Legislature(2013 - 2014)HOUSE FINANCE 519

04/06/2013 09:00 AM FINANCE

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09:04:44 AM Start
09:05:26 AM SB21
12:34:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 12:15 p.m. Today --
Heard & Held
- Bill Presentation, Fiscal Note Overview
Scheduled But Not Heard
<Pending Referral>
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 6, 2013                                                                                            
                         9:04 a.m.                                                                                              
9:04:44 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 9:04 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lindsey Holmes                                                                                                   
Representative Scott Kawasaki, Alternate                                                                                        
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative David Guttenberg                                                                                                 
ALSO PRESENT                                                                                                                  
Representative  Beth Kerttula;  Michael Pawlowski,  Advisor,                                                                    
Petroleum  Fiscal  Systems,  Department  of  Revenue;  Susan                                                                    
Pollard, Oil,  Gas, and Mining  Section, Department  of Law;                                                                    
Joe  Balash,  Deputy  Commissioner,  Department  of  Natural                                                                    
CSSB 21(FIN) am(efd fld)                                                                                                        
          OIL AND GAS PRODUCTION TAX                                                                                            
          CSSB 21(FIN) am(efd fld) was HEARD and HELD in                                                                        
          committee for further consideration.                                                                                  
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)                                                                                    
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     providing a  tax credit against the  corporation income                                                                    
     tax  for   qualified  oil  and  gas   service  industry                                                                    
     expenditures; relating  to the  oil and  gas production                                                                    
     tax rate; relating  to gas used in  the state; relating                                                                    
     to  monthly installment  payments  of the  oil and  gas                                                                    
     production tax; relating to oil  and gas production tax                                                                    
     credits for  certain losses and  expenditures; relating                                                                    
     to  oil and  gas  production  tax credit  certificates;                                                                    
     relating  to  nontransferable   tax  credits  based  on                                                                    
     production;  relating to  the  oil and  gas tax  credit                                                                    
     fund; relating  to annual  statements by  producers and                                                                    
     explorers;    establishing    the     Oil    and    Gas                                                                    
     Competitiveness  Review  Board; and  making  conforming                                                                    
9:05:26 AM                                                                                                                    
Representative Costello MOVED to  ADOPT the HCS CSSB 21(RES)                                                                    
as a working  document. There being NO OBJECTION,  it was so                                                                    
9:06:39 AM                                                                                                                    
MICHAEL  PAWLOWSKI,   ADVISOR,  PETROLEUM   FISCAL  SYSTEMS,                                                                    
DEPARTMENT   OF   REVENUE,   provided   the   Power   Point,                                                                    
"Department  of Revenue  Sectional Review  HCS CSSB  21(RES)                                                                    
April 5, 2013" (copy on file).                                                                                                  
9:07:30 AM                                                                                                                    
AT EASE                                                                                                                         
9:07:57 AM                                                                                                                    
Co-Chair Stoltze  requested that  members to  hold questions                                                                    
until the end of each section.                                                                                                  
Mr. Pawlowski  turned to Slide  2, "Main  Provisions", which                                                                    
listed the  items of discussion  in the order they  would be                                                                    
     •Interest Rate for Delinquent Tax Payments and Refunds                                                                   
     of Overpayments of Taxes                                                                                                 
     •Income Tax Credit for Qualified Oil and Gas Service                                                                     
     Industry Expenditures                                                                                                    
     •Production Tax Rate - 33%                                                                                               
     •Repeal of Progressivity                                                                                                 
     •Gross Value Reduction                                                                                                   
          o Establishes 20 % reduction  from the gross value                                                                    
          at  the point  of production  for North  Slope oil                                                                    
          and gas produced from                                                                                                 
          1) new units,                                                                                                         
          2) new participating areas in existing units and,                                                                     
          3) expanded acreage.                                                                                                  
     •Tax Credits                                                                                                             
          o Eliminates  current 20% capital  expenditure tax                                                                    
          credit for North Slope after December 31, 2013.                                                                       
          o Increases tax  credit for carried-forward annual                                                                    
          losses to  33% for the North  Slope after December                                                                    
          31, 2013.                                                                                                             
          o Establishes  a $5 per  barrel of oil  tax credit                                                                    
          for some production.                                                                                                  
          o   Establishes  a   sliding   scale  credit   for                                                                    
          production not qualified for the $5 credit.                                                                           
          o Extends small producer credit.                                                                                      
          o Revenue report to legislature in 2016                                                                               
          o Lease expenditures and joint interest billings                                                                      
          o Oil and gas infrastructure fund in AIDEA                                                                            
Mr. Pawlowski turned to Slide 3, "Interest Rate Delinquent                                                                      
Taxes." He noted that members could find the provision on                                                                       
Page 3, lines 9 through 19 of the bill:                                                                                         
     * Sec. 5. AS 43.05.225 is amended by adding a new                                                                          
     subsection to read:                                                                                                        
          (b) On and after January 1, 2014, unless                                                                              
          otherwise provided,                                                                                                   
                (1) when a tax  levied in this title becomes                                                                    
               delinquent, it  bears interest in  a calendar                                                                    
               quarter  at  the  rate  of  three  percentage                                                                    
               points above the annual rate                                                                                     
                charged  member banks  for  advances by  the                                                                    
               12th  Federal  Reserve  District  as  of  the                                                                    
               first   day   of    that   calendar   quarter                                                                    
               compounded quarterly  as of  the last  day of                                                                    
               that quarter;                                                                                                    
               (2) the  interest rate is  12 percent  a year                                                                    
                     (A) delinquent fees payable under AS                                                                       
                    05.15.095(c); and                                                                                           
                     (B) unclaimed property that is not                                                                         
                    timely paid or delivered, as allowed by                                                                     
                    AS 34.45.470(a).                                                                                            
Mr. Pawlowski continued with Slide 3:                                                                                           
     Amends AS 43.05.225(1)  to set the interest  rate at 3%                                                                  
     points above  the annual rate charged  member banks for                                                                    
     advances   by  the   12th   Federal  Reserve   District                                                                    
     compounded quarterly.                                                                                                      
          oCurrently, the  interest rate  is the  greater of                                                                    
          either  5% points  above the  annual rate  charged                                                                    
          member  banks for  advances  by  the 12th  Federal                                                                    
          Reserve  District  OR  the   annual  rate  of  11%                                                                    
          compounded quarterly.                                                                                                 
     •Eliminates the 11% alternate annual rate.                                                                                 
     •Applies to many tax types.                                                                                                
     •Applies against the State for refunds of overpayments                                                                     
     of taxes.                                                                                                                  
     •Interest rate change as of January 1, 2014.                                                                               
Mr. Pawlowski  stated that if  a company overpaid  its taxes                                                                    
the  state  would  owe  the  company a  refund,  and  if  it                                                                    
underpaid, the state would be  owed the difference according                                                                    
to  the  interest  rate.  He relayed  that  the  bill  would                                                                    
simplify the tax structure so  that the rate would no longer                                                                    
be  a  greater than  or  less  than  scenario, but  a  fixed                                                                    
floating  percentage rate  of 3  percent  above the  federal                                                                    
funds rate. He said that  the rate applied to many different                                                                    
tax types.                                                                                                                      
9:11:50 AM                                                                                                                    
Representative  Holmes  asked  whether the  new  rate  could                                                                    
cause businesses to withhold money  because more money could                                                                    
be made elsewhere.                                                                                                              
Mr. Pawlowski  replied that upstream oil  and gas activities                                                                    
typically had high  hurdle rates. He said  that overpaying a                                                                    
tax  in  order  to  get  a  refund  from  the  state,  at  3                                                                    
percentage  points  above  a  lower  amount,  would  not  be                                                                    
beneficial  to  companies.   Conversely,  the  3  percentage                                                                    
points,  was  close to  what  the  Internal Revenue  Service                                                                    
(IRS) applied and seemed more feasible.                                                                                         
Representative  Gara  discussed   when  Alaska's  Clear  and                                                                    
Equitable Share (ACES) had been  passed people had expressed                                                                    
concern that companies would  not accurately report profits.                                                                    
He wondered if removing the  11 percent rate would take away                                                                    
the incentive  for companies  to accurately  report profits.                                                                    
He  asked whether  more  underpayments  or overpayments  had                                                                    
been made.                                                                                                                      
Mr.  Pawlowski answered  that  historically  there had  been                                                                    
more  underpayments  than  overpayments. He  said  that  the                                                                    
concern about  accurate profit reporting had  been discussed                                                                    
in  the previous  committee. He  warned that  being punitive                                                                    
for things that  were often outside of  a company's control,                                                                    
when the state had not  had the ability to execute decisions                                                                    
quickly, could be stifling to the business climate.                                                                             
9:14:30 AM                                                                                                                    
Co-Chair Stoltze  asked if  the tax  provision was  the same                                                                    
provision employed in the Carlson case.                                                                                         
SUSAN POLLARD,  OIL, GAS, AND MINING  SECTION, DEPARTMENT OF                                                                    
LAW,  responded  the  tax  provision was  an  issue  in  the                                                                    
Carlson case;  the Supreme Court  had to decide  whether the                                                                    
provisions of AS  43.55.225 would apply to  the damage award                                                                    
in  the  case.  The  decision  in  the  case  was  that  the                                                                    
provision would not apply.                                                                                                      
Co-Chair  Stoltze understood  that the  case of  the Carlson                                                                    
decision the  interest rate had  been egregiously  placed on                                                                    
the state.                                                                                                                      
Ms. Pollard  replied that the  state had argued that  the 11                                                                    
percent rate  in AS 43.05.225  did not apply to  the Carlson                                                                    
case. She  furthered that the  penalty provisions  were well                                                                    
within  statute  and  separately  assessed.  She  said  that                                                                    
unlike other  tax provisions where  a tax could  be settled,                                                                    
interest accrued and could not be compromised.                                                                                  
Co-Chair  Stoltze relayed  that  the  Carlson case  involved                                                                    
out-of-state fishermen  who had sued the  state because they                                                                    
believed  they  had  been  treated  unfairly  because  their                                                                    
licensure rate for participating  in exclusive use fisheries                                                                    
was higher than the rate for in-state fishermen.                                                                                
Co-Chair Stoltze  recognized Representative Kerttula  in the                                                                    
9:18:09 AM                                                                                                                    
Mr. Pawlowski highlighted Section 8 of the bill:                                                                                
Sec.  8. AS  43.20 is  amended by  adding a  new section  to                                                                    
     Sec. 43.20.049. Qualified oil  and gas service industry                                                                  
     expenditure credit.                                                                                                      
      (a) For a tax year  beginning after December 31, 2013,                                                                    
     a  taxpayer may  apply  a credit  against  the tax  due                                                                    
     under this chapter for a  qualified oil and gas service                                                                    
     industry expenditure  incurred in the state.  The total                                                                    
     amount of credit  a taxpayer may receive in  a tax year                                                                    
     may not  exceed the lesser  of 10 percent  of qualified                                                                    
     oil and  gas service industry expenditures  incurred in                                                                    
     the state during the tax year or $10,000,000.                                                                              
          (b) A taxpayer may not apply more than                                                                                
          $10,000,000 in tax credits under this section in                                                                      
          a  tax year.  A tax  credit  or portion  of a  tax                                                                    
          credit  under  this section  may  not  be used  to                                                                    
          reduce  the taxpayer's  tax  liability under  this                                                                    
          chapter  below  zero.  Any unused  tax  credit  or                                                                    
          portion of a tax credit  under this section may be                                                                    
          applied  in  later  tax  years,  except  that  any                                                                    
          unused tax credit  or portion of a  tax credit may                                                                    
          not  be carried  forward  for more  than five  tax                                                                    
          years immediately following the  tax year in which                                                                    
          the  qualified   oil  and  gas   service  industry                                                                    
          expenditures were incurred.                                                                                           
          (c)  An  expenditure  that is  the  basis  of  the                                                                    
          credit  under this  section may  not be  the basis                                                                    
               (1) a deduction against the tax levied under                                                                     
               this chapter;                                                                                                    
               (2) a credit or deduction under another                                                                          
               provision of this title; or                                                                                      
               (3) any federal credit claimed under this                                                                        
          (d) Notwithstanding  any contrary provision  of AS                                                                    
          40.25.100(a) or  AS 43.05.230(e), for a  year that                                                                    
          three or  more taxpayers claim a  tax credit under                                                                    
          this  section,  the  department  may  publish  the                                                                    
          aggregated  amount of  tax  credits claimed  under                                                                    
          this section  and a  description of  the qualified                                                                    
          oil  and gas  service  industry expenditures  that                                                                    
          were  the  basis  for  a  tax  credit  under  this                                                                    
               (e) In this section,                                                                                             
                     (1)  "manufacture"   means  to  perform                                                                    
                    substantial  industrial   operations  in                                                                    
                    the  state  to  transform  raw  material                                                                    
                    into tangible  personal property  with a                                                                    
                    useful life  of three years or  more for                                                                    
                    use in the  exploration for, development                                                                    
                    of,   or  production   of  oil   or  gas                                                                    
                     (2)     "modification"     means     an                                                                    
                    adjustment,    equipping,    or    other                                                                    
                    alteration    to    existing    tangible                                                                    
                    personal  property  that  has  a  useful                                                                    
                    life of  three years or more  and is for                                                                    
                    use in the  exploration for, development                                                                    
                    of,   or  production   of  oil   or  gas                                                                    
                    deposits;   "modification"    does   not                                                                    
                    include  minor  product  alterations  or                                                                    
                   inventory activities;                                                                                        
                     (3)  "qualified  oil  and  gas  service                                                                    
                    industry    expenditure"     means    an                                                                    
                    expenditure directly  attributable to an                                                                    
                    in-state    manufacture   or    in-state                                                                    
                    modification   of    tangible   personal                                                                    
                    property  used in  the exploration  for,                                                                    
                    development of, or  production of oil or                                                                    
                    gas  deposits,  but   does  not  include                                                                    
                    components or  equipment used for  or in                                                                    
                    the  process  of that  manufacturing  or                                                                    
Mr. Pawlowski  shared that the  provision had been  added to                                                                    
the   governor's   original   bill  with   the   intent   of                                                                    
incentivizing activity  outside of  the direct focus  of the                                                                    
bill.  He  asserted  that a  vibrant  service  industry  was                                                                    
critical  to support  a  vibrant oil  and  gas industry.  He                                                                    
relayed  that the  goal behind  the credit  was to  focus on                                                                    
giving a benefit to companies  that were doing manufacturing                                                                    
or  modification work  in-state that  supported the  oil and                                                                    
gas industry.                                                                                                                   
Mr. Pawlowski spoke to Slide 4:                                                                                                 
     Amends the Alaska Net Income Tax Act by adding a new                                                                       
     section, AS 43.20.049.                                                                                                     
        · Provides a tax credit for the lesser of 10 % of                                                                       
          qualified   oil    and   gas    industry   service                                                                    
          expenditures    incurred   in    the   state    or                                                                    
        · Applies against tax liability, may be carried-                                                                        
          forward for  no more  than 5  tax years  after the                                                                    
          expenditures were incurred.                                                                                           
        · Qualified   oil    and   gas    service   industry                                                                    
          expenditure must  be directly attributable  to the                                                                    
          in-state manufacture  or modification  of tangible                                                                    
          personal  property that  has  a useful  life of  3                                                                    
          years   or   more   used   in   the   exploration,                                                                    
         development, or production of oil or gas.                                                                              
Mr.  Pawlowski stated  the "qualified  oil  and gas  service                                                                    
expenditure" was defined  on Page 5, lines 3  through 15. In                                                                    
order to qualify for the credit  the company first had to be                                                                    
a tax  payer. Several companies  in the state, due  to their                                                                    
corporate  organization were  not  subject to  the tax.  The                                                                    
credit  was directly  targeted to  companies  that were  tax                                                                    
payers and only allowed companies  to use the credit against                                                                    
their  tax liability.  The credit  was not  transferable but                                                                    
was a  direct benefit to  companies doing work in  the state                                                                    
that   was   directly   tied  to   the   manufacturing   and                                                                    
modification of  the type of large  infrastructure necessary                                                                    
to support the oil and gas industry.                                                                                            
9:20:30 AM                                                                                                                    
Representative  Wilson asked  for an  example of  what would                                                                    
qualify under the credit.                                                                                                       
Mr. Pawlowski  replied the "hot  oil" units and  modules had                                                                    
been considered. He mentioned  the fabrication that occurred                                                                    
in   the    Interior;   value   added   work    that   built                                                                    
Representative  Holmes understood  that  the credit  applied                                                                    
not  to  people  buying  the  products  but  to  the  people                                                                    
manufacturing them.                                                                                                             
Mr. Pawlowski pointed to Page 4, lines 25 through 27:                                                                           
     (1) a deduction against the tax levied under this                                                                          
     (2) a credit or deduction under another provision of                                                                       
     this title; or                                                                                                             
     (3) any federal credit claimed under this title.                                                                           
He  elaborated  that  there  was   a  limitation  on  double                                                                    
qualifying the  expenditures. If an integrated  oil company,                                                                    
doing its own  fabrication work wanted to  claim the credit,                                                                    
the fabrication  work expenditures  could not  be used  as a                                                                    
deduction under the production tax.  The intent was to focus                                                                    
the  credit  on  the  companies  that  were  supporting  the                                                                    
industry, as  the logistical support was  an important piece                                                                    
for an overall healthy industry.                                                                                                
Representative  Holmes asked  if  a company  was not  paying                                                                    
taxes in year one, could  the credit be carried forward into                                                                    
future years when taxes would be paid.                                                                                          
Mr. Pawlowski responded in the affirmative.                                                                                     
9:22:48 AM                                                                                                                    
Representative Holmes wondered if  the credit would be aimed                                                                    
at attracting  new work in  the state  or would it  apply to                                                                    
work that had already been done in the state.                                                                                   
Mr. Pawlowski replied that the  intent was to increase work.                                                                    
He offered that it would  benefit some of the work currently                                                                    
happening  in the  state. The  intent of  the credit  was to                                                                    
give  the production  and  manufacturing  facilities in  the                                                                    
state a leg up to compete against outside work.                                                                                 
Representative Gara believed that  everyone on the committee                                                                    
would like  to see increased  work; however, the  credit was                                                                    
not incentivizing  new work but  giving a 10  percent credit                                                                    
to work that was already happening.                                                                                             
Mr. Pawlowski  rebutted that there was  work currently being                                                                    
done in the state. The  hope was that as industry investment                                                                    
grew  Alaskan businesses  would  be competing  for a  larger                                                                    
amount of the work.                                                                                                             
Representative  Gara wondered  what percentage  of the  work                                                                    
was already being done in the state.                                                                                            
Mr. Pawlowski replied  that he did not know  the percent. He                                                                    
stated that it would be difficult to determine the number.                                                                      
Vice-Chair  Neuman asked  about  a scenario  related to  the                                                                    
building of a liquid natural gas (LNG) facility.                                                                                
Mr.  Pawlowski  did not  believe  a  facility would  qualify                                                                    
under  the  credit.  He  added  that  if  the  facility  was                                                                    
manufactured in  the state then  it would  qualify; however,                                                                    
the  company would  have to  be  manufacturing the  facility                                                                    
itself and  not the actual  outcome of the product  that the                                                                    
plant produced, in order to receive the credit.                                                                                 
Vice-Chair  Neuman  asked  whether an  existing  LNG  export                                                                    
facility  or manufacturing  facility could  qualify for  the                                                                    
Mr. Pawlowski replied  in the negative. He  relayed that the                                                                    
LNG was  not tangible personal  property with a  useful life                                                                    
of three  years or more, but  rather was a product  that was                                                                    
used immediately.                                                                                                               
9:28:49 AM                                                                                                                    
Co-Chair Austerman  understood that the  liquification plant                                                                    
that  was planned  for the  LNG project  in Fairbanks  was a                                                                    
module that  would be developed, created  and built in-state                                                                    
and would be eligible for the credit.                                                                                           
Mr.  Pawlowski   replied  that  if  the   actual  plant  was                                                                    
fabricated and assembled  in the state then  the plant would                                                                    
Co-Chair  Austerman  asked  whether   $10  million  was  the                                                                    
maximum benefit.                                                                                                                
Mr. Pawlowski responded  that the benefit was  10 percent of                                                                    
the qualified expenditures as a lesser of $10 million.                                                                          
Mr. Pawlowski continued to Page 6, lines 11 through 13:                                                                         
     (2) on and  after January 1, 2014, the tax  is equal to                                                                    
     the annual production tax value  of the taxable oil and                                                                    
     gas as  calculated under AS 43.55.160(a)  multiplied by                                                                    
     33 percent.                                                                                                                
Mr. Pawlowski  stated the  change would  move away  from the                                                                    
current sum  of a 25  percent tax plus the  progressive tax.                                                                    
He spoke to Slide 5:                                                                                                            
     · AS 43.55.011(e) is amended to levy an annual flat                                                                        
        tax rate of 33%. Applies to oil and gas produced                                                                        
        after December 31, 2013.                                                                                                
     · AS 43.55.011(g), the monthly progressivity tax, is                                                                       
        repealed as of January 1, 2014.                                                                                         
     · Producers of oil and gas still make estimated                                                                            
        monthly installment payments.                                                                                           
Co-Chair Stoltze handed the gavel to Co-Chair Austerman.                                                                        
Representative Gara spoke to the  decision to get rid of the                                                                    
progressive  tax. He  understood  that most  of the  current                                                                    
progressivity  tax was  paid by  Exxon, Conoco  Phillips and                                                                    
British Petroleum. He asked whether  any of the corporations                                                                    
were  obligated  to  spend  any  of  the  progressivity  tax                                                                    
credits in Alaska.                                                                                                              
Mr.  Pawlowski replied  no; there  was  no direct  statutory                                                                    
requirement  in the  bill  that any  tax  reduction must  be                                                                    
spent in-state.                                                                                                                 
Representative  Gara asked  whether  any  analysis had  been                                                                    
done  as to  what portion  of the  money would  be spent  in                                                                    
9:32:20 AM                                                                                                                    
Mr.  Pawlowski replied  that the  intent was  for a  broader                                                                    
improvement  of the  economics in  the state.  He said  that                                                                    
instead of  focusing solely on  the small, zero sum  game of                                                                    
the revenues generated that would  be used in the state, the                                                                    
administration   had  looked   at   improving  the   overall                                                                    
economics to attract more outside  capital. The analysis had                                                                    
been developed with consultants  from both the Department of                                                                    
Revenue and the legislature.                                                                                                    
Representative  Gara  clarified  that   there  had  been  no                                                                    
analysis  done  that would  determine  what  portion of  the                                                                    
money would be spent in-state.                                                                                                  
Mr. Pawlowski  hoped that the companies  would reinvest more                                                                    
in-state  than they  earned, and  that opportunities  in the                                                                    
state would become more attractive  in order to draw in more                                                                    
capital. He shared that  the administration wanted investors                                                                    
to see Alaska as a destination for investment.                                                                                  
9:33:54 AM                                                                                                                    
Co-Chair   Austerman  requested   that  the   administration                                                                    
address and  provide detail concerning the  language on Page                                                                    
6 of the bill.                                                                                                                  
Mr.  Pawlowski   explained  that  the  production   tax  was                                                                    
currently  divided  into two  separate  taxes:  the base  25                                                                    
percent tax and  the additional tax rate added  to the base,                                                                    
which was referred  to as a progressivity tax.   The tax was                                                                    
calculated  monthly based  on a  mathematical equation  that                                                                    
stated  that above  30 dollars  a barrel  of btu  equivalent                                                                    
production tax value,  or the profit before  tax per barrel,                                                                    
the  tax rate  itself increased  four tenths  of a  percent.                                                                    
Currently, the  mathematical equation  determined percentage                                                                    
changed  each month  based on  oil price,  company spending,                                                                    
and  oil production.  The base  tax rate  of 25  percent was                                                                    
increased to  33 percent in the  current legislation. Rather                                                                    
than  having a  base tax  and adding  a tax  rate, the  bill                                                                    
would increase  the tax and  allow that  to be the  flat tax                                                                    
Representative  Wilson asked  whether  the department  would                                                                    
outline the differences between all versions of the bill.                                                                       
Mr. Pawlowski replied in the affirmative.                                                                                       
Representative Wilson asked if  there was a requirement that                                                                    
corporations  spend  a certain  amount  of  tax credits  in-                                                                    
Mr. Pawlowski  replied no.  He felt that  the tax  rate, tax                                                                    
credits and  tax deductions had  to be examined  together in                                                                    
order to  understand the  integrated system  and the  way it                                                                    
would affect the economics.                                                                                                     
9:37:25 AM                                                                                                                    
Representative Gara  quoted a statement  by the  governor in                                                                    
     "I am not interested  in choosing progressivity so they                                                                    
     (the  companies)  can take  that  money  and invest  it                                                                    
     somewhere else. If  they are willing to  invest it here                                                                    
     I am  open to considering it  but I am standing  up for                                                                    
     Alaskan's in this and not some other country."                                                                             
Representative   Gara   wondered   what  had   changed   the                                                                    
governor's analysis of the situation.                                                                                           
JOE  BALASH,  DEPUTY  COMMISSIONER,  DEPARTMENT  OF  NATURAL                                                                    
RESOURCES,  referred   to  a   presentation  given   to  the                                                                    
committee  the prior  day regarding  investment relative  to                                                                    
other places  in the  world, as prices  had varied.  He said                                                                    
that the ability  to make decisions was only as  good as the                                                                    
most recent period  of data reported. He  relayed that there                                                                    
was a drop  in oil prices after the spike  in 2008, and that                                                                    
the gap  between Alaska and  other oil producing  states had                                                                    
significantly increased.                                                                                                        
9:39:24 AM                                                                                                                    
Representative  Gara   understood  that  the   states  where                                                                    
production  had  increased  since   2008  were  using  newly                                                                    
developed fracking  technology and  that there had  not been                                                                    
an increase in conventional oil production.                                                                                     
Mr. Balash replied  that he had been  speaking to investment                                                                    
dollars  and  not  to production.  He  elaborated  that  the                                                                    
relative  pace  at  which  the  state  had  been  attracting                                                                    
investment was the issue at  hand. He stressed that the 2009                                                                    
benchmarking study showed that  Alaska had been in-line with                                                                    
the rest of  the U.S. and the globe; in  the years since the                                                                    
evidence was overwhelmingly in the opposite direction.                                                                          
Representative  Munoz inquired  about the  projected revenue                                                                    
implications connected  to the shift  from 35 percent  to 33                                                                    
Mr.  Pawlowski replied  that  as a  general  rule of  thumb,                                                                    
before credits  or the  application of  other pieces  of the                                                                    
bill, each one  percent move in the tax  rate was equivalent                                                                    
to approximately $100 million.                                                                                                  
Representative Munoz  asked how  the 33  percent in  the new                                                                    
system compared to ACES at lower prices.                                                                                        
Mr.  Pawlowski replied  that ACES  was 25  percent less  the                                                                    
certain amount of tax as prices  rose. As oil prices fell he                                                                    
33 percent would  become a tax increase at  lower prices. He                                                                    
said that  the number  was off-set at  some price  levels by                                                                    
other pieces in the legislation.  He offered that 33 percent                                                                    
at many price levels at the  lower end of price ranges would                                                                    
be  a higher  tax rate  than  the current  25 percent  under                                                                    
9:42:42 AM                                                                                                                    
Representative  Costello  queried  any discussion  that  had                                                                    
occurred  related to  bracketing versus  the elimination  of                                                                    
Mr. Balash  replied that the  best summation of the  oil tax                                                                    
problem  had  come  from   the  legislative  consultant  PFC                                                                    
Energy, which had  identified five key issues  with ACES; in                                                                    
each case  the line  could be  drawn back  to progressivity.                                                                    
In attempting  to address progressivity  in current  law the                                                                    
department had found that  progressivity created problems in                                                                    
a  company's  ability  to  plan.   One  of  the  significant                                                                    
problems that  had been identified  was that if  the current                                                                    
mechanism was converted  from a function to  a bracket there                                                                    
would still  be a  net trigger; there  would still  be rates                                                                    
that  changed from  month  to month.  The  HCS CSSB  21(RES)                                                                    
version addressed the  per barrel credit by  bringing a more                                                                    
progressive  system.  The  administration  did  not  have  a                                                                    
problem with  a progressive  system, but progressivity  as a                                                                    
mechanism was an unfixable problem  requiring the removal of                                                                    
progressivity altogether.                                                                                                       
9:45:52 AM                                                                                                                    
Representative Costello wondered what  other sections of the                                                                    
bill were  most important  looking at  the 33  percent rate.                                                                    
She  noted  that  the  33  percent was  not  the  rate  that                                                                    
companies would be paying in the future.                                                                                        
Mr.  Pawlowski answered  that it  was important  to consider                                                                    
the  tax  rate  in  conjunction  with  the  removal  of  the                                                                    
qualified  capital  expenditure  credit, the  carry  forward                                                                    
loss credit,  the small producer  credit, the  gross revenue                                                                    
exclusion,  the  sliding per  barrel  credit  and the  basic                                                                    
development  of a  net  system. All  of  the items  combined                                                                    
formed  the  government  take. He  explained  that  the  tax                                                                    
system under discussion was one  element of the total burden                                                                    
that industry  paid to  the state. When  looking at  the tax                                                                    
rate, the impact of credits  and the gross revenue exclusion                                                                    
had  to be  considered  because the  combination created  an                                                                    
effective tax rate.                                                                                                             
Co-Chair Stoltze  relayed that PFC Energy  would address the                                                                    
committee later in the day.                                                                                                     
9:48:35 AM                                                                                                                    
Representative  Kawasaki questioned  whether the  investment                                                                    
of  capital  expenditures  by  corporations  in  Alaska  had                                                                    
Mr. Balash  replied that the  issue was how  much investment                                                                    
the  state  was  attracting  in  comparison  to  the  global                                                                    
investment pool.                                                                                                                
Representative Kawasaki  asserted that the states  that were                                                                    
attracting  more investment  were using  hydraulic fracking,                                                                    
which was  not a practice  in Alaska. He  questioned whether                                                                    
it was a fair comparison.                                                                                                       
Mr. Balash  replied that fracking  was not taking  place all                                                                    
over  the world.   When  the  larger, global  considerations                                                                    
were taken into  account the state was  simply not competing                                                                    
with global market. He stated  that Alaska was not competing                                                                    
for the growth in capital  spending for upstream oil and gas                                                                    
investment around the world. He  admitted that the advent of                                                                    
hydraulic   fracking  had   made  an   improvement  to   the                                                                    
production  of tight  resource  formations  but pointed  out                                                                    
that higher oil prices were also a factor.                                                                                      
9:52:19 AM                                                                                                                    
Representative Kawasaki  asked how amending  AS 43.55.011(e)                                                                    
would address the issue.                                                                                                        
Mr. Balash replied  that the base tax rate was  a key driver                                                                    
of the  marginal influences on investment  decisions made by                                                                    
Mr.  Pawlowski added  that around  the world  increasing oil                                                                    
prices,  coupled with  increased innovation  and technology,                                                                    
was  driving  investment  that   was  leading  to  increased                                                                    
production;  Alaska was  not  experiencing  the same  growth                                                                    
trend. The  administration believed  that the  reason Alaska                                                                    
was falling behind  was due to a tax rate  that increased as                                                                    
prices rose.  The tax increases  under ACES  was diminishing                                                                    
the effect that increasing  prices had on driving investment                                                                    
behavior.  The flat  tax  would allow  the  price signal  to                                                                    
follow into the system and benefit  the state, as it does in                                                                    
the rest of the world.                                                                                                          
Co-Chair  Austerman   hoped  that  the   conversation  would                                                                    
respond to the  question of what percentage  the state would                                                                    
take. He  believed the point  was of particular  interest to                                                                    
the public.                                                                                                                     
Mr.  Pawlowski  replied that  the  intent  of the  afternoon                                                                    
meeting  was to  allow members  to understand  where in  the                                                                    
bill  the  various  mechanisms that  the  consultants  would                                                                    
integrate  into an  economic picture  for Alaskans  could be                                                                    
9:56:18 AM                                                                                                                    
Representative  Thompson  wondered  how much  of  the  money                                                                    
being spent on  the North Slope was related  to locating and                                                                    
producing new oil compared to  investment in the maintenance                                                                    
of continued oil flow.                                                                                                          
Co-Chair Stoltze hoped industry would  be able to answer the                                                                    
question later. He believed that  the committee accepted the                                                                    
concept that tax policy influenced behavior.                                                                                    
Mr. Pawlowski continued to Slide 6:                                                                                             
        · Amends AS 29.60.850(b) to eliminate the reference                                                                     
          to AS 43.55.011(g) and substitutes the corporate                                                                      
          income tax.                                                                                                           
        · Statute directs appropriation not to exceed                                                                           
          $60,000,000 or amount when added to fund balance,                                                                     
          equals $180,000,000.                                                                                                  
        · No   change    is   made   to    the   eligibility                                                                    
          determinations for community revenue sharing                                                                          
          payments or to authority of legislature to                                                                            
          appropriate any amount.                                                                                               
Mr. Pawlowski pointed  to Page 2, lines 9 through  16 of the                                                                    
legislation.  He  shared  that  current  revenues  from  the                                                                    
progressivity  surcharge were  softly dedicated  directly to                                                                    
the community revenue sharing fund.  He remarked that in the                                                                    
original version  of the bill the  community revenue sharing                                                                    
fund was targeted  back to the Alaska net  income tax, which                                                                    
included corporate income  tax on oil and gas  tax payers as                                                                    
well  as  the broader  economic  activity  of all  corporate                                                                    
income tax payers.                                                                                                              
Co-Chair Stoltze hoped the issue  would be a smaller part of                                                                    
the committee's discussion.                                                                                                     
10:00:28 AM                                                                                                                   
Mr. Pawlowski  clarified that  no changes  would be  made in                                                                    
the eligibility  determinations or  to the authority  of the                                                                    
legislature  to  appropriate any  amount  to  the fund.  The                                                                    
intent was  to maintain  the system under  which communities                                                                    
had  been  operating.  The  current   version  of  the  bill                                                                    
relinked  the   community  revenue   sharing  back   to  the                                                                    
corporate income tax as a source of funding.                                                                                    
Mr.   Pawlowski  discussed   slide  7:   "Qualified  Capital                                                                    
Expenditure Tax Credit."                                                                                                        
     · The 20 percent qualified capital expenditure tax                                                                         
        credit is limited to expenditures incurred before                                                                       
        January 1, 2014  to explore for, develop, or produce                                                                    
        oil and gas deposits on the North Slope.                                                                                
     · Tax credits for expenditures incurred to explore                                                                         
        for, develop, or produce oil and gas deposits south                                                                     
        of the North Slope are not impacted.                                                                                    
     · The full amount of a tax credit certificate may be                                                                       
        issued in a single year.                                                                                                
Mr. Pawlowski spoke to Page  14, line 17 of the legislation.                                                                    
Under current  law when a  company made a  qualified capital                                                                    
expenditure credit on the North  Slope, two tax certificates                                                                    
were issued;  the credit  had to be  divided and  taken over                                                                    
two  years. The  spending  itself generated  the credit  and                                                                    
then  the credit  was  spread  out in  order  to smooth  the                                                                    
fiscal  impact  on the  state.  The  general obligation  was                                                                    
created by the act of  spending. The legislation would allow                                                                    
the  capital credits  to  be  taken in  a  single year.  The                                                                    
change would  close out the  20 percent  capital expenditure                                                                    
credit  for  the North  Slope  in  the calendar  year  2013.                                                                    
Expenditures made  during 2013  would still generate  the 20                                                                    
percent capital  credit, but  expenditures after  January 1,                                                                    
2014 would no longer generate the credit.                                                                                       
Co-Chair Stoltze  asked if the  provision could result  in a                                                                    
loss of revenue to the state.                                                                                                   
Mr.  Pawlowski replied  that the  provision would  become an                                                                    
increase in  revenue for the  state because the  state would                                                                    
no longer be paying the credits.                                                                                                
10:03:34 AM                                                                                                                   
Representative   Holmes  understood   that  the   underlying                                                                    
concept  of  the  provision  was that  the  state  had  been                                                                    
incentivizing spending rather than production.                                                                                  
Mr. Pawlowski  responded that when the  administration began                                                                    
the process  to repeal progressivity it  was discovered that                                                                    
the repeal  of progressivity was  balanced by the  repeal of                                                                    
the credits.  The administration wished to  simplify the tax                                                                    
rate as well  as reduce the obligation for the  state of the                                                                    
Representative Holmes  hoped for a deeper  public discussion                                                                    
that included  the credits  outstanding and  the obligations                                                                    
of the state                                                                                                                    
10:05:19 AM                                                                                                                   
Representative Munoz asked about  the increase in tax filers                                                                    
who were not tax payer.  She noted the provision that stated                                                                    
that the  tax filers were  not owed  a tax liability  to the                                                                    
Mr.  Pawlowski  stated that  19  tax  payers were  currently                                                                    
filed, 6  actually paid  tax and 13  received enough  in tax                                                                    
credits that their tax liability  was zero. An additional 33                                                                    
companies in  the state had  not produced oil but  had filed                                                                    
for  tax credits.  He noted  that the  information could  be                                                                    
found in the tax division's annual report.                                                                                      
Co-Chair Stoltze  asked if the  report listed  the taxpayers                                                                    
by name.                                                                                                                        
Mr.  Pawlowski replied  that they  were listed  as anonymous                                                                    
Representative Munoz requested a copy of the report.                                                                            
Mr.  Pawlowski  said   he  would  provide  a   copy  to  the                                                                    
10:07:09 AM                                                                                                                   
Representative  Costello  queried  the  state's  outstanding                                                                    
obligation for the qualified capital expenditure credit.                                                                        
Mr.  Pawlowski  clarified  that the  question  was  for  the                                                                    
current FY14 fiscal year.                                                                                                       
Representative  Costello   requested  the   total  potential                                                                    
liability to the state through the credit.                                                                                      
Mr.  Pawlowski  responded that  the  estimate  for FY15  was                                                                    
approximately $850 million.                                                                                                     
Representative  Costello wondered  whether the  credits were                                                                    
the driving  force behind new exploration  that had occurred                                                                    
in recent years.                                                                                                                
Mr. Pawlowski stated that  industry found credits important,                                                                    
but that the credits needed to  be balanced by the tax rate.                                                                    
He said  that if  the state  had a  punitive tax  system the                                                                    
credits would not be enough  to overcome the tax system. The                                                                    
Brooks Range had given  statements concerning the challenges                                                                    
faced which seeking out financing for new developments.                                                                         
10:09:39 AM                                                                                                                   
Representative Kawasaki  asked if Department of  Revenue had                                                                    
a copy of the audited  capital expenditures available to the                                                                    
committee members.                                                                                                              
Mr.  Pawlowski  responded   that  the  department  regularly                                                                    
audited before  credits were issued. He  understood that the                                                                    
committee would need to go  into executive session or sign a                                                                    
confidentiality agreement  in order to see  confidential tax                                                                    
payer information.                                                                                                              
Representative  Kawasaki  recalled  that when  the  original                                                                    
bill was  drafted the  intent had  been to  incentivize more                                                                    
exploration,  production   and  development.   He  expressed                                                                    
concern that  there were only  500 wells on the  North Slope                                                                    
compared to most other hydrocarbon  basins, such as Wyoming,                                                                    
which had 20,000 wells.                                                                                                         
Representative  Gara asked  how many  tax payers  there were                                                                    
prior to ACES.                                                                                                                  
Mr.  Pawlowski  clarified  that  the  numbers  were  not  in                                                                    
reference to  before ACES, rather that  there were currently                                                                    
19 potential tax  payers, 6 of which actually  paid tax. The                                                                    
remaining 13 received enough in  tax credits to reduce their                                                                    
tax  liability  to  zero.  He   added  that  there  were  an                                                                    
additional  33  that  filed  and  received  the  exploration                                                                    
Representative  Gara  noted  the  major  oil  companies  had                                                                    
testified  that  they  were   not  interested  in  exploring                                                                    
outside of  their units.  He understood  that the  future of                                                                    
the  state involved  incentivizing new  exploration and  new                                                                    
fields  online. He  suggested that  the  extra 46  companies                                                                    
trying to  get oil into  the pipeline was beneficial  to the                                                                    
state,  even though  the companies  were  not paying  taxes,                                                                    
because they generated activity.                                                                                                
Mr. Pawlowski  replied that  the activity  in the  state was                                                                    
not as beneficial when put  into the context of the activity                                                                    
occurring  worldwide. The  HCS CSSB  21(RES) did  not repeal                                                                    
the exploration credit.                                                                                                         
10:14:26 AM                                                                                                                   
Representative Gara  believed that  ACES was  poorly worded.                                                                    
He wondered  why the state  could not rewrite the  credit so                                                                    
that it related to direct well activity.                                                                                        
Mr.  Pawlowski  replied  that a  common  statement  made  by                                                                    
companies  was  that  Alaska  often  tended  to  micromanage                                                                    
development.  He had  observed during  the evolution  of the                                                                    
legislation a departure from trying  to narrowly define what                                                                    
was incentivized. Rather than  trying to design an incentive                                                                    
that  generated  targets  toward  wells  or  facilities  the                                                                    
legislation would give  a credit per barrel  of oil. Instead                                                                    
of  trying to  incentivize what  might result  in production                                                                    
the benefit  should be  directly tied to  the barrel  of oil                                                                    
10:16:16 AM                                                                                                                   
Representative  Gara recalled  from previous  testimony that                                                                    
one out of every 20  wells that were drilled proved useless.                                                                    
Taking  away the  credit  for companies  to  spend money  on                                                                    
wells could  deter investment  and other  production related                                                                    
Mr.  Pawlowski  explained  that  the  exploration  incentive                                                                    
credit could still be used  by qualifying companies. He said                                                                    
that  there  was  a  loss   carried-forward  credit  in  the                                                                    
legislation  would  generate  a credit  for  companies  that                                                                    
spent the  money to  drill an exploration  well, and  had no                                                                    
tax  liability, that  could  be turned  into  the state  for                                                                    
cash.  He explained  that  the reason  that  the credit  was                                                                    
lower than  under ACES  was because  the bill  reduced taxes                                                                    
Vice-Chair Neuman  asked whether moving to  a base qualified                                                                    
capital expenditure tax credit would simplify the tax code.                                                                     
Mr.  Pawlowski  replied that  that  base  tax rate  was  the                                                                    
primary  simplification to  the system.  He reiterated  that                                                                    
the  administration   wanted  to  focus  the   incentive  on                                                                    
10:21:07 AM                                                                                                                   
Mr.  Pawlowski  addressed   Slide  8,  "Carried-Forward  Tax                                                                    
Credit AS 43.55.023(b)":                                                                                                        
        · Based on the amount of a producer's or explorer's                                                                     
          adjusted   lease   expenditures  that   were   not                                                                    
          deductible  in calculating  the annual  production                                                                    
          tax values for that year.                                                                                             
        · Retains 25% credit for a carried-forward annual                                                                       
          loss  for  adjusted  lease  expenditures  incurred                                                                    
          outside of the North Slope.                                                                                           
        · Provides a tax credit of 33% for a carried-                                                                           
          forward   annual    loss   for    adjusted   lease                                                                    
          expenditures incurred  after December 31,  2013 on                                                                    
          the North Slope.                                                                                                      
Mr. Pawlowski  directed members to  Page 15, line 14  of the                                                                    
bill. The previous qualified  capital expenditure credit was                                                                    
based on  qualified capital  expenditures and  was available                                                                    
to  the major  producers or  a small  producer that  did not                                                                    
have a  tax liability.  The loss carried-forward  credit was                                                                    
targeted specifically  to companies that were  spending more                                                                    
than  they  were  earning,  which   narrowed  the  range  of                                                                    
eligible  companies.  He   stated  that  the  administration                                                                    
believed  that  matching the  33  percent  tax rate  was  an                                                                    
important  policy objective  because it  would keep  the new                                                                    
investors   with  the   companies  that   were  already   in                                                                    
production.  He encouraged  the committee  to keep  the loss                                                                    
carry-forward consistent with the base tax rate.                                                                                
Mr. Pawlowski continued to Slide 9, "AS 43.55.024 Credit":                                                                      
        · Extends the small producer credit to 2022 (from                                                                       
          2016)  for  producers  of less  than  100,000  BTU                                                                    
          equivalent barrels of daily production.                                                                               
        · Non-transferable,   only    applies   against   AS                                                                    
          43.55.011(e) tax.                                                                                                     
        · Establishes a $5 per barrel credit for each                                                                           
          barrel of  taxable oil that qualifies  for a gross                                                                    
          revenue exclusion.                                                                                                    
        · Establishes a sliding scale credit from $8 to                                                                         
          zero based on monthly  gross value of oil produced                                                                    
          on the North  Slope that does not  qualify for the                                                                    
          gross  revenue exclusion.  Not applicable  against                                                                    
          the minimum tax.                                                                                                      
Mr. Pawlowski  explained that the  credit was a  $12 million                                                                    
credit per company and provided  a base level of support for                                                                    
smaller  producers  in  the  state.   The  credit  was  non-                                                                    
transferrable and only applied against the production tax.                                                                      
Representative  Gara  queried  the  definition  of  a  small                                                                    
producer based on the number of barrels produced in a day.                                                                      
Mr. Pawlowski clarified that the  $12 million credit was for                                                                    
a producer  with 50,000 barrel  equivalent or less  per day,                                                                    
but that  the credit  itself went up  to less  than 100,000,                                                                    
with a phase out between the two.                                                                                               
Vice-Chair   Neuman  asked   about   the  ramifications   of                                                                    
returning to a btu equivalent measurement.                                                                                      
Mr.  Pawlowski  replied  that  the   btu  equivalent  in  AS                                                                    
43.55.011(g) was the  progressivity function that determined                                                                    
the tax rate.   The reference to btu  equivalent barrels was                                                                    
retained  in  the  small  producer  credit  section  of  the                                                                    
legislation and was a production  volume for the purposes of                                                                    
determining a fixed tax credit.                                                                                                 
10:26:38 AM                                                                                                                   
Co-Chair    Austerman   requested    further   clarification                                                                    
concerning the $12 million fixed credit.                                                                                        
Mr. Pawlowski replied  that the small producer  credit was a                                                                    
fixed  amount per  company and  not per  project. The  small                                                                    
producer  received  a fixed  annual  credit  of $12  million                                                                    
until the point above 50,000  btu equivalent was reached, at                                                                    
which time the value of the credit itself would decline.                                                                        
Co-Chair Austerman asked for more detail.                                                                                       
Mr. Pawlowski  believed it would  decline to $6  million and                                                                    
then  down  to  zero.  He  noted  the  equation  in  Section                                                                    
43.55.024(c), subsection  2. He stated that  no changes were                                                                    
being  made to  the way  in which  the credit  functioned in                                                                    
current law, but was extending  the time period with which a                                                                    
company could  enter production and qualify  for the credit.                                                                    
The legislation  included an addition  to the  02.4 credits;                                                                    
the credits  were non-transferrable  and only usable  by the                                                                    
company  that   was  generating  the  credit.   He  directed                                                                    
attention to  Page 18  of the  legislation which  listed the                                                                    
per barrel credits:                                                                                                             
     Sec.  26.  AS  43.55.024   is  amended  by  adding  new                                                                    
     subsections to read:                                                                                                       
      (i) A  producer may apply  against the  producer's tax                                                                    
     liability for  the calendar year under  AS 43.55.011(e)                                                                    
     a  tax credit  of $5  for  each barrel  of oil  taxable                                                                    
     under AS  43.55.011(e) that  meets one  or more  of the                                                                    
     criteria  in  AS  43.55.160(f)  and  that  is  produced                                                                    
     during a calendar  year after December 31,  2013. A tax                                                                    
     credit authorized  by this subsection may  not reduce a                                                                    
     producer's tax  liability for a calendar  year under AS                                                                    
     43.55.011(e) to below zero.                                                                                                
     (j)  A producer  may apply  against the  producer's tax                                                                    
     liability for  the calendar year under  AS 43.55.011(e)                                                                    
     a  tax   credit  in  the   amount  specified   in  this                                                                    
     subsection  for each  barrel of  taxable  oil under  AS                                                                    
     43.55.011(e) that does not meet  any of the criteria in                                                                    
     AS 43.55.160(f) and that is  produced during a calendar                                                                    
     year   after  December   31,  2013,   from  leases   or                                                                    
     properties north  of 68 degrees  North latitude.  A tax                                                                    
     credit  under   this  subsection   may  not   reduce  a                                                                    
     producer's tax  liability for a calendar  year under AS                                                                    
     43.55.011(e) to  below the  amount calculated  under AS                                                                    
     43.55.011(f).  The  amount  of  the tax  credit  for  a                                                                    
    barrel of taxable oil subject to this subsection is                                                                         
           (1)  $8 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
         for the month is less than $80 a barrel;                                                                               
           (2)  $7 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the  month is greater  than or equal to  $80 a                                                                    
          barrel, but less than                                                                                                 
           $90 a barrel;                                                                                                        
           (3)  $6 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the  month is greater  than or equal to  $90 a                                                                    
          barrel, but less than                                                                                                 
           $100 a barrel;                                                                                                       
           (4)  $5 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the month  is greater than or equal  to $100 a                                                                    
          barrel, but less than $110 a barrel;                                                                                  
           (5)  $4 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the month  is greater than or equal  to $110 a                                                                    
          barrel, but less than $120 a barrel;                                                                                  
           (6)  $3 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the month  is greater than or equal  to $120 a                                                                    
          barrel, but less than $130 a barrel;                                                                                  
           (7)  $2 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the month  is greater than or equal  to $130 a                                                                    
          barrel, but less than $140 a barrel;                                                                                  
           (8)  $1 for  each barrel  of taxable  oil if  the                                                                    
          average  gross value  at the  point of  production                                                                    
          for the month  is greater than or equal  to $140 a                                                                    
          barrel, but less than $150 a barrel;                                                                                  
           (9) zero if the average  gross value at the point                                                                    
          of  production for  the month  is greater  than or                                                                    
          equal to $150 a barrel.                                                                                               
10:31:03 AM                                                                                                                   
Representative   Wilson  wondered   if   it   would  be   an                                                                    
oversimplification to make all  of the credits by-the-barrel                                                                    
Mr. Pawlowski responded that the  easy oil was gone. He said                                                                    
that  the  economics of  production  required  a variety  of                                                                    
styles of  credits in  order to  support the  more expensive                                                                    
Representative  Wilson wondered  whether more  credits could                                                                    
be given  to companies  working with  the harder  to produce                                                                    
Mr. Pawlowski  replied that  the structure  in the  bill had                                                                    
come from the  previous committee in an  attempt to increase                                                                    
the effective tax rate at higher prices.                                                                                        
Representative   Wilson   requested   a   written   response                                                                    
highlighting the  advantages and  disadvantages of  a simple                                                                    
per barrel credit.                                                                                                              
Co-Chair  Stoltze  remarked   that  the  administration  was                                                                    
presenting  an agnostic  and clinical  view  of the  changes                                                                    
made  by  another  committee; the  administrations  original                                                                    
bill was not before the committee.                                                                                              
Mr. Pawlowski appreciated the clarification.                                                                                    
10:34:43 AM                                                                                                                   
Mr.  Balash communicated  that  a  later presentation  would                                                                    
highlight how the  GRE would be the most  effective tool for                                                                    
new production.                                                                                                                 
Representative Gara  asked how the $8  to zero sliding-scale                                                                    
"mini-progressivity" element  shown on  Slide 9  compared to                                                                    
progressivity under  ACES. He  shared that  currently, after                                                                    
$30 of  profit was  made on a  barrel, progressivity  was .4                                                                    
percent per dollar.                                                                                                             
Mr.  Pawlowski  deferred  the  question  to  economists  and                                                                    
consultants.  He furthered  that slides  would be  developed                                                                    
that would best illustrate an answer.                                                                                           
10:37:41 AM                                                                                                                   
Representative Gara  asked for verification that  the $5 per                                                                    
barrel credit only related to new oil.                                                                                          
Mr. Pawlowski replied in the affirmative.                                                                                       
Representative  Gara remarked  that the  way the  credit was                                                                    
currently designed  it applied to  leases given in  2003 for                                                                    
oil that had gone in to  the pipeline in the past. He argued                                                                    
that the  legislation would  incentivize something  that had                                                                    
already been done.                                                                                                              
Co-Chair Stoltze  remarked that  the question would  be held                                                                    
for later.                                                                                                                      
Mr.   Pawlowski  relayed   that  the   next  slide   in  the                                                                    
presentation would provide further information.                                                                                 
Co-Chair Austerman quoted Page 6  of a presentation from the                                                                    
previous day:                                                                                                                   
     "At the year-end 2010 the Energy Information Agency                                                                        
     and the Federal Department of Energy put remaining                                                                         
     North Slope reserves at 3.7 billion barrels of oil."                                                                       
Co-Chair Austerman  assumed that  the fields  mentioned were                                                                    
legacy   fields.  He   probed  the   determination  of   the                                                                    
percentage of new  oil versus old oil in  the legacy fields.                                                                    
He wondered how  much of the 3.7 billion barrels  of oil the                                                                    
sliding scale could be applied to.                                                                                              
10:40:02 AM                                                                                                                   
Mr. Balash answered  that the 3.7 billion was  cited for the                                                                    
year-end 2010; production since  had brought the number down                                                                    
to  3.3  billion barrels.  He  thought  that for  comparison                                                                    
purposes; the  central North  Slope, on-shore,  mostly state                                                                    
land, undiscovered resource estimated  to be recoverable was                                                                    
approximately 3.1 billion barrels  that should qualify under                                                                    
the GRE.  He observed  that the  sliding scale  credit, when                                                                    
oil was  $110 per barrel, offered  a lot of incentive  for a                                                                    
company to  produce oil reserves  already in the  ground. He                                                                    
said  that   the  3.3  billion  barrels   estimated  by  the                                                                    
department could produce for decades.                                                                                           
Mr. Pawlowski  clarified that the  3.3 billion  that started                                                                    
off  as the  3.7  billion  estimated in  the  slide was  not                                                                    
generally  seen  as  eligible for  the  targeted  incentives                                                                    
toward the geologically new production.                                                                                         
10:43:38 AM                                                                                                                   
Representative Costello  wondered what  would be  the lowest                                                                    
effective tax rate and the  highest for both the current and                                                                    
proposed tax systems.                                                                                                           
Mr.  Pawlowski  spoke  specifically  to  the  legacy  fields                                                                    
because they were the easiest  to calculate. Under ACES, the                                                                    
lowest  effective  tax  rate was  essentially  zero  because                                                                    
credits  could  be used  to  off-set  the minimum  tax.  The                                                                    
highest effective tax  rate was the 75 percent,  which was a                                                                    
combination of the  25 percent base rate  plus the potential                                                                    
50  percent  of  progressivity.  He qualified  that  the  75                                                                    
percent rate kicked  in at extremely high  oil prices. Under                                                                    
the  bill  the  highest  effective  tax  rate  would  be  33                                                                    
percent. He offered  that having a fixed  tax rate benefited                                                                    
companies  because the  company  could plan  around the  tax                                                                    
rate  using credits  to off-set  expenses. Under  33 percent                                                                    
and  the $8  top  zero  sliding scale  the  4 percent  gross                                                                    
minimum would raise  to a maximum of 33 percent  on the net;                                                                    
under ACES it could go from zero to 75 percent.                                                                                 
Representative Costello believed  that the discussion should                                                                    
take  into  account  lower  oil   prices.  She  requested  a                                                                    
comparison of  the effect of progressivity  at higher prices                                                                    
versus the sliding scale.                                                                                                       
Mr. Pawlowski replied that  the administration would address                                                                    
the issue later  in the day. He  appreciated the recognition                                                                    
that there  was a difference  between a progressive  tax and                                                                    
Representative Holmes  expressed concern that if  oil prices                                                                    
dropped under ACES the state  would be in financial trouble.                                                                    
She asked whether the credits  would go into negative at the                                                                    
expense of the  state if there was no  minimum effective tax                                                                    
rate under ACES.                                                                                                                
Mr. Pawlowski  replied that it  was true. He stated  that in                                                                    
low prices, high spending, and  many credits being generated                                                                    
could set the stage for  a negative tax liability situation.                                                                    
Incumbent producers would  not have the ability  to turn the                                                                    
credits  into the  state  for a  cash  payment, the  credits                                                                    
would be carried  forward. The impact would  be negative and                                                                    
would erode the state revenues into the following year.                                                                         
10:48:09 AM                                                                                                                   
Representative  Gara understood  that at  the highest  price                                                                    
possible the tax rate would only rise to 33 percent.                                                                            
Mr. Pawlowski  replied in the affirmative.  The credit would                                                                    
be  used to  offset  taxes, similar  to  the capital  credit                                                                    
under ACES.                                                                                                                     
Representative Gara hypothesized that  the highest tax rate,                                                                    
at  the  highest price  of  $200  per  barrel, would  be  33                                                                    
percent under the sliding scale.                                                                                                
Mr. Pawlowski replied in the affirmative.                                                                                       
Representative Gara  wondered whether the 4  percent minimum                                                                    
could go lower.                                                                                                                 
Mr. Pawlowski  replied that a small  producer or exploration                                                                    
credit  could be  used against  the sliding  scale, but  the                                                                    
aforementioned credits were targeted and specific credits.                                                                      
Representative Gara  asked if a company's  tax payment could                                                                    
be below  zero under the credits  that the bill left  on the                                                                    
Mr. Pawlowski said that he  would get back to the committee.                                                                    
He stated  that the sliding  scale was targeted  to specific                                                                    
production; the  reality of  the 4  percent minimum  tax was                                                                    
still large  when compared to a  zero tax. He said  he would                                                                    
need  to add  up  all  of the  possible  credits that  would                                                                    
remain under the  system to conclude if the  number could be                                                                    
taken to zero.                                                                                                                  
Representative Gara  questioned whether  the state  had been                                                                    
in a situation  under ACES where less than a  25 percent tax                                                                    
had been collected.                                                                                                             
Mr.  Pawlowski  stated that  he  would  follow up  with  the                                                                    
committee with the information.                                                                                                 
10:50:56 AM                                                                                                                   
Mr. Balash thought  that a review of several  months in 2009                                                                    
might reveal that  the state did fall below 25  percent on a                                                                    
monthly basis.                                                                                                                  
Representative   Munoz    asked   if    the   administration                                                                    
anticipated a problem with the  nominal dollar figure verses                                                                    
a percentage in the per barrel scenario.                                                                                        
Mr. Pawlowski  replied that  it would be  an issue  in long-                                                                    
term economics. He stated that  it was, more often than not,                                                                    
a  benefit to  the state.  He said  that the  fear had  been                                                                    
adding an additional level of  complication by adjusting for                                                                    
the  payments.  He  thought that  lowering  the  per  barrel                                                                    
credit would be a larger issue.                                                                                                 
10:55:36 AM                                                                                                                   
12:21:23 PM                                                                                                                   
Mr. Pawlowski  discussed slide 10: "Gross  Revenue Exclusion                                                                    
for North Slope Oil and Gas (Gross Value Reduction):                                                                            
   · For oil and gas produced north of 68 degrees North                                                                         
     latitude,  the gross value at the point of production                                                                      
     is reduced by 20 percent for the oil or gas produced                                                                       
          1) Leases in a unit established after January 1,                                                                      
          2) New reservoirs in an expanded participating                                                                        
          area within a unit formed before January 1, 2003;                                                                     
          3) Acreage added to an existing participating                                                                         
          area with approval by the Department of Natural                                                                       
Mr.  Pawlowski  stated  that  the   GRE  was  technically  a                                                                    
reduction in  the gross value.  He noted that  the provision                                                                    
could be found  on Page 24, line 24 of  the legislation. The                                                                    
provision  would examine  new developments  both within  and                                                                    
outside of existing  units in an effort to  reduce the gross                                                                    
production tax  value by  20 percent of  the gross  value of                                                                    
the  particular oil  and gas  that was  produced. Under  the                                                                    
current  system  the  state   did  not  distinguish  between                                                                    
multiple different fields or different  types of oil and gas                                                                    
being  produced when  taxing  a company.  In  the spirit  of                                                                    
simplicity, the mechanism focused  on the barrel rather than                                                                    
investment or  spending. The bill defined  where the barrels                                                                    
came from and then counted  them differently at the level of                                                                    
the gross value.                                                                                                                
12:25:35 PM                                                                                                                   
Mr. Pawlowski discussed the distinctions.                                                                                       
Mr. Balash  stated that  when oil  fields were  explored and                                                                    
discoveries  were made  the  fields  generally covered  more                                                                    
than a single  lease, at which time the  leases were brought                                                                    
together  in  a   unit.  Within  the  unit   existed  a  two                                                                    
dimensional boundary  and a new  unit that was  brought into                                                                    
production  would be  easy to  count  as new  oil. Only  two                                                                    
units producing  presently would  qualify on the  unit test:                                                                    
Oooguruk  and Nakiachuk.   In  both cases  those units  were                                                                    
brought  forward by  companies that  were making  investment                                                                    
commitments  with   a  great  degree  of   uncertainty.  The                                                                    
decision to  include them in  the proposal had been  made in                                                                    
an attempt to  be fair. He relayed that when  a company came                                                                    
to the  state and made a  discovery, and then took  the step                                                                    
of unitizing, as they moved  into production they identified                                                                    
for the  Division of  Oil and  Gas what  their participating                                                                    
area  would  be;  the  parts of  the  reservoir  that  would                                                                    
contribute  to  production  from  the wells  that  would  be                                                                    
drilled in  the plan  of development.  Once a  company moved                                                                    
into production  there was the possibility  that another oil                                                                    
producing reservoir  might be found.  Multiple participating                                                                    
areas   could  exist   in  the   unit  proper   and  a   new                                                                    
participating  area in  a legacy  field would  be considered                                                                    
new oil.                                                                                                                        
12:31:43 PM                                                                                                                   
Mr. Balash  discussed the expansion  of an area  included in                                                                    
an  existing  field.  He  said  that  when  the  areas  were                                                                    
established  they  were  based  on the  expectation  of  how                                                                    
production would occur based on  the technology available at                                                                    
the time. As time has  passed technology has advanced to the                                                                    
point  that companies  could access  further  out and  drive                                                                    
production   from  the   extended   areas,  which   required                                                                    
companies  to apply  for an  expansion of  the participating                                                                    
area. If  a participating area  expanded in a  legacy field,                                                                    
the area could  qualify for the GRE if the  company was able                                                                    
to satisfy  the department concerning the  accountability of                                                                    
the production.                                                                                                                 
12:34:12 PM                                                                                                                   
The meeting was adjourned at 12:34 p.m.                                                                                         

Document Name Date/Time Subjects
HCS CSSB 21 RES Sectional for HFIN 040513 final.pdf HFIN 4/6/2013 9:00:00 AM
SB 21
SB 21
NEW FN SB21HCSCS(RES)-DOR-TAX-04-05-13.pdf HFIN 4/6/2013 9:00:00 AM
SB 21
NEW FN SB021HCSCS(RES)-DNR-DOG-4-5-13.pdf HFIN 4/6/2013 9:00:00 AM
SB 21
SB 21 Fiscal Impact Presentation HFIN.pdf HFIN 4/6/2013 9:00:00 AM
SB 21