Legislature(2015 - 2016)

04/06/2016 03:05 PM FIN


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03:05:43 PM Start
03:06:26 PM HB247
07:57:02 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                  HOUSE FINANCE COMMITTEE                                                                                       
                       April 6, 2016                                                                                            
                         3:05 p.m.                                                                                              
                                                                                                                                
3:05:43 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Thompson called the House Finance Committee                                                                            
meeting to order at 3:05 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Jane  Pierson,  Staff,  Representative Steve  Thompson;  Don                                                                    
Bullock,  Staff, House  Majority; Ken  Alper, Director,  Tax                                                                    
Division,   Department   of   Revenue;   Randall   Hoffbeck,                                                                    
Commissioner,  Department  of  Revenue;  Representative  Liz                                                                    
Vasquez; Representative Adam Wool.                                                                                              
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 247    TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                    
                                                                                                                                
          HB 247 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Thompson discussed the meeting agenda.                                                                                 
                                                                                                                                
HOUSE BILL NO. 247                                                                                                            
                                                                                                                                
     "An  Act relating  to  confidential information  status                                                                    
     and  public   record  status  of  information   in  the                                                                    
     possession of  the Department  of Revenue;  relating to                                                                    
     interest  applicable  to  delinquent tax;  relating  to                                                                    
     disclosure  of  oil  and   gas  production  tax  credit                                                                    
     information; relating  to refunds  for the  gas storage                                                                    
     facility tax credit, the  liquefied natural gas storage                                                                    
     facility  tax credit,  and the  qualified in-state  oil                                                                    
     refinery   infrastructure   expenditures  tax   credit;                                                                    
     relating to  the minimum  tax for  certain oil  and gas                                                                    
     production;  relating to  the  minimum tax  calculation                                                                    
     for  monthly  installment  payments of  estimated  tax;                                                                    
     relating  to interest  on monthly  installment payments                                                                    
     of  estimated  tax;  relating to  limitations  for  the                                                                    
     application  of tax  credits; relating  to oil  and gas                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures;     relating    to     limitations    for                                                                    
     nontransferable  oil  and  gas production  tax  credits                                                                    
     based on oil production  and the alternative tax credit                                                                    
     for oil  and gas  exploration; relating to  purchase of                                                                    
     tax  credit  certificates  from the  oil  and  gas  tax                                                                    
     credit fund; relating  to a minimum for  gross value at                                                                    
     the   point   of    production;   relating   to   lease                                                                    
     expenditures  and tax  credits for  municipal entities;                                                                    
     adding    a   definition    for   "qualified    capital                                                                    
     expenditure";  adding  a  definition  for  "outstanding                                                                    
     liability  to   the  state";  repealing  oil   and  gas                                                                    
     exploration    incentive    credits;   repealing    the                                                                    
     limitation on  the application  of credits  against tax                                                                    
     liability  for   lease  expenditures   incurred  before                                                                    
     January 1,  2011; repealing  provisions related  to the                                                                    
     monthly installment payments for  estimated tax for oil                                                                    
     and gas produced before January  1, 2014; repealing the                                                                    
     oil  and  gas  production   tax  credit  for  qualified                                                                    
     capital  expenditures  and certain  well  expenditures;                                                                    
     repealing   the    calculation   for    certain   lease                                                                    
     expenditures applicable before  January 1, 2011; making                                                                    
     conforming amendments;  and providing for  an effective                                                                    
     date."                                                                                                                     
                                                                                                                                
3:06:26 PM                                                                                                                    
                                                                                                                                
Co-Chair  Neuman  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute    for   HB    247,   Work    Draft   29-GH2609\F                                                                    
(Nauman/Shutts, 4/6/16).  There being  NO OBJECTION,  it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
Co-Chair  Thompson addressed  the Committee  Substitute (CS)                                                                    
and summarized  some of the  changes. He noted  that changes                                                                    
were made  to the House  Resources Committee version  of the                                                                    
bill.  He  relayed that  the  interest  on delinquent  taxes                                                                    
would  be  5  percent  above  the  Twelfth  Federal  Reserve                                                                    
District  rate compounded  quarterly for  the first  4 years                                                                    
and then  straight interest at  5 percent above  the Twelfth                                                                    
Federal Reserve  District rate for  the next two  years. The                                                                    
oil tax floor  was hardened to 2 percent of  the gross value                                                                    
of the point  of production. He outlined  adjustments to the                                                                    
Cook Inlet  credits in the  CS. The net operating  losses in                                                                    
the House Resources  version of the bill was  25 percent, 10                                                                    
percent, and  10 percent and  were unchanged in the  CS. The                                                                    
"Qualified  Capital  Expenditure"   (QCE)  credits  were  20                                                                    
percent,  20 percent,  20 percent  in the  Resources version                                                                    
and were changed to 20 percent  and in January 2017 and 2018                                                                    
to  10 percent.  The "Well  Lease Expenditure"  (WLE) credit                                                                    
remained unchanged at  40 percent reduced to  30 percent [in                                                                    
2017[,  and 20  percent  [in  2018]. He  added  that the  CS                                                                    
amended  the  Frontier  Basin Credits  for  expenditures  to                                                                    
complete  an exploration  well that  was  "spudded" but  not                                                                    
completed before  July 1, 2016.  The CS extended  Cook Inlet                                                                    
credits  to Middle  Earth to  hold the  region harmless  and                                                                    
reduced the  cap on credits  that the Department  of Natural                                                                    
Resources  (DNR)  may purchase  from  $200  million to  $100                                                                    
million "per  person, per year."  He detailed that  the "new                                                                    
definition"  for   new  oil  was  5   years.  The  Committee                                                                    
Substitute removed the Cook Inlet  tax cap on oil January 1,                                                                    
2017.                                                                                                                           
                                                                                                                                
3:09:17 PM                                                                                                                    
                                                                                                                                
JANE   PIERSON,   STAFF,  REPRESENTATIVE   STEVE   THOMPSON,                                                                    
presented  the   changes  in  the  bill.   She  provided  an                                                                    
explanation  of  changes (copy  on  file)  to the  Committee                                                                    
Substitute:                                                                                                                     
                                                                                                                                
    Title Changes to conform with changes in the bill.                                                                          
                                                                                                                                
     Sec. 6. (Page  3, Lines 18-28) AS  43.05.225 - Interest                                                                    
     Rate  on  delinquent  taxes.  Will  now  be  compounded                                                                    
     quarterly  at   5%  above  the  12th   Federal  Reserve                                                                    
     District for  the first 4  years after the  tax becomes                                                                    
     delinquent and  5% annually,  no compounding  after the                                                                    
     first 4 years.                                                                                                             
                                                                                                                                
     Sec. 10  (Page 5,  Lines 5-26) AS  43.55.011(e) Deletes                                                                    
     reference to the  Cook Inlet tax cap.  Repealed in Sec.                                                                    
     42.                                                                                                                        
                                                                                                                                
     Sec. 11 (Page 5, Lines  6-26) AS 43.55.011(f) - Hardens                                                                    
     the  floor so  that  no credits  can  reduce the  floor                                                                    
     below  2%   of  the  gross   value  at  the   point  of                                                                    
     production.                                                                                                                
                                                                                                                                
     Sec. 12 (Page  8, Lines 6-7) AS  43.55.011(m) Takes out                                                                    
     reference to  old credits that  are not being  used and                                                                    
     deletes a reference to the Cook Inlet tax cap.                                                                             
                                                                                                                                
     Sec. 13. (Page  8, Line 13-18) AS  43.55.019(e) - Makes                                                                    
     sure  that the  Education  Tax Credit  cannot take  the                                                                    
     floor.                                                                                                                     
                                                                                                                                
     Sec.14.  (Page  15-16,  Lines 1-3)  AS  43.55.020(a)  -                                                                    
     Installment  Payments -  Conforming language  regarding                                                                    
     payment  of taxes  and the  new floor.   Addresses  the                                                                    
     Cook Inlet tax cap.                                                                                                        
                                                                                                                                
     Sec. 15 (Page 16, Line  12) AS 43.55.023(a) - Qualified                                                                    
     Capital  Expenditures.   Reduces the  qualified capital                                                                    
     expenditure  credits  from  20%   to  10%  starting  on                                                                    
     January 1, 2017.                                                                                                           
                                                                                                                                
3:12:17 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued with the explanation of changes:                                                                          
                                                                                                                                
     Sec. 16  (Page 17,  Lines 6-16)  AS 43.55.023(b)  - Net                                                                    
     Operating  Loss  Credits.     Keeps  the  Middle  Earth                                                                    
     carried-forward annual  loss credits  at 25%.   Reduces                                                                    
     the Cook Inlet  Net Operating loss credits  from 25% to                                                                    
     10%  starting  January  1, 2017,  if  the  producer  or                                                                    
     explorer has  not taken  a credit  prior to  January 1,                                                                    
     2017  they are  not eligible.   The  amount Cook  Inlet                                                                    
     NOLs are  consistent with  the House  Resources version                                                                    
     of the bill.   Continues a 25% credit  for Middle Earth                                                                    
     after 2016.                                                                                                                
                                                                                                                                
     Sec.  17  (Page  17,  Lines 27-30)  AS  43.55.023(c)  -                                                                    
     Conforming language to the floor.                                                                                          
     Sec. 20  (Page 19 Lines  11-20) AS 43.55.023(l)  - Well                                                                    
     Lease  Expenditure Credits.    Reduces  the Cook  Inlet                                                                    
     Well  Lease  Expenditure Credits  from  40%  to 30%  on                                                                    
     January  1,  2017,  and  to 20%  on  January  1,  2018.                                                                    
     Middle Earth  credits will  reduce from  40% to  30% on                                                                    
     January 1, 2017                                                                                                            
                                                                                                                                
     Sec. 21-23 (Pages 19, Lines  31-17) AS 43.55.024(f) (g)                                                                    
     (i) - Small Producer Credits.  Conforms to the floor.                                                                      
                                                                                                                                
     Sec.  24  (Page  20,  Lines 26-28)  AS  43.55.025(m)  -                                                                    
     Middle Earth  Drilling Credits. States that  the middle                                                                    
     earth  drilling credits  are  extended  to complete  an                                                                    
     exploration  well that  has spudded  but not  completed                                                                    
     before July 1, 2016.                                                                                                       
                                                                                                                                
     Sec.25.  (Page   21,  Lines   26-29)  AS   43.55.025  -                                                                    
     Alternative Tax Credits for Oil  and Gas Exploration. -                                                                    
     Conforming language to the floor.                                                                                          
                                                                                                                                
     Sec. 26.  (Page 22, Lines  5 and 13) AS  43.55.028(e) -                                                                    
     Oil and Gas Tax  Credit Fund Established; Cash Purchase                                                                    
     of   Tax  Credit   Certificates.     States  that   the                                                                    
     Department may  not purchase more than  $100,000,000 in                                                                    
     tax credits from a person in  a calendar year.  This is                                                                    
     reduced  from  $200,000,000   in  the  House  Resources                                                                    
     version of the bill.                                                                                                       
                                                                                                                                
     Sec.  31.   (Page  15,  Lines   11,  17,  and   20)  AS                                                                    
     43.55.160(e) Conforming amendment  regarding Cook Inlet                                                                    
     Tax Cap on oil.                                                                                                            
                                                                                                                                
     Secs.  32  and 33.  (Pages  25-27,  Lines  24 -  6)  AS                                                                    
     43.55.160(f) (g)  New Oil, Gross Value  Reduction - For                                                                    
     oil  and gas  first produced  after December  31, 2016,                                                                    
     the new  oil reduction shall  apply for the  first five                                                                    
     years   after  the   commencement   of  production   in                                                                    
     commercial quantities.  For oil  and gas first produced                                                                    
     prior to  January 1, 2017,  the reduction  shall expire                                                                    
     January 1, 2021.                                                                                                           
                                                                                                                                
3:16:18 PM                                                                                                                    
                                                                                                                                
Ms. Pierson noted that any other changes were conforming                                                                        
amendments.                                                                                                                     
                                                                                                                                
3:16:31 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
3:17:28 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
DON  BULLOCK, STAFF,  HOUSE  MAJORITY,  emphasized that  the                                                                    
removal of the Cook Inlet gas cap only applied to oil.                                                                          
                                                                                                                                
Representative Gara  had questions about the  changes in the                                                                    
CS compared to  the governor's bill. He  understood that the                                                                    
governor eliminated the  Cook Inlet QCE and  WLE credits and                                                                    
wondered whether  changes were  made to  the credits  in the                                                                    
CS.  Mr.  Bullock  replied  that  based  on  testimony  from                                                                    
Enalytica,  the  credits  were   stepped  down  rather  than                                                                    
eliminated. Representative Gara noted  that the governor had                                                                    
proposed to eliminate the 20  percent QCE and the 40 percent                                                                    
WLE credits.  He asked what  the CS  did in relation  to the                                                                    
items.  Mr.  Bullock referenced  page  16,  line 11  of  the                                                                    
legislation  and pointed  out the  language reduced  the QCE                                                                    
from  20 percent  to 10  percent. He  reported that  the Net                                                                    
Operating Loss  (NOL) credit  found on  page 17  was "scaled                                                                    
down"  to  10  percent  inside the  Cook  Inlet  sedimentary                                                                    
basin.                                                                                                                          
                                                                                                                                
Co-Chair  Thompson  noted  that the  Department  of  Revenue                                                                    
(DOR) would answer questions later in the evening.                                                                              
                                                                                                                                
3:21:07 PM                                                                                                                    
                                                                                                                                
Representative Gara  noted that the governor's  bill did not                                                                    
allow the  tax floor  to go below  4 percent.  He understood                                                                    
that in the  CS the tax floor was established  at 2 percent.                                                                    
Mr. Bullock  answered that  the reduction  of the  tax floor                                                                    
was  a  2  step  process;  first  a  calculation  determined                                                                    
whether the minimum  tax on the gross applied and  if so, AS                                                                    
43.55.011(f) applied. If the allowable  credits were below 4                                                                    
percent  the floor  hardened  at  2 percent.  Representative                                                                    
Gara  surmised that  the tax  floor was  now 2  percent. Mr.                                                                    
Bullock   believed  the   governor  had   wanted  a   higher                                                                    
percentage  than 4  percent. Representative  Gara asked  for                                                                    
the  changes  to the  Cook  Inlet  oil  tax  in the  CS.  He                                                                    
responded that on January 1, 2017  the tax cap on Cook Inlet                                                                    
Oil was  eliminated. Representative  Gara wondered  what the                                                                    
oil tax reverted  to. Mr. Bullock replied that  the tax rate                                                                    
would be the same as the statewide rate of 35 percent.                                                                          
                                                                                                                                
Representative Gara  asked whether  the 35 percent  rate was                                                                    
structured  the same  as in  SB 21  (Oil And  Gas Production                                                                    
Tax)[Chapter 10  SLA 13 - 05/21/2013].  Mr. Bullock remarked                                                                    
that  35  percent  was  the  rated  established  in  SB  21.                                                                    
Representative Gara asserted that  the 35 percent tax kicked                                                                    
in at  $155 per barrel of  oil but was much  lower below the                                                                    
threshold.  Representative Gara  voiced that  the governor's                                                                    
bill  removed  the  exemption for  "Gross  Value  Reduction"                                                                    
(GVR) fields  (post 2002  fields) and  subjected the  oil to                                                                    
the  tax  floor.  He  surmised that  the  CS  subjected  GVR                                                                    
field's oil to  the tax floor after 5 years  and the "higher                                                                    
prices  to the  older oil  tax rate."  Mr. Bullock  answered                                                                    
that there  were two different  effects related to  the GVR.                                                                    
He explained that  one was added back in  order to determine                                                                    
the NOL credit  and the second change limited  the period in                                                                    
which  the  GVR  would   apply.  Representative  Gara  asked                                                                    
whether the  statewide tax rate  would apply after  the five                                                                    
period.  Mr.  Bullock  responded  that "they  would  not  be                                                                    
subject to the  GVR." Representative Gara asked  "how it was                                                                    
not the same thing."                                                                                                            
                                                                                                                                
3:24:50 PM                                                                                                                    
                                                                                                                                
Mr. Bullock replied that "after  the oil no longer qualified                                                                    
for the  GVR and  the clocks  ran out  there was  no special                                                                    
distinction for the oil."                                                                                                       
                                                                                                                                
Representative Wilson asked which sections  of the CS had to                                                                    
do  with SB  21 and  the North  Slope. Mr.  Bullock answered                                                                    
that SB  21 addressed the  GRV, therefore the  provisions in                                                                    
the CS  related to the  hard floor applied, in  addition the                                                                    
NOL changes, the QCE reduction,  and the interest rates were                                                                    
changes  from SB  21. Representative  Wilson referenced  the                                                                    
changes  to  the interest  rate  for  delinquent taxes.  She                                                                    
surmised  that the  taxes were  not  really delinquent;  the                                                                    
companies paid its  taxes and that the  state was delinquent                                                                    
due  to audits.  She  did not  want it  to  appear like  the                                                                    
companies were  not filing appropriately. She  asked how the                                                                    
interest rate changes were  developed. Mr. Bullock responded                                                                    
that there had been  significant discussion on the necessary                                                                    
length of  time to  complete audits.  He explained  that the                                                                    
reduced interest rate  "after the first period  of time" was                                                                    
established  in  consideration  of   the  time  it  took  to                                                                    
complete   audits.   He    informed   the   committee   that                                                                    
"delinquency" referred to the amount  of tax that was due at                                                                    
the  time and  maybe  higher subsequent  to  the audit  than                                                                    
initially calculated.  Similarly, if a company  was entitled                                                                    
to a refund the rate would  apply the interest rate from the                                                                    
date of the overpayment.                                                                                                        
                                                                                                                                
Co-Chair  Thompson  surmised  that  it  was  essentially  an                                                                    
underpayment. Mr.  Bullock replied  that delinquency  was an                                                                    
underpayment  based  on the  tax  amount  determined by  the                                                                    
audit. He  detailed that  the interest  only applied  to the                                                                    
unpaid amount as determined by the audit.                                                                                       
                                                                                                                                
Representative  Wilson   asked  whether   all  of   the  oil                                                                    
companies  were  audited.  She remarked  that  the  Internal                                                                    
Revenue Service (IRS) did not audit all taxes.                                                                                  
                                                                                                                                
Co-Chair Thompson  deferred the  question to  the Department                                                                    
of Revenue (DOR).                                                                                                               
                                                                                                                                
3:29:16 PM                                                                                                                    
                                                                                                                                
Representative Munoz asked about the updated fiscal notes.                                                                      
                                                                                                                                
Co-Chair  Thompson  replied  that   DOR  was  in  a  meeting                                                                    
currently and would  have the updated fiscal  notes later in                                                                    
the evening.                                                                                                                    
                                                                                                                                
Representative Gara  spoke to the governor's  effort to "cap                                                                    
tax credits  at $25 million  per owner." He  understood that                                                                    
the CS  capped credits at  $100 million. He  understood that                                                                    
companies never  claimed more than $100  million in credits.                                                                    
He asked  if the cap was  real. Mr. Bullock stated  that the                                                                    
amount was  a cap  and anticipated  that enough  funding was                                                                    
maintained in  the oil and  gas tax  credit fund to  pay the                                                                    
amount. Representative Gara stated  that the governor's bill                                                                    
estimated  a  savings  of $785  million  and  the  Resources                                                                    
version only saved the state $20  million in FY 17. He asked                                                                    
for concurrence.                                                                                                                
                                                                                                                                
Co-Chair Thompson  deferred the question to  DOR. He relayed                                                                    
that the meeting would recess until 6:30 p.m.                                                                                   
                                                                                                                                
3:31:19 PM                                                                                                                    
RECESSED                                                                                                                        
                                                                                                                                
6:39:42 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Thompson  asked  the  department  to  address  the                                                                    
committee.                                                                                                                      
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
stated that  he was  present to  answer questions  about the                                                                    
Committee Substitute.  He referred to a  draft fiscal impact                                                                    
document from the  department dated April 6,  2016, (copy on                                                                    
file)  which included  a table  that depicted  the estimated                                                                    
fiscal impact [revenue and budget]  of the provisions in the                                                                    
CS.                                                                                                                             
                                                                                                                                
Representative  Kawasaki referred  to  the  DOR fiscal  note                                                                    
dated March 29,  2016 that projected a $770  million to $805                                                                    
million fiscal impact  [in FY 2017]. He asked  why the total                                                                    
fiscal impact  for the CS  in FY 17  was $10 million  to $50                                                                    
million. Mr.  Alper answered that  FY 17 was not  the "wrong                                                                    
data point  to use as  the comparative." He  elaborated that                                                                    
there  were   anomalies  in   FY  17   and  that   the  most                                                                    
"substantial" change  between the  previous fiscal  note was                                                                    
the  effective date.  The governor's  bill had  an effective                                                                    
date  of  July 1,  2016  and  most  of  the changes  in  the                                                                    
Committee Substitute  included an effective date  of January                                                                    
1, 2017. He suggested that  referring to the out years, when                                                                    
the  provisions were  fully  implemented  provided a  better                                                                    
comparison.  Representative  Kawasaki cited  the  difference                                                                    
between the governor's  bill total fiscal impact  in FY 2018                                                                    
totaling $420  million to  $455 million  and the  CS version                                                                    
fiscal  impact  of  $105  million  to  $195  million,  which                                                                    
amounted  to   roughly  half  the   fiscal  impact   of  the                                                                    
governor's bill.  Mr. Alper replied  in the  affirmative. He                                                                    
detailed  that the  largest difference  in  the totals  were                                                                    
related to the "minimum tax."  The governor's hard floor was                                                                    
5 percent;  all of the  various credits were  "tightened up"                                                                    
and  would not  reduce the  tax burden  below the  5 percent                                                                    
floor. The  Committee Substitute  included a 2  percent hard                                                                    
floor for  credits that represented  the largest  portion of                                                                    
the changes.                                                                                                                    
                                                                                                                                
6:45:30 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  referred to  the NOL  credits and                                                                    
wondered  how the  Committee  Substitute  differed from  the                                                                    
House  Resources Committee  and governor's  versions of  the                                                                    
bill.  Mr. Alper  answered that  companies experiencing  net                                                                    
operating  losses was  a new  phenomenon  in "modern  Alaska                                                                    
history" due to  the low oil prices. He  elaborated that the                                                                    
companies were  losing money at  a time the state  offered a                                                                    
net profits tax and were  earning NOL credits. A company was                                                                    
prohibited from receiving  a cash payment from  the state if                                                                    
a company produced more than  50,000 bbl. per day therefore,                                                                    
the  credit balance  against taxes  was  carried forward  to                                                                    
future  years. He  elucidated that  DOR predicted  that $750                                                                    
million in carried forward  "non-cashable" NOL credits would                                                                    
be due  to the major  producers in FY  2018 or FY  2019. The                                                                    
floor was  partially hardened against  the majors  using the                                                                    
NOL credits at 4 percent in  the CS. The $750 million amount                                                                    
represented the  amount that was  left over after  the floor                                                                    
was   completely  wiped   out  by   stacked  credits   while                                                                    
accumulating more  NOLs to  carry forward.  The CS  made the                                                                    
stacked  credits  "higher;" only  some  of  the minimum  tax                                                                    
could be  offset (2  percent). Therefore,  only some  of the                                                                    
operating loss  credits were  not being  used to  offset the                                                                    
floor  and  were remaining  in  the  company's pile  of  NOL                                                                    
credits. He  guessed that based  on the  original governor's                                                                    
bill fiscal note another $400  to $500 million in NOLs would                                                                    
be carried  forward amounting to  over $1 billion  in credit                                                                    
liabilities  that will  be offset  to taxes  once the  price                                                                    
increased. Representative Guttenberg  wondered what happened                                                                    
if the state  remained in a long-term  low price environment                                                                    
and how  long the NOL credits  were able to "roll  out." Mr.                                                                    
Alper  answered that  the breakeven  average price  based on                                                                    
the current estimates  was $46.00 for all  oil companies. He                                                                    
noted  that 180  million  bbl. per  year  were produced  and                                                                    
every dollar price  drop below $46.00 represented  a loss of                                                                    
$180  million in  operating budget  losses times  35 percent                                                                    
totaled  $75 million  in NOL  credits. He  reported that  if                                                                    
there were multiple years of  operating losses for the major                                                                    
producers "the  NOLs were a  wave that would build  and roll                                                                    
forward." In the future, if the  price of oil spiked to $120                                                                    
per barrel  the carried forward  NOL credits would  first be                                                                    
used  to  offset  the  production   tax  but  not  from  the                                                                    
royalties.                                                                                                                      
                                                                                                                                
6:50:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Thompson noted that  Representative Liz Vasquez and                                                                    
Representative  Adam  Wool  were present  in  the  committee                                                                    
room.                                                                                                                           
                                                                                                                                
Representative  Gara  asked  whether North  Slope  producers                                                                    
could  either deduct  or charge  the state  35 percent  of a                                                                    
company's losses depending on the  size of the producer. Mr.                                                                    
Alper  responded that  the credit  applied to  revenue minus                                                                    
expenditures  if   amounted  to  a  negative   number  which                                                                    
represented  a loss  times the  35 percent  of the  rate and                                                                    
would  amount to  the credit  earned. He  reiterated that  a                                                                    
company producing  less than  50 thousand  bbl. per  day was                                                                    
eligible for  a refundable cash  credit that was  subject to                                                                    
appropriation  and  larger  producers received  NOL  carried                                                                    
forward  credits.  Representative  Gara spoke  to  the  cash                                                                    
credits and  asked whether the  state was paying  35 percent                                                                    
of  all of  a  company's operating  and  capital costs.  Mr.                                                                    
Alper  answered  in  the  affirmative.  Representative  Gara                                                                    
referred  to  North  Slope  companies  that  were  producing                                                                    
50,000 bbl. or  less and asked how much the  state would pay                                                                    
in credits to  the small producers in FY 17,  FY 18 and paid                                                                    
in the current year. Mr. Alper  replied that the total in FY                                                                    
15 was  $203 million  and in FY  16 was  estimated similarly                                                                    
and  in FY  17 was  roughly $325  million and  in FY  18 was                                                                    
approximately  $250   million.  Representative   Gara  asked                                                                    
whether  years after  that time  relied on  "guesswork." Mr.                                                                    
Alper answered  that the estimates  were a little  more than                                                                    
guesswork but tended  to increase the closer  to the present                                                                    
day because  more variables were known.  Representative Gara                                                                    
surmised that for small North  Slope producers the state was                                                                    
estimated to  pay $200 million  to $325 million  within four                                                                    
years  and  only  receive  $15 million  to  $60  million  in                                                                    
production  taxes. Mr.  Alper responded  in the  affirmative                                                                    
but the CS  would change the estimates due  to hardening the                                                                    
floor to  2 percent in  FY 18 when  $70 to $100  million was                                                                    
projected in production tax revenues.                                                                                           
                                                                                                                                
6:55:11 PM                                                                                                                    
                                                                                                                                
Representative  Gara asked  that  considering the  increased                                                                    
revenues  the  state  was  still expected  to  pay  more  in                                                                    
cashable NOLs in  the future years than it  would receive in                                                                    
production   tax  revenues.   Mr.  Alper   replied  in   the                                                                    
affirmative  and stated  that "at  best" the  production tax                                                                    
was predicted  to just breakeven. Representative  Gara spoke                                                                    
to the  NOLs paid to  the major producers. He  wondered what                                                                    
was  forecasted for  the  current and  next  year NOLs.  Mr.                                                                    
Alper responded  that in  the calendar  year 2015  one major                                                                    
producer  had enough  credits to  offset a  large amount  of                                                                    
production tax.  The department predicted  approximately $23                                                                    
million in  carry forward NOLs in  FY 16 and $95  million in                                                                    
FY 17  and by  2018 the  number increased  to at  least $150                                                                    
million,  which  completely  offset North  Slope  production                                                                    
taxes. Representative Gara  asked about FY 17 and  FY 18. He                                                                    
asked for the total value of  the NOL credits for both years                                                                    
combined.  Mr.  Alper  clarified  that any  of  the  credits                                                                    
earned  in FY  15 were  at  the 45  percent level  due to  a                                                                    
temporary NOL increase over two  years granted in SB 21. The                                                                    
forecasted amount of  NOLs earned by the  major producers by                                                                    
the end of FY 16 was $385 million.                                                                                              
                                                                                                                                
Representative Gara asked  about the estimate for  FY 17 and                                                                    
FY  18. Mr.  Alper clarified  that the  $385 million  figure                                                                    
included the  NOL's from  the prior  year since  the credits                                                                    
carried forward and accumulated. He  offered that by the end                                                                    
of  FY 17  the total  was $635  million (approximately  $250                                                                    
million more  than in  FY 16) and  by the end  of FY  18 the                                                                    
total was $766 million (about  $135 million more than in the                                                                    
end of FY 17).                                                                                                                  
                                                                                                                                
Representative Wilson spoke to the  money owed in credits in                                                                    
the current year. She asked  for verification that there was                                                                    
a  difference in  the credits  owed and  what the  state was                                                                    
required to pay.  Mr. Alper answered in  the affirmative. He                                                                    
spoke to  how much  the state  had to  repay and  pointed to                                                                    
statute  that only  required "a  relatively small  number at                                                                    
low oil prices" but  historically the legislature funded the                                                                    
amount  requested. He  remarked that  ultimately the  amount                                                                    
paid was subject to appropriation.                                                                                              
                                                                                                                                
7:01:31 PM                                                                                                                    
                                                                                                                                
Representative Wilson noted her  frustration at the tenor of                                                                    
the conversation  about the  credits. She  characterized the                                                                    
state's  return  on the  investment  as  "pretty good."  She                                                                    
asked whether Mr. Alper agreed.  Mr. Alper responded that he                                                                    
had included  a few slides  in a past presentation  that had                                                                    
calculated  new  barrels   associated  with  refundable  tax                                                                    
credits and  believed it was  a more  fair way to  frame the                                                                    
discussion on  return on investment. He  commented that when                                                                    
the price  of oil  had risen the  state received  a windfall                                                                    
from the legacy oil  fields. Representative Wilson contended                                                                    
that she  saw the  windfall as  an investment  from previous                                                                    
tax  credits that  incentivized production.  She recalled  a                                                                    
chart related  to SB 21  that depicted the highest  years of                                                                    
tax credits were  forthcoming due to other  tax credits from                                                                    
previous tax  systems. She asked whether  the refundable tax                                                                    
credits were only related to  SB 21 or included credits from                                                                    
previous systems. She asked for  a distinction between North                                                                    
Slope  and  Cook Inlet  refundable  tax  credits. Mr.  Alper                                                                    
responded that SB 21 did not  impact Cook Inlet taxes in any                                                                    
way. The credits  related to Cook Inlet were  the 25 percent                                                                    
"Operating Loss Credit" that was  part of Alaska's Clear and                                                                    
Equitable Share (ACES), the  20 percent "Capital Expenditure                                                                    
Credit"  from the  Petroleum Production  Tax (PPT)  in 2006,                                                                    
the 40  percent credit WLE  part of the Cook  Inlet Recovery                                                                    
Act in 2010, and the  Exploration Credits from 2003 from the                                                                    
Economic Limit  Factor (ELF) era. He  explained that related                                                                    
to   the   North  Slope   part   of   the  charts   included                                                                    
transitioning from  the refundable capital credits  from PPT                                                                    
and  extended through  ACES were  being  accelerated to  1.5                                                                    
years  and eliminated.  The chart  also  included the  small                                                                    
amount of  exploration credits  from 2003  and the  NOLs. He                                                                    
added that the NOL concept dated  back to the PPT system but                                                                    
establishing the  credits at 35  percent and 45  percent was                                                                    
unique to  SB 21.  He voiced  that the  bill as  proposed or                                                                    
amended did not change the NOL credit on the North Slope.                                                                       
                                                                                                                                
7:06:07 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  what cash  tax  credits  were                                                                    
currently  eligible  for  payment  under SB  21.  Mr.  Alper                                                                    
answered  that  if  exclusively  tax  credits  under  SB  21                                                                    
existed  for  Cook  Inlet  the   NOL  credits  would  apply.                                                                    
Representative   Wilson   interjected  and   rephrased   her                                                                    
question. She wondered what the  cashable tax credits solely                                                                    
for the North Slope based exclusively on SB 21 would total.                                                                     
Mr. Alper  replied that roughly  $67 million  in exploration                                                                    
credits were anticipated. He detailed  that the credits were                                                                    
high because  the 40 percent exploration  credits were about                                                                    
to  sunset and  were stacked  with 45  percent NOL  credits.                                                                    
Representative Wilson asked whether  the number included the                                                                    
NOL credits that were credits  against taxes owed. Mr. Alper                                                                    
clarified  that   the  majors  did  not   receive  cash  for                                                                    
anything, but  the smaller producers could  receive cash for                                                                    
NOLs. Representative Wilson spoke to  the 2 percent floor in                                                                    
the  Committee Substitute.  She  asked  whether the  credits                                                                    
would carry forward  to the following year or  would be lost                                                                    
due to  the 2  percent floor. Mr.  Alper responded  that the                                                                    
NOLs would  carry forward to  the next year; however  the SB                                                                    
21 per barrel credit was  not carried forward.  He mentioned                                                                    
that the  small producer  and per  barrel credits  were "use                                                                    
them or  lose them" credits. Representative  Wilson surmised                                                                    
that the  issue could  have a  negative impact  on activity.                                                                    
Mr. Alper remarked that the  per barrel credit and the small                                                                    
producer credits had been established  in law and were never                                                                    
cashable. The CS only impacted  the $5 per barrel credit for                                                                    
new fields or "GVR eligible"  fields earned by new producers                                                                    
currently, which could  be used to reduce taxes  to zero and                                                                    
would  subject  them  to  the   2  percent  hard  floor.  He                                                                    
characterized the change as an unrecoverable tax increase.                                                                      
                                                                                                                                
7:11:23 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt referred  to Representative  Wilson's                                                                    
question regarding the benefits  of the credits. He recalled                                                                    
that  Mr. Alper  had referred  to a  slide and  relayed that                                                                    
most  of the  production  came from  legacy  fields. He  had                                                                    
heard  that  there  had  been   a  recent  increase  in  oil                                                                    
production. He  wondered how his answer  "meshed." Mr. Alper                                                                    
referred  to  the  DOR forecast  documents  (Revenue  Source                                                                    
Book)  that  included  the  types  of  oil  production  that                                                                    
stacked  such  as currently  producing  oil,  the oil  under                                                                    
development  and   the  amounts  of  oil   that  were  under                                                                    
evaluation  by  the  department.   He  elucidated  that  the                                                                    
currently producing oil  was in a natural  decline rate. New                                                                    
wells were  drilled in legacy fields  to increase efficiency                                                                    
but were  not considered  new oil  and specifically  did not                                                                    
qualify for the Gross value  Reduction (GVR). He agreed that                                                                    
production increased last  year by 1 percent  or 15 thousand                                                                    
barrels per day  in the new CD5 field  which decreased North                                                                    
Slope  decline  by  5,000  barrels per  day  to  offset  the                                                                    
decline  to 10,000  barrels per  day. Representative  Pruitt                                                                    
surmised  that  the  NOLs  came into  play  to  help  offset                                                                    
decline.  He surmised  that NOL's  were responsible  for the                                                                    
oil from  CD5 and  also the  new oil from  new wells  in the                                                                    
legacy  fields.   He  believed  that  without   the  state's                                                                    
investments  more  oil would  not  have  been produced.  Mr.                                                                    
Alper agreed. He stated that  there was a substantial amount                                                                    
of new oil  and one could argue what was  the total share of                                                                    
new oil versus legacy oil.  He informed the committee that 9                                                                    
percent of the  current production was eligible  for the GVR                                                                    
and  some of  the  oil could  possibly be  new  oil. In  the                                                                    
specific  case of  CD5 (ConocoPhillips  field) the  spending                                                                    
did not show up  on the credit side of the  ledger, but as a                                                                    
reduction  in tax  liability  due to  an  offset in  profits                                                                    
because  field development  began  in  profitable years.  He                                                                    
maintained that switching  to a net profits tax  in 2006 was                                                                    
"a more  fundamental decision" to encourage  reinvestment of                                                                    
profits in Alaska  by investing in new fields  by not taxing                                                                    
the share of  revenue that was reinvested  in something new.                                                                    
He opined that "there  were efficiencies and inefficiencies"                                                                    
in the system, but the  incentive had been successful in the                                                                    
case of CD5                                                                                                                     
                                                                                                                                
7:16:37 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt spoke  to the  uncertainty caused  by                                                                    
changing from  gross to "a  high level"  of net in  order to                                                                    
offset the high level on  net credits. He believed the state                                                                    
had  created  the  haphazard  system  of  credits  that  was                                                                    
currently  in place  for its  own benefit.  He spoke  to the                                                                    
limit  of $100  million  per  company in  the  CS. He  asked                                                                    
whether the  administration intended  to pay the  credits to                                                                    
the statutory number  of $73.5 million maximum  pay out. Mr.                                                                    
Alper remarked that  he could not read  the governor's mind.                                                                    
He stated  that the governor's  bill intended to  reduce the                                                                    
annual  size  of  the  credit   program  to  something  more                                                                    
affordable  for  the  state. The  Committee  Substitute  was                                                                    
"somewhere  in between"  the governor's  bill and  the House                                                                    
Resources  Committee version  and he  was uncertain  how the                                                                    
governor was going to  respond. Representative Pruitt stated                                                                    
there had been a previous  version of the bill that included                                                                    
a  $200  million  limit.  He remarked  that  Mr.  Alper  was                                                                    
present  to "speak  for  the governor"  and  wanted to  know                                                                    
whether the administration  was going to pay  the credits to                                                                    
the statutory limit in the future.                                                                                              
                                                                                                                                
7:19:51 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
7:20:51 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
answered that the question was  two-fold. First, it depended                                                                    
on how  much the  legislature would appropriate  for payment                                                                    
of  the credits.  Second, the  decision concerning  how much                                                                    
the governor  appropriated depended  on what  budget package                                                                    
was passed by the legislature.                                                                                                  
                                                                                                                                
Representative  Pruitt spoke  to  the $100  million cap.  He                                                                    
asked  what  happened if  a  producer  had $110  million  in                                                                    
"liability" and wondered whether  the $10 million would roll                                                                    
over as  credits for the  next year. Mr. Alper  responded in                                                                    
the affirmative.  He discussed "repurchasing  credits" known                                                                    
as "certificates."  He explained  that only  small producers                                                                    
were eligible  to have its  certificates repurchased  by the                                                                    
state and  that the  refundable credits were  not use  it or                                                                    
lose it credits. He reiterated  that only credits that could                                                                    
be  applied  against  a  liability   could  not  be  carried                                                                    
forward; NOLs and other credits were "not lost."                                                                                
                                                                                                                                
7:23:28 PM                                                                                                                    
                                                                                                                                
Representative  Munoz referred  to testimony  from producers                                                                    
urging that the credits should  be maintained in the current                                                                    
year.  She  noted that  producers  operated  on a  different                                                                    
fiscal year and  asked what portion of the FY  17 credit for                                                                    
Cook  Inlet  was committed  in  the  state's current  fiscal                                                                    
year.  Mr.  Alper  replied  that  the  Committee  Substitute                                                                    
included an  effective date  of January 1,  2017 and  all of                                                                    
the credits earned  for the rest of 2016  were unchanged. He                                                                    
detailed  that  some  of the  credits  earned  from  January                                                                    
through  June, 2017  (included in  fiscal  year 2017)  would                                                                    
impact the  FY 17 calculations. Whatever  the fiscal impact,                                                                    
the numbers  were much smaller  in FY 17 largely  because it                                                                    
was only  half a year. The  bulk of the impact  was not seen                                                                    
until all  of the  provisions were  fully implemented  in FY                                                                    
18. Representative  Munoz observed  that the  largest impact                                                                    
in the  CS was on the  North Slope and thought  the goal was                                                                    
to place  a greater  impact on Cook  Inlet. She  referred to                                                                    
DOR's spring  revenue forecast document  and cited  the Cook                                                                    
Inlet revenue for FY 17 of  $414 million, $162 million in FY                                                                    
18 decreasing  to $100 million in  FY 20. She asked  for the                                                                    
estimated amount  based on  the CS that  the state  would be                                                                    
paying in credits  for Cook Inlet. Mr.  Alper explained that                                                                    
the  CS  fiscal impact  document  was  divided into  revenue                                                                    
increases  and  reduced  spending.  In FY  18,  spending  on                                                                    
credits  for Cook  Inlet  would be  reduced  by the  credits                                                                    
average of $35 million, which  would be subtracted from $162                                                                    
million.                                                                                                                        
                                                                                                                                
7:27:53 PM                                                                                                                    
                                                                                                                                
Representative  Munoz  surmised  that   changes  in  the  CS                                                                    
generated more revenue  in relation to the  North Slope. Mr.                                                                    
Alper  answered  that  the  CS  only  impacted  3  areas  of                                                                    
revenue. One change, the reintroduced  tax on Cook Inlet oil                                                                    
generated a minimal  dollar amount and was  estimated at $10                                                                    
million  to  $15  million  per year  until  2021  when  they                                                                    
slightly increased.  Second, most of  the oil and  value was                                                                    
from  the  North  Slope;  therefore,  the  impact  from  the                                                                    
hardened floor would be felt  on the North Slope. He offered                                                                    
that the  third piece related  to the GRV  reductions impact                                                                    
on the  NOL credits was  limited to the North  Slope because                                                                    
the GVR  provision in SB  21. He  stated that the  money and                                                                    
value were in the North Slope production.                                                                                       
                                                                                                                                
Co-Chair Neuman referred to $15  million in the value of oil                                                                    
in Cook  Inlet. He  asked about  the current  production and                                                                    
price  of  the  oil.  Mr. Alper  answered  that  Cook  Inlet                                                                    
produced 15 to 18 thousand bbl.  per day which resulted in 5                                                                    
million taxable bbls.  of oil per year  (the number included                                                                    
a  reduction   of  roughly  one-eighth  total   barrels  for                                                                    
royalties).  He mentioned  that the  department's forecasted                                                                    
price  was "bleak"  and the  state would  receive about  $10                                                                    
million per year in production tax.                                                                                             
                                                                                                                                
Representative  Munoz  referred   to  conclusions  from  the                                                                    
legislature's  consultant [Janak  Mayer, Chairman  and Chief                                                                    
Technologist, enalytica] that the  issues lied in Cook Inlet                                                                    
credits  that had  worked  but were  now  too generous.  She                                                                    
thought  the  Cook   Inlet  changes  in  the   CS  were  not                                                                    
sufficient  and  warranted   further  reduction.  She  would                                                                    
continue to work on the issue.                                                                                                  
                                                                                                                                
7:31:25 PM                                                                                                                    
                                                                                                                                
Representative Pruitt asked  how much of the  15,000 bbl. to                                                                    
18,000 bbls. of oil production  from Cook Inlet was consumed                                                                    
in-state. Mr. Alper replied that  all of the oil was refined                                                                    
in Alaska and was mostly consumed in state.                                                                                     
                                                                                                                                
Commissioner Hoffbeck  interjected that 100 percent  of Cook                                                                    
Inlet production was used in Alaska.                                                                                            
                                                                                                                                
Representative  Pruitt asked  how the  $10 million  in taxes                                                                    
would  impact investment  in Cook  Inlet, for  refiners like                                                                    
Tesoro, and also  consumers. Mr. Alper deduced  that the tax                                                                    
was roughly $0.05  per gallon. He was  uncertain what amount                                                                    
a company  would absorb and how  much would be passed  on to                                                                    
customers.  Representative Pruitt  mentioned  the bill  that                                                                    
would  increase motor  fuel tax  by $0.08,  jet fuel  tax by                                                                    
$0.07, etc. Fuel  taxes paid by the  consumer could increase                                                                    
to $0.13 per gallon. He  asked whether his calculations were                                                                    
accurate if both measures passed.                                                                                               
                                                                                                                                
Commissioner  Hoffbeck answered  that Cook  Inlet oil  was a                                                                    
waterborne commodity  that could  be sold anywhere  and that                                                                    
the market would determine the  price of the oil. Cook Inlet                                                                    
producers "would not cut Tesoro a deal" due to credits.                                                                         
                                                                                                                                
7:35:24 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  was concerned that the  committee had                                                                    
not  seen any  modelling on  how  the CS  would impact  Cook                                                                    
Inlet investment.                                                                                                               
                                                                                                                                
Representative Gara  discussed the development of  CD5 under                                                                    
ACES  and the  "conscious  decision" had  been  made by  the                                                                    
legislature that the taxes were  high and at high prices the                                                                    
state would  reinvest in credits.  He voiced that  oil taxes                                                                    
were  lower   and  hoped  that  would   be  considered  when                                                                    
decisions were made  about credits. He pointed to  the FY 17                                                                    
credits and  deduced that roughly  $325 million  in cashable                                                                    
credits and  $250 million in large  producer credits accrued                                                                    
for   the  North   Slope,  and   $130  million   in  credits                                                                    
accumulated for  Cook Inlet. He  asked whether his  math was                                                                    
accurate.  Mr.  Alper  responded  that the  CS  reduced  the                                                                    
credit spend  in FY 17 by  $20 million because of  the later                                                                    
effective dates.  He reported that DOR  recently revised the                                                                    
credit  spend and  estimated the  credits  would total  $775                                                                    
million in FY  17 which would total roughly  $750 million if                                                                    
the  CS was  passed. Additionally,  another $150  million in                                                                    
credits against liability and  approximately $300 million in                                                                    
carried  forward   credits  that  were  not   cashable  were                                                                    
applicable  and brought  the FY  17 total  to $1.1  billion.                                                                    
Representative Gara spoke to the  accrued credits for FY 18.                                                                    
He  asked whether  the CS  maintained over  $500 million  in                                                                    
credits. Mr.  Alper answered that  the revised FY  18 credit                                                                    
estimate in the  final spring forecast was  $500 million and                                                                    
the  bill  would  reduce the  amount  by  approximately  $60                                                                    
million for  a total  number of  $440 million.  In addition,                                                                    
$150  million in  non-cashable credits  and $205  million in                                                                    
credits against  liability applied to total  $800 million in                                                                    
FY  18. He  remembered that  the CS  gained $100  million in                                                                    
taxes due  to the  hardening of  the floor,  which detracted                                                                    
from the $800 million total.                                                                                                    
                                                                                                                                
7:40:20 PM                                                                                                                    
                                                                                                                                
Representative   Gara  asked   about  the   additional  $200                                                                    
million. Mr. Alper replied that  the $200 million related to                                                                    
the credits  against a tax  liability that were  the minimum                                                                    
tax, the small producer credit, and the per barrel credit.                                                                      
                                                                                                                                
Representative Gara asked whether  the small producer credit                                                                    
was  eliminated  in all  versions  of  the legislation.  Mr.                                                                    
Alper responded that the small  producer credit would slowly                                                                    
phase out  over the  next 9 years.  He delineated  that that                                                                    
the  credit  was established  in  the  PPT system  10  years                                                                    
earlier and  must be earned by  May 1, 2016 in  order to use                                                                    
it. If a  new company qualified by May 1,  2016, the company                                                                    
collected  the credit  for the  next nine  years. The  small                                                                    
producer  credits would  end  in  2024. Representative  Gara                                                                    
spoke  to the  $100  million credit  limit  per company.  He                                                                    
wondered  whether the  limit was  real since  most producers                                                                    
already  fell  within  the  $100   million  cap.  Mr.  Alper                                                                    
reiterated that  there had been  6 instances in  the state's                                                                    
history  when  a  company had  received  credits  over  $100                                                                    
million in  a single  year. He elaborated  that DOR  was not                                                                    
aware of any  large credits over the  $100 million threshold                                                                    
in the next two or three years.                                                                                                 
                                                                                                                                
7:43:04 PM                                                                                                                    
                                                                                                                                
Representative Gara  believed that the state  should collect                                                                    
$800 million in tax revenue  in order to afford $800 million                                                                    
in  credits.  He ascertained  that  the  CS instituted  a  4                                                                    
percent gross  tax with some  exceptions and  was maintained                                                                    
until roughly  $76.00 per barrel.  Mr. Alper  clarified that                                                                    
based  on  current cost  estimates  the  crossover point  at                                                                    
which  the  gross  tax  inflected and  paid  the  normal  35                                                                    
percent  tax  with the  per  barrel  credit was  $76.00  per                                                                    
barrel  for legacy  oil.  Representative  asserted that  the                                                                    
state could not afford the tax structure in the CS.                                                                             
                                                                                                                                
Representative Wilson  referred to taxing oil  in Cook Inlet                                                                    
and thought  that it was  "different" than North  Slope oil.                                                                    
She referred  to Flint  Hills being  forced to  compete with                                                                    
royalty oil and could import  refined oil rather than refine                                                                    
Alaskan oil. She  asked when the "scale would  be tipped" in                                                                    
favor of  importing refined oil  due to the proposed  tax on                                                                    
Cook Inlet oil. Mr. Alper answered  that he did not know the                                                                    
answer.  Representative Wilson  stated that  the answer  was                                                                    
necessary  to  keep  the instate  refineries  "strong."  She                                                                    
asked if  the governor's bill  taxed gas in Cook  Inlet. Mr.                                                                    
Alper replied  that the  ELF tax  caps part  of the  PPT tax                                                                    
were  not  changed  in  the   governor's  bill  because  the                                                                    
legislation  eliminated  many  of   the  credits  and  would                                                                    
revisit the  issue in 5  years. He continued that  the House                                                                    
Resources version  created a working group  to determine how                                                                    
to tax  Cook Inlet gas and  oil in 2022 and  the CS repealed                                                                    
the tax  cap for oil and  repealed the $0.17 tax  cap on gas                                                                    
in 2022.                                                                                                                        
                                                                                                                                
In  response to  a  question by  Representative Wilson,  Mr.                                                                    
Alper replied  that there  was no gas  tax in  the Committee                                                                    
Substitute.  Representative Wilson  wondered why.  She spoke                                                                    
about  fairness and  stated that  nothing related  to energy                                                                    
issues  was fair.  Mr. Alper  ascertained that  the gas  tax                                                                    
caps were  put in place in  2006 for the same  reason that a                                                                    
lot of the  credits were put in place, because  of a fear of                                                                    
a gas shortage  in Cook Inlet. He stated that  the $0.17 gas                                                                    
tax  cap  in  Cook  Inlet  was zero  because  of  the  small                                                                    
producer credit  but the  credit was  starting to  phase out                                                                    
and some  Cook Inlet gas would  be subject to the  $0.17 tax                                                                    
within 2 years.                                                                                                                 
                                                                                                                                
7:48:58 PM                                                                                                                    
                                                                                                                                
Representative  Wilson voiced  that "the  committee did  not                                                                    
receive all of the information."  The committee did not know                                                                    
how much the  state was making per year and  that one highly                                                                    
profitable  year made  the investment  in credits  worth it.                                                                    
She  stated  that  field  development   took  time  and  the                                                                    
development years  made the  states credit  investments look                                                                    
unfavorable. She  was concerned that  she did not  know when                                                                    
taxes "tipped the scale" unfavorably  and wondered whether a                                                                    
"better way" to understand  how the state's investments were                                                                    
working existed  and believed they were  "pretty darn good."                                                                    
Commissioner Hoffbeck answered that  there was no doubt that                                                                    
the  change   in  Regulatory  Commission  of   Alaska  (RCA)                                                                    
regulations  regarding  price  and  credits  "turned  things                                                                    
around" in  Cook Inlet. He  believed that the  Department of                                                                    
Natural  Resources' (DNR)  testimony on  ample gas  reserves                                                                    
and  availability   of  gas  in  Cook   Inlet  prompted  the                                                                    
governor's decision  to "pull back"  on the  exploration and                                                                    
development  credits  in   Cook  Inlet.  The  administration                                                                    
believed taking a  hiatus from incentivizing oil  and gas in                                                                    
Cook  Inlet   was  warranted   due  to   sufficient  supply.                                                                    
Representative  Wilson   spoke  to  the  North   Slope.  She                                                                    
wondered whether currently  the administration would propose                                                                    
changing oil  taxes if  oil prices  were higher;  around $70                                                                    
per  barrel. Commissioner  Hoffbeck answered  that the  bill                                                                    
did not make  significant changes to credits  on North Slope                                                                    
oil. The  issue related to  hardening of the oil  tax floor.                                                                    
He stated that the discussion  would not be occurring if oil                                                                    
prices  were  higher.  He  affirmed   that  the  Cook  Inlet                                                                    
discussion  was prompted  by the  low price  environment and                                                                    
the state's ability to pay the credits.                                                                                         
                                                                                                                                
7:52:36 PM                                                                                                                    
                                                                                                                                
Representative  Kawasaki  asked  whether  Middle  Earth  was                                                                    
included in  the CS.  Mr. Alper  responded that  there "were                                                                    
simply  too  few  transactions  in  Middle  Earth"  and  the                                                                    
transactions could  not be  reported due  to confidentiality                                                                    
laws so Middle  Earth was included with Cook  Inlet as "non-                                                                    
North  Slope.  The  transactions   made  up  a  very  slight                                                                    
percentage of fiscal  impacts. Representative Kawasaki asked                                                                    
for  the  percentage of  Middle  Earth  activity. Mr.  Alper                                                                    
related  a  story  from  personal  experience  and  repeated                                                                    
information  shared publicly  by a  representative from  the                                                                    
Doyon  Corporation   in  relation   to  Middle   Earth.  The                                                                    
representative  reported that  the corporation  received $60                                                                    
million in  credits earned to  date and he noted  that Doyon                                                                    
was the  largest user of  exploration services in  the area.                                                                    
Representative Kawasaki  pointed to a very  small tax change                                                                    
for wells being  spudded in the CS  by the end of  FY 16. He                                                                    
asked  whether   wells  currently   qualified  and   if  the                                                                    
provision had  a fiscal impact.  Mr. Alper answered  that he                                                                    
was  referring  to "Frontier  Areas  Credit"  or the  "super                                                                    
credit" (80 percent credit) for  "high probability area." He                                                                    
referred to testimony from the  Ahtna Corporation that had a                                                                    
promising well that  could supply oil to  the Glenallen area                                                                    
and the provision  in the CS ensured the  well qualified for                                                                    
the super credit.  He added that without  the change Ahtna's                                                                    
well would still have earned a roughly 55 percent credit.                                                                       
                                                                                                                                
Co-Chair Thompson thanked the presenters.                                                                                       
                                                                                                                                
HB  247  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Thompson  discussed the schedule for  the following                                                                    
meeting.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
7:57:02 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 7:56 p.m.                                                                                          

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