Legislature(2017 - 2018)HOUSE FINANCE 519

03/21/2017 09:00 AM FINANCE

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Audio Topic
09:46:41 AM Start
09:47:49 AM HB111
11:59:18 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 9:30 AM --
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 21, 2017                                                                                            
                         9:46 a.m.                                                                                              
                                                                                                                                
9:46:41 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 9:46 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Lisa   Weissler,  Staff,   Representative  Andy   Josephson;                                                                    
Representative  Geran  Tarr,  Sponsor;  Representative  Andy                                                                    
Josephson,  Sponsor;  Ken  Alper,  Director,  Tax  Division,                                                                    
Department of Revenue.                                                                                                          
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                             
                                                                                                                                
          HB 111 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Foster addressed the meeting agenda.                                                                                   
                                                                                                                                
HOUSE BILL NO. 111                                                                                                            
                                                                                                                                
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
9:47:49 AM                                                                                                                    
                                                                                                                                
LISA   WEISSLER,  STAFF,   REPRESENTATIVE  ANDY   JOSEPHSON,                                                                    
addressed the sectional analysis for the bill.                                                                                  
                                                                                                                                
     Section 1.  It is the  intent of the  legislature that,                                                                    
     contingent on  passage of a fiscal  plan, a substantial                                                                    
     portion  of outstanding  credits eligible  for purchase                                                                    
     will be purchased.                                                                                                         
                                                                                                                                
Ms.  Weissler  expounded  that  the  amount  of  outstanding                                                                    
credits under current law amounted to $900 million.                                                                             
                                                                                                                                
Representative Wilson  asked whether the section  was legal.                                                                    
She wondered  about "tying  an obligation"  to passage  of a                                                                    
bill. She  believed that the  intent language  "sounded like                                                                    
blackmail."                                                                                                                     
                                                                                                                                
REPRESENTATIVE   GERAN   TARR,    SPONSOR,   answered   that                                                                    
Legislative Legal Services did not  point to the language as                                                                    
problematic,  which  they  did with  other  provisions  when                                                                    
drafting the  bill. She thought  that since  intent language                                                                    
was uncodified there was not a legal issue.                                                                                     
                                                                                                                                
Ms. Weissler relayed that under  current law, payment of the                                                                    
outstanding   credits  was   "discretionary."  The   statues                                                                    
authorized  that if  the balance  of  the fund  used to  pay                                                                    
credits   was  insufficient,   the   amount  available   was                                                                    
allocated   among  the   applicants  "by   regulation."  She                                                                    
furthered  that  the  credits still  existed  and  could  be                                                                    
carried  forward, transferred,  or sold.  She observed  that                                                                    
the legislature  wanted to pay  the credits  when sufficient                                                                    
funds were available.                                                                                                           
                                                                                                                                
Representative  Tarr related  that  after hearing  testimony                                                                    
from banks  that held  credit certificates  and some  of the                                                                    
companies waiting  for credit payments, she  wanted the bill                                                                    
to express the interest of  the House Resources Committee in                                                                    
addressing  the  obligation  "contingent  on  passage  of  a                                                                    
fiscal  plan."  She  indicated that  the  statutory  minimum                                                                    
payment was  $76 million, which  extended the  payments over                                                                    
decades. She  voiced the  desire to pay  the debt  off "much                                                                    
sooner."                                                                                                                        
                                                                                                                                
Representative Wilson  stated the  bill addressed  oil taxes                                                                    
and not  a fiscal  plan. She  wondered whether  the language                                                                    
was   in  the   appropriate  vehicle.   Representative  Tarr                                                                    
referred to  HB 247 [HB 247  Tax; Credits;Interest;Refunds;O                                                                    
& G  - CHAPTER 4  4SSLA 16  - 06/28/2016] from  the previous                                                                    
year  related  to  oil  and   gas  taxes  and  credits.  She                                                                    
recounted that the  governor had created a fund  to pay down                                                                    
the  credit balance.  She maintained  that it  was uncertain                                                                    
what  amount  the state  could  afford  to pay  towards  the                                                                    
credit balance  lacking a fiscal plan;  therefore, the House                                                                    
Resources Committee elected  not to attach a  fund or fiscal                                                                    
note related  to the credits.  She felt "a sense  of urgency                                                                    
to come up with a solution on how to pay the obligations."                                                                      
                                                                                                                                
Co-Chair Foster noted that he  would request a legal opinion                                                                    
for Section 1.                                                                                                                  
                                                                                                                                
Representative  Pruitt  believed  the concern  expressed  by                                                                    
Representative Wilson was relevant.  He spoke to the meaning                                                                    
of the  term fiscal  plan. He stated  that the  language was                                                                    
very "vague." The state had  an obligation it needed to pay,                                                                    
but  he was  very uncomfortable  with the  vagueness of  the                                                                    
language in  Section 1 referencing  a fiscal plan.  He urged                                                                    
the committee  to proceed  with "caution"  and characterized                                                                    
the language as "for lack of a better term, extortion."                                                                         
                                                                                                                                
9:55:20 AM                                                                                                                    
                                                                                                                                
Representative  Tarr stated  that  the  alternative was  not                                                                    
including any language regarding  paying the "obligations at                                                                    
all." She emphasized  that the intent was to  pay the credit                                                                    
obligations. She  relayed that  under the  current statutory                                                                    
minimum,  the payments  would extend  over  many years.  She                                                                    
advised that  one option was  not addressing the  credits at                                                                    
all, another  was paying  the credits  over many  years, and                                                                    
another option devised a solution  like the intent language,                                                                    
"to make it a more short-term problem."                                                                                         
                                                                                                                                
Co-Chair  Foster   interjected  that  the   committee  would                                                                    
revisit the issue after obtaining a legal opinion.                                                                              
                                                                                                                                
Vice-Chair  Gara  emphasized  that the  section  was  merely                                                                    
intent  language.  He  informed the  committee  that  intent                                                                    
language  was  non-binding  and was  not  subject  to  legal                                                                    
analysis. He  spoke about a  fair fiscal plan.  He countered                                                                    
that the intent language "was  not extortion, it was logic."                                                                    
He interpreted  the intent  language that  if the  state had                                                                    
sufficient  funds the  credits  would be  paid  at a  faster                                                                    
pace, but  lacking funds the state  was not able to  pay the                                                                    
credits.                                                                                                                        
                                                                                                                                
Representative Pruitt  responded that  the language  put him                                                                    
in an uncomfortable  position of voting for a  bill that was                                                                    
predicated on another bill passing the legislature.                                                                             
                                                                                                                                
Co-Chair Foster spoke to the importance of the issue.                                                                           
                                                                                                                                
Ms. Weissler addressed Section 2 of the bill:                                                                                   
                                                                                                                                
     Section 2.  Amends AS  43.05.225 regarding  interest on                                                                    
     delinquent  oil  and  gas production  tax  payments  to                                                                    
     remove  a  three-year  limit on  accrual  of  interest.                                                                    
     Since 2014, the interest  rate for delinquent taxes was                                                                    
     set three  points above the  Federal discount  rate. HB                                                                    
     247 added  a new  section increasing  the rate  for oil                                                                    
     and  gas to  seven  points above  the Federal  discount                                                                    
     rate compounded.  The higher rate applies  only for the                                                                    
     first  three years  after  the  tax becomes  delinquent                                                                    
     after  which  there  is   no  interest.  The  amendment                                                                    
     repeals  the  three-year  limit because  zero  interest                                                                    
     discourages companies  from settling tax  disputes with                                                                    
     the state.                                                                                                                 
                                                                                                                                
Ms. Weissler elaborated that the  section removed the three-                                                                    
year  limit  and  was included  because  the  limit  "worked                                                                    
against  the  Department  of  Revenue's  (DOR)  attempts  to                                                                    
settle tax disputes."                                                                                                           
                                                                                                                                
Representative   Tarr  interjected   that  current   statute                                                                    
provided DOR six  years to complete the audits  and that the                                                                    
limit conflicted  with the statute. She  thought that making                                                                    
improvements  to   the  auditing  system  could   assist  in                                                                    
completing the audits more quickly,  which was in everyone's                                                                    
best interest.                                                                                                                  
                                                                                                                                
9:59:45 AM                                                                                                                    
                                                                                                                                
Co-Chair Foster  recognized Representative Josephson  in the                                                                    
audience.                                                                                                                       
                                                                                                                                
Representative Wilson underscored  that the three-year limit                                                                    
had  not stopped  DOR  from completing  the  audit, but  the                                                                    
interest  could  not  accrue after  year  three.  She  asked                                                                    
whether the interest  would not accrue after  three years if                                                                    
the state  was unable to  complete an audit within  the time                                                                    
period. She  noted that  the audit could  proceed up  to six                                                                    
years. Representative  Tarr replied  that a  prolonged audit                                                                    
was not only the fault of  the state. She detailed that each                                                                    
side had  responsibility for the  length of time it  took to                                                                    
audit   a   disputed   tax  issue.   Representative   Wilson                                                                    
emphasized  that  the  audits  would  continue  after  three                                                                    
years, only the interest on delinquent tax ceased accruing.                                                                     
                                                                                                                                
Representative  Thompson  asked   when  the  "clock  started                                                                    
ticking" when taxes were disputed.                                                                                              
                                                                                                                                
Representative  Tarr   answered  that  if  the   taxes  were                                                                    
delinquent  the interest  would  begin to  accrue after  the                                                                    
taxes  were  due. She  pointed  out  that the  interest  was                                                                    
applied  equally  to  an underpayment  or  overpayment.  She                                                                    
noted  that  many  audits  took  the  entire  six  years  to                                                                    
complete. She  relayed that there  had been  much discussion                                                                    
about how to fix the  problem resulting in audits proceeding                                                                    
more  quickly.  She  suggested directing  questions  to  DOR                                                                    
regarding  how  to  make the  audit  process  less  complex.                                                                    
Representative Thompson  wanted to ensure the  provision was                                                                    
not  retroactive.  Representative  Tarr  answered  that  the                                                                    
section  was retroactive  to  January 1,  2017  in order  to                                                                    
prevent a time  lag in the way the provision  was applied to                                                                    
the delinquent taxes.                                                                                                           
                                                                                                                                
10:03:44 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara  wondered whether  the interest  referred to                                                                    
in  the bill  was the  only interest  charged on  delinquent                                                                    
taxes. Ms. Weissler deferred to DOR on the question.                                                                            
                                                                                                                                
Vice-Chair Gara  asked whether the delinquent  tax provision                                                                    
only  applied  to the  amount  of  tax that  was  underpaid.                                                                    
Representative  Tarr  responded   in  the  affirmative.  She                                                                    
furthered that in some instances  the interest paid had been                                                                    
more than the amount owed.  She believed that scenario was a                                                                    
reason for  the criticism  of the  current system.  She felt                                                                    
that everyone  benefitted if audits could  be completed more                                                                    
quickly. She  favored the legislature acting  to address the                                                                    
issue  even if  additional staffing  was necessary  to solve                                                                    
the problem.                                                                                                                    
Ms. Weissler addressed Sections 3, 4, and 5:                                                                                    
                                                                                                                                
     Section 3.  Amends AS  43.05.230(a) in  accordance with                                                                    
     the  addition of  information  requirements related  to                                                                    
     tax credits (see sections 20 to 22).                                                                                       
                                                                                                                                
     Section  4.   Amends  AS  43.05.230(l)  to   allow  the                                                                    
     Department  of Revenue  (DOR) to  make  public (1)  the                                                                    
     aggregate amount of oil and  gas production tax credits                                                                    
     issued to a  person in the preceding  calendar year and                                                                    
     (2) expenditure  descriptions added by sections  20 and                                                                    
     21 of the bill.                                                                                                            
                                                                                                                                
     Section 5.  Adds a new  subsection (m) to  AS 43.05.230                                                                    
     allowing DOR  to disclose confidential  tax information                                                                    
     relating to oil and gas  tax credits to legislators, an                                                                    
     agent of  a legislator  or legislative committee,  or a                                                                    
     legislative   contractor   in  executive   session   in                                                                    
     conformance with a signed confidentiality agreement.                                                                       
                                                                                                                                
Ms. Weissler pointed out that  Sections 3 and 4 were related                                                                    
to  the  public  disclosure  of  information  regarding  tax                                                                    
credit  certificates.   Section  5   was  relevant   to  the                                                                    
disclosure  of   confidential  information   concerning  tax                                                                    
credits. The confidential information  would be disclosed to                                                                    
the legislature subject to  a confidentiality agreement. She                                                                    
delineated  that  the  tax  credits   referred  to  in  both                                                                    
sections were  transferrable, related to  investment credits                                                                    
and would only  apply to Middle Earth tax credits  if HB 111                                                                    
was adopted. She addressed Section 6:                                                                                           
                                                                                                                                
     Section 6.  Amends AS 43.55.011(f) to  change the North                                                                    
     Slope minimum  tax to 5  percent of the gross  value at                                                                    
     the  point of  production  when the  average West  Cost                                                                    
     price per  barrel for Alaska  North Slope crude  oil is                                                                    
     $50 or  more; and 4  percent when the average  price is                                                                    
     less than  $50; removes  the variable minimum  tax that                                                                    
     would  occur  at sustained  oil  prices  below $25  per                                                                    
     barrel. Applies the minimum tax  to gas produced on and                                                                    
     after  January 1,  2018  and before  2022;  and to  oil                                                                    
     produced on  and after  January 1,  2018. In  2022, the                                                                    
     net production on gas will  change to a gross value tax                                                                    
     system and the minimum tax for gas will end.                                                                               
                                                                                                                                
Ms.   Weissler  elaborated   that  Section   6  applied   to                                                                    
provisions in SB  138 [SB 138 Gas Pipeline; AGDC;  Oil & Gas                                                                    
Prod. Tax  - CHAPTER  14 SLA 14  - 05/08/2014]  that changed                                                                    
the  gas  tax in  2022  to  a  gross  value tax  system  and                                                                    
eliminated a minimum tax on gas.                                                                                                
                                                                                                                                
10:07:20 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Gara  asked  whether  the bill  retained  the  3                                                                    
percent minimum  tax when  the price  dropped below  $25 per                                                                    
barrel  and 2  percent below  $20 per  barrel. Ms.  Weissler                                                                    
answered that  the section did  remove the  variable sliding                                                                    
scale minimum  tax. She turned  to Section 7  that contained                                                                    
the hardening of the minimum tax floor:                                                                                         
                                                                                                                                
     Section 7.  Adds a new  subsection (q) to  AS 43.55.011                                                                    
     to  provide  that the  application  of  any tax  credit                                                                    
     issued under the oil and  gas production tax may not be                                                                    
     used to  reduce the minimum  tax with the  exception of                                                                    
     oil  subject  to the  gross  value  reduction. For  oil                                                                    
     subject  to  the  reduction, subsections  (q)  and  (s)                                                                    
     provide that the  minimum tax will be  calculated on 70                                                                    
     or  80 percent  of  the  gross value  at  the point  of                                                                    
     production  to ensure  companies  receive benefit  from                                                                    
     the gross value reduction.  New subsection (r) prevents                                                                    
     a  taxpayer  from  applying  per  barrel  credits  that                                                                    
     cannot  be used  in one  month due  to the  minimum tax                                                                    
     floor to offset a tax  liability from a different month                                                                    
     in that  calendar year (the "migrating"  credit issue).                                                                    
     This issue only occurs in a  year where the tax rate is                                                                    
     below  the minimum  tax in  some months  and above  the                                                                    
     minimum tax in other months in a year.                                                                                     
                                                                                                                                
Ms. Weissler expounded  on Section 7. She drew  a picture to                                                                    
demonstrate that  the minimum tax  only applied to  oil that                                                                    
was not subject to the gross value reduction (GVR).                                                                             
                                                                                                                                
Representative Tarr furthered that  the section was added in                                                                    
recognition that  the GVR provisions  had been put  in place                                                                    
for the early  stages of production, which  allowed the full                                                                    
value of the GVR reduction to be realized.                                                                                      
                                                                                                                                
10:10:00 AM                                                                                                                   
                                                                                                                                
Ms. Weissler continued to address  Section 7, new subsection                                                                    
(r).  She relayed  that the  subsection prevented  companies                                                                    
from saving the  sliding scale per barrel  credit for months                                                                    
when it  then could be  applied to decrease taxes  below the                                                                    
minimum  floor.  The  language  was  intended  to  stop  the                                                                    
practice.                                                                                                                       
                                                                                                                                
Representative Guttenberg  asked how  difficult it  would be                                                                    
to monitor. Ms. Weissler deferred the question to DOR.                                                                          
                                                                                                                                
Representative   Tarr   interjected   that   currently   the                                                                    
department was  performing monthly estimates and  the "true-                                                                    
up" process  happened yearly. She expected  that the true-up                                                                    
process would uncover any unrealized  credits and apply them                                                                    
appropriately.                                                                                                                  
                                                                                                                                
Ms. Weissler addressed Section 8:                                                                                               
                                                                                                                                
     Section  8. Amends  AS  43.55.020,  related to  monthly                                                                    
     installment payments in accordance  with the changes to                                                                    
     the minimum tax in sections 6 and 7.                                                                                       
                                                                                                                                
Ms.  Weissler noted  that the  section contained  conforming                                                                    
language. Ms. Weissler turned to Section 9:                                                                                     
                                                                                                                                
     Section 9.  Eliminates the North  Slope carried-forward                                                                    
     annual loss (net operating loss) credit.                                                                                   
                                                                                                                                
Ms. Weissler moved to Sections 10 and 11:                                                                                       
                                                                                                                                
     Section 10.  Amends AS 43.55.023(c) in  accordance with                                                                    
     the hardening of the minimum floor in section 7.                                                                           
                                                                                                                                
     Section  11.  Amends  AS  43.55.023(d)  to  remove  the                                                                    
     ability for taxpayers  to apply for a  cash payment for                                                                    
     net   operating   loss    credits   issued   under   AS                                                                    
     43.55.023(b).                                                                                                              
                                                                                                                                
Ms.  Weissler expounded  that if  the bill  passed the  only                                                                    
cash  credits  left  were for  the  Middle  Earth  qualified                                                                    
capital expenditure  credit, well lease  expenditure credit,                                                                    
and the exploration credit.                                                                                                     
                                                                                                                                
Representative  Wilson referred  to $900  million previously                                                                    
mentioned in the intent language.  She asked what portion of                                                                    
the $900 million would be able  to be used as a cash payment                                                                    
and what  amount could be  used as deductions.  Ms. Weissler                                                                    
answered that the  $900 million in credits  were already "on                                                                    
the books" and the amount would not change.                                                                                     
                                                                                                                                
Representative  Tarr added  that  the  Middle Earth  credits                                                                    
were due to expire on a timeframe set in existing statute.                                                                      
                                                                                                                                
Ms. Weissler moved to Sections 12 through 14:                                                                                   
                                                                                                                                
     Section 12.  Amends AS 43.55.024(g) in  accordance with                                                                    
     the hardening of the minimum floor in section 7.                                                                           
                                                                                                                                
     Section 13.  Amends AS 43.55.024(g) in  accordance with                                                                    
     the hardening of the minimum floor in section 7.                                                                           
                                                                                                                                
     Section 14.  Amends AS 43.55.024(j), the  sliding scale                                                                    
     per barrel  tax credit, to  $8 at oil prices  less than                                                                    
     $60; $7  at $60  to less  than $70; $6  at $70  to less                                                                    
     than $80;  $5 at  $80 to  less than $90;  $4 at  $90 to                                                                    
     less than $100; $3 at $100  to less than $110; and zero                                                                    
     when oil prices are $110 and above.                                                                                        
                                                                                                                                
Vice-Chair  Gara asked  Ms. Weissler  to repeat  the sliding                                                                    
scale numbers. Ms. Weissler complied.                                                                                           
                                                                                                                                
10:15:20 AM                                                                                                                   
                                                                                                                                
Representative   Guttenberg  stated   that  the   difference                                                                    
between $99  and $100 was  $0.99 for the calculation  of oil                                                                    
tax revenue for the state. He  asked how the issue was dealt                                                                    
with. Representative  Tarr reminded  the committee  that she                                                                    
distributed an  analysis of  the per  barrel credit  ["CS HB                                                                    
111 Analysis  of Per  Barrel Credit by  Rep. Tarr"  (copy on                                                                    
file)]. She answered  that an amendment had  been offered in                                                                    
the past during the SB 21  [SB 21 Oil And Gas Production Tax                                                                    
- CHAPTER 10  SLA 13 - 05/21/2013]  deliberations to address                                                                    
the issue  and "smooth out  the formula." The  amendment did                                                                    
not  pass, but  she still  possessed the  legal language  to                                                                    
address   the  $99.99   to   $100  problem.   Representative                                                                    
Guttenberg asked how the department  dealt with the issue at                                                                    
present.  Representative Tarr  replied  that the  department                                                                    
followed the strict price guidelines  and used the $0.99 cut                                                                    
off.  She  reiterated  that a  formula  existed  that  would                                                                    
address the issue.                                                                                                              
                                                                                                                                
Ms. Weissler addressed Sections 15 through 17:                                                                                  
                                                                                                                                
     Section 15.  Amends AS 43.55.025(g) in  accordance with                                                                    
     the addition of a dry hole  credit in section 17 of the                                                                    
     bill.                                                                                                                      
     Section 16.  Amends AS  43.55025(i) in  accordance with                                                                    
     the hardening of the minimum floor in section 7.                                                                           
                                                                                                                                
     Section 17. Adds  a new subsection (q)  to AS 43.55.025                                                                    
     to allow an  explorer to take a  purchasable tax credit                                                                    
     of 15 percent of  exploration expenditures incurred for                                                                    
     drilling that results in a  dry hole. The credit may be                                                                    
     allowed  only if  (1) the  explorer has  no oil  or gas                                                                    
     production;  (2)  all  service contracts  are  paid  in                                                                    
     full; (3) the  lease is returned to the  state; and (4)                                                                    
     the  expenditure is  not the  basis for  another credit                                                                    
     claimed under the production tax.                                                                                          
                                                                                                                                
Ms. Weissler indicated that Section  17 contained a new idea                                                                    
proposed  by  the  consultant,  Rich  Ruggiero,  Castle  Gap                                                                    
Advisors, LLC,  which changed the net  operating loss credit                                                                    
that resulted  in a dry hole  to a net operating  loss carry                                                                    
forward.                                                                                                                        
                                                                                                                                
Representative  Guttenberg   stated  that  not   every  well                                                                    
drilled  was  meant for  production.  He  asked whether  the                                                                    
section   specifically   dealt   with  holes   drilled   for                                                                    
production.  Ms.  Weissler   stated  the  provision  applied                                                                    
exclusively to production wells.                                                                                                
                                                                                                                                
Co-Chair  Seaton  asked  whether the  provision  applied  to                                                                    
issues  prior to  unitization. He  wondered  whether a  non-                                                                    
productive lease area could be  returned. He asked about the                                                                    
size of  the lease that would  be returned to the  state for                                                                    
the dry  hole. Representative  Tarr answered that  the issue                                                                    
had not been "flushed out"  in prior discussion. She thought                                                                    
that  the  provision  would  be  "geared  toward  the  early                                                                    
exploration work."  She spoke  to the  risk involved  in the                                                                    
early  stages   of  development   and  ensuring   that  some                                                                    
compensation was received for  the work if unsuccessful. She                                                                    
voiced that  by revoking  the lease the  opportunity existed                                                                    
to offer the lease to another entity in the future.                                                                             
                                                                                                                                
Co-Chair   Foster   invited  Representative   Josephson   to                                                                    
testify.                                                                                                                        
                                                                                                                                
10:21:22 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  ANDY  JOSEPHSON,  SPONSOR, shared  that  the                                                                    
bill would  end cash credits  on January 1, 2018  except for                                                                    
Middle  Earth   credits.  He   relayed  that   the  previous                                                                    
committee  believed that  adoption  of a  fiscal plan  could                                                                    
bring   "some  solace   and  comfort   to  principally   the                                                                    
independents, to  continue their work given  that passage of                                                                    
the bill  would be  some statement  by the  legislature that                                                                    
future cash credits would be  unaffordable." He referenced a                                                                    
comment about  the audit period  and concern about  the fact                                                                    
that interest  earned was greater  than the  delinquent tax.                                                                    
He clarified  that the  concern was addressed  in SB  21 and                                                                    
may  have  gone  too  far  by creating  a  3-year  limit  on                                                                    
interest when the appeals and  litigation process could last                                                                    
much longer.                                                                                                                    
                                                                                                                                
Vice-Chair  Gara   asked  whether  the   exploration  credit                                                                    
referenced in  Sections 17 applied  within a lease  that was                                                                    
already producing or not in production.                                                                                         
                                                                                                                                
Ms. Weissler did not know  the answer. She surmised that the                                                                    
idea was  to compensate for  the operating losses for  a dry                                                                    
hole. She  qualified that the  explorer had "to have  no oil                                                                    
or gas production." She deduced  that if the explorer was in                                                                    
the middle of  a lease with other wells  that were producing                                                                    
they already  had a  tax liability and  the section  was not                                                                    
applicable. Vice-Chair Gara ascertained  that if the section                                                                    
only applied  to entities not  in production the  answer was                                                                    
acceptable. He  asked whether the credit  only applied after                                                                    
exploration was  unsuccessful and the lease  was returned to                                                                    
the state.  Ms. Weissler  replied in the  affirmative. Vice-                                                                    
Chair Gara asked  Ms. Weissler to repeat  her explanation of                                                                    
Section 16. Ms. Weissler  replied that the section reflected                                                                    
the hardening of the minimum floor.                                                                                             
                                                                                                                                
Representative  Wilson  referred  to Section  17,  page  20,                                                                    
lines 5 through 7. She read the following:                                                                                      
                                                                                                                                
     …A credit under this subsection may only be allowed if                                                                     
     (1)  the explorer does not produce oil or gas in the                                                                       
     calendar year in 6 which the credit is earned;                                                                             
Representative Wilson asked whether  it took longer than one                                                                    
year to produce oil after  drilling the hole. She added that                                                                    
"explorers  and developers  were  not  necessarily the  same                                                                    
company."                                                                                                                       
                                                                                                                                
10:27:11 AM                                                                                                                   
                                                                                                                                
Ms.  Weissler responded  that the  provision  related to  an                                                                    
explorer that  was not producing  anything to  eliminate tax                                                                    
liability.  She indicated  that the  explorer chose  to take                                                                    
the  credit. Representative  Wilson thought  the answer  did                                                                    
not  make   sense.  She  understood   the  reason   for  the                                                                    
provision, but  she thought  that new  areas took  longer to                                                                    
get  to the  point of  production.  She wondered  if it  was                                                                    
possible to meet the one-year expectation.                                                                                      
                                                                                                                                
Representative Tarr answered that  the section was much more                                                                    
limited  in scope  to  areas where  nothing  was found.  She                                                                    
elucidated that the companies would  still be compensated to                                                                    
encourage risk.  She thought that  the DNR could  speak more                                                                    
to the topic.  She noted that more  detailed information was                                                                    
available, and it was less  and less likely the circumstance                                                                    
would  happen in  the future.  She recalled  a situation  in                                                                    
Middle Earth where  a company thought an  area was promising                                                                    
but the drilling was unsuccessful  and thought the provision                                                                    
was  more   applicable  to   a  similar   circumstance.  She                                                                    
indicated that Middle Earth had  not had much development in                                                                    
contrast  to  the North  Slope  where  more information  was                                                                    
available.                                                                                                                      
                                                                                                                                
Representative   Wilson  could   not  imagine   any  company                                                                    
anywhere drilling in a location  they did not expect to find                                                                    
oil. She expressed doubt that  the expectation could be met.                                                                    
She wanted to avoid unintended consequences.                                                                                    
                                                                                                                                
Co-Chair  Seaton  referred  to  the  company  Caelus  Energy                                                                    
Alaska.  He  hypothesized  a  situation  where  the  company                                                                    
drilled  dry  holes in  a  new  field.  He deemed  that  the                                                                    
company could  not claim the  tax because other  fields were                                                                    
in production.  He asked whether  a new company  without any                                                                    
other development  could use the  credit that  reimbursed 15                                                                    
percent of  expenses, if it  was not deducting  the expenses                                                                    
off any other exploration  or production tax. Representative                                                                    
Tarr replied in the affirmative.                                                                                                
                                                                                                                                
10:32:40 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara  spoke to  the intention  in Section  17 and                                                                    
asked  for   clarification  about   Representative  Wilson's                                                                    
concerns.                                                                                                                       
                                                                                                                                
Representative Wilson asked  whether the provision pertained                                                                    
only to  situations where no  oil was  found. Representative                                                                    
Tarr  answered that  the exploration  company would  have to                                                                    
apply  for the  credit  and meet  certain stipulations.  She                                                                    
indicated  that  one  of the  stipulations  to  receive  the                                                                    
credit was  that no  oil or  gas was  found in  the one-year                                                                    
period the  credit was  earned. Representative  Wilson asked                                                                    
what happened if  oil was found but not  produced within one                                                                    
year. Representative  Tarr replied  that the credit  was for                                                                    
companies  that were  unsuccessful. She  furthered that  the                                                                    
state wanted to balance the  risk for companies that engaged                                                                    
in work and  were unsuccessful. She related  that the credit                                                                    
was used  elsewhere to incentivize companies  that typically                                                                    
were very successful at exploration.                                                                                            
                                                                                                                                
10:36:02 AM                                                                                                                   
                                                                                                                                
Representative   Wilson  asked   whether  unsuccessful   was                                                                    
defined  as  finding nothing.  She  wondered  what made  the                                                                    
exploration  unsuccessful.  Representative Tarr  pointed  to                                                                    
line 2 of Section 17 and  read the phrase "for drilling that                                                                    
results  in  a dry  hole."  She  observed  that a  dry  hole                                                                    
suggested that there wasn't enough for production.                                                                              
                                                                                                                                
Representative  Pruitt inquired  about  the  genesis of  the                                                                    
section.  Representative  Tarr  replied  that  the  previous                                                                    
[House  Resources] committee  had listened  to a  variety of                                                                    
industry   representatives,   public  testimony,   and   its                                                                    
consultant. She  elucidated that  the committee heard  a lot                                                                    
of  testimony regarding  the high  cost  of development  and                                                                    
related risk  in the  state. The provision  was chosen  as a                                                                    
tool  to incentivize  and attract  exploration  work in  the                                                                    
state.   The  specific   suggestion  was   offered  by   the                                                                    
consultant and industry representatives.                                                                                        
                                                                                                                                
Representative Pruitt surmised the  section would apply to a                                                                    
brand-new company that would have  to fail. He was unsure of                                                                    
the definition  for a dry  hole. He was trying  to determine                                                                    
the  need for  the  section. He  was  uncertain about  being                                                                    
supportive of any new credits.                                                                                                  
                                                                                                                                
Representative  Tarr  referred  to  a slide  that  had  been                                                                    
provided  by either  DOR or  the  consultant, Rich  Ruggiero                                                                    
that depicted the development profile  of a major field. She                                                                    
remembered that once peak production  declined the major oil                                                                    
producers  were less  interested in  the field.  She related                                                                    
that   when  production   was  trending   downward  it   was                                                                    
beneficial  to  attract new  entrants  who  were willing  to                                                                    
explore for the remaining oil  in the field. She stated that                                                                    
over  the  last  several  years   "quite  a  number  of  new                                                                    
companies" came to the state  to engage in exploration work.                                                                    
She  delineated that  some companies  like  Great Bear  only                                                                    
engaged in  exploration work and the  incentive was intended                                                                    
for  explorers. She  furthered that  transitioning to  a net                                                                    
profits  system  that  carried   forward  losses  to  a  tax                                                                    
liability  and  eliminated  cashable credits  only  befitted                                                                    
producers. Production  tax liability  was not  applicable to                                                                    
exploration companies;  the credit  incentivized exploration                                                                    
work in the state.                                                                                                              
                                                                                                                                
10:43:09 AM                                                                                                                   
                                                                                                                                
Representative   Pruitt   interpreted   that   the   section                                                                    
specifically applied  to an explorer  but intended  that the                                                                    
explorer would  turn into a  producer. He deduced that  if a                                                                    
company  was solely  an  explorer the  credit  could not  be                                                                    
transferred. He  wondered what the  value of the  credit was                                                                    
for  explorers who  would not  "make it  to production"  but                                                                    
also  could not  transfer  the  credit. Representative  Tarr                                                                    
answered that  the explorer  received a  cash credit  for 15                                                                    
percent of  the exploration  costs; the  value would  be the                                                                    
cash payment the company received.  She reiterated that some                                                                    
companies   were  more   interested  in   exploration  work.                                                                    
Representative Pruitt thought there was  a goal to move away                                                                    
from  cash  credits, which  he  endorsed.  He was  skeptical                                                                    
about  adding  a   new  one.  He  spoke   to  the  potential                                                                    
utilization  of  the  credit.  He  thought  the  credit  was                                                                    
contrary to  the intent  of the  legislation. Representative                                                                    
Tarr replied that the bill  was taking a different direction                                                                    
in  the  overall tax  system.  She  offered that  the  state                                                                    
learned a  valuable lesson in avoiding  situations where the                                                                    
state became  "over obligated." The bill  changed the system                                                                    
to one  where losses  were a deduction  against taxes.  If a                                                                    
company never  became a taxpayer  the opportunity  could not                                                                    
be  realized.  The  credit  was "isolated"  to  a  group  of                                                                    
companies  that  would  not  become  producers.  The  credit                                                                    
incentivized  continued exploration  and helped  ensure that                                                                    
work  continued in  all stages  of development  to halt  the                                                                    
decline in production. She suggested  that the incentive was                                                                    
beneficial  for   Cook  Inlet  and  noted   the  success  of                                                                    
incentives that increased production.                                                                                           
                                                                                                                                
10:47:00 AM                                                                                                                   
                                                                                                                                
Representative  Tarr recommended  that  if cashable  credits                                                                    
were unacceptable other incentives  should be established to                                                                    
ensure that exploration continued in the state.                                                                                 
                                                                                                                                
Representative Josephson interjected  that the existing cash                                                                    
credit  system  was  unsustainable.   He  relayed  that  Mr.                                                                    
Ruggerio  suggested  that  the  exploration  credit  was  an                                                                    
option  to  consider.   The  "uplift  feature"  incentivized                                                                    
independents to  remain in the  state. In  consultation with                                                                    
DNR  and DOR,  the credit  was  perceived as  a modest  cash                                                                    
credit.                                                                                                                         
                                                                                                                                
Representative  Pruitt asked  about  the precise  definition                                                                    
for a dry hole. Representative  Tarr responded that it would                                                                    
be best  to consult  with DNR. She  added that  a definition                                                                    
was not included  in the bill, but the  regulations would be                                                                    
definitive.                                                                                                                     
                                                                                                                                
10:50:04 AM                                                                                                                   
                                                                                                                                
Representative  Guttenberg expressed  his long-time  support                                                                    
for  explorers  who  were  at  the "high  risk  end  of  the                                                                    
equation."   He    asked   whether   the    credit   applied                                                                    
independently   to    each   lease   the    explorer   held.                                                                    
Representative   Tarr   indicated   that  each   lease   was                                                                    
independent    and   handled    separately.   Representative                                                                    
Guttenberg  inquired  whether  the  credit  applied  if  the                                                                    
explorer  had another  lease  in production.  Representative                                                                    
Tarr  referred to  page  20,  lines 5  and  6  and read  the                                                                    
following:                                                                                                                      
                                                                                                                                
     …A credit under this subsection may only be allowed if                                                                     
     (1) the explorer does not produce oil or gas in the                                                                        
     calendar year in 6 which the credit is earned;                                                                             
                                                                                                                                
Representative Tarr  pointed out  that the credit  was lease                                                                    
specific  provided that  the explorer  was  not currently  a                                                                    
producer.                                                                                                                       
                                                                                                                                
Co-Chair Seaton  mentioned that he  did not see  a provision                                                                    
in  the section  that authorized  the state  to acquire  the                                                                    
data regarding  the lease. He  thought the  provision seemed                                                                    
like it was  designed for the small  companies that explored                                                                    
and sold  the lease to  a major  oil company to  develop. He                                                                    
commented that  the provision enabled  the company  to "sell                                                                    
the investment"  the state  made in the  company or  if they                                                                    
drilled  a dry  hole  the  state paid  the  cash credit.  He                                                                    
wondered  how the  credit corresponded  with  the claw  back                                                                    
provision  if oil  eventually was  discovered and  the lease                                                                    
was  sold. He  inquired whether  the state  could "retrieve"                                                                    
the  states  cash  credit investment  from  the  transaction                                                                    
sale.  He  wondered whether  it  was  part of  the  previous                                                                    
discussion. Ms. Weissler  responded that it was  not part of                                                                    
the  discussion.  She reiterated  that  a  dry hole  made  a                                                                    
company eligible  for the credit and  if it was not  and the                                                                    
lease  was  sold,  she  presumed that  the  costs  would  be                                                                    
recovered  through the  sale of  the lease.  Co-Chair Seaton                                                                    
was  trying  to  figure  out  if the  credit  was  fair  and                                                                    
balanced.                                                                                                                       
                                                                                                                                
10:55:18 AM                                                                                                                   
                                                                                                                                
Representative Tarr  answered that a  dry hole was  the only                                                                    
circumstance that  the company  was eligible for  the credit                                                                    
and  they would  also be  required to  relinquish the  lease                                                                    
back to the state. She  detailed that the other circumstance                                                                    
would  enable  the losses  to  be  carried forward;  if  the                                                                    
company  sold  the lease  the  value  of the  carry  forward                                                                    
losses became part of the commercial transaction.                                                                               
                                                                                                                                
Representative  Josephson encouraged  the  committee to  ask                                                                    
the department to add a claw back provision.                                                                                    
                                                                                                                                
Vice-Chair  Gara   was  trying  to  determine   whether  the                                                                    
existing  language  worked.  He  asked  whether  exploration                                                                    
expenditures were  a "limited scope of  expenditures" and if                                                                    
they  were defined  somewhere. Representative  Tarr answered                                                                    
that  exploration  expenditures  were currently  defined  in                                                                    
statute.                                                                                                                        
                                                                                                                                
Ms. Weissler moved on to Sections 18 and 19:                                                                                    
                                                                                                                                
     Section 18.  Amends AS 43.55.028(a) in  accordance with                                                                    
     section 11  that removes the  ability for  taxpayers to                                                                    
     apply  for  a  cash  payment  for  net  operating  loss                                                                    
     credits.                                                                                                                   
                                                                                                                                
     Section  19.  Amends  AS   43.55.028(e)  to  limit  the                                                                    
     state's  purchase   of  credits  to  $35   million  per                                                                    
     company.  Only companies  with production  of not  more                                                                    
     than  15,000  barrels per  day  may  apply for  a  cash                                                                    
     payment.  Current law  sets the  purchase limit  at $70                                                                    
     million  and applies  to companies  with not  more than                                                                    
     50,000 barrels per day.                                                                                                    
                                                                                                                                
Ms.  Weissler elaborated  that Section  19  only applied  to                                                                    
Middle Earth if the bill passed  as written. She moved on to                                                                    
Sections 20 through 22:                                                                                                         
                                                                                                                                
     Section 20.  Amends AS 43.55.030(a)  to require  an oil                                                                    
     and gas producer to submit  to DOR information required                                                                    
     under regulation and, for each  expenditure that is the                                                                    
     basis of a credit under  AS 43.55.023 or AS 43.55025, a                                                                    
     description of (1) the expenditure,  (2) the purpose of                                                                    
     the expenditure, and (3) a  description of the lease or                                                                    
     property for which the expenditure was incurred.                                                                           
                                                                                                                                
     Section  21.  Amends  AS  43.55.030(e)  to  require  an                                                                    
     explorer or  producer without  production to  submit to                                                                    
     DOR  information  required  under regulation  and,  for                                                                    
     each expenditure  that is the  basis of a  credit under                                                                    
     AS 43.55.023 or  AS 43.55025, a description  of (1) the                                                                    
     expenditure, (2)  the purpose  of the  expenditure, and                                                                    
     (3) a  description of the  lease or property  for which                                                                    
     the expenditure was incurred.                                                                                              
                                                                                                                                
     Section 22. Requires the  department to annually report                                                                    
     to the legislature the  information collected under new                                                                    
     subsections AS 43.55.030(a) (10) and (e).                                                                                  
                                                                                                                                
Ms. Weissler  suggested that if  net operating  loss credits                                                                    
were eliminated Sections 20 and  21 would need to be amended                                                                    
to  reflect net  operating  loss  deductions. She  mentioned                                                                    
that  DOR noted  that  Section 22  was  not necessary  since                                                                    
reporting requirements already existed in statute.                                                                              
                                                                                                                                
10:58:53 AM                                                                                                                   
                                                                                                                                
Ms. Weissler moved to Section 23, which was new:                                                                                
     Section  23. Adds  a  new section  to  AS 43.55.150  to                                                                    
     ensure that the gross value  at the point of production                                                                    
     does not go  below zero. The gross  value is determined                                                                    
     by  subtracting tariffs  and transportation  costs from                                                                    
     the West Coast  sale price per barrel.  The gross value                                                                    
     at  the   point  of  production  is   used  in  various                                                                    
    calculations throughout the production tax statute.                                                                         
                                                                                                                                
Ms. Weissler moved to Sections 24 through 25:                                                                                   
                                                                                                                                
     Section 24.  Amends AS 43.55.160(e) in  accordance with                                                                    
     section 25  that provides for the  carry-forward of net                                                                    
     operating losses.                                                                                                          
                                                                                                                                
     Section  25.  Amends  AS  43.55.165(a)  to  add  a  new                                                                    
     subsection (3) that allows 50  percent of net operating                                                                    
     losses  to  carry  forward  to   when  a  taxpayer  has                                                                    
     production. The  carry forward  and uplift  proposed in                                                                    
     section  26 allows  producers to  recover costs  before                                                                    
     paying production tax.                                                                                                     
                                                                                                                                
Ms. Weissler noted that Section  24 was conforming language.                                                                    
She addressed Section 26:                                                                                                       
                                                                                                                                
     Section 26. Amends AS 43.55.165  to add new subsections                                                                    
     (m)  and (n).  Subsection  (m) provides  an uplift  for                                                                    
     seven  years  of  seven  percentage  points  above  the                                                                    
     Federal  Reserve  rate  for   the  50  percent  in  net                                                                    
     operating   losses  carried   forward  to   production.                                                                    
     Subsection  (n)  directs   the  Department  of  Natural                                                                    
     Resources to develop regulations  to establish a review                                                                    
     process  for pre-approval  of  lease expenditures  that                                                                    
     will generate a carry-forward annual loss.                                                                                 
                                                                                                                                
Ms.  Weissler elaborated  that  Section  26 subsection  (m),                                                                    
stated  that  the  Federal  Reserve  rate  was  currently  8                                                                    
percent. She furthered that  the consultant suggested adding                                                                    
the  timeline  to  incentivize more  rapid  production.  She                                                                    
reported that  subsection (n) "needed work"  and offered her                                                                    
assistance. She detailed  that the intent was  to enable the                                                                    
government  and industry  to work  together  to ensure  that                                                                    
both  entities'  needs, and  policies  were  being met.  She                                                                    
noted  that  the  subsection  was  incomplete  and  did  not                                                                    
adequately convey the intent. She moved to Section 27:                                                                          
                                                                                                                                
     Section  27. Repeals  AS 43.55.028(g)(3)  that set  the                                                                    
     purchase of $70  million in tax credits  at 100 percent                                                                    
     of the  first $35 million  and 75 percent of  the other                                                                    
     $35 million in a  year; repeals AS 43.55.028(g)(3) that                                                                    
     allowed for  the assignment  of production  tax credits                                                                    
     to a third-party assignee.                                                                                                 
                                                                                                                                
Ms. Weissler  explained that AS 43.55.028(g)  (3) in Section                                                                    
27 was  repealed due to the  change to a $35  million cap in                                                                    
the  legislation. She  pointed to  AS 43.55.028(g)  (30) and                                                                    
noted that the statute was added  to a fish tax bill in 2013                                                                    
and was  believed to  exclusively apply  to Cook  Inlet gas.                                                                    
The  statute   was  no  longer  necessary   because  of  the                                                                    
elimination  of  cash  credits.  In  addition,  the  statute                                                                    
caused more  problems for the  state due to the  transfer of                                                                    
credits to  banks, which changed  "the whole dynamic  of the                                                                    
incentive  system."  She  addressed  the  remainder  of  the                                                                    
sections:                                                                                                                       
                                                                                                                                
     Section 28. Establishes a  legislative working group to                                                                    
     analyze the Cook Inlet oil and gas fiscal regime.                                                                          
                                                                                                                                
     Section 29.  Applicability. Provisions relating  to the                                                                    
     minimum  tax,  migrating  credit,  net  operating  loss                                                                    
     credit, and repeal of  third-party assignments apply on                                                                    
     or after January 1, 2018.                                                                                                  
                                                                                                                                
     Section  30.  Transition:  carried-forward  losses  and                                                                    
     lease   expenditures.  The   department  may   purchase                                                                    
     purchasable tax credits earned  before January 1, 2018.                                                                    
     The net  operating loss carry forward  provisions added                                                                    
     sections  25   and  26  apply  to   lease  expenditures                                                                    
     incurred on or after January 1, 2018.                                                                                      
                                                                                                                                
     Section  31.  Transition:   assignment  of  tax  credit                                                                    
     certificates. The department may  continue to apply and                                                                    
     enforce  tax credit  assignments  to third-parties  for                                                                    
     credits applied for before January 1, 2018.                                                                                
                                                                                                                                
     Section  32.   Transition:  payment  of   tax;  filing.                                                                    
     Taxpayers shall pay the tax  as provided in current law                                                                    
     for a tax or installment  payment for production before                                                                    
     January 1, 2018.                                                                                                           
     Section  33.  The  change  to  delinquent  interest  in                                                                    
     section 2 is retroactive to January 1, 2017.                                                                               
                                                                                                                                
     Sec.  34.  The  intent  language,  delinquent  interest                                                                    
     provision, Cook Inlet  Working Group, and retroactivity                                                                    
     of  the  delinquent  interest provision  are  effective                                                                    
     immediately.                                                                                                               
                                                                                                                                
     Sec.  35. All  other  sections take  effect January  1,                                                                    
     2018.                                                                                                                      
                                                                                                                                
11:04:15 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
11:12:07 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster noted the committee would stop the                                                                              
presentation at noon. The subsequent DOR slides would be                                                                        
heard during the afternoon meeting.                                                                                             
                                                                                                                                
Representative Pruitt asked whether he could assume that                                                                        
the presentation was on behalf of the governor.                                                                                 
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
answered in the affirmative but  qualified that he was doing                                                                    
his best  to analyze the nuances  in the bill. He  could not                                                                    
speak  to the  governor's  opinion on  every  detail of  the                                                                    
legislation.  He  voiced  that  he  was  present  to  merely                                                                    
explain  the  bill  and  not  take a  position  on  HB  111.                                                                    
Representative  Pruitt   asked  whether  the   governor  was                                                                    
supportive of  the current  legislation. Mr.  Alper answered                                                                    
that  the governor  did  not typically  take  a position  on                                                                    
legislation  while under  the committee  process. He  stated                                                                    
that some elements in the  bill were similar or identical to                                                                    
provisions  in   previous  legislation  introduced   by  the                                                                    
governor. He did  not want to speak for  the governor beyond                                                                    
what  was  previously   introduced  by  him.  Representative                                                                    
Pruitt  asked at  what point  Mr. Alper  had first  received                                                                    
copies of the current version  of the legislation. Mr. Alper                                                                    
answered that he  had seen the committee  substitute (CS) at                                                                    
the same  time as the public.  He had spoken with  the House                                                                    
Resources Committee chairs prior  to the introduction of the                                                                    
original bill.  He was not  involved in the creation  of the                                                                    
legislation. He  shared that  his role  was to  provide some                                                                    
technical guidance.                                                                                                             
                                                                                                                                
11:16:00 AM                                                                                                                   
                                                                                                                                
Mr.  Alper provided  a PowerPoint  presentation titled  "New                                                                    
Sustainable  Alaska  Plan,  Pulling Together  to  Build  Our                                                                    
Future; CSHB  111(RES)\N by  the House  Resources Committee,                                                                    
Oil and Gas Production Tax  and Credits: Background and Bill                                                                    
Analysis"  dated March  21, 2017  (copy on  file). He  began                                                                    
with a table of contents on slide 2:                                                                                            
                                                                                                                                
     Background on Alaska's oil and gas taxes and analysis                                                                      
     of CS HB 111(RES)\N                                                                                                        
        · Money- how oil has funded the state in the past                                                                       
        · Transition- how we've adapted to falling prices                                                                       
        · Credits- what we know, what has accrued                                                                               
        · Last year's HB247 and remaining concerns                                                                              
        · Overview of CSHB 111(RES) with detail of selected                                                                     
          tax sections                                                                                                          
        · Fiscal note                                                                                                           
                                                                                                                                
Mr. Alper turned  to slide 3: "History Of Oil  And Gas Taxes                                                                    
In Alaska."                                                                                                                     
                                                                                                                                
     Four Main Sources of State of Alaska Oil Revenue                                                                           
                                                                                                                                
        Property Tax ($0.1 billion in FY12,  $0.1 billion in                                                                    
        FY16) Pipeline,  Equipment,  Facilities Numbers  are                                                                    
        state share; $0.4 is shared with local governments                                                                      
                                                                                                                                
        Royalty ($2.9 billion in FY12, $1.2 billion in FY16)                                                                    
        Landowner's share, usually  12.5%. Most  North Slope                                                                    
        production is on State land. At least ¼ of royalties                                                                    
        go to the Permanent Fund                                                                                                
                                                                                                                                
        Production Tax ($6.1  billion in FY12,  $0.2 billion                                                                    
        in FY16) Based on net profits;  most tax legislation                                                                    
        in recent years  is over this  tax. North  Slope 35%                                                                    
        less a variable "per taxable barrel" credit                                                                             
                                                                                                                                
        Corp. Income Tax ($0.6 billion in FY12, $0.0 billion                                                                    
        in FY16) Taxes remaining profit after production tax                                                                    
        Global asset  apportionment;  9.4%, but  effectively                                                                    
        closer to 6.5%  Total dropped  from $9.7  billion to                                                                    
        $1.5 billion in 4 years                                                                                                 
                                                                                                                                
Mr.  Alper  elaborated  that the  zero-amount  depicted  for                                                                    
corporate income tax  in FY 16 was "a bit  of a distortion."                                                                    
He  explained that  companies made  quarterly estimated  tax                                                                    
payments,  which  in  the calendar  year  2014  amounted  to                                                                    
overpayments  due  to price  decreases  in  2015. The  large                                                                    
refunds  in  FY  15  for  the  estimated  overpayments  were                                                                    
reflected against revenue in FY 16.                                                                                             
                                                                                                                                
11:21:49 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara asked about corporate  income tax related to                                                                    
worldwide  apportionment. He  asked whether  the zero-amount                                                                    
in FY  16 meant that no  profits were realized in  Alaska or                                                                    
if  it  reflected  worldwide  profits  and  specific  Alaska                                                                    
figures  were unknown.  Mr. Alper  answered that  the amount                                                                    
reflected  worldwide   profitability  apportioned   but  not                                                                    
specifically Alaskan  profitability. He reiterated  that the                                                                    
zero  amount was  due to  the  Alaska specific  circumstance                                                                    
when the companies overpaid  estimated taxes during calendar                                                                    
year 2014 and the zero-amount reflected the states refund.                                                                      
                                                                                                                                
Representative  Pruitt asked  what  the profitability  would                                                                    
have  been if  the refund  was not  due. Mr.  Alper answered                                                                    
that he  would provide a  precise number but  estimated that                                                                    
the  number ranged  from  $50 million  to  $100 million.  He                                                                    
turned to slide 4 titled: "The  History Of Oil And Gas Taxes                                                                    
In Alaska."                                                                                                                     
     Six changes to the production tax since 2005:                                                                              
                                                                                                                                
     1.   2005:  Gov.   Murkowski  aggregates   Prudhoe  Bay                                                                    
     satellite fields for ELF calculation                                                                                       
     2. 2006:  Petroleum Production  Tax "PPT"  changed from                                                                    
     taxing gross  revenue to net  profits (needed  for Gov.                                                                    
     Murkowski's "stranded gas act" gasline)                                                                                    
     3.  2007: Alaska's  Clear  and  Equitable Share  "ACES"                                                                    
     corrects revenue  shortfalls due to bad  cost estimates                                                                    
     in PPT. Major tax increase                                                                                                 
     4.  2010:  Cook  Inlet  Recovery  Act  "CIRA"  provided                                                                    
     additional credits outside the  North Slope targeted at                                                                    
     southcentral gas supply issues                                                                                             
     5. 2013: SB 21 was a  tax cut at most prices (small tax                                                                    
     increase  at   low  prices)  and  provided   "new  oil"                                                                    
     benefits                                                                                                                   
     6. 2016:  HB 247 began  tax credit reform,  phasing out                                                                    
    Cook Inlet credits and limiting "new oil" benefits                                                                          
                                                                                                                                
Mr.  Alper explained  that the  Economic Limit  Factor (ELF)                                                                    
calculation  was  a  multiplier  applied  to  the  tax  rate                                                                    
between zero  and one  which resulted in  the owners  of the                                                                    
fields  paying   a  lower  rate.  He   added  that  Governor                                                                    
Murkowski "chose to count them  as one thing," which lead to                                                                    
a $150  million tax increase.  The limit factor  only stayed                                                                    
in place for about 15  months until the Petroleum Production                                                                    
Tax (PPT) bill  in 2006 was adopted. He spoke  to the Alaska                                                                    
Supreme  Court  decision on  December  2016,  ruling in  the                                                                    
state's  favor on  the "Prudhoe  Bay aggregation"  case that                                                                    
would have cost  the state a total of $500  million from the                                                                    
accumulated  interest  on  the  original  $150  million.  He                                                                    
indicated that the  switch to a net profits  tax required an                                                                    
estimate  of a  per barrel  cost. The  revenue estimate  was                                                                    
$800  million  less  than  estimated   due  to  higher  than                                                                    
anticipated costs per barrel, which  lead to the creation of                                                                    
Alaska's Clear  and Equitable Share (ACES)  tax system under                                                                    
Governor  Sarah  Palin.  He reported  that  the  Cook  Inlet                                                                    
Recovery Act  [HB 280  Natural Gas:  Storage/ Tax  Credits -                                                                    
CHAPTER  16 SLA  10 -  05/12/2010] was  targeted at  the gas                                                                    
shortfall in  Southcentral Alaska and was  created to ensure                                                                    
an adequate gas  supply. The act added many  new credits and                                                                    
expanded existing  credits. The  credits applied to  oil and                                                                    
gas in  Cook Inlet  and became a  large portion  of cashable                                                                    
credits. He noted that SB  21 partially hardened the minimum                                                                    
tax floor. When  the price of oil dropped to  $60 and below,                                                                    
the  state  received  approximately  $100  million  more  in                                                                    
production tax than  it would have under  ACES. However, the                                                                    
tax cut  in SB  21 amounted to  approximately $1  billion at                                                                    
$120 per barrel price of oil,  which was the price of oil at                                                                    
the time was bill was in the committee process.                                                                                 
                                                                                                                                
11:27:28 AM                                                                                                                   
                                                                                                                                
Mr. Alper  addressed the final  point on slide 4  related to                                                                    
HB 247 that  phased out the Cook Inlet  credits. He reported                                                                    
that the  bill would change  oil taxes for the  seventh time                                                                    
in 12 years.                                                                                                                    
                                                                                                                                
Mr. Alper moved to slide 5 titled "Government Take."                                                                            
                                                                                                                                
     Government Take Oil as a percentage of government                                                                          
     •In high price / high revenue years, oil has provided                                                                      
     90% or more of state UGF revenue                                                                                           
     •FY2017 estimated at 67% of revenue                                                                                        
          o In FY2017 oil revenues are only covering 22% of                                                                     
          the budget. About 2/3 is being paid out of                                                                            
          savings                                                                                                               
                                                                                                                                
     Since TAPS, in years 1978 -2016, Alaska has received                                                                       
     $141 billion in petroleum revenue                                                                                          
     •Since the switch to Net, in years 2007 -2016, Alaska                                                                      
     has received $64 billion                                                                                                   
     •Highest single year was 2008: $11.3 billion                                                                               
                                                                                                                                
     Any discussion of the appropriate state "share" needs                                                                      
     to clarify- "share of what?"                                                                                               
                                                                                                                                
Mr.  Alper pointed  out that  in  FY 17  the state  received                                                                    
approximately  $1  billion  in   unrestricted  oil  and  gas                                                                    
revenue. He  addressed the share received  by government and                                                                    
defined  what comprised  oil revenue  beginning  on slide  6                                                                    
titled "Government Take:"                                                                                                       
                                                                                                                                
     • Market Value? (sales price, or "ANS")                                                                                    
                                                                                                                                

Document Name Date/Time Subjects
DOR Presentation - HB 111 Background and Bill Analysis - 3.21.17.pdf HFIN 3/21/2017 9:00:00 AM
HB 111