Legislature(2017 - 2018)HOUSE FINANCE 519

03/21/2017 01:30 PM FINANCE

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Audio Topic
01:37:38 PM Start
01:38:38 PM HB111
03:32:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 3/22/17 at 9:00 AM --
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 21, 2017                                                                                            
                         1:37 p.m.                                                                                              
                                                                                                                                
RECESSED UNTIL 9:00 a.m. ON WEDNESDAY, MARCH 22, 2017                                                                           
                                                                                                                                
1:37:38 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Seaton called the House Finance Committee meeting                                                                      
to order at 1:37 p.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 Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Ken Alper, Director, Tax Division, Department of Revenue;                                                                       
Representative Garran Tarr.                                                                                                     
                                                                                                                                
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                             
                                                                                                                                
          HB 111 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Seaton reviewed the agenda returning to the                                                                            
presentation on HB 111 from the tax division.                                                                                   
                                                                                                                                
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."                                                                                      
                                                                                                                                
1:38:38 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
turned to slide 13 of  the PowerPoint presentation: "Oil and                                                                    
Gas  Production   Tax  and  Credits:  Background   and  Bill                                                                    
Analysis." The  slide discussed  the background  on Alaska's                                                                    
oil and gas taxes and analysis of CSHB 111(RES).                                                                                
                                                                                                                                
Mr.  Alper  moved  to  slide   14.  He  explained  that  the                                                                    
exploration credit  went back to  2003, and was  intended to                                                                    
give a benefit against taxes  of some percentage of spending                                                                    
on  desired  exploration  activities.  There  was  also  the                                                                    
capital expenditure credit, which  was part of the Petroleum                                                                    
Production Tax  (PPT) bill. The capital  credit was expanded                                                                    
in 2010  and created  a 40 percent  credit called  the "well                                                                    
lease  expenditure  (WLE)."  The   North  Slope  credit  was                                                                    
repealed with SB  21 [oil and gas tax  legislation passed in                                                                    
2013] in  the previous  legislature. House Bill  247[oil and                                                                    
gas  tax  legislation,   29th  Legislature]  eliminated  the                                                                    
capital  credit  in  two  stages,  to  be  repealed  in  the                                                                    
following  year. In  Middle  Earth there  would  be a  small                                                                    
credit remaining into the future.  The main credit that what                                                                    
was  discussed the  most was  the Net  Operating Loss  (NOL)                                                                    
credit, which paid  for a percentage of  a company's losses.                                                                    
That  type of  credit was  "stackable" with  exploration and                                                                    
capital  credits.  This  lead  to up  to  85  percent  state                                                                    
participation in  company expenditures for about  a two-year                                                                    
period.                                                                                                                         
                                                                                                                                
1:42:30 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  wondered about  stackable credits                                                                    
and how prevalent they were in the world.                                                                                       
                                                                                                                                
Mr. Alper responded that the  whole idea of cashable credits                                                                    
was quite  unique to  Alaska. He did  not know  whether they                                                                    
existed in other jurisdictions.                                                                                                 
                                                                                                                                
1:43:52 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton   acknowledged  Representative   Ortiz  and                                                                    
Representative Tilton at the table.                                                                                             
                                                                                                                                
Vice-Chair  Gara asked  whether  Mr. Alper  knew of  another                                                                    
jurisdiction that pays for a portion of a company's losses.                                                                     
                                                                                                                                
Mr. Alper  responded that it  was not unusual for  losses or                                                                    
pre-production  spending,  also  considered  losses,  to  be                                                                    
carried forward  and captured once there  was production and                                                                    
value.  There were  many ways  to do  this, but  it was  the                                                                    
nature  of  a  profit  system   that  the  costs  from  pre-                                                                    
production ended up in the taxes post-production.                                                                               
                                                                                                                                
Vice-Chair  Gara indicated  that the  major producers  saw a                                                                    
35 percent  credit for  NOL and  a 35  percent deduction  on                                                                    
their expenses,  but did not pay  a 35 percent tax  rate. He                                                                    
asked  whether it  was not  more common  to see  a deduction                                                                    
based on tax  rate as opposed to something  much larger than                                                                    
the effective tax rate.                                                                                                         
                                                                                                                                
Mr.  Alper pointed  out the  difference between  the nominal                                                                    
versus  the effective  tax rate.  He suggested  it would  be                                                                    
easier if it were just a flat  tax rate. He had a slide that                                                                    
provided  a  better NOL  rate.  He  agreed that  the  system                                                                    
created nuances such as those mentioned.                                                                                        
                                                                                                                                
1:46:24 PM                                                                                                                    
                                                                                                                                
Mr. Alper scrolled  to slide 15. He spoke about  some of the                                                                    
different tax  credits. The small producer  credit went back                                                                    
to the beginning  of PPT. It was designed to  make the first                                                                    
amount  of a  company's profits  effectively tax-free  if it                                                                    
fell  beneath a  certain production  threshold which  worked                                                                    
out to  be the first  $12 million  of tax liability  for the                                                                    
first nine years  of production. In order  to qualify, small                                                                    
producers had  to have first  production by May  2016. There                                                                    
would be a gradual phase  out of small producer credits over                                                                    
the  subsequent nine  years. The  per-taxable barrel  credit                                                                    
had   been   the  foundational   credit   for   the  SB   21                                                                    
calculation. He mentioned the sliding  scale for legacy oil.                                                                    
The new  oil would  receive the $5  flat rate  credit. Other                                                                    
credits  were   essentially  cash,   and  were   not  really                                                                    
considered  production tax  credits,  but  were against  the                                                                    
state's corporate income tax.                                                                                                   
                                                                                                                                
Mr. Alper discussed credits  against corporate income taxes.                                                                    
In 2007,  the state began  to buy  back the credits  at face                                                                    
value from the companies.  He explained the rationale behind                                                                    
the choice. The state created  a tax credit fund and created                                                                    
certain rules for  buyback. One of the  rules governing this                                                                    
was  that  the  company  had to  produce  less  than  50,000                                                                    
barrels  per day  in  order  to be  eligible  for cash.  The                                                                    
larger companies  would have to carry  their credits forward                                                                    
to  the following  year. Exxon,  ConocoPhillips, and  BP, as                                                                    
well as Hilcorp as of 2015, all fit this category.                                                                              
                                                                                                                                
1:50:10 PM                                                                                                                    
                                                                                                                                
Representative Wilson asked if  it made a difference whether                                                                    
a company  wrote off the loss  in its taxes or  if the state                                                                    
paid a check to the company.                                                                                                    
                                                                                                                                
Mr. Alper  answered that  there was  no real  difference. He                                                                    
pointed to  a big table  in the Revenue Sources  Book, Table                                                                    
8-4,  which  broke  out  cash  credits,  credits  subtracted                                                                    
against liability,  North Slope/non-North Slope, with  a lot                                                                    
of detail. The main difference  was time. If the company was                                                                    
set to  receive cash,  they would  receive it  the following                                                                    
year, whereas if  the credit was used  against the company's                                                                    
own taxes, they may receive it five or seven years later.                                                                       
                                                                                                                                
Representative Wilson  asked if those were  the same credits                                                                    
that a company could take to a bank as collateral.                                                                              
                                                                                                                                
Mr. Alper  responded that there  had been a  provision added                                                                    
in 2013 that  enabled a company to assign the  rights to its                                                                    
credit cash  to a bank.  For the  state, that meant  that it                                                                    
was  paying directly  to the  bank, which  allowed for  some                                                                    
bankruptcy protection to  the bank. Much of  the lending for                                                                    
small oil  companies was  venture capital,  high-risk money.                                                                    
What began to occur was  companies would borrow an extra $50                                                                    
million  in year  1. They  had the  same startup  money from                                                                    
venture capitalists  and would  bank on  that credit  to pay                                                                    
the  second lender  back.  The banks  that  were making  the                                                                    
short-term loans were  left hanging with the  lack of credit                                                                    
cash.                                                                                                                           
                                                                                                                                
Representative Wilson  asked if the credit  system increased                                                                    
oil production.                                                                                                                 
                                                                                                                                
Mr. Alper  responded that  he did not  want to  speculate on                                                                    
increased production, but that  it certainly had accelerated                                                                    
spending.                                                                                                                       
                                                                                                                                
1:53:07 PM                                                                                                                    
                                                                                                                                
Mr. Alper  moved to slide 16  on the history of  oil and gas                                                                    
production tax credits.                                                                                                         
                                                                                                                                
     FY 2007 thru 2016, $8.0 Billion in Credits                                                                                 
     North Slope                                                                                                                
       · $4.4 billion credits against tax liability                                                                             
          Major producers; mostly 20% capital credit in                                                                         
          ACES and per-taxable-barrel credit in SB21                                                                            
        · $2.3 billion repurchased credits                                                                                      
          New producers and explorers developing new fields                                                                     
                                                                                                                                
     Non-North Slope (Cook Inlet & Middle Earth)                                                                                
       · $0.1 billion credits against tax liability                                                                             
          Another $500 to $800 million Cook Inlet tax                                                                           
        reductions (through 2013) due to the tax cap still                                                                      
        tied to ELF                                                                                                             
        · $1.2 billion repurchased credits (most since                                                                          
          2013)                                                                                                                 
                                                                                                                                
Mr. Alper elaborated that $8  billion was offered in credits                                                                    
in the first 10 years of  the program. About $4.5 billion of                                                                    
that was not  an expenditure by the state, but  an offset to                                                                    
taxes  and a  reduction in  revenue received.  This occurred                                                                    
mostly in  the North Slope,  and almost entirely  via either                                                                    
the  per-barrel  credit in  SB  21  or  the old  20  percent                                                                    
capital credit  from ACES.  If a  major producer  spent $600                                                                    
million, and  earned 20 percent  capital credit,  they would                                                                    
be  subtracting $120  million from  that  year's taxes.  The                                                                    
other $3.5 billion were cash credits.                                                                                           
                                                                                                                                
1:54:28 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked if the state  still allowed companies                                                                    
to sell their credits to other companies at a discount.                                                                         
                                                                                                                                
Mr.  Alper  explained that  the  credits  could be  sold  to                                                                    
another  company and  that  the company  had  to inform  the                                                                    
state of  the activity, but  it was not required  to specify                                                                    
how much it received. The  private market for secondhand tax                                                                    
credit was an unknown, private negotiation.                                                                                     
                                                                                                                                
Vice-Chair  Gara provided  an  example of  the state  buying                                                                    
back credits from BP for the  full amount.  He asked whether                                                                    
it had been proposed that  the state participate at the same                                                                    
level, buying them at a discount.                                                                                               
                                                                                                                                
Mr. Alper  responded that he  did not know whether  that had                                                                    
been proposed,  but the Senate  added language to HB  247 in                                                                    
the previous year which said that  a company could get up to                                                                    
$70 million  in a given year.  The first $35 million  had to                                                                    
be paid at face value. If  it wanted more, the company would                                                                    
have to  accept a 25  percent haircut. The most  any company                                                                    
could get  would be $61.25  million to purchase  $70 million                                                                    
worth of credits.  There had never been a  discussion to buy                                                                    
the credits at a discount.                                                                                                      
                                                                                                                                
1:56:51 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  spoke  to the  credits  against  tax                                                                    
liability. He  asked whether  when Mr.  Alper meant  the $8,                                                                    
$7, $5  when referring the  per-taxable barrel credit  in SB                                                                    
21..                                                                                                                            
                                                                                                                                
Mr. Alper replied in the affirmative.                                                                                           
                                                                                                                                
Representative  Pruitt asked  how much  of the  $4.4 billion                                                                    
was associated with that particular credit.                                                                                     
                                                                                                                                
Mr  Alper  replied  that  the  credit  became  effective  in                                                                    
January  2014, with  the effective  date  of SB  21. In  the                                                                    
first  18  months  or  so,  it was  around  half  a  billion                                                                    
dollars. It had been a  much smaller number since prices had                                                                    
fallen, to where most North  Slope production was well under                                                                    
the  minimum tax  threshold.  He noted  that  a later  slide                                                                    
would show  that the numbers  quickly went to $8  [slide 47]                                                                    
then  dropped  rapidly at  prices  under  $70 and  companies                                                                    
bumped up against minimum tax.                                                                                                  
                                                                                                                                
1:58:06 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  was trying  to recall  the discussion                                                                    
around SB 21.  He recalled that there had  been concern that                                                                    
the  state  was moving  away  from  the progressive  tax  in                                                                    
Alaska's Clear  and Equitable Share  (ACES). He  wondered if                                                                    
the state should be grouping  the tax with other credits. It                                                                    
was an integral part of that particular tax.                                                                                    
                                                                                                                                
Mr. Alper  remarked that the answer  to the representative's                                                                    
previous question was $1.2 billion.  He stated that it was a                                                                    
credit, it was called a credit  in statute, it needed to get                                                                    
accounted for  when credits were  accounted for, and  it was                                                                    
used to offset  taxes. He agreed it was an  integral part of                                                                    
the SB  21-based tax  system. The change  had been  made for                                                                    
reasons  of progressivity.  The original  bill presented  by                                                                    
Governor Parnell  had been  a 25  percent flat  tax, without                                                                    
progressivity or  per-barrel credits. The problem  with that                                                                    
was  that, when  layered  with royalty,  which was  slightly                                                                    
regressive,  it lead  to an  overall regressive  tax regime.                                                                    
The  goal  of  the  then  legislature had  been  to  have  a                                                                    
relatively flat  total government  take curve.  That changed                                                                    
from $25  with no credit  to $35 with  a $5 credit,  and was                                                                    
roughly revenue  neutral at $100  per barrel oil.  It wasn't                                                                    
viewed as a tax increase, only  an increase in the tax rate,                                                                    
with a credit  benefit that roughly equaled  each other out.                                                                    
Suddenly, it added  $800 million a year  in credit liability                                                                    
to the state, even though it was revenue-neutral.                                                                               
                                                                                                                                
2:00:47 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara reported  that  the 35  percent credit  was                                                                    
called a  35 percent tax  - he strongly disagreed.  When the                                                                    
so-called  credit, which  was really  a price-sensitive  tax                                                                    
reduction,  takes  place,  at   $80  per  barrel  the  state                                                                    
received  15  percent profits  tax.  He  stated it  was  not                                                                    
really a 35 percent tax.                                                                                                        
                                                                                                                                
Mr.  Alper stated  that the  bill introduced  in 2013  had a                                                                    
flat 25 percent  tax. Had that structure  survived, it would                                                                    
be  a 25  percent  tax at  all prices.  By  throwing in  the                                                                    
subtractive feature,  nominally the state received  above 25                                                                    
percent  at certain  prices, but  for the  last three  years                                                                    
those prices were quite a bit lower than that.                                                                                  
                                                                                                                                
2:02:17 PM                                                                                                                    
                                                                                                                                
Mr. Alper explained slide 17.                                                                                                   
                                                                                                                                
     Providing some detail out of confidential data:                                                                            
     Of the nearly $3.5 billion in state-repurchased                                                                            
     credits through the end of FY16:                                                                                           
        · $1.5 billion went to eight North Slope projects                                                                       
          that now have production                                                                                              
        · $0.8 billion went to 11 North Slope projects that                                                                     
          do not yet have any production. Some of these are                                                                     
          abandoned, and some are in process                                                                                    
        · $0.9 million went to eight non-North Slope                                                                            
          projects that have production                                                                                         
        · $0.3 million went to eight non-North Slope                                                                            
          projects that do not yet have any production                                                                          
                                                                                                                                
Mr. Alper remarked  that the data was  all confidential, but                                                                    
that  of  the  $3.5 billion  in  state-repurchased  credits,                                                                    
about $1.5  billion went to  8 companies on the  North Slope                                                                    
that  were currently  in  production.  Another roughly  $0.8                                                                    
billion went  to 11  North Slope projects  that did  not yet                                                                    
have  production. $0.9  million  went to  8 non-North  Slope                                                                    
projects that  had production, and  about $0.3  million went                                                                    
to  8  non-North  Slope  projects  that  did  not  yet  have                                                                    
production.                                                                                                                     
                                                                                                                                
Mr. Alper continued to slide 18.                                                                                                
                                                                                                                                
        North Slope Repurchased Credits                                                                                         
        · Between FY07-FY16 spent $1.5 billion supporting                                                                       
          eight producing projects                                                                                              
        · Total production from these producers through end                                                                     
          of 2015 is 63 million barrels                                                                                         
        · Total credits = $24 / barrel                                                                                          
             o Doesn't include payments to non-producing                                                                        
               projects                                                                                                         
             o This number will decrease over time due to                                                                       
               additional production from these fields                                                                          
        · Lease expenditures for these projects, through                                                                        
          FY15, were $6.0 billion                                                                                               
             o Credit support was 25% of lease expenditures                                                                     
                                                                                                                                
Mr. Alper  elaborated on slide  18. Narrowing down  to North                                                                    
Slope credits that went to  companies in production, through                                                                    
the  end of  calendar year  2015,  that came  to 63  million                                                                    
barrels of  oil produced.  The state's investment  was about                                                                    
$24  per   barrel.  The  total  credit   support  for  lease                                                                    
expenditures was 25 percent.                                                                                                    
                                                                                                                                
2:04:24 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  how   much  money  the  state                                                                    
received through royalty, oil, and other taxes up to FY 16.                                                                     
                                                                                                                                
Mr. Alper explained  that $61 billion was the  total oil and                                                                    
gas revenue.                                                                                                                    
                                                                                                                                
Representative Wilson  surmised that the state  had paid out                                                                    
$3.5 billion for the $61 billion that it received.                                                                              
                                                                                                                                
Mr. Alper suggested  it was important to  recognize that the                                                                    
great bulk of that revenue  came from older assets that were                                                                    
producing long  before the state  began buying  tax credits.                                                                    
He agreed  that a  relatively small amount  had gone  to tax                                                                    
credits  in  the  early  years. It  was  becoming  a  larger                                                                    
percentage as prices declined.                                                                                                  
                                                                                                                                
2:07:06 PM                                                                                                                    
                                                                                                                                
Representative Wilson  disagreed, stating  that some  of the                                                                    
repurchasing  was   owed  for   what  had   been  previously                                                                    
received.                                                                                                                       
                                                                                                                                
Mr.  Alper responded  that the  numbers  represented in  the                                                                    
slides were  paid in full.  The issue of unpaid  tax credits                                                                    
was limited to FY 17 and beyond.                                                                                                
                                                                                                                                
Representative Wilson asked  whether there was not  a way to                                                                    
say  that credits  coming  forward had  nothing  to do  with                                                                    
projects  that  came online  that  provided  benefit to  the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr.  Alper remarked  that the  slide  attempted to  identify                                                                    
projects  that   were  specifically  tied  to   the  credits                                                                    
received.                                                                                                                       
                                                                                                                                
Representative Wilson stated that a  lot of the credits that                                                                    
were  written   off  had  to  do   with  production  already                                                                    
received,  as there  were not  a lot  of new  projects going                                                                    
forward. She wanted to ensure that  it was not the case that                                                                    
the state was not getting its money's worth from 2017.                                                                          
                                                                                                                                
Mr. Alper gave the example of  a project for which a company                                                                    
received $100 million  in credits over time,  with 5 million                                                                    
barrels of production in a  few years. Simple division would                                                                    
say that the state had  invested $20 per barrel. Three years                                                                    
on, that  company could  be up to  10 million  barrels, from                                                                    
those same wells, and not  earning more credits as they were                                                                    
not drilling more.  At that point the $20  per barrel figure                                                                    
drops to  a $10 per  barrel figure,  as all the  old credits                                                                    
would be divided among more barrels.                                                                                            
                                                                                                                                
2:08:32 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  reiterated  that the  state  had                                                                    
paid $1.5 billion  on eight producing projects,  for a total                                                                    
of  63 million  barrels. He  asked how  many of  the barrels                                                                    
were in production before the  credits came online. A lot of                                                                    
the projects were already in  place pre-SB 21, which changed                                                                    
the  economics.  People applauded  all  of  the things  that                                                                    
happened  with SB  21, but  many  of those  were already  in                                                                    
place. He  asked Mr.  Alper to extrapolate  how much  of the                                                                    
$63 million was a result of those credits.                                                                                      
                                                                                                                                
Mr.  Alper responded  that there  were inevitably  decisions                                                                    
that had  to be made when  putting together the data  set he                                                                    
was  presenting.  The projects  which  were  already in  the                                                                    
pipeline before  SB 21 were  not included,  however Economic                                                                    
Limit Factor (ELF) projects were  included in the 63 million                                                                    
barrels.                                                                                                                        
                                                                                                                                
Representative  Guttenberg  concluded  that  it  was  really                                                                    
difficult to  understand the results of  the credits outside                                                                    
the boardroom                                                                                                                   
                                                                                                                                
Mr.  Alper  explained  that  he attempted  to  get  as  much                                                                    
information to  the decision-makers  as he could  within the                                                                    
current laws regarding confidentiality.                                                                                         
                                                                                                                                
2:11:08 PM                                                                                                                    
                                                                                                                                
Mr. Alper spoke  to slide 19. He highlighted  that the slide                                                                    
showed the production tax received  by year since FY 07. The                                                                    
first  bar  showed calculated  tax,  or  the tax  rate.  The                                                                    
middle bar  showed the amount  of revenue  actually received                                                                    
by the state.  The darker red bar was the  net income to the                                                                    
state  after cash  credits have  been paid.  The system  had                                                                    
developed  in a  time in  which the  state was  receiving $2                                                                    
billion to  $6 billion  a year. Investing  in the  future of                                                                    
Alaska made a certain  fiscal and long-term strategic sense.                                                                    
Then  the price  fell and  the credits  remained similar  in                                                                    
scope. Suddenly, the  revenue was offset by  the credits. In                                                                    
FY 15  and FY 16, the  amount of credits paid  was more than                                                                    
the  revenue coming  in.  All  of the  liability  for FY  17                                                                    
rolled forward  and would become  FY 18 liability,  shown in                                                                    
the negative  red bar  in the slide.  The forecast  showed a                                                                    
small number.                                                                                                                   
                                                                                                                                
Mr. Alper turned to slide 20  which showed the same data set                                                                    
but with unrestricted petroleum  revenue. The only thing not                                                                    
shown  was royalties  going into  the  Permanent Fund.  High                                                                    
numbers get higher, but the  amount of total revenue is more                                                                    
dramatically impacted  by having  a several  hundred million                                                                    
dollar credit system.                                                                                                           
                                                                                                                                
2:13:59 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked Mr. Alper  to return to slide  19. He                                                                    
asked whether, with all owed  credits paid, there would be a                                                                    
net zero in 2019.                                                                                                               
                                                                                                                                
Mr.  Alper  responded that  he  would  have to  examine  the                                                                    
numbers but  that to the naked  eye it looked like  a fairly                                                                    
low number.                                                                                                                     
                                                                                                                                
Representative Wilson  wondered why the state  would not add                                                                    
all  of the  royalties into  the chart,  as the  state still                                                                    
receives them.                                                                                                                  
                                                                                                                                
Mr. Alper answered that the  chart was made at the beginning                                                                    
of the process. The unrestricted royalties could be added.                                                                      
                                                                                                                                
Representative   Wilson  believed      that  including   all                                                                    
royalties  made  the  graph    transparent  and  easier  for                                                                    
constituents to understand.                                                                                                     
                                                                                                                                
Mr. Alper  indicated that  it was  a robustly  edited graph,                                                                    
with requests from  committees over the last  year. He would                                                                    
be more than happy to add another layer.                                                                                        
                                                                                                                                
Representative Pruitt  asked if Mr. Alper  recalled that the                                                                    
throughput forecast for 2026 was  around 309,000 barrels per                                                                    
day.                                                                                                                            
                                                                                                                                
Mr.  Alper agreed  that it  was  in the  300,000 to  350,000                                                                    
range. At the beginning of  the chart, it was around 700,000                                                                    
per day of throughput in 2007 and 2008.                                                                                         
                                                                                                                                
Mr.  Alper  turned to  slide  21.  He  spoke to  the  unpaid                                                                    
balance:                                                                                                                        
                                                                                                                                
   · FY2009-2015     Legislature    used     "open    ended"                                                                    
     appropriation   language.   All   credit   certificates                                                                    
     presented were purchased                                                                                                   
   · FY16 Appropriation Capped at $500 million                                                                                  
        o $498 million paid out by end of June                                                                                  
        o About $211 million North Slope, $287 million non-                                                                     
          NS                                                                                                                    
   · FY17 Governor proposes $1 billion to clear credit                                                                          
     liability as part of reform package and full fiscal                                                                        
     plan                                                                                                                       
        o Legislature appropriated $460 million towards                                                                         
          expected demand of $775 million                                                                                       
        o Governor vetoed all but $30 million (formula                                                                          
          calc.)                                                                                                                
        o Funds were paid first in-first out; most went to                                                                      
          Cook Inlet capital and well lease expenditure                                                                         
          claims                                                                                                                
                                                                                                                                
Mr.   Alper  expounded   that  the   amount  presented   for                                                                    
repurchase  estimated to  be $400  million was  appropriated                                                                    
from  the General  Fund to  the tax  credit fund.  He stated                                                                    
that the most  that was ever spent in a  given year was $628                                                                    
million. For FY  16, the governor struck  out the open-ended                                                                    
language and  replaced it with  $500 million. It  turned out                                                                    
to  be $498.5  million, so  the appropriation  was spent.  A                                                                    
little over  40 percent was  North Slope, and the  rest non-                                                                    
North Slope, meaning  half of the credits  were Middle Earth                                                                    
and  Cook Inlet  credits.  He  reported that  Representative                                                                    
Geran  Tarr had  mentioned  the  governor's complete  fiscal                                                                    
package  introduced  in  the  previous  legislative  session                                                                    
including a  one-time $1 billion appropriation  to put money                                                                    
into the tax credit fund.  This was envisioned as an overall                                                                    
solution that would  eliminate most of the  credits into the                                                                    
future and  fix the  existing problem.  The package  had not                                                                    
passed  and   what  was   eventually  appropriated   by  the                                                                    
legislature was $460 million. He  did not know the origin of                                                                    
the amount. At  the time the estimated demand  had been $775                                                                    
million, so  this was underfunded. The  governor vetoed $460                                                                    
million   down  to   $30  million,   based   on  a   formula                                                                    
calculation. The formula was a statutory guideline.                                                                             
                                                                                                                                
2:19:19 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  continued  to  address   slide  21  showing  the                                                                    
$30 million had  been spent and  most of the money  had gone                                                                    
to  Cook Inlet  earlier claims.  He  moved to  slide 22  and                                                                    
shared that the  Tax Division had issued  about $600 million                                                                    
in  certificates in  FY 17;  about $100  million had  either                                                                    
been paid or transferred.                                                                                                       
                                                                                                                                
   · $600 million in certificates have been issued in                                                                           
     FY17                                                                                                                       
     Of these, about $100 million have either been:                                                                             
        o Paid (from the roughly $30 million available                                                                          
          funds);                                                                                                               
        o Transferred (to be used against another company's                                                                     
          tax liability); or                                                                                                    
        o Are ineligible for repurchase                                                                                         
   · Total remaining awaiting repurchase ~$500 million                                                                          
   · Applications in-hand about $200 million                                                                                    
        o $50 million "023" credits (NOL and Cook Inlet                                                                         
          drilling)                                                                                                             
        o $150 million "025" credits (Exploration; have                                                                         
          sunset)                                                                                                               
   · So total known demand is roughly $700 million                                                                              
   · Additional ~$400 million forecasted for FY18                                                                               
                                                                                                                                
Mr.  Alper  specified  that   the  current  amount  awaiting                                                                    
repurchase was $500 million. About  $200 million was in-hand                                                                    
applications,  about  $50  million  in NOL  and  Cook  Inlet                                                                    
drilling, and  $150 million in  the exploration  credits had                                                                    
sunset. The  division was currently  working through  a very                                                                    
large  last slug  of the  exploration credits.  The division                                                                    
knew   about   $700    million   and   anticipated   another                                                                    
$400 million  in   FY  18.  That   meant  $1.1   billion  in                                                                    
liability,   minus   appropriations  and   current   credits                                                                    
changing hands, leaving a hanging balance of $900 million.                                                                      
                                                                                                                                
2:21:53 PM                                                                                                                    
                                                                                                                                
Representative   Pruitt   asked   what   kind   of   credits                                                                    
represented the $400 million forecast in FY 18.                                                                                 
                                                                                                                                
Mr.  Alper answered  they were  mostly NOLs  and Cook  Inlet                                                                    
capital and WLE credits. All of  the 2016 NOLs would come in                                                                    
roughly March 31 [2017].                                                                                                        
                                                                                                                                
Representative Pruitt suggested the  NOLs were not cashable.                                                                    
He   was  trying   to   understand   the  partial   payment.                                                                    
Ultimately, he  wondered how  much would  have to  be cashed                                                                    
out.                                                                                                                            
                                                                                                                                
Mr.  Alper responded  that they  were cashable.  The current                                                                    
number was more like $500 million.                                                                                              
                                                                                                                                
Mr.  Alper  turned  to  slide  23.  He  explained  that  the                                                                    
greybars  represented  what   the  statutory  formula  would                                                                    
appropriate in a  given year, expected to be  $50 million to                                                                    
$100  million. Meanwhile  credits would  accrue at  a faster                                                                    
rate. The  rate of  increase was  shrinking due  to reforms.                                                                    
The graph only represented  known, current projects, leading                                                                    
to $1.6 billion by 2026.                                                                                                        
                                                                                                                                
Mr. Alper moved to the formula on slide 24:                                                                                     
                                                                                                                                
     Credit appropriation formula AS 43.55.028(b) and (c)                                                                       
     · Based on a percentage of production tax revenue                                                                          
        before subtracting credits that are taken against                                                                       
        liability)                                                                                                              
          o Forecast price below $60: 15%                                                                                       
          o Forecast price above $60: 10%                                                                                       
     · Was never used in previous years' budgets before                                                                         
        FY17                                                                                                                    
     · Earlier    years    would   have    generated   large                                                                    
        appropriations that would have exceeded the demand                                                                      
        for credits, "endowing" the fund                                                                                        
     · Recent years would have spent down any past                                                                              
      surpluses; reducing the fund to zero by FY2016                                                                            
     · We'd be in the same place now- only there wouldn't                                                                       
        be the expectation that we'd provide unlimited                                                                          
        funding                                                                                                                 
                                                                                                                                
Mr. Alper relayed  that had the formula  been followed then,                                                                    
the  amount  appropriated  would  have been  more  than  the                                                                    
demand. It would have endowed  a tax credit fund. Once lower                                                                    
prices  occurred,  the  unpaid  credits would  still  be  an                                                                    
issue, but the  difference would be that there  would not be                                                                    
the expectation  from industry that the  state would provide                                                                    
unlimited funding.                                                                                                              
                                                                                                                                
2:26:24 PM                                                                                                                    
                                                                                                                                
Mr.  Alper advanced  to slide  25, showing  how the  formula                                                                    
worked  and how  it would  have worked.  Open-ended language                                                                    
for the  appropriation became more  convenient and  was more                                                                    
for the sake of simplicity  rather than policy. He explained                                                                    
the  differences  between   budgeted  versus  actual  versus                                                                    
statutory  tax  credit  funding formula.  The  graph  showed                                                                    
credits  received, actual  production  tax, credits  against                                                                    
liability,   revenue  due   to  AS   43.55.011,  oil   price                                                                    
forecasts, credit  caps per  AS 43.55.028  (c) and  end year                                                                    
fund balances.                                                                                                                  
                                                                                                                                
Representative   Wilson    asked   whether,    because   the                                                                    
calculation was  based on ACES,  when there was a  change to                                                                    
credits, the  state should have  been utilizing  the formula                                                                    
to ensure  that funding  followed the  formula as  well. She                                                                    
wondered if the numbers would  be different. She thought the                                                                    
formula should be looked at  every time there was a proposed                                                                    
tax change.                                                                                                                     
                                                                                                                                
Mr. Alper answered  that had the formula  been followed from                                                                    
the beginning,  what she had  described would the  case, and                                                                    
the formula would have been revisited.  As no one was in the                                                                    
habit of using  the formula, it had not  been revisited. The                                                                    
moment in  which that would  have been important was  in the                                                                    
era of the Cook Inlet Recovery  Act. It created what lead to                                                                    
a new liability  of a couple of hundred  million dollars per                                                                    
year. Had  it been  built into the  system, the  formula may                                                                    
have had to adapt.                                                                                                              
                                                                                                                                
Representative  Wilson  asked  whether one  could  speculate                                                                    
that,  had  the formula  been  used,  and the  numbers  were                                                                    
positive   rather  than   negative,  the   state  would   be                                                                    
revisiting the tax structure if  there was not the liability                                                                    
since  the state  had a  formula  that worked  and that  the                                                                    
state followed.                                                                                                                 
                                                                                                                                
Mr.  Alper  responded that  the  poster  child for  the  tax                                                                    
credits  were the  companies wanting  to explore  areas that                                                                    
were too marginal  for the major producers -  the 50 million                                                                    
to 10  to 20 thousand  barrel per day fields.  What happened                                                                    
was a  handful of  rather large, unexpected  discoveries. If                                                                    
the current system applied to  those projects going forward,                                                                    
that would  mean billions of  dollars in  credit liabilities                                                                    
which the  state simply  did not have  the resources  to pay                                                                    
for. The system would need to be revisited anyway.                                                                              
                                                                                                                                
Representative Wilson explained that  most of the time North                                                                    
Slope and Cook Inlet were  thrown together, when one of them                                                                    
was subsidized. She  wondered if Cook Inlet  were taken out,                                                                    
leaving only North Slope, what the number would look like.                                                                      
                                                                                                                                
Mr.  Alper stated  that  the department  would  look at  the                                                                    
assumption  that  Cook  Inlet had  its  own  revenue-neutral                                                                    
funding source, and what the  endowed fund would have looked                                                                    
like with only the North Slope credits.                                                                                         
                                                                                                                                
Representative  Wilson asked  in the  department to  include                                                                    
interest in the data it was compiling.                                                                                          
                                                                                                                                
Mr.  Alper  replied  that  the   department  would  put  the                                                                    
information together.                                                                                                           
                                                                                                                                
Co-Chair Foster  recognized the presence of  House Resources                                                                    
Co-Chair Representative Geran Tarr.                                                                                             
                                                                                                                                
2:32:25 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked for verification that  the Cook Inlet                                                                    
credits disappeared in FY 19.                                                                                                   
                                                                                                                                
Mr. Alper responded that Cook  Inlet credits would disappear                                                                    
completely  in calendar  year 2018.  The  last credits  from                                                                    
calendar  2017  would  be  paid  in FY  19,  so  they  would                                                                    
disappear completely in FY 20.                                                                                                  
                                                                                                                                
Vice-Chair Gara  asked to  return to slide  19. With  no new                                                                    
Cook Inlet  credits in  FY 19  and FY  20, the  graph showed                                                                    
North Slope  credits deducted  from production  taxes, close                                                                    
to zero.                                                                                                                        
                                                                                                                                
Mr. Alper  responded that in  the 2020s, the  forecast price                                                                    
of oil was creeping up, but  still in the range of receiving                                                                    
the minimum tax. At very  low prices, very little per-barrel                                                                    
credit could  be used.  Once oil prices  reached the  $60 to                                                                    
$70 range,  there was  still a  minimum tax  but all  $8 was                                                                    
being used. He  noted that cash credits  (represented by the                                                                    
gap between  the second bar  and the  red bar on  slide 19),                                                                    
were using up about half of the remaining revenue.                                                                              
                                                                                                                                
Vice-Chair  Gara referred  to  the large  fields as  non-GVR                                                                    
fields.  The  GVR  fields  were  new  fields  and  post-2002                                                                    
fields.  The  fields that  received  credits  for the  first                                                                    
seven years pay  close to zero production tax  at oil prices                                                                    
up to  $70 per barrel.  He asked for verification  that this                                                                    
was true.                                                                                                                       
                                                                                                                                
Mr. Alper  responded that the  $5 per barrel credit  for new                                                                    
oil was not held to the minimum tax so it would pay zero.                                                                       
                                                                                                                                
Vice-Chair  Gara  reported  the  state was  getting  a  zero                                                                    
percent  production tax  until  oil prices  reached $70  per                                                                    
barrel.  He  asked  for committee  discussion  on  the  zero                                                                    
revenue for no production, when  some of those were projects                                                                    
that were already moving ahead.                                                                                                 
                                                                                                                                
Mr. Alper replied that there  were many things the bill did.                                                                    
He remarked that the legislation  was substantial. It shrunk                                                                    
the  size  of  effective  NOL  credits,  it  abandoned  cash                                                                    
payments  for  them,  and  it   hardened  the  minimum  tax.                                                                    
Specific provisions in the  legislation addressed the issues                                                                    
in the status quo.                                                                                                              
                                                                                                                                
2:37:04 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  returned to  slide  25.  He posited  what  would                                                                    
happen to  a company that  had $900 million in  credits. The                                                                    
credits  were   not  considered  debt  and   did  not  incur                                                                    
interest. They  were a  tax offset  document. They  could be                                                                    
sold or transferred  to another company. There  was not much                                                                    
demand at  present especially as  even major  producers have                                                                    
low tax liability. The companies  were not paying very much,                                                                    
and it could  only be used to offset 20  percent of tax. The                                                                    
exploration  credits   were  not  under   that  restriction,                                                                    
however,  the  last  of the  exploration  credits  would  be                                                                    
issued later in  the year. The secondary  market for credits                                                                    
was not robust.                                                                                                                 
                                                                                                                                
Mr. Alper  moved to  the topic of  the major  provisions and                                                                    
regional impacts  of HB 247 on  slide 28. The final  law had                                                                    
been largely based on the Senate's version of HB 247.                                                                           
                                                                                                                                
     Cook Inlet                                                                                                                 
        · Complete phase-out of NOL, QCE, and WLE by 2018                                                                       
        · Extends "tax caps" on gas indefinitely, adds $1/                                                                      
          bbl oil tax                                                                                                           
        · Municipal utility pro-ration of costs                                                                                 
     Middle Earth                                                                                                               
       · Reduces the NOL, QCE, and WLE credit rates                                                                             
        · Extends "Frontier Basin" exploration credit to                                                                        
          July 2017                                                                                                             
     North Slope                                                                                                                
        · GVR "Graduation" provision after three to seven                                                                       
          years                                                                                                                 
        · GVR can't be used to increase the amount of an                                                                        
          NOL                                                                                                                   
     Statewide                                                                                                                  
        · $70 million per company per year cap ($61 with                                                                        
          "haircut")                                                                                                            
        · Interest rates increased for 3 years, then drops                                                                      
          to zero                                                                                                               
        · Transparency,   local   hire,   state   obligation                                                                    
          offsets, surety bond                                                                                                  
                                                                                                                                
2:43:17 PM                                                                                                                    
                                                                                                                                
Co-Chair   Seaton   referred   to  the   qualified   capital                                                                    
expenditure  (QCE) credit,  which had  been extended  past a                                                                    
July 1 date  in the Senate version of the  bill. He asked if                                                                    
the particular credit  could be used for  Hilcorp's flow out                                                                    
gasline in Cook Inlet.                                                                                                          
                                                                                                                                
Mr. Alper  responded that  the QCE  credit had  been reduced                                                                    
from 20 percent  to 10 percent for 2017.  Middle Earth would                                                                    
continue  on and  Cook Inlet  would go  to zero.  If capital                                                                    
work was to be carried out  in 2017, the company could apply                                                                    
for the credit. He did  not know about specific restrictions                                                                    
for  repairs. There  was specific  language in  statute that                                                                    
covered restrictions.                                                                                                           
                                                                                                                                
2:44:18 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara asked  Mr. Alper  to explain  the effective                                                                    
tax rate on oil produced in Cook Inlet.                                                                                         
                                                                                                                                
Mr. Alper relayed  that the Cook Inlet oil and  gas paid the                                                                    
lowest tax  under ELF.  The smaller  fields paid  the lowest                                                                    
tax. He detailed  that PPT locked ELF  multipliers from 2005                                                                    
into place for all oil and  gas fields in Cook Inlet through                                                                    
2022. On the  gas side the average gas  production was taxed                                                                    
at 17 cents  per 1,000 cubic feet, and all  oil was taxed at                                                                    
zero.  In   HB 247,  the  17   cent  tax  was   extended  in                                                                    
perpetuity, and it  would no longer sunset. On  the oil side                                                                    
the zero  was seen  as unsustainable; therefore,  the Senate                                                                    
placed the  $1 tax  in HB  247. There  were about  5 million                                                                    
barrels of oil produced in Cook  Inlet, so the result was $5                                                                    
million.                                                                                                                        
                                                                                                                                
2:46:55 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked if there  was a way of  converting to                                                                    
terms of gross or profits tax that were more commonly used.                                                                     
                                                                                                                                
Mr. Alper  said that  he did  not know  the actual  costs of                                                                    
producing oil  in Cook Inlet. The  tax cap in place  made it                                                                    
less important for tax calculation.  He reported that all of                                                                    
the  oil   produced  in  Cook   Inlet  was  sold   to  local                                                                    
refineries, not to  the global market, and did  not have the                                                                    
same shipping costs associated with  it. It would be easy to                                                                    
describe  it as  a gross  tax. He  did not  think there  was                                                                    
enough information to convert it to a net tax.                                                                                  
                                                                                                                                
Vice-Chair Gara  stated that oil  was a global  commodity so                                                                    
the price  was the same  regardless. Taxing oil by  a dollar                                                                    
would not make the cost for oil higher.                                                                                         
                                                                                                                                
Mr.  Alper agreed.  For the  sake of  simplicity, one  could                                                                    
assume  that that  oil was  being  sold for  $50, which  was                                                                    
about what  a barrel of oil  was worth. He specified  that a                                                                    
$1 production tax was about 2 percent of the gross.                                                                             
                                                                                                                                
2:48:56 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton asked  Mr. Alper  to  provide a  comparison                                                                    
which would  help to determine  an appropriate tax  for Cook                                                                    
Inlet, considering that  it did not incur  the same expenses                                                                    
as North Slope oil.                                                                                                             
                                                                                                                                
Mr. Alper  complied and suggested  that if the  market price                                                                    
was $50,  the gross tax from  the North Slope was  4 percent                                                                    
of $40  and the dollar  tax in Cook  Inlet was 2  percent of                                                                    
$50, it  could be  determined what  tax would  be comparable                                                                    
for the Cook Inlet.                                                                                                             
                                                                                                                                
Co-Chair Seaton asked about the  gross value reduction of 20                                                                    
percent.  He asked  whether  the extra  10  percent used  to                                                                    
lower the royalties was still on the books.                                                                                     
                                                                                                                                
Mr. Alper thought Co-Chair Seaton  was referring to the late                                                                    
addition to SB 21, which  created the gross value reduction.                                                                    
It was a  20 percent benefit for "new oil,"  and a new layer                                                                    
was added. If  all leases on a given field  are greater than                                                                    
12.5 percent  then the  company would  receive a  30 percent                                                                    
benefit. This was characterized as  a payback for high state                                                                    
royalties.  He  underlined  that this  only  regarded  state                                                                    
royalties.                                                                                                                      
                                                                                                                                
2:51:53 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  asked where  the oil would  come from                                                                    
if the refineries  did not purchase the Cook  Inlet oil. Mr.                                                                    
Alper  thought  it  would  come  from  the  North  Slope  or                                                                    
somewhere else in the world.                                                                                                    
                                                                                                                                
Representative  Pruitt  asked  if  the cost  for  a  similar                                                                    
product  from  somewhere  else  would  include  delivery.Mr.                                                                    
Alper  thought that  all oil  contracts were  different, but                                                                    
believed  that  there  would  be   a  higher  price  due  to                                                                    
delivery.                                                                                                                       
                                                                                                                                
Representative Pruitt indicated that  the market cost of $50                                                                    
for oil,  for example  from the Middle  East, would  have an                                                                    
added  cost  for  delivery.Mr.   Alper  mentioned  that  the                                                                    
contracts were private, but that  he assumed that closer oil                                                                    
would be attractive due to this lesser cost for delivery.                                                                       
                                                                                                                                
Representative  Pruitt asked  whether  a  state increase  to                                                                    
Cook Inlet oil tax would increase the costs to customers.                                                                       
                                                                                                                                
Mr.  Alper   thought  it  was  reasonable   to  assume  that                                                                    
companies would  pass those  costs on.  It would  be another                                                                    
cost  to the  refineries. He  underlined that  there was  no                                                                    
change to Cook Inlet tax in the legislation.                                                                                    
                                                                                                                                
Mr. Alper  continued with slide  29 regarding  concerns over                                                                    
tax and credit system:                                                                                                          
                                                                                                                                
        · Hybrid system with a net tax above $75, a gross                                                                       
          tax between $45 and $75, and a net tax (via the                                                                       
          NOL credit) below $45                                                                                                 
        · Possible multi-billion dollar future liability                                                                        
          for large new discoveries                                                                                             
        · Possible ability to use carried forward operating                                                                     
          loss credits to zero out all taxes ("hardening                                                                        
          the floor")                                                                                                           
        · Equity between major producers and new explorers                                                                      
          if major changes made to operating loss credits                                                                       
        · High per barrel credit keeps us in the 4%                                                                             
          "minimum tax" at up to nearly $80 oil                                                                                 
                                                                                                                                
                                                                                                                                
Representative Wilson asked if  the same effect occurred due                                                                    
to constant changes to the tax structure.                                                                                       
                                                                                                                                
Mr.  Alper  was  unaware  of how  oil  companies  factor  in                                                                    
changes  in Alaska  oil  tax. He  thought  that the  current                                                                    
structure was  unstable. The potential credit  liability was                                                                    
larger  than the  anticipated  revenue.  Regardless of  what                                                                    
action was taken,  the state still would not  have the means                                                                    
to pay  $1 billion  per year in  tax credits  going forward.                                                                    
Companies needed  to know how  the state would  resolve that                                                                    
issue before they could commit to producing that oil.                                                                           
                                                                                                                                
2:59:24 PM                                                                                                                    
                                                                                                                                
Representative Wilson remarked that  Alaska was the unstable                                                                    
entity. The projects  are long-term, and the  changes to the                                                                    
tax system were  yearly. She asked Mr. Alper  whether he was                                                                    
confident  that the  proposed legislation  would ensure  the                                                                    
tax structure could stay in  place for at least three years,                                                                    
resulting in more oil in the pipeline.                                                                                          
                                                                                                                                
Mr. Alper  replied that he  could not promise  anything, but                                                                    
noted  the importance  of resolving  the credit  issue in  a                                                                    
stable manner. He did not  think the current bill before the                                                                    
committee would address the issue  of tax. He thought issues                                                                    
of oil  tax would  continue to come  up inevitably,  but the                                                                    
issue of oil  credits needed to be addressed  in the current                                                                    
year.                                                                                                                           
                                                                                                                                
3:01:47 PM                                                                                                                    
                                                                                                                                
Representative Pruitt asked which  credits Mr. Alper thought                                                                    
should change.                                                                                                                  
                                                                                                                                
Mr.  Alper  answered  that  NOLs in  current  law  were  not                                                                    
affordable as cash. If the policy  were to be that the state                                                                    
would not buy  credits, then it should be  put into statute.                                                                    
He would address the sectional  of the bill in later slides.                                                                    
The overarching  change in the  legislation was  getting the                                                                    
state out of the business of paying cash for NOLs.                                                                              
                                                                                                                                
Representative  Pruitt  asked  if  the  oil  companies  felt                                                                    
similarly  about  the  issue and  whether  the  state  could                                                                    
expect a similar conversation with them.                                                                                        
                                                                                                                                
Mr. Alper suggested  that no company would gladly  give up a                                                                    
benefit,  however  no  one was  proposing  taking  away  the                                                                    
$900 million in credits. Going forward,  the state needed to                                                                    
know what  the companies need  to move ahead  with projects,                                                                    
with the understanding that the  State of Alaska was getting                                                                    
out of the cash business.                                                                                                       
                                                                                                                                
Representative Pruitt  stated that the companies  make plans                                                                    
years into  the future.  He wondered if  they would  come to                                                                    
the state to indicate that  losing that benefit would affect                                                                    
those plans.                                                                                                                    
                                                                                                                                
Mr. Alper  said that the  oil companies had paid  90 percent                                                                    
of  state government  in  the past.  When  the state  needed                                                                    
money, it would  previously go to oil  companies rather than                                                                    
a  cigarette  tax  which  would  have  raised  $25  million.                                                                    
Suddenly a substantial  percentage of the GF  was coming out                                                                    
of invested  assets. In all  likelihood, it would  take some                                                                    
of the pressure off  future legislatures because expectation                                                                    
and demand would be lowered.                                                                                                    
                                                                                                                                
3:07:28 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara  asked about  the  page  2 in  Mr.  Alper's                                                                    
response to Vice-Chair Gara dated  February 6, 2017 (copy on                                                                    
file), regarding the effective tax  rates on GVR and non-GVR                                                                    
oil at various prices. He  asked for verification that there                                                                    
was  an approximate  tax of  4 percent  from non-GVR  fields                                                                    
(i.e.  Prudhoe  Bay and  older  fields)  at prices  slightly                                                                    
above $70 per barrel.                                                                                                           
                                                                                                                                
Mr. Alper  replied that the  statement was  mostly accurate,                                                                    
but noted things varied from  producer to producer. He added                                                                    
that the minimum tax governed to around $70 or so.                                                                              
                                                                                                                                
Vice-Chair  Gara  referred  to  new  oil  (i.e.  Nakaitchuq,                                                                    
Oooguruk,  Point  Thomson,  and  other  post-2003  oil).  He                                                                    
stated that for the GVR oil  the state did not receive the 4                                                                    
percent tax  up to oil  prices at  about $70 per  barrel. He                                                                    
stated  that according  to Mr.  Alper's report,  the average                                                                    
North Slope GVR field did not  pay the 4 percent minimum tax                                                                    
and paid no  taxes up to prices of about  $70 per barrel for                                                                    
the first seven years.                                                                                                          
                                                                                                                                
                                                                                                                                
Mr. Alper  replied in the affirmative  related to production                                                                    
tax. He  detailed that there was  no hard floor on  new oil.                                                                    
There tended to be zero tax at low prices.                                                                                      
                                                                                                                                
Vice-Chair Gara stated that one  of his biggest concerns was                                                                    
related  to  what  he  termed the  "zero  percent  and  four                                                                    
percent tax  problem" the  state would  live with  until oil                                                                    
prices exceeded  the current price  by 25 to 40  percent. He                                                                    
suggested that  if the  state were to  have the  audacity to                                                                    
raise those  taxes, for every  $1 increase the  company only                                                                    
paid about $0.60.                                                                                                               
                                                                                                                                
Mr. Alper thought the net $0.60 was fairly accurate.                                                                            
                                                                                                                                
Co-Chair Foster  indicated that the committee  would have to                                                                    
adjourn in about 20 minutes.                                                                                                    
                                                                                                                                
Mr.  Alper  stated that  the  next  few slides  would  prove                                                                    
important  as they  contained graphs  which illustrated  the                                                                    
legislation.                                                                                                                    
                                                                                                                                
Co-Chair  Foster  asked  Mr.   Alper  to  proceed  with  the                                                                    
sectional analysis.                                                                                                             
                                                                                                                                
Mr. Alper  advanced to slide 31.  He spoke to the  impact on                                                                    
interest rates in Section 2:                                                                                                    
                                                                                                                                
     Interest rates were amended in HB247                                                                                       
        · DOR expressed concern when Senate Finance CS                                                                          
          introduced the "zero interest after 3-year"                                                                           
          provision                                                                                                             
        · Makes it very hard to settle tax disputes                                                                             
        · Sought to get it removed in Conference Committee                                                                      
        · Proposed removing it in HB 5005(July session)                                                                         
        · Currently, doesn't impact any actual interest                                                                         
          calculation until 2020 so can be retroactive to                                                                       
          1/1/17                                                                                                                
                                                                                                                                
     Concern with language: HB247 separated  the Oil and Gas                                                                    
     Production Tax  interest rate from all  other taxes for                                                                    
     the  first time.  HB111  does not  fix  this. We  would                                                                    
     prefer all taxes to use the same interest.                                                                                 
                                                                                                                                
Mr. Alper  elaborated that the  problem with  interest going                                                                    
to zero  after three years  was that there was  no incentive                                                                    
to  settle. This  bill  could go  through  the court  system                                                                    
while earning the time-value of  money in appeal. He thought                                                                    
the interest  rate should  stay the same.  He did  not think                                                                    
there  should be  a  zero  interest rate.  No  one would  be                                                                    
paying zero until  2020, so it could be  made retroactive to                                                                    
2017.                                                                                                                           
                                                                                                                                
3:15:05 PM                                                                                                                    
                                                                                                                                
Mr.  Alper continued  to address  slide 31  and pointed  out                                                                    
that  HB   247  had   separated  the  production   tax  from                                                                    
everything  else. If  the legislation  was going  to address                                                                    
interest  rates,  the   administration  requested  that  the                                                                    
interest rate be  the same for all taxes. He  moved to slide                                                                    
32 and addressed Sections 3 through 4 of the legislation:                                                                       
                                                                                                                                
     Information about credits made public                                                                                      
        · These sections were originally introduced as HB99                                                                     
        · Expands provision from HB247 requiring annual DOR                                                                     
          report of who received tax credits and the amount                                                                     
        · Adds to the report how much in tax credit                                                                             
          certificates is issued, as well as                                                                                    
               o A    description    of    each    company's                                                                    
                  expenditures;                                                                                                 
               o The purpose of the expenditure; and                                                                            
               o The lease or property on which it's                                                                            
                  located                                                                                                       
     Concern with  language: As this bill  mostly eliminates                                                                    
     "credits," to meet  the intent of the  original bill it                                                                    
     may be  necessary to  redraft Sec.  4 to  report "lease                                                                    
     expenditures.  Also,  Sec.  22 is  redundant  with  the                                                                    
     other report requirement in Sec. 4                                                                                         
                                                                                                                                
                                                                                                                                
Representative Pruitt  shared Mr.  Alper's concern.  He felt                                                                    
it   represented   a   huge  change.   He   understood   the                                                                    
conversation about  transparency, but  he wondered  if there                                                                    
were  Securities Exchange  Commission (SEC)  violations that                                                                    
could occur related to lease expenditures.                                                                                      
                                                                                                                                
3:18:59 PM                                                                                                                    
                                                                                                                                
Mr. Alper  replied that the point  was valid and he  was not                                                                    
necessarily suggesting that  comprehensive expenditures were                                                                    
released. Since  it was converted  to a carry  forward lease                                                                    
expenditure,  if  the  same  information  was  desired,  the                                                                    
drafted sections would  not obtain that goal.  He noted that                                                                    
Rich  Ruggiero   [oil  and  gas  consultant   hired  by  the                                                                    
legislature  in   2017]  knew  more  about   the  nature  of                                                                    
transparency and what was legally required.                                                                                     
                                                                                                                                
3:20:23 PM                                                                                                                    
                                                                                                                                
Mr.  Alper continued  to slide  33 related  to Section  5 on                                                                    
executive sessions:                                                                                                             
                                                                                                                                
     Provides   authority   for   DOR   to   share   certain                                                                    
    confidential taxpayer information with legislators                                                                          
        · As written, legislators would have access to                                                                          
          the           same information as our audit                                                                           
          employees                                                                                                             
        · Section   requires    developing   a   substantial                                                                    
          confidentiality agreement to be signed by                                                                             
          legislators                                                                                                           
        · Some administrative costs and possible taxpayer                                                                       
          concerns                                                                                                              
        · Would   likely   engage    IRS   rules   including                                                                    
          background checks, chain of custody, information                                                                      
          retention,     etc.                                                                                                   
     Concern with language: Also may need to change                                                                             
     reference from "credits" to "lease expenditures"                                                                           
                                                                                                                                
Mr. Alper thought this would  involve creating a very robust                                                                    
confidentiality  system. He  relayed that  when an  employee                                                                    
leaves  the  tax  division,  all  other  employees  must  be                                                                    
informed so that no information is thereafter shared.                                                                           
                                                                                                                                
3:21:34 PM                                                                                                                    
                                                                                                                                
Representative  Wilson   asked  about  the   liability.  She                                                                    
wondered if  the liability would  rest on the  legislator or                                                                    
on the state.                                                                                                                   
                                                                                                                                
Mr. Alper imagined  the state could be  held accountable for                                                                    
negligence.  The IRS  [Internal Revenue  Service] could  cut                                                                    
off  access  to certain  taxpayer  data  if they  deemed  it                                                                    
necessary. The Tax Division was under additional scrutiny.                                                                      
                                                                                                                                
                                                                                                                                
Representative  Wilson  wondered   about  information  being                                                                    
taken with pictures  on a smartphone. She wanted  to be able                                                                    
to provide information to her  constituents but wanted to be                                                                    
certain that there was no risk of liability.                                                                                    
                                                                                                                                
3:24:05 PM                                                                                                                    
                                                                                                                                
Mr. Alper  moved to the  subject of  a minimum tax  on slide                                                                    
34:                                                                                                                             
                                                                                                                                
     The minimum tax is an "alternative" calculation                                                                            
        · The taxpayer calculates their net-profits tax,                                                                        
          which is 35% of "production tax value" less the                                                                       
          sliding scale per barrel credit                                                                                       
        · In parallel, they calculate the "gross minimum                                                                        
          tax", which is 4% of gross (wellhead) value when                                                                      
          oil prices are above $25 / bbl                                                                                        
        · Actual tax due is the 'higher of' the two                                                                             
          calculations                                                                                                          
        · Typical "crossover" occurs at about $70-$75 oil                                                                       
        · Amendment raises this minimum tax from 4% to 5%                                                                       
          when the oil price is above $50                                                                                       
        ·                                                                                                                       
Mr. Alper  expounded that the  amendment changing  Section 6                                                                    
would change  the tax from 4  percent to 5 percent  when the                                                                    
price of oil was above $50 per barrel.                                                                                          
                                                                                                                                
Mr. Alper  referred to  the graph on  slide 35.  He reported                                                                    
that  revenue  to the  state  at  various price  points  was                                                                    
illustrated by  blue, orange and  grey lines. He  pointed to                                                                    
the grey line  indicating zero minimum tax.  Starting at $50                                                                    
there would  be additional  revenue. The  graph on  slide 36                                                                    
represented the change  due to a 1 percent  tax increase. At                                                                    
just  over  $50  a  barrel,  the  increase  represented  $60                                                                    
million,  at $70  per  barrel,  $85 million.    A 1  percent                                                                    
increase, from 4 percent to  5 percent, actually represented                                                                    
a 25 percent increase.                                                                                                          
                                                                                                                                
3:26:19 PM                                                                                                                    
                                                                                                                                
Mr. Alper  moved to  the subject of  hardening the  floor on                                                                    
slide 37.  He explained  that the  sliding scale  per barrel                                                                    
credit was  statutorily hardened to  the floor. Many  of the                                                                    
other  credits  could go  below  the  floor, potentially  to                                                                    
zero. There  were six different  sections due to  changes in                                                                    
the language regarding a series of different credits.                                                                           
                                                                                                                                
3:27:29 PM                                                                                                                    
                                                                                                                                
Mr. Alper discussed  the meaning of hardening  the floor. He                                                                    
indicated  that regulations  say that  if the  sliding scale                                                                    
credit was used,  no other credit could go  below the floor.                                                                    
The  legislation  aimed to  avoid  all  other credits  going                                                                    
below  the floor.  The near-term  impact at  low prices  was                                                                    
about $20 [million]. In the  fiscal note there was an amount                                                                    
of $20 million. He explained  that the fiscal note contained                                                                    
a  spreadsheet in  which each  line represented  a different                                                                    
change in  the bill, each with  its own cost. The  sum total                                                                    
of the fiscal note was $20 million in short-term revenue.                                                                       
                                                                                                                                
3:29:00 PM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  if the  four credits,  because                                                                    
they  could  not go  beneath  the  floor, could  be  carried                                                                    
forward.                                                                                                                        
                                                                                                                                
Mr. Alper responded that the  small producer credits and the                                                                    
per barrel  credit could not  be carried forward.  He stated                                                                    
that in general,  credits under AS 43.55.024  fell under the                                                                    
"use  it or  lose it"  category; however,  credits under  AS                                                                    
43.55.023  and  43.55.025  could  be  carried  forward  into                                                                    
future years (i.e. NOLs and exploration credits).                                                                               
Co-Chair Foster reviewed the agenda for the following day.                                                                      
                                                                                                                                
3:31:22 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
3:32:16 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Foster  RECESSED  the  meeting  until  9:00  a.m.,                                                                    
Wednesday, March 22, 2017.                                                                                                      
                                                                                                                                
^RECESSED UNTIL 9:00 a.m. ON WEDNESDAY, MARCH 22, 2017                                                                        
                                                                                                                                
3:32:16 PM                                                                                                                    
                                                                                                                                
                                                                                                                                

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