscal                                                                    
policy  and wealth  management  would  be de-coupled,  which                                                                    
would take the  pressure off of oil and  other industries to                                                                    
perpetually provide revenues to fund the budget.                                                                                
                                                                                                                                
2:48:05 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith  presented a  chart that  showed how  a wealth                                                                    
management plan  would work over time  ("Wealth Preservation                                                                    
Strategy:  The Long  View," Page  36). It  spanned from  the                                                                    
date  of first  oil production  on the  North Slope  in 1978                                                                    
when all  of the state's wealth  was "in the ground"  to the                                                                    
future date  of 2050  when all  of the  oil would  have been                                                                    
produced. He explained that under  the strategy that the net                                                                    
asset value of  the state's combined assets  would grow over                                                                    
time at one percent with  the population. The green arrow at                                                                    
the top  of the chart  showed where the state  was currently                                                                    
with its  wealth split between  oil in the ground  and money                                                                    
in the bank.                                                                                                                    
                                                                                                                                
Dr. Goldsmith concluded  that the answer to  the question of                                                                    
whether the  state's petroleum  economy was  sustainable was                                                                    
"maybe" ("Can  We Do It,"  Page 37). He detailed  that there                                                                    
was  no  guarantee  that petroleum  could  sustain  Alaska's                                                                    
economy  for the  next 50  years and  that it  would require                                                                    
luck.  He  communicated  that  petroleum  offered  the  best                                                                    
chance for continued prosperity.  He emphasized that without                                                                    
a proactive stance,  the state would "be like  the frog, who                                                                    
doesn't realize  she is slowly  cooking in a pot  of boiling                                                                    
water."  In the  past, the  state  had been  both smart  and                                                                    
lucky, but it needed to be  smarter as it could not count on                                                                    
good luck forever.  He  professed that Alaska needed to take                                                                    
the words of Yogi Berra to  heart, "the future ain't what it                                                                    
used to be."                                                                                                                    
                                                                                                                                
Representative Doogan wondered whether  the $7,200 figure on                                                                    
Page  34 was  reflective of  current spending  and what  the                                                                    
number  included. Dr.  Goldsmith  replied  that because  the                                                                    
state was  in a  surplus the  current spending  of financial                                                                    
assets  included   the  PFD   and  petroleum   revenues.  He                                                                    
explained that presently the state  did not spend all of the                                                                    
petroleum revenues  that were collected  due to  the current                                                                    
surplus  environment.  The  portion   that  was  spent  went                                                                    
towards funding the general fund.                                                                                               
                                                                                                                                
Representative Doogan  asked what would happen  in the event                                                                    
that the  state spent more  money than it brought  in during                                                                    
the present year. He wondered  whether the spending would be                                                                    
encompassed in  the $7,200  figure. Dr.  Goldsmith responded                                                                    
that in  order to maintain  the value of the  state's assets                                                                    
that any draw from the CBR  or general fund would need to be                                                                    
included  in the  figure. He  added that  in a  deficit year                                                                    
that  it would  be necessary  to  look at  a combination  of                                                                    
categories  that   included  petroleum  revenues   into  the                                                                    
general fund, draws  from the CBR and the  general fund, and                                                                    
the PFD.                                                                                                                        
                                                                                                                                
2:52:07 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough asked  whether the  $7,200 took  into                                                                    
account   the   PERS/TRS   [Public   Employees'   Retirement                                                                    
System/Teachers'    Retirement   System]    liability.   Dr.                                                                    
Goldsmith replied that it did  not take into account how the                                                                    
money  would be  spent; however,  if the  PERS/TRS liability                                                                    
caused the  spending out of  the general fund to  exceed the                                                                    
$7,200 limit it would become  necessary to locate money from                                                                    
elsewhere in order to maintain the value of the assets.                                                                         
                                                                                                                                
Representative Gara asked  what an income tax  would have to                                                                    
be to cover the current  operating budget of $8.9 billion in                                                                    
non-federal money  in order  to replace  oil revenue  in the                                                                    
event of production decline and eventual pipeline shutdown.                                                                     
                                                                                                                                
Co-Chair Thomas replied that it would be $16,000.                                                                               
                                                                                                                                
Co-Chair  Stoltze  asked whether  the  $16,000  was for  tax                                                                    
payers or per capita. Dr.  Goldsmith responded that the loss                                                                    
of the $8  billion to the economy would  cause a significant                                                                    
percentage  of  the  population   to  leave  the  state.  He                                                                    
explained that it  was necessary to determine  what the size                                                                    
of  the  economy would  look  like  in  the absence  of  oil                                                                    
revenue and  to then determine  what an income or  sales tax                                                                    
would have to be on the  remaining residents in order to pay                                                                    
for the same size of government.  He did not know the answer                                                                    
to that.  He referred to Page  13 showed that the  burden on                                                                    
households  in the  event of  a state  income and  sales tax                                                                    
would   be  $2300   per  capita.   Given  Alaska's   current                                                                    
population  the  total revenue  from  income  and sales  tax                                                                    
would  amount to  approximately $1.7  billion. He  explained                                                                    
that it  would be necessary to  multiply the tax by  four or                                                                    
five to reach the $8 billion figure.                                                                                            
                                                                                                                                
Representative Gara  wondered whether Alaska would  gain any                                                                    
ground  by putting  $2 billion  per year  into savings  in a                                                                    
scenario  in  which  the  state was  lucky  and  oil  prices                                                                    
remained high for five to ten years.                                                                                            
                                                                                                                                
2:56:55 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith  responded that the state  was currently lucky                                                                    
for the fourth  time in its history and that  it should take                                                                    
advantage of the  luck by saving as much as  possible for an                                                                    
uncertain future.                                                                                                               
                                                                                                                                
Co-Chair  Stoltze  wondered  whether Alaska  had  sufficient                                                                    
time  to save  enough money  in a  state retirement  account                                                                    
similar  to  a 401  K  before  the  oil was  gone,  assuming                                                                    
continued  spending and  increases.  Dr. Goldsmith  believed                                                                    
that with  forward thinking  by the  state it  was possible.                                                                    
The state  was currently blessed  with high oil  prices that                                                                    
provided the state with surpluses.  He communicated that DOR                                                                    
had projected very  high oil revenues for at  least the next                                                                    
ten years.                                                                                                                      
                                                                                                                                
Representative  Doogan   remarked  that  a  member   at  the                                                                    
committee table  had a proposal  to put another  $10 billion                                                                    
into the permanent fund.                                                                                                        
                                                                                                                                
Co-Chair  Stoltze asked  how much  the  state was  currently                                                                    
spending on state operations from the permanent fund.                                                                           
                                                                                                                                
Representative  Costello  wondered   whether  Dr.  Goldsmith                                                                    
agreed with  the bill's [HB  110] premise that ACES  and the                                                                    
progressivity  were discouraging  investment in  Alaska. She                                                                    
discussed that  the bill changed  how the  progressivity was                                                                    
applied  to the  current  tax structure  and  included a  40                                                                    
percent tax credit on infield  work. Dr. Goldsmith responded                                                                    
that incentives matter  and a tax regime that  was made more                                                                    
attractive to  the industry  would attract  more production.                                                                    
He  thought that  it was  difficult to  determine how  much,                                                                    
when, or how  it would increase production;  however, he was                                                                    
confident that it  would. He believed that  it was important                                                                    
to rethink the current oil  tax policy because ACES had been                                                                    
developed  in a  lower  priced environment  and the  current                                                                    
high  oil prices  were an  unchartered territory  that could                                                                    
continue  forever. He  elaborated that  it was  an important                                                                    
factor  to determine  what Alaska  could be  in relation  to                                                                    
itself and to other locations.                                                                                                  
                                                                                                                                
Representative  Costello wondered  whether the  marginal and                                                                    
effective tax shift to the  left caused by the progressivity                                                                    
adjustment  in HB  110 was  sufficient to  make Alaska  more                                                                    
competitive with world markets.                                                                                                 
                                                                                                                                
3:01:48 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith did not know how  far the shift to left should                                                                    
be. He  believed it would  be very beneficial for  the state                                                                    
to   know  what   the  opportunities   were   for  new   oil                                                                    
developments  on the  North Slope  and  what the  associated                                                                    
cost structures were.  He explained that it  was possible to                                                                    
statistically  get a  sense  of  how a  change  in tax  rate                                                                    
impacted production in  North Dakota where there  were a lot                                                                    
of  small and  easily accessible  drilling operations  going                                                                    
on;  however,  it was  more  challenging  in Alaska  because                                                                    
there were a  limited number of projects and it  was hard to                                                                    
know  how  far  to  move  the tax  structure  to  "kick"  an                                                                    
unprofitable well into profitability.                                                                                           
                                                                                                                                
Co-Chair   Thomas   wondered   whether   incentivizing   the                                                                    
production of new  oil with tax credits and  a different tax                                                                    
rate would spur oil and  job development. He did not believe                                                                    
it was necessary to lower the  tax rate for "old" legacy oil                                                                    
wells.  Dr. Goldsmith  replied that  ACES  had attempted  to                                                                    
address  that there  were some  very profitable  fields that                                                                    
could   withstand   a   higher  tax   rate;   however,   new                                                                    
developments  could  not  support  the same  high  rate.  He                                                                    
reasoned that  it was not  possible to balance the  two with                                                                    
one tax rate;  therefore, ACES had provided a  high tax rate                                                                    
combined with tax  credits. He believed that it  had been an                                                                    
interesting  concept,  but that  it  had  not been  entirely                                                                    
successful. He  relayed that it was  necessary to compromise                                                                    
between taxing a  high rate for current  revenues and taxing                                                                    
a lower rate for long-term revenues.                                                                                            
                                                                                                                                
3:06:05 PM                                                                                                                    
                                                                                                                                
Representative  Edgmon wondered  how long  it would  take to                                                                    
put together a composite  economic picture that used present                                                                    
value  calculations, inflation  adjustments, and  population                                                                    
trends. He recognized  that Alaska was in  a tough situation                                                                    
but  it  was  necessary   to  consider  the  state  spending                                                                    
aspects.  Dr.  Goldsmith  asked  for  clarification  on  the                                                                    
question.                                                                                                                       
                                                                                                                                
Representative  Edgmon  asked  how  long it  would  take  to                                                                    
compile a report  that included a timeline  that showed when                                                                    
the state  would need  to dip into  savings and  the formula                                                                    
programs that  required state support, using  the assumption                                                                    
that  there  would  be  a  reduction  to  oil  taxes  and  a                                                                    
subsequent $1 billion  to $2 billion revenue  shortfall as a                                                                    
backdrop. Dr.  Goldsmith did  not think  it would  take very                                                                    
long.  He recommended  the Office  of Management  and Budget                                                                    
(OMB)  10-year report  that used  DOR  10-year forecast  and                                                                    
overlaid it  with a  forecast of  general fund  spending. He                                                                    
believed  the report  was a  very useful  tool and  that the                                                                    
forecast should  be pushed  out beyond  10 years  given that                                                                    
under  current  assumptions  that there  would  be  economic                                                                    
surpluses for the  next 10 years. He  explained that looking                                                                    
farther  than  10  years  into  the  future  with  different                                                                    
revenue regimes  and expenditure growth rates  would help to                                                                    
provide  a fuller  and richer  picture that  indicated where                                                                    
the vulnerability was.                                                                                                          
                                                                                                                                
Representative  Edgmon wanted  a model  that projected  into                                                                    
the  future  that  also   provided  information  on  current                                                                    
implications, available  savings, and liquid  assets without                                                                    
the use  of Permanent  Fund earnings  or tax  increases that                                                                    
would  allow  the state  to  function  while it  waited  for                                                                    
further oil development.                                                                                                        
                                                                                                                                
3:10:13 PM                                                                                                                    
                                                                                                                                
Representative  Gara  referred  to Dr.  Goldsmith's  comment                                                                    
that ACES had a high tax  rate. When ACES had been developed                                                                    
it  had  been  explained  that  a lower  tax  rate  on  less                                                                    
profitable fields and  a higher tax rate  on more profitable                                                                    
ones  was  accomplished  with  a 25  percent  tax  rate  and                                                                    
progressivity that did not kick-in  until each field had $30                                                                    
worth of  profit. Dr. Goldsmith  believed that he  was right                                                                    
and that ACES had a number of "interesting" features.                                                                           
                                                                                                                                
Representative   Hawker   wondered    what   thoughts   were                                                                    
underlying  Mr.  Goldsmith's  characterization  of  ACES  as                                                                    
"interesting." Dr. Goldsmith responded  that one of the most                                                                    
interesting things was  the way that ACES  attempted to deal                                                                    
with the challenge  of determining how to  tax legacy fields                                                                    
at  a high  rate and  new development  at a  lower rate.  He                                                                    
believed that  the fact  that it  was an  economic challenge                                                                    
made it interesting.                                                                                                            
                                                                                                                                
Representative  Hawker  asked   for  verification  that  Mr.                                                                    
Goldsmith thought  that ACES attempted to  tax legacy fields                                                                    
at  a higher  rate  and  new fields  at  a  lower rate.  Dr.                                                                    
Goldsmith  agreed, but  did not  claim  to be  an expert  on                                                                    
ACES.                                                                                                                           
                                                                                                                                
Representative Hawker  wondered why the state  would want to                                                                    
tax  an already  "stressed" legacy  field at  a higher  rate                                                                    
than  a young  and "vigorous"  field. He  believed that  the                                                                    
saying "the  best place to  find oil  was in an  oil field,"                                                                    
may have been inconsistent  with Mr. Goldsmith's analysis of                                                                    
ACES. He  discussed that the  cost of  additional production                                                                    
on  mature legacy  fields was  much higher  on a  per barrel                                                                    
basis.  Dr. Goldsmith  replied  that  squeezing another  one                                                                    
percent out of a field like  Prudhoe Bay or Kuparuk would be                                                                    
the equivalent  to developing a  new satellite or  finding a                                                                    
new field. He believed that  it would be beneficial to apply                                                                    
new  technology to  the existing  fields,  which would  have                                                                    
comparable  to much  higher marginal  costs  than new  field                                                                    
development.  He  opined  that   the  tax  structure  should                                                                    
incentivize  the  higher  costs  on the  legacy  fields.  He                                                                    
explained  that  a  legacy field  that  had  existing  daily                                                                    
production of $80  per barrel that increased to  $120 held a                                                                    
profit that  was not  reflected by an  increase in  cost. He                                                                    
delineated that  in a  situation in  which the  sole concern                                                                    
related to  current revenues that the  knowledge of "perfect                                                                    
information" would  allow the  state to  set tax  rates that                                                                    
would "skim off" as much excess profit as possible.                                                                             
                                                                                                                                
3:16:41 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  wondered  whether the  state  should                                                                    
currently skim as much "take"  as possible or whether it was                                                                    
wiser  to  moderate  the short-term  skim  for  a  long-term                                                                    
sustained  skim.  Dr.  Goldsmith  believed  that  the  state                                                                    
should  not  try  to  maximize the  skim  because  the  risk                                                                    
associated  to activities  in  the oil  patch  tended to  be                                                                    
overlooked.  Aside from  the issue  of the  ability for  the                                                                    
state's tax rate  to compete with other  locations, the rate                                                                    
of return needed to be  higher to compensate for the extreme                                                                    
risk associated  with investing large amounts  of capital on                                                                    
activities that may  or may not pay off in  the short-run or                                                                    
long-run.                                                                                                                       
                                                                                                                                
Representative   Doogan   thought   that   Dr.   Goldsmith's                                                                    
presentation  had gotten  much  more  sophisticated and  had                                                                    
changed from  30 years earlier. Dr.  Goldsmith remarked that                                                                    
Alaska  had experienced  a significant  amount of  good luck                                                                    
over the years. He looked  back towards the beginning of oil                                                                    
production when the  state had expected to get  a maximum of                                                                    
10  billion  barrels of  oil  in  Prudhoe Bay  and  Kuparuk;                                                                    
however,  the state  was looking  at a  20 year  to 30  year                                                                    
lifetime for the oil industry  and there had been 16 billion                                                                    
barrels of  oil produced on  the North Slope that  was still                                                                    
going  strong. With  luck and  good planning  the state  was                                                                    
looking  at  enough  remaining   petroleum  to  sustain  the                                                                    
economy for many generations.                                                                                                   
                                                                                                                                
Representative  Edgmon  wondered  what   a  forecast  for  a                                                                    
downward  curve in  federal spending  in  Alaska would  look                                                                    
like. Dr. Goldsmith remarked that  federal funding was going                                                                    
down to  approximately $60 million  per year  for particular                                                                    
areas  such as  the Denali  Commission and  clean water  and                                                                    
sewer. He detailed  that it would be necessary  to work very                                                                    
hard  to maintain  future funding  for the  state's highways                                                                    
and  airports,  which were  big  contributors  to the  state                                                                    
capital budget  each year. He  relayed that a  future change                                                                    
to the formula  for highway funding would  be very important                                                                    
for the  state to be  concerned with. Military  spending was                                                                    
the other big  uncertainty; however, it had held  up well in                                                                    
the past few years.                                                                                                             
                                                                                                                                
3:23:15 PM                                                                                                                    
                                                                                                                                
Vice-chair Fairclough  wondered whether he was  tracking the                                                                    
decline  in earmarks  and the  evident decline  in resources                                                                    
from  Washington  D.C.  that had  been  provided  by  former                                                                    
Senator Ted  Stevens (the "Stevens' Effect").  Dr. Goldsmith                                                                    
replied he  did try  to track money  coming into  the state;                                                                    
however,  the  federal  reporting  was  really  "lousy."  He                                                                    
relayed that  earmarks only  accounted for  approximately $8                                                                    
billion  to $9  billion per  year in  total federal  dollars                                                                    
provided  to  Alaska  and the  funds  were  divided  between                                                                    
capital and  operating grants, social  security, retirement,                                                                    
military, and non-profits.                                                                                                      
                                                                                                                                
Vice-chair Fairclough  wondered whether  there was a  way to                                                                    
track  money that  came into  the  state for  the Bureau  of                                                                    
Indian Affairs and tribal entities  and to determine whether                                                                    
funds were dropping  for these areas as  well. Dr. Goldsmith                                                                    
replied that in  theory there was a way to  track the funds,                                                                    
but  the  tracking  that occurred  in  Washington  D.C.  was                                                                    
inadequate.                                                                                                                     
                                                                                                                                
Vice-chair Fairclough wondered whether  he had any advice to                                                                    
help policy  makers gain public engagement  and support from                                                                    
Alaskans on the development of  a proactive plan to save and                                                                    
protect  the  next  generation's  future.  She  thanked  Dr.                                                                    
Goldsmith   for   participating   in   the   fiscal   policy                                                                    
subcommittee working groups.                                                                                                    
                                                                                                                                
3:27:17 PM                                                                                                                    
                                                                                                                                
Dr. Goldsmith  responded that it  was important to  make the                                                                    
message simple  and to pound  the message home.  He believed                                                                    
that the "three legged stool"  analysis provided a clear and                                                                    
simple message that was easy to understand.                                                                                     
                                                                                                                                
Vice-chair  Fairclough remarked  that zero  production times                                                                    
$250 per barrel equaled taxes for Alaskans.                                                                                     
                                                                                                                                
HB  110  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
3:29:59 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 3:29 PM.                                                                                           
                                                                                                                                

Document Name Date/Time Subjects
HB110 ISER UofA HFIN 03172011PDF.pdf HFIN 3/17/2011 1:30:00 PM
HB 110
CSHB110-NEW FN DNR-DOG-3-11-2011.pdf HFIN 3/17/2011 1:30:00 PM
HB 110