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