Legislature(2017 - 2018)HOUSE FINANCE 519
03/20/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB115 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 115 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
March 20, 2017
2:23 p.m.
2:23:49 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 2:23 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
Randall Hoffbeck, Commissioner, Department of Revenue;
Representative Garran Tarr; Lisa Weissler, Staff,
Representative Andy Josephson.
PRESENT VIA TELECONFERENCE
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 111 was HEARD and HELD in committee for
further consideration.
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed the agenda for the day.
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
2:24:37 PM
Representative Thompson MOVED to ADOPT Amendment 13 (copy
on file):
Page 2, line 9:
Delete "a new subsection"
Insert "new subsections"
Page 2, following line 18:
Insert a new subsection to read:
"(c) In accordance with AS
37.13.145(b)(1), and subject to
appropriation, 33 percent of the amount
available for distribution under (b) of this
section shall be reserved for dividends. The
remainder of the amount calculate to be
available for distribution under (b) of this
section shall be reduced by the difference
between the amount calculated under (1) of
this subsection and the amount under (2) of
this subsection if the amount calculated
under (1) of this subsection exceeds the
amount under (2) of this subsection:
(1) the total amount of oil and
gas production taxes under AS 43.55.011
- 43.55.180, mineral lease rentals,
royalties, royalty sale proceeds, net
profit shares under AS 38.05.180(f) and
(g), and federal mineral revenue
sharing payments and bonuses received
by the state from mineral leases that
are deposited into the general fund in
the current fiscal year;
(2) the sum of $1,200,000,000."
Co-Chair Seaton OBJECTED for discussion.
Representative Thompson read from a prepared statement:
In times of higher revenue, we reduce how much is
spent from the Permanent Fund. This concept is no
different then from a family manages their money: when
they make more money, they quit drawing from their
savings account. The draw limit was modeled by the
administration. The $1.2 billion threshold is not
arbitrary. The administration vetted this number using
their model, a model that was vetted by Mackenzie, a
very reputable financial consulting firm. The
administration determined that the draw limit is a
critical addition to protecting the dividend and
preserving the Permanent Fund value. The commissioner
of revenue last year in May signed a letter that
states, "In preserving the value of the fund, the
revenue limit also protects the divided. In short, the
revenue limit is a critical addition to the bill."
Members who say the draw limit is unnecessary because
the forecasts are low need to consider that the
forecasts have consistently been inaccurate. Their
forecasts only go forward 5 years. When you look over
the last 10 years the forecasts have not been correct.
They have been way off. Without the draw limit the
state will have a smaller Permanent Fund, a smaller
percent POMV, and a smaller PFD.
Representative Thompson pointed out that the commissioner
was in the room if anyone wanted to hear from him.
Co-Chair Foster invited the commissioner to come up to
provide a statement.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
concurred with the statements made by Representative
Thompson. The administration had always felt that the draw
limit was an important component within the bill to protect
the durability of the fund and the dividend and to take
volatility out of the State of Alaska's revenue stream. He
reiterated that it was one of five "must haves" in the
bill. The administration supported the amendment.
Co-Chair Seaton continued to have some interest in the
amendment. He had looked at a draw point of $1.5 billion.
He also looked at different levels, but had not decided on
an appropriate amount. He was concerned that if the
proposal was enacted at $90 per barrel of oil the state
would still be in a deficit. He opposed the amendment. He
suggested that perhaps it would be appropriate down the
road.
Co-Chair Seaton MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Tilton, Wilson, Pruitt, Thompson
OPPOSED: Gara, Grenn, Guttenberg, Kawasaki, Seaton, Foster
The MOTION to ADOPT Amendment 13 FAILED (4/7).
Co-Chair Seaton indicated a CS would be drawn up that
reflected the adopted amendments.
Co-Chair Foster reported the amendment would be set aside.
The committee would bring back a clean CS for review.
HB 115 was HEARD and HELD in committee for further
consideration.
2:30:48 PM
AT EASE
2:37:50 PM
RECONVENED
hb111
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."
2:37:50 PM
REPRESENTATIVE GARRAN TARR, relayed that the House
Resources Committee thought the state's oil and gas system
was broken. She elaborated that when SB 21 passed
[Legislation passed in 2013 - Short Title: Oil and Gas
Production tax] the price of oil was $94 per barrel. The
state had been operating with oil prices ranging from $60
to $100 per barrel. The legislature did not spend a
significant amount of time crafting an oil and gas tax
system that worked well in a low-price environment like the
one the state was presently experiencing. There were
unintended consequences resulting from the low-price
environment that were not well studied and placed a
significant burden on the state equating to hundreds of
millions of dollars of credits for some of the most
profitable corporations in the world. In crafting HB 111
the House Resources Committee had looked at an alternative
for credits, keeping in mind that Alaska wanted to remain
an attractive place for investment and to continue working
towards a shared goal of more oil in the Trans-Alaska
pipeline. The committee adjusted the underlying tax
structure that would result in a more appropriate value for
Alaska's oil when prices were lower. The current price of
oil was $51 per barrel, below what the legislature thought
the low-price environment was in 2013 when considering SB
21.
Representative Tarr pointed to slide 24: "SB 21 Tax
Calculation AT Different Prices." The slide was from a
presentation by Ken Alper, the Director of the Tax Division
within the Department of Revenue (DOR). It showed the SB 21
calculation at different prices. She noted there were some
mathematical errors on the sheet. However, she wanted to
use it as an illustration.
Representative Guttenberg wanted to be sure he had the
correct form. "Oil Tax Analysis by Rep. Tarr" (copy on
file).
Representative Wilson asked if the committee would review
the corrections. Representative Tarr responded
affirmatively. She was using the example to illustrate how
the tax equation worked. She would transition to her
examples that were corrected. She directed members'
attention to the top line containing the price per barrel
of oil at $40, $60, $80, $100, $120, $140. The second line
reflected allowable transportation expenses of $9.33. The
price per barrel minus transportation expenses equaled the
gross value at the point of production (GVPP) shown
beginning in the first column with $30.67. As the price of
oil went up the GVPP went up by $20. She highlighted the
fourth line that showed the lease expenditures in the
amount of $30.88. The lease expenditures subtracted from
the GVPP equaled the production tax value (PTV) net. In a
low-price environment, the PTV was a negative number and
became positive as the price per barrel increased. Once the
PTV was determined it was multiplied by 35 percent to get
the per-barrel tax degrading the PTV by one-third.
Representative Tarr highlighted the following line
representing the per barrel credit. The committee had some
adjustments to the per barrel credit to retain more value
per barrel. She explained that the reason the committee
chose the per barrel credit was that it was the easiest way
to adjust the underlying tax system. She emphasized that
the per barrel credit was subtracted after transportation
costs, lease expenditures, and degrading the value by 1/3.
The net profit system allowed investors to deduct
transportation costs and lease expenditures (although not
100 percent but a significant portion of operating and
capital expenses). She continued to explain the
calculation. The production tax value minus the 35 percent
tax minus the per barrel credit reflected the tax per net.
The per barrel credit had a significant amount of power in
the equation because of where the per barrel credit was
subtracted from the value. She reported that the minimum
tax reflected in the line below the tax per net on the
slide represented 4 percent of the GVPP. She clarified that
the GVPP at $30.67 multiplied by .04 equaled the minimum
tax. The system was designed such that the state took the
higher of the two: the tax per net or the minimum tax. In
the example, the minimum tax was the higher of the two. She
wanted everyone on the same page in understanding how the
tax calculation worked. She reemphasized that the per
barrel credit had significant power in the equation because
the state had already provided certain allowable deductions
and reduced the amount by one-third with a tax of 35
percent.
Representative Tarr pointed to the last few rows on the
slide - tax as percent of price, tax as percent of the
GVPP, and tax as percent of the PTV. She highlighted the
tax as the GVPP in the first couple of columns, which
reflected the current minimum tax of 4 percent. She would
be paying close attention to the tax as percent of the PTV
in the upcoming documents based on the recommendation of
the state's consultant, Rich Ruggiero. She elaborated that
when looking at the overall tax amount in a net profit
system the focus should be on a percentage of the PTV
because it represented the net amount. The production tax
value was determined after subtracting transportation costs
and lease expenditures. She suggested that to understand
the overall effective tax rate the tax should be calculated
by using the percent of the PTV. In looking at the tax as a
percent of the PTV at lower prices it was extremely low.
For instance, at $60 per barrel for oil the tax as percent
of the PTV was 10 percent and at $80 it was 18 percent.
People talked about the state's net profit system having a
35 percent tax. However, in the current system, the state
never reached the high rate of taxation until the price of
oil reached $140 and higher. The state had rarely reached
that level of pricing for oil. She noted that in 2008 oil
prices peaked at $147 per barrel but was short-lived. The
state had never seen that price before or since then. She
opined that getting to the 35 percent tax amount would not
likely happen in the near-term or longer term. She
continued that when the committee looked at the tax as a
percent of the PTV it wanted to focus on the $60 to $80 per
barrel price range. She surmised that the state would
likely be operating in the lower range for a while and
wanted to do something more reasonable.
2:47:43 PM
Vice-Chair Gara gave kudos to Representative Tarr for being
able to do the math on the $8 per barrel credit. He pointed
out that the chart was really for older oil. He did not
think it applied to the post 2002 gross value reduction. He
asked if he was correct. Representative Tarr indicated that
Vice-Chair Gara was correct.
Vice-Chair Gara asked about the post 2002 gross value
reduction (GVR) oil and whether there was a minimum tax.
Representative Tarr responded that in the bill the floor
was hardened and there was a minimum tax. However, the
information did not reflect the GVR reduction, a 20 percent
reduction in the value plus a $5 credit. She would be
bringing up the issue when the change from credits to
deductions was discussed.
Vice-Chair Gara was eager to hear how the bill would
change. He wondered if he was correct in saying that
presently, without the bill, there was no minimum tax and
the GVR tax rate was lower than the bigger field tax rate.
Representative Tarr answered in the affirmative.
Representative Kawasaki wondered if there was some point
between the $60 to $80 range that made a difference. He
wondered if there was a graphic showing that point.
Representative Tarr indicated that Mr. Alper would be
providing a chart in his presentation to the committee. She
concluded that legislators should be able to do the math
themselves rather than relying on the Department of
Revenue. She wanted members to have a more intimate
understanding of how the equation worked. She did not try
to take on any of the modeling activities.
Representative Kawasaki asked whether the line would be
linear. He thought there would be a pivotal point.
Representative Tarr responded that it had a stair step
approach. Currently, the per barrel credit was applied when
oil prices reached between $60 to $70. She remarked that
there was a strange transition point between $69.99 and
$70.00 - there was a significant tax hike. In prior years
she reported running an amendment that used a formula to
smooth out the transition. She reported that it was not in
the current version of the bill but thought the House
Finance Committee should consider it.
2:51:03 PM
Vice-Chair Gara had been told that the 35 percent tax rate
did not take effect until oil reach $150 to $155 per
barrel. He wondered how it was possible to reach a 36
percent tax rate when there was a maximum tax rate of 35
percent. Representative Tarr explained that most of the
time she looked at the tax as a percent of the GVPP. The
consultant advised that in a net profit system it was
better to determine the tax value based on the PTV more
accurately reflecting the effective tax rate.
Representative Tarr turned to the per barrel credit sheet
titled: "CS HB 111 Analysis of per Barrel Credit by Rep.
Tarr" (copy on file). She highlighted the first column of
the per barrel credit. She noted that the per barrel credit
was not applied relative to the overall price per barrel.
It was applied to the GVPP, which already reflected the
transportation reductions. Under the current system,
everything below $80 received an $8 credit. It stair
stepped down $7, $6, $5, $4, $3, $2, $,1 to zero. However,
under the current system once zero was reached the state
was still offering a credit between $140 to $150 for the
GVPP. It meant the state was offering a credit when oil
prices were at $160 per barrel.
Co-Chair Seaton asked for clarification as to the chart
being discussed. Representative Tarr reported that the
chart was in members' packets. She responded, "It should
say per barrel credit at the top." She made clear that the
first column reflected the GVPP. Under the current system
the state gave $1 credit for oil priced at $160 per barrel.
She had been continually told by the consultant that in the
low-price environment more would not be gained because of
expenses. The way the state could take less at the low end
was by making sure to have a windfall on the high end.
However, under the current law, the windfall would not
happen until oil reached $160 per barrel. She opined that
the problem was the state had never seen $160 price for oil
per barrel. She thought the state would be waiting a long
time for a windfall since it had never seen $160 per barrel
oil. The legislation reflected adjustments in the lower
price environment scaling back how dramatically the per
barrel credit was changed. The original version of the bill
had a $5 credit. However, in the lower price environment,
making a dramatic change to the per barrel credit was a
significant tax increase. The committee had chosen to scale
the change back to reflect a step-down. A windfall would
result between $130 and $147 (the highest price per barrel
the state had seen).
2:56:23 PM
Representative Wilson asked why the state was looking for a
windfall versus having a structure that worked no matter
the price. The committee was discussing a tax structure
that many companies built their businesses around.
Representative Tarr offered that it was suggested that the
state move to a gross tax - a flat tax rate based on the
gross value. However, it could be seen through different
presentations that in the lower price environment the flat
tax did not work well. However, a net profit system could
work well in a low-price environment. She reported that in
the bill, when oil prices were below $40, the minimum tax
was 4 percent. Alaska would only take 4 percent in low oil
price climates, but the only way to take such a small
percentage was to balance it by taking more at higher oil
prices. She tried to incorporate a balance in the bill. She
continued that the state needed to get more value out of
the production tax. Balance could be found by taking a
lesser amount at lower prices and a little bit more at
higher prices.
Representative Wilson commented that she thought Alaska had
done well with what the oil companies had been forced to
give the state. The state's infrastructure was an example.
She suggested that although 4 percent sounded like a low
amount, relative to low oil prices, it was significant. She
was trying to understand the idea of a windfall.
Representative Tarr suggested that Representative Wilson's
point might be one they disagree on. She was not sure she
could sway the representative otherwise. She reported that
in terms of the math some people favored the "Jay Hammond"
one-third, one-third, one-third approach. She argued that
if the target was a 33 percent tax, the state would never
come close operating in a 4 percent tax world. She
suggested that over time, and what the state had seen with
the historical average over the previous 30 years, the one-
third, one-third, one-third approach had prevailed. She
indicated that the way to accomplish the split was to take
a little bit less at lower prices and a little bit more at
higher prices.
Representative Wilson wondered if there would be a side-by-
side comparison between HB 111 and SB 21. She thought it
was important to have one. Co-Chair Foster responded that
he would be open to suggestions.
Representative Wilson expounded that she wanted to be able
to have a comparison so that she could explain it to her
constituents. Co-Chair Foster agreed that the more
information available, the better.
3:00:29 PM
Representative Pruitt argued that under the current tax
structure the state had the best of both worlds. It had the
net at the top where a larger percentage tax was collected
ensuring a large amount of revenue for the state. At the
bottom, when the net typically generated zero, a 4 percent
gross minimum tax applied. He suggested that even when
companies were losing money, the state had money coming in.
The state had structured the tax system so that the state
was always receiving money no matter the price of oil.
Representative Tarr indicated that if the tax structure
worked in the way Representative Pruitt was describing,
there would not be a problem. She suggested there was a
significant amount of confusion about the issue. She
clarified that there was no minimum tax presently. In some
circumstances, the state was currently paying more than 100
percent of the cost. Even though there was a "4 percent
minimum tax" the credits were used against the tax so that
the value went below zero. She thought the state needed to
harden the floor so that the state had a 4 percent minimum
tax. She reiterated that at present there was no minimum
tax enforced. In the current legislation there is a
hardened floor.
Representative Pruitt commented that it was going to be a
fascinating week. He indicated that Representative Tarr was
incorrect. The state still taxed the oil companies even
when they could move over the net operating losses (NOL)'s
and transfer the loss. The state still charged companies a
gross tax of 4 percent.
Co-Chair Foster urged Representative Tarr to finish up her
presentations. He thought policy calls and issues were
being discussed and would be debated. He wanted the
introduction on the record.
Vice-Chair Gara indicated he would be distributing an
analysis done by DOR showing the tax rates the state
received at various prices. He agreed with Representative
Tarr that the 4 percent minimum tax lasted up to $70 or $72
per barrel. The state received no taxes up to $70 barrel
for 7 years on GVR oil.
3:04:19 PM
Representative Tarr clarified that there was no minimum
tax, as there was no hard floor in current law. Credits
could be used to go below the minimum tax potentially
reducing the value below zero. There were several sections
of the bill where the floor was hardened. Such provisions
of law would not be necessary if it was in existing law.
She was happy to share her sources that substantiated her
point.
Representative Tarr drew members' attention back to the per
barrel credit handout. She pointed out that the paper
showed what was currently in place and what was being
proposed in the bill. She would also be looking at some
additional Excel spreadsheets (Document: "Oil Tax Analysis
by Rep. Tarr") (copy on file).
Representative Tarr looked at per barrel prices of $25 to
$145 because the lowest per barrel price the state had seen
was $27 and the highest was $147. She relayed that
committee members were looking at the severance tax which
was a combination of a gross tax and a net tax. It was one
component of the overall taxes. There were also property
taxes paid to municipalities and corporate income tax paid
to the state. However, the severance tax was deductible
from the corporate income tax and the corporate income tax
was deductible from the federal corporate income tax. There
were different places where there were built-in incentives.
Companies could continue to deduct the same thing multiple
times.
Representative Tarr pointed to the lease expenditure row,
the forth row down, showing lease expenditures of $25,
$30.88 (average), $40, and $50. In looking at the different
lease expenditure amounts it helped to understand how
behavior would change as the price of oil changed. The
overall value would change. In the $25 range the PTV was
negative. Once the 35 percent tax was applied and the per
barrel credit of $8 was subtracted the tax per net was
always lower than the minimum tax which was $.60 per
barrel. At $35 per barrel the minimum tax would always
equal $1. Companies were losing monies, therefore, the
House Resources Committee kept the minimum tax low at 4
percent, but hardened the floor to ensure that the state
would receive a minimum tax even at lower prices.
Representative Wilson clarified that when the price of oil
was at $25 or $35 per barrel companies were losing money.
Even at the lower prices, the bill would allow the state to
charge 4 percent. Representative Tarr responded in the
affirmative. She explained that by hardening the floor the
state would collect a 4 percent minimum tax at lower
prices.
Representative Wilson suggested that companies would
experience an additional loss to what they were already
experiencing because of the lower prices of oil.
Representative Tarr responded, "It could be characterized
in that way."
3:08:40 PM
Representative Tarr moved to page 2 of the spreadsheet. The
chart showed that at $45 oil, the PTV was a positive value.
It would be unlikely for companies to spend money at lower
oil prices because the PTV would be degraded. Lease
expenditures trended downward by $10 over the past few
years due to the price of oil dropping. She also mentioned
a lag time when companies needed to lay down a rig or
people needed to be laid off. She concluded that when oil
prices went down companies did not immediately respond but
would over time, hence the lag. For example, from the
previous year to the current year there was a $5 difference
in lease expenditures. It reflected companies scaling back
on capital and operating expenses. In the $45 range the 4
percent minimum tax was higher than the tax per net. She
suggested that even when the production tax was a positive
value, $1.44, the minimum tax would apply because the per
barrel credit was a significant value. At $55 per barrel
the number [PTV] stayed positive farther out. Companies
could increase their expenditures a little and there would
still be a PTV. However, the generous $8 per barrel credit
made the tax per net a negative value. again, the minimum
tax would apply. She indicated that the examples were the
reason she chose $50 per barrel to be the point of
demarcation for raising the minimum tax from 4 percent to 5
percent. She reasoned that the tax of a percent of the PTV
was 12.7 percent with a 4 percent minimum. She relayed that
when the minimum tax was raised to 5 percent (from $1.80 to
$2.25) the difference was about .45. She calculated that by
raising the minimum tax to 5 percent would result in
bringing in and additional amount of $70,000,000 in
revenues. She reviewed the formula: Subtracting the royalty
share from 500,000 barrels oil production per day equaled
437,500 barrels per day. She multiplied 437,500 barrels per
day by 365 days per year to total about 160,000,000 barrels
per year. She multiplied 160,000,000 times .45 totaling
approximately $70,000,000 in additional revenue.
Representative Tarr explained that the committee had
considered a 4.5 percent minimum tax. She suggested
dividing the previous number in half. The committee did not
raise the minimum tax below $50 per barrel. However, it
hardened the floor - a 4 percent minimum tax below $50.
Above $50 the committee raised the minimum tax to 5
percent. She pointed to the spreadsheet indicated that
instead of $1.80 per barrel in taxes it would be $2.25 per
barrel reflecting a 5 percent minimum tax. She continued
that the 5 percent minimum tax equaled 15.9 percent of the
PTV. The overall change of the effective tax rate was only
a few percentage points increasing 12.7 to 15.9 percent.
She reiterated the minimal percentage difference. She had
asked Mr. Ruggiero if Alaska would remain competitive if it
made a 2 to 3 percent adjustment to the effective tax rate.
He responded affirmatively. The committee tried to come up
with something reasonable.
3:14:37 PM
Representative Wilson was aware Representative Tarr had
stated that the hard floor would go to 5 percent at $50 oil
prices. However, she asked if the 4 percent was a hard
floor and a raise in taxes under the $50 mark. She wondered
if she was accurate. Representative Tarr responded that she
was correct.
Representative Wilson asked at what point the oil companies
would stop laying down rigs because of the implementation
of new taxes. Representative Tarr responded that, in
looking at the original slide and why she reviewed several
different lease expenditure scenarios, the overall price
per barrel would have significantly more influence over oil
companies' decisions than the tax amounts. She thought
companies would likely spend less money in the lower price
environments. She continued that companies would be in
harvest mode rather than spending money on exploration and
development without the extra spending dollars.
Representative Wilson commented that she had learned that
at $65 per barrel, before the legislation, companies would
decide whether to continue drilling or lay down rigs. She
indicated that their decisions were based on profitability.
She wondered if the $60 to $65 mark would change with the
passage of the legislation. Representative Tarr responded
that she would expect the companies would change their
mark. She thought it was reflected in the lease
expenditures. In 2016, the average lease expenditure was
$30.22. In 2015, the amount was an additional $5 and in
2014, it was another additional $5. In Fall 2014 when
prices were low, and it became apparent they would remain
low for a prolonged period companies scaled back. They
began laying off workers and slowing down other activity.
It made sense to her while that would happen. She did not
think it was reasonable to expect that companies would take
on major projects if the price per barrel continued in the
$30 and $40 range.
Representative Wilson did not expect companies to take on
more. However, she argued that the state could tax more but
would not gain more if less oil was being produced. She was
concerned that if companies were looking to have their rigs
back in operation at $60 to $65 based on the current tax
structure, the price per barrel might have to increase to
$80 or $85 with the proposed change. She thought incoming
royalties might go down with less production. She would
direct her questions to the oil companies.
3:18:34 PM
Vice-Chair Gara was unclear about the GVR oil - the post
2002 production units. He asked if the 4 percent minimum
would apply to those fields in the first 7 years. He
reported that under current law they paid no tax within the
first 7 years up to $70 per barrels. Representative Tarr
relayed that the intent was to harden the floor at 4
percent even for GVR oil.
Vice-Chair Gara suggested there would not be a 7-year tax
holiday. Representative Tarr replied that the tax holiday
would include a 20 percent reduction and a $5 credit. The
same circumstance of "higher of" would apply. For example,
if the 4 percent minimum tax was higher of the other the 4
percent minimum tax would apply. She would discuss it more
when the committee looked at the reductions.
LISA WEISSLER, STAFF, REPRESENTATIVE ANDY JOSEPHSON,
reported that there was a provision in HB 111 that
protected the GVR from the minimum so that the minimum tax
would apply to the 70 percent or 80 percent that was not
subject to the GVR.
Vice-Chair Gara noted that under current law the GVR
fields, what he called the post 2002 fields and all future
fields, did not pay the minimum tax. Given the discount
they received, the average GVR field paid no production tax
up to $70 or $72 per barrel. He understood two separate
things. He wanted to clarify that a GVR field currently
received a 7-year tax holiday from the gross minimum tax.
He wondered if those fields, in the first 7 years, would
still have the holiday from paying the minimum tax, or if
they would start paying the minimum tax in the first year
like every other field.
3:21:00 PM
Representative Tarr explained the portion equaling the
original value minus the deduction of 20 percent would not
be subject to the minimum tax. However, the remaining 80
percent would be subject to the minimum tax provision. The
gross value reduction would still apply, but the remaining
value would be subject to the minimum tax.
Representative Tarr explained that above $50 per barrel,
the 5 percent minimum tax kicked in and the relative value
was about $70 million. She suggested the $70 million would
be paid by about 5 potential production companies.
Representative Tarr continued to the spreadsheet on page 3.
If the price of oil was $65 per barrel companies would
still be operating in the minimum tax unless companies
significantly slowed down activities and expenditures went
to $25. The committee felt that the minimum tax had to be 5
percent rather than 4 percent. She pointed out that the PTV
net was positive. Companies subtracted transportation
expenses and lease expenditures. If oil were to reach $65
per barrel, there would be about $25 prior to the 5 percent
equaling about $8.44 of profit per barrel. She noted that
once an $8 credit was applied the value would be
significantly reduced to $.44 per barrel or the minimum tax
of $2.20 per barrel. The committee felt that amount was too
low because they wanted more value in the low-price
environment of $50, $60, $70, or $80 range. The difference
would be $2.75 minus $2.20 which equaled $.55 per barrel.
She highlighted a scenario where the price per barrel was
$.45 and how more value would result by adding $.55 per
barrel.
3:24:01 PM
Representative Tarr discussed scenarios at $75 per barrel.
She indicated that at $75 the minimum tax would apply if
the lease expenditures increased to what they had been 2
years prior. She opined that the state could not have a
such a low minimum tax at $75 per barrel. She advocated
raising the minimum tax to 5 percent comparing the
difference of $3.25 and $2.60.
Vice-Chair Gara spoke to a concern about just raising the
minimum floor to 5 percent at higher prices versus going to
6 or 7 percent as prices increased. He surmised that as the
price of oil increased so did the industry's profits. He
referred to her analysis that at $55 per barrel the
effective profits tax rate was 15.9 percent. He continued
that leaving the minimum tax at 5 percent at $65 per barrel
the effective tax rate went down to 11.4 percent. At $75
per barrel it decreased to 9.5 percent. He wondered if the
decreases were due to the minimum tax remaining at 5
percent.
Representative Tarr answered in the affirmative. She
elaborated that it was also why the per barrel credit made
a difference. She relayed that the consultants advised the
state to move away from things attached to the price per
barrel. Depending on which side of the equation someone was
on, the value would degrade over time due to inflation. A
way to get around that was to use a per barrel credit. The
House Resources committee stepped down the per barrel
credit. In existing law, the per barrel credit was $8. In
the proposed legislation the per barrel credit stepped down
to $7. She pointed to the area of the slide that showed the
step down from $8 to $7, which added $1 to the tax per net.
She continued to highlight areas of the page that showed
where the state currently stood and pointed to some
differences. She reiterated the importance of maintaining a
minimum tax that retained enough value, so the state would
still get some value when the price was around $75.
3:27:55 PM
Representative Tarr moved to slide 4. She reviewed that in
the existing law the per barrel credit was $8 even when the
price per barrel was $85 because of the GVPP (it was
reflected as $75 on the slide). She highlighted percentages
on the chart pertaining to existing law. She continued to
point to certain areas on the chart noting the changes
where the per barrel credit was scaled back from $8 to $6.
She pointed to the effective tax rate on the chart. She
restated that the adjustment was about a couple of
percentage points. One way to make things smoother was to
use a formula. She thought there was a significant amount
of variability in the overall tax rate. She added that it
had to do with a company's behavior and their spending at
different prices. She did not feel the overall effective
tax rate was too high. In terms of a relative value
currently, Mr. Alper stated that every dollar change in
price equaled $60 million to the state. She used the
example of the per barrel credit being reduced from $8 to
$6, a reduction of $2. The reduction, because the per
barrel credit was applied as a full dollar deduction, would
be equal to $120 million.
Vice-Chair Gara spoke to the $75 per barrel level on slide
3. He noted that the credit went down by $1. He expressed
his concern that at an oil price of $50 per barrel the
effective tax rate was 15.9 percent of profits. At $65 per
barrel the tax rate was 11.4 percent of profits and at $75
per barrel the rate went down to 9.4 percent of profits
applying the 5 percent minimum tax. He was aware that there
was some impact of the $7 per barrel credit, as it would
change from $8 under current law. He asked about the
effective tax rate on profits for an average field where
the per barrel credit was $7. He wondered if it was 9.5
percent or if there was another adjustment he was not
factoring in.
3:31:00 PM
Representative Tarr commented that she thought a row was
missing on slide 3. In the circumstance brought up by Vice-
Chair Gara, the tax per net at $4.94 was higher than the
minimum tax and, therefore, would apply. She relayed the
formula: $4.94 divided by $34.12.
Vice-Chair Gara surmised it was one-seventh. Representative
Tarr answered that it was about 14.5 percent. Her opinion
was that the overall effective tax rates were still very
reasonable and kept Alaska in the competitive category
relative to other regimes and opportunities for companies.
Representative Tarr advanced to the other price per barrel
examples on slides 4-7 and addressed the 35 percent tax
rate recommended by the state's consultants. She suggested
that a way of balancing the system was to scale back on the
lower end to get some on the higher end. She thought it was
the reason a low minimum tax such as 4 percent or 5 percent
would be acceptable. In other words, the state would
receive a higher percentage of the value as prices
increased. Relative to the existing law, she noted $130 per
barrel. She indicated that existing law was $4, and she
went down to zero. She emphasized that the windfall portion
would come at higher prices where they approached the 35
percent tax rate. She relayed that she had reviewed the
first part of the bill: how the state could get more value
for the resource being severed at lower prices. She
summarized that below $50 per barrel the bill hardened the
floor to a true 4 percent minimum tax. The bill raised the
minimum tax to 5 percent between $50 to $70 per barrel. The
bill adjusted the per barrel credit above $70. She
indicated that the committee substitute was scaled back
from the original bill, which she thought softened the
impact of the provision. She suggested that the per barrel
credit was an area that could be adjusted because of the
way it was applied and because it was less sensitive in
certain ways. She concluded that she had reviewed how to
obtain more value at a lower price environment in which the
state was currently operating.
Co-Chair Seaton referred to the original version of SB 21
which had the maximum per barrel credit set at $5 per
barrel. He asked if she had looked at that in the analysis.
He suggested that if she had corresponding graphs, he would
like them forwarded to him.
3:35:08 PM
Representative Tarr responded affirmatively. She explained
that the way the Senate configured the bill the $5 credit
applied even at the highest of prices. She recommended an
adjustment to moderate the system so that less would be
taken on the low end and more on the high end. If the state
kept the $5 per barrel credit at high prices it would never
see a windfall. It would eat away at the value. However, if
the credit was scaled back to zero at higher prices, the
effective tax rate would reach closer to 35 percent and
result in windfall profits.
Co-Chair Seaton did not like characterizing a 35 percent
severance tax rate on profits as a windfall because it was
the tax rate. He added that the purpose of a $5 per barrel
credit was an adjustment to the Alaska's Clear and
Equitable Share (ACES) $25 at $100 per barrel. A sliding
scale was incorporated in the House Resources Committee
providing a windfall on the lower side. He was interested
in seeing the charts she had.
3:36:48 PM
Representative Wilson remarked that the taxes kept changing
so frequently they started mixing with each other. She was
pretty sure with SB 21 and in discussions regarding per
barrel credits that there were other tax credits given up
in exchange. She did not believe the legislation had come
over to the House and subsequently changed by the House.
Other tax credits were changed as well. She asked
Representative Tarr to comment.
Representative Tarr responded, "That's true." She continued
that the ACES system relied heavily on the qualifying
capital expenditure (QCE) credit. There was criticism of
the credit because it was not linked to production. For
example, some work done to a runway on the North Slope was
in question in terms of whether the type of work qualified
for a capital expenditure credit. The alternative was a per
barrel credit linked to production which was also
criticized. The criticism stemmed from not having a clear
way to delineate whether it would be applied to oil coming
on as new oil or to oil that would be produced. She thought
it was still a point of contention about the system. People
had varying views on whether the state should be giving a
credit for oil that was already slated for production.
Representative Wilson commented that there had also been a
lot of criticism for changing the oil tax system so much.
She brought up having reduced or eliminated small producer
credits. She was aware of some trade-offs that had been
made prior to the legislature instituting a per barrel
credit. She wanted to be clear what had been given up at
the time. She agreed with Representative Tarr that the
legislature wanted better checks and balances regarding
where credits were going and what the state was receiving
in exchange. She was certain the state had eliminated some
of the other credits that had been valuable to the small
producers versus the larger producers.
Representative Tarr responded that the small producer
credit was still in place and was applicable to work
commenced by January 1, 2016. The state also had well lease
expenditure (WLE) credits and exploration credits. The
important question to consider was which ones worked best
and incentivized desirable behavior. She indicated that the
state had been challenged in answering that question. Mr.
Alper would be able to provide aggregate data in his
presentation. For example, he would be able to provide the
amount spent on the North Slope or in Cook Inlet. Further,
he would be able to report how much was being spent on
projects in production. However, beyond that, the state
would not have specifics about money spent on stages
leading to production or on unsuccessful leads.
Representative Tarr noted that the bill contained a couple
of provisions that would be helpful in legislators
understanding. She suggested that the consultant brought up
the need for things to be more opaque. The state did not
have access to all the information that would help the
legislature to better understand the way things worked and
how it could provide incentives to the state's desired
outcomes such as increased production. The bill would
enable legislators to have access through signing
confidentiality agreements about tax information. It would
also require reporting of some aggregate amounts that would
be publicly available. It attempted to differentiate what
the public might be interested in versus what policy makers
would be interested in knowing. From her point of view, it
was not that the subsidies or incentives were 100 percent
problematic but, given the state's fiscal situation, it did
not make much sense to spend millions of dollars on things
that did not lead to production. She wanted to be able to
get the answers why certain investments did not result in
production. She suggested that it would be helpful for
legislators to have more information to make decisions.
Representative Tarr also commented that, relative to the
different tax changes, there had been several requests for
stability. In the volatile industry of oil stability was a
challenge. She thought it would be best for the legislature
to provide something that could last for 3, 5, or 7 years.
There were so many things beyond the legislature's control
relative to the price of oil. She reflected that when the
legislature based its budget on $60, $80, and $100 per
barrel oil prices in FY 15 and the price dropped
significantly, everyone was surprised. She posed the
question about how the state was being more strategic about
the dollars being invested. She relayed that some
investment changes were made in Cook Inlet, Middle Earth,
and on the North Slope. She mentioned that having 3
separate regimes within the state was another complicating
factor to the state's tax system. One of the things the
legislature would attempt to move towards was how to
address credits. Under the current system the net operating
losses were converted into credits which could be presented
for an exchange of cash.
Representative Tarr reported that another problematic issue
was that credit certificates could be used as collateral at
a bank for financing. The amendment that was offered to
allow the certificates to be used at a bank for borrowing
money, was offered at 1:00 A.M. and attached to a fish tax
bill. During the amendment debate in committee, it was
reported that the amendment would only apply in Cook Inlet.
However, in practice, it applied statewide. She indicated
Bank of America and ING Company had talked about how
presently they were bridging loans from some of the
companies. However, if the companies defaulted the banks
became the lease holders of the credits. She wondered if
the banks would have a fire sale. She thought the whole
system had become too top heavy. From the committee's
perspective there was not a significant amount of value in
offering an incentive that would not be honored. If the
state was not going to pay its obligations or could not pay
them in a timely fashion, what good was it to have them in
statute. She mentioned there being concern about cashable
credits and whether the state should continue to offer
them.
Representative Tarr reported was also concern about the
certificates being able to be used for bank financing. Mr.
Ruggiero had indicated that it was typical of other regimes
around the world to allow losses to be carried forward and
used as deductions. She suggested that it was not much of a
change for the three largest producers. They were currently
tax payers in the State of Alaska. They had losses in a
year and likely used them in the same year they were earned
due to having a production tax liability. The same happened
with corporate income tax where companies carried losses
forward and used them against their corporate income tax.
She relayed that the state was not really making a change
for a tax payer. In a circumstance where a loss had to be
carried forward into a second year, a change was being
made. The larger change would affect the companies in the
exploration and development phase of their work and were
not currently tax payers to the State of Alaska. The
resources committee took away cash credits and repealed the
portion of statute that allowed them to be used for bank
financing. She indicated that instead certain carry forward
losses were allowed.
Representative Tarr pointed to the handout titled: "CS HB
111 Carry Forward Analysis by Rep. Tarr" (copy on file).
She explained that during the third, fifth, or seventh year
of development phase of work companies would be carrying
forward losses and once they became tax payers they would
use the losses against production taxes. She reported that
Mr. Ruggiero had relayed that in some places companies were
offered an uplift - interest earned on a loss. She spoke of
having looked at a couple of different scenarios and
pointed to the first column. A loss equaled 100 percent of
a loss minus 50 percent carry forward with an 8 percent
uplift - slightly below the uplift amount in the current
legislation. Column 2 showed a 100 percent loss minus a 100
percent carry forward with 10 percent interest. The
committee preferred the scenario in the second column and
an amendment was offered that brought the bottom line to a
similar amount.
Representative Tarr pointed out that when a company carried
forward 50 percent of its loss for 7 years, the value at
the end of the period would equal about $85.70. In other
words, a company would gain about 85 percent of the loss by
carrying them forward. In the second scenario, if a company
allowed 100 percent of the loss to be carried forward, by
the time the 7 years was over, they would earn about 200
percent of the loss. It was the feeling of the House
Resources Committee that it could not obligate the state to
such a significant incentive. She furthered that a company
in exploration and development that completed work to get
to production (on average it took 7 years to reach
production) would become a producer of new oil and would
qualify for the GVR, a provision associated with new oil.
The gross value reduction took 20 percent of the value and
the per barrel credit. By applying the GVR provision some
of the value would be reduced. The committee felt that if
the carry forward percentage was too high and the GVR
provisions were applied, the state would be subtracting too
much of the value leaving little for the state. She
reminded members that not only were the carry forward
provisions applicable for 7 years, so was the GVR
provision. In her opinion, each provision should not be
considered without the other. She reviewed that the state
would be providing carry forward losses with a generous
uplift for 7 years. Once companies became producers GVR
provisions would apply and losses could still be
subtracted. She opined that if either of the provisions
were too generous, at times of high prices and high
production, the state would receive nothing. The House
Resources Committee had been concerned with striking the
right balance which was the reason it did not opt for a 100
percent carry forward at 10 percent.
Representative Tarr spoke about how to match up the two
numbers. She detailed that column 1 needed to be adjusted
to about 57 percent. For example, if 57 percent of the loss
was carried forward at 8 percent, after 7 years it equaled
100 percent of the value. She offered that, as a policy
call, at the end of the 7 years if companies wanted to
retain the value of 100 percent of their losses, the
committee could adjust the 50 percent carry forward
slightly higher. She wanted to be more conservative with
that number. The combination of the current provision and
the GVR provisions which could be applied by a company
becoming a new producer would quickly reduce the value
available to the state.
3:51:36 PM
Vice-Chair Gara commented on the difficulty of finding
consensus in a committee. He wanted to return to the tax
rate issue. He was aware Representative Tarr wanted to
honor what the proponents of Alaska's Clear and Equitable
Share (ACES) and of SB 21 characterized in the respective
legislations. The representative had noted in ACES that
producers received their credits based on how much they
spent. Whereas, with SB 21 credits were based on
production. He supposed the $8 credit had nothing to do
with production, just price. He wondered if he was
accurate. Representative Tarr indicated he was correct.
Vice-Chair Gara wanted that point made clear. He agreed
with Co-Chair Seaton that 35 percent was not a windfall
profits range. He relayed that all the taxes combined in
Norway equaled about 78 percent. He thought a person could
find a different tax rate in every jurisdiction. He was
concerned about the declining effect of a profits tax rate
in the price range between $50 and $70 per barrel where the
price of oil would likely stay for the following 10 years
according to DOR. He suggested that beyond the 4 percent or
5 percent minimum tax it would be the greater of the SB 21
profits tax rate or the gross tax.
Co-Chair Seaton asked what slide Vice-Chair Gara was
referring to.
Vice-Chair Gara confirmed he was not referring to a slide.
He clarified that he had a general question on credits.
Under current law, producers deducted 35 percent of costs
when the profits tax range applied. He asked if the
deduction remained in the legislation being discussed.
Representative Tarr responded that losses were treated as
loses. There would be 100 percent to work from carrying
forward 50 percent. She explained that the difference was
when the loss was converted to a credit versus simply
taking deductions, which was much easier to follow.
Vice-Chair Gara suggested that in current law companies pay
an effective tax rate of about 12 percent of profits at $90
per barrel. However, companies also received a 35 percent
deduction as if paying a 35 percent tax. He asked if, under
HB 111, it would always be a 35 percent deduction.
Representative Tarr responded in the affirmative. She
explained it was one of the things the consultant spent a
significant amount of time talking about - the mismatch
between the effective tax rate and the deduction.
Essentially, the value would be doubled because companies
would be paying an effective tax rate of 50 percent of the
allowable deduction amount.
Co-Chair Seaton asked if a company's expenses were 100
percent deductible. He suggested that until there was a
conversion to a tax credit, deductions were deducted at 100
percent. He wanted to clarify that companies could write
off their deductions at 100 percent until they reached the
minimum tax. Once a minimum tax kicked in, deductions would
be converted into a tax credit at which time the 35 percent
would apply. He asked Representative Tarr to comment.
Representative Tarr replied that both people were correct.
A company could carry forward its losses, but the
conversion to tax credits was at the rate of 35 percent. It
was a mismatch because the overall effective tax rate was
much lower. She relayed that when SB 21 was crafted, the
two numbers were supposed to match each other. The reason
the net operating loss (NOL) credit was offered at 35
percent was because the tax rate was 35 percent. She opined
that the two things did not work well together when the
effective tax rate was never 35 percent.
3:57:47 PM
Vice-Chair Gara commented that he agreed there was a
problem with being able to write off 35 percent of costs.
He thought he and representative Seaton were using
different words. Companies deducted 100 percent of their
costs and multiplied it by 35 percent when they were only
paying a 12 or 14 percent tax rate. Representative Tarr had
made a change. He asked her to explain the change in the
bill. Representative Tarr replied that by only using
deductions the other issues were eliminated. Companies took
100 percent of their deductions to get to the value that
they worked from. The bill would also allow 50 percent of
the value to be carried forward. The bill did not require
converting to credits. Tax payers would use their
deductions against their production tax liability.
3:59:01 PM
Vice-Chair Gara thought the change was an improvement. He
hoped to hear from the consultants about what was done in
other states. Louisiana let companies carry forward for 2
years just for horizontal well expenditures and nothing
else.
Representative Tarr responded that she found it was
difficult to compare Alaska to anywhere else. She learned
that in comparing Alaska to another jurisdiction it was
important to consider the producer share versus the non-
producer share. The development in Alaska was occurring on
state lands. In states such as Louisiana and Texas,
development was more likely to occur on private land. She
suggested that the scenario was much different when the
lease expenditure cost or overall lease per acre might be
substantially costlier. The royalty would be going to the
private land holder and another portion would be going to
the state and federal government (combined they were the
non-producer's share). In Alaska's case, it was receiving
the severance tax because the state was the land holder and
the lease payments tended to be lower than other entities.
The state had a significantly longer development timeline,
which was why the state used 7 years. She spoke of the slow
set-up time of a drilling operation in Alaska in comparison
to other states. She thought the consultant had a good
suggestion of looking from the stand point of producer
share and non-producer share to understand how Alaska
compared. Mr. Ruggiero told of companies being able to get
100 percent of the value of their loses. She indicated that
there had been criticism of the current legislation due to
only 50 percent being carried forward. However, she
highlighted the GVR provisions in the bill. She suggested
that if the state wanted to do something different, it also
needed to look at the interaction of the GVR. She opined
that the state could not give up all the value by allowing
the deductions to be carried forward adding value to them
while also having the GVR provisions. She asserted that
nothing would be left. Mr. Ruggiero also recommended a
fundamental shift to the existing tax structure to reflect
the overall profit profile; to do something bracketed on
the net. In that vein, he recommended eliminating per-
barrel credits and GVR provisions altogether. Although the
House Resources Committee did not get rid of either of
them, it started looking at a tax as the percentage of net.
Mr. Ruggiero's suggested that if the state had a true net
profits system, the focus should be on the tax as a
percentage of the production tax value - that was what
happened in a net system.
4:02:51 PM
Representative Pruitt thought the committee could spend a
significant amount of time discussing the details of the
bill. He asked for the number of additional barrels of oil
per day that would result from the legislation and wondered
how many extra people would be put to work.
Representative Tarr responded that she had never seen them
as a component of a tax bill. She relayed that the
legislature had not looked at employee hiring for SB 21.
However, it had bench marked it against ACES where there
had been an uptick in investment, the number of individuals
working on the North Slope, and the number of operational
rigs. She thought that staff from DOR might be able to
provide the answers to Representative Pruitt's questions.
In terms of the number of barrels per day, she worked from
the information provided by DOR. The department had
indicated that over the following 10 years the state would
be down to a few hundred thousand barrels per day. She
suggested that it was difficult for the department to make
estimations beyond 5 years because of the everchanging
environments and the price volatility of the oil and gas
industry. She mentioned the $80 price shift in the price
per barrel in the last few years. She opined that it would
be difficult to make accurate estimations. She reported
that the House Resources Committee had moderated some of
the changes in the bill to avoid causing a downturn if the
price per barrel returned to $30-$40.
Representative Tarr continued that the committee felt that
hardening the floor was a reasonable approach. She
highlighted that at the profit range beginning at $55 per
barrel [she pointed to an unidentified handout] 4 to 5
percent was applied to ensure the state had more value. She
noted that a change in the per barrel credit kicked in at
$75. She pointed to page 3 of the "Oil Tax Analysis be Rep.
Tarr" document and highlighted that even with high lease
expenditures the production tax value would remain high.
The committee wanted to hit the reset button on lower
prices. She reported that during the SB 21 deliberations
the committee did not look at what happened below $60 per
barrel because, at the time, the possibility of price
dropping was not a concern. She thought that if someone had
suggested looking at what would happen if oil went to $30
per barrel, they would have been accused of not using their
time wisely. It did not seem like it was possible for the
price to drop as it did. She continued that in reviewing
the 10-year price profile from 2013 and prior, the price
had been between $60 to $100 except for a spike to $147 in
2008. The price spike had been very short in duration. She
indicated that the committee looked at the typical price
range from $80 to $100, as the legislature had done its
budgeting based on $100 per barrel oil. However, there was
a huge shift down in price. She had spent a significant
amount of time trying to understand how the committee had
estimated so poorly. In the same year, Texas, budgeted
around $65 per barrel oil. Someone suggested that perhaps
Texas came closer in its estimation because more of the oil
headquarters were located there. She acknowledged that her
answer was not scientific. She had wondered if Alaska had
missed some information and had not uncovered anything.
4:08:05 PM
Representative Pruitt asked if the plan would put
additional oil in the pipeline. Representative Tarr
responded that she believed so. She thought the legislation
kept Alaska an attractive place for investment. The state's
overall effective tax rates were very reasonable in
comparison to other jurisdictions. She relayed that the per
barrel credits were retained because it mattered where the
per barrel credit was applied in the equation. She
suggested that because it came after the other deductions,
the per barrel credit - even scaled back - was a generous
credit.
Representative Tarr noted other attractive incentives
including changing the investment opportunity with the
carry-forward losses and leaving in the GVR provisions. She
explained that retaining a net system meant that companies
could take deductions for transportation and lease
expenditures. The companies were made whole or protected in
some ways because they had their deductions prior to the
tax rate being applied. She believed Alaska would remain an
attractive place for development. She supposed that several
things made Alaska attractive including geology, access to
information, the tax rate, the local skilled workforce, and
the price per barrel. She remarked that Alaska was stable
politically (she was not speaking in terms of the stability
of Alaska's tax system), unlike other regimes in a civil
war. Alaska had a good workforce of people knowledgeable in
the industry and had been working in the industry for
decades. She believed that the modest adjustment in the tax
structure provided the state more value in a lower price
environment. She thought it was something the committee
would have put in place when looking at SB 21 had the
committee been thinking oil would be at $50 per barrel for
the long term rather than $90 or $100.
4:10:50 PM
Representative Pruitt noted that Representative Tarr had
mentioned several times the attractive environment. He
wanted to know what kind of response she had received from
investors since the bill was made available to the public.
He asked if she had received letters. He wondered if
investors had indicated that the legislation would create
additional investment, and consequently more oil in the
pipeline. He wanted to see something that indicated support
from the entities that would be affected. He wanted to know
if companies thought the legislation was more attractive
than what was already in place.
Representative Tarr reminded Representative Pruitt of the
735,000 plus shareholders that they represented. She had
heard from several constituents that the legislation did
not go far enough and that the credits should be done away
with altogether. There were others that did not want to see
any changes made to the tax system. She noted that in
talking about the credits provision of the bill, 93 percent
of the people she represented responded to a budget survey
in which they advocated eliminating the credits. She
relayed that during the session in an earlier pole by the
Senate Majority it showed that 65 percent of about 7000
Alaskans that responded wanted to do away with the credits.
She saw her role as a member of the board of directors of
the people she represented. She did not believe the state's
goals were perfectly aligned with the oil industry. She
thought the largest point that would be discussed had to do
with the loss carry forward and whether the right balance
was struck with a 50 percent carry forward and interest of
8 percent. She recommended looking at the interactions with
the GVR provisions within the first 7 years of production.
She was aware that with long lead times peak production
would occur in years 5, 6 and 7. Once oil was in peak
production the state needed to make certain to extract some
value before production declined. The state needed to be
thoughtful about where incentives were offered and how
generous they were, a balance the House Resources Committee
tried to strike.
Co-Chair Seaton indicated others had questions as well.
Representative Pruitt relayed that Representative Tarr kept
saying that the legislation made Alaska an attractive place
for investment. He wanted to understand the explanation
about how the bill made Alaska a more attractive investment
place for him to speak to his constituents. He understood
the severance aspect of the bill making sure that Alaska
received its share. He wondered whether the legislation
would make Alaska more attractive for investment. In other
words, what policy put more oil in the pipeline.
Co-Chair Seaton stated that the consultants would be
presenting to the committee at which time they could
address Representative Pruitt's question.
Representative Pruitt argued that the consultant was not
stating that the legislation made Alaska an attractive
place for investment. Co-Chair Seaton responded that
Representative Pruitt did not know because he had not
asked.
Representative Pruitt responded that Representative Tarr
was saying that it attracted more investment, which was the
reason he was asking her. Co-Chair Seaton would allow
Representative Tarr to answer Representative Pruitt's
question but did not want an argument about philosophy to
ensue.
Representative Tarr responded that Alaska would be an
attractive place for investment. She claimed that if she
was deciding where to invest her dollars she knew that in
Alaska she would be allowed to carry forward 50 percent of
her losses and would earn 8 percent interest. She would be
able to do so for 7 years. At such time that she became a
producer, in addition to being able to use her losses, she
would be able to have the GVR provisions in place that
would be a 20 percent reduction. She noted that the
legislature was not eliminating the obligation of what the
state did currently with credits. She brought up writing a
check on one side of a balance sheet and deducting against
the tax liability to the state on the other side of the
balance sheet. The state would not be writing checks to
companies, but rather shifting the burden to the other side
of the balance sheet in the form of a reduction against the
tax liability. The State of Alaska would still loose the
value of the reductions. The value would be gone. However,
the state would no longer be paying a cash credit and
writing a check to a company while they were doing the
work. She claimed that no other regime in the world wrote
cash checks. She furthered that if someone thought
eliminating writing cash checks made Alaska unattractive
then every other regime was unattractive as well. Alaska
was the only place that had written cash checks and
encouraged using the credit certificates as collateral to
borrow against. She remarked that under the current system,
investment in Alaska had become less attractive because of
the state not being able to fulfill its obligations making
the incentive not worth having at all. She opined that
shifting the obligation from writing checks to the other
side of the balance sheet as a deduction against liability
made investment more attractive. She cited similar examples
of the type of incentives offered in the bill such as
refinery credits. She mentioned a time when people were
looking to reopen the refinery facility in Kenai. She
reemphasized that the state would be shifting from writing
checks to companies to pay for their development. The
companies would have to be well financed enough to become a
producer at which time they would be able to use the
deductions against their tax liability. She asserted that
it would make Alaska like every other regime in the world.
If Representative Pruitt thought that the provision would
make it unattractive for companies to invest, then Alaska
was as equally unattractive as every other location in the
world.
4:18:41 PM
Representative Wilson asserted that Alaska was not like any
other regime. She did not believe a fair comparison could
be made. She was glad to hear that the fact the state could
not meet its obligations was viewed as a problem. She
believed that part of the reason the issue was currently
being discussed was because when the state was making a
significant amount from oil, it spent it on government
instead of saving it to pay its obligations. She noted that
when SB 21 was under consideration she had spoken with
subcontractors in the private sector about the effects of
Alaska's Clear and Equitable Share (ACES), as they had been
most affected by the changes the state made to its oil tax
structure. She wondered if any research had been done
regarding the effects HB 111 would have on private
businesses. She thought they would be most affected by the
proposed changes. Representative Tarr responded positively.
She elaborated that she had been in contact about changing
from a credit to a deduction.
Representative Wilson interrupted Representative Tarr's
response to clarify her question. She explained that she
was not talking about oil companies. She was talking about
suppliers such as Flowline Alaska in Fairbanks. She
indicated they were a supplier that had contracts in place
prior to the implementation of ACES. She continued that
when ACES occurred the projects did not happen. At the
implementation of SB 21 many projects began again. She
conveyed that the suppliers explained what happened, what
they expected to happen, and what was happening. She wanted
to clarify which group she was talking about. She
reiterated that she was not talking about the oil
companies. Representative Tarr responded that she had heard
from companies that they had contracted their workforce in
response to low oil prices, a circumstance beyond the
state's control. A domino effect was felt due to low oil
prices rather than the state's tax policy. Suppliers and
support businesses were affected as a result. She explained
that the reason for the modest change made in HB 111 was to
avoid imposing something that pushed too far or had
unintended consequences.
4:21:39 PM
Representative Wilson responded that in the 7 years she had
been in office the legislature had taken up legislation
having to do with oil taxes every year. She suggested that
the legislature either had not gotten things correct or
could not admit it was right. She surmised that it was the
state's budgeting that landed the state in its current
fiscal situation. She thought the legislature was trying to
re-coop its mistakes from the oil companies. She wanted to
see real numbers to be able to make an informed decision.
She did not think it was fair to compare the fields, as
they varied significantly because of location, the type of
oil, and other factors. She mentioned some fields were
modest. She wondered about other presentations in the House
Resources Committee. She was happy to listen to previous
presentations for the information.
Co-Chair Seaton added that the charts showed the low,
average, higher, and high costs representative of the
distance from fields and the different kinds of oil.
Representative Wilson did not believe the information
revealed the effects. She was trying to figure out the
effects on the low and high ends and whether companies
would go forward with projects.
Representative Tarr continued to explain (working from page
4 of the spreadsheet packet). She looked at 4 different
scenarios for the lease expenditures because she wanted to
understand the companies' different behaviors. The lease
expenditures reflected increased capital or operating
expenditures. She suggested that a company earlier in
development would be on the higher end of spending.
Whereas, some of the other companies that were in the phase
of production would not be spending as much. In the oil tax
analysis handout, she used the average lease expenditure of
$30.88. However, some were below, and some were above which
prompted her to look at lease expenditures of $25, $40, and
$50. There was a big difference in the equation depending
on how much was being spent. She did not make changes to
the transportation line. She spoke of the Smith Bay
development. She noted that even in a higher priced
environment, if a company's lease expenditures were high
and transportation costs were pricey, certain developments
would not make sense until the price of oil reached well
over $100. The economics would not make sense. She used
Point Thomson as an example. One of the things that was
costly in the project was the pipeline which was located
close to the Trans-Alaska Pipeline System (TAPS). The Smith
Bay project was 124 miles away from the existing TAPS
infrastructure. A pipeline of over 100 miles long would
have to be built for oil to reach TAPS. She asserted that
the transportation costs would be phenomenal. Such a
development would not occur without the price of oil being
high enough for the transportations costs to be deducted.
She went up to $145 per barrel in her handout because the
legislature did not look at the high price environment when
Alaska's Clear and Equitable Share (ACES) was considered,
or at the low-price environment when SB 21 was considered.
She wanted to look at the entire breadth of prices the
state had seen. The range she had looked at was $25 to $145
per barrel. She also looked at 4 different lease
expenditure scenarios. She had not spent much time with Mr.
Alper and his staff doing the same equation because it was
something she wanted to understand. However, he had an
analyst that did life cycle modeling. She had done a
presentation for the House Resources Committee using a
smaller scale model of a development that produced 50,000
barrels per day and another that was a 200,000 barrel per
day development. She interjected that the overall volume of
production influenced spending habits. The modeling showed
what happened in the development stage and the production
stage and the relative impacts of both. She hoped the
analyst would have an opportunity to bring her presentation
to the House Finance Committee.
Representative Wilson was looking for the number of
additional barrels of oil that would be produced through
the different processes. There were expectations when the
legislature took up SB 21. She suggested that a column be
added to Representative Tarr's handout.
4:28:07 PM
Vice-Chair Gara had only heard one oil company, a company
in the Cook Inlet, claim that Alaska's tax system was too
generous. He wondered if Cook Inlet had been addressed in
the bill. Representative Tarr responded that it was
addressed in a reinstated working group. The group had been
a feature of the original HB 247. Currently, there was not
much oil production in Cook Inlet, a circumstance which had
the potential to change. The bill contained a place holder
tax of $1 per barrel. She added that there was a weird
interaction on the tax on gas based on SB 138 [Capital
Budget legislation passed in 2016] so that after 2022 the
tax on gas became a gross tax. The working group was
included in the bill to get ahead of the 2022 deadline. She
also wanted to avoid a big surprise to any of the operators
there. As a Southcentral legislator, she had a significant
amount of concerns about a stable supply of gas. She had
found a pamphlet in some old files that contained some
contingency planning. It had been only a few years prior
that there had been talks of importing natural gas. The
working group was a means to allow for more thoughtfulness
in the area.
4:30:08 PM
Representative Ortiz had a question regarding accrued
credits that would become losses and carried forward
against future obligations. He asked what happen to the
credits or losses when a larger company took over a smaller
company under current law. He wondered what would be
different under HB 111. Representative Tarr replied that
currently the value of the carry forward losses would go to
the new owner. She thought that it would not change under
the proposed legislation. She provided a hypothetical
scenario where if a company did 3 or 4 years of exploration
work and another company took over the value of the carry
forward losses would be a part of the commercial
transaction.
Co-Chair Seaton asked if there were any claw back
provisions in the bill for companies that sold their
assets, including credits. Representative Tarr responded in
the negative. It only applied to a commercial transaction
between a willing seller and a willing buyer.
Co-Chair Seaton commented that it sounded like the state
was investing money while someone else was making money by
selling their operation, receiving the credits, and
receiving the profits. The state did not receive it and the
new buyer did not receive anything because they paid money
for the leases. He thought the committee would look at the
issue further.
Representative Guttenberg asked if Middle Earth was
included in the legislation.
Representative Tarr responded that Middle Earth credits
remained in place except for entirely doing away with
cashable credits. The Middle Earth credits would no longer
be cashable, but would be transferable to another producer.
Ms. Weissler added that two of the credits would remain
cashable. The net operating loss credits would not be
cashable but the well-lease expenditure and well
exploration credits would be subject to cash. She explained
that there were provisions in the bill that included a cap
of $35 million per company and companies that produced
15,000 barrels per day as opposed to 50,000.
Representative Guttenberg reported that at the subcommittee
level he had recommended keeping some of the industry
credits. The Legislative Finance Division had rationalized
that there was no transparency - the numbers were
aggregated figures between producers. In other words, it
was not possible to know what credit resulted in added
production. He elaborated that a company might take credits
and see no additional production and someone else might not
take any credits but see significant increased production.
He asked Representative Tarr to speak to the issue of
transparency and how other tax regimes around the world
dealt with it.
Representative Tarr responded that there were 3 ways the
House Resources Committee approached it based on what kind
of information the state wanted. At the recommendation of
the consultant, language was inserted for a new pre-
approval process. The consultant talked about how, in many
regimes around the world, he had to go before a government
entity prior to money being spent to allow for the
sovereign to scrutinize the anticipated expenditures. She
elaborated that even if they were converted to a carry
forward loss, it was a loss of revenue to the state when a
company became a producer and tax payer. She suggested that
there was still an investment on the part of the state. She
clarified that the committee did not envision a line-by-
line review of each lease expenditure like an audit, as
there had been some criticism from industry. The state had
not envisioned something that would be extremely detailed.
Instead, it would be a chance for the state to understand
the possible investment opportunities. It would also help
with a timeline for development. She suggested thinking
about every dollar being precious and the state offering an
opportunity for the losses to be carried forward and used
against tax liability. She asked if members thought the
state should pick up a portion of the costs resulting from
companies with poor management that allowed slippage in a
schedule for instance. Alternatively, the state could have
an opportunity to scrutinize the circumstances and indicate
the increased cost. The idea was for the state to have an
early stage opportunity to look at development, get a sense
of the work schedule, and have an understanding that it
would be a well thought out project.
Representative Tarr continued. She indicated that currently
there was a plan of development and a plan of production.
However, both were too far along in the process to
accomplish what the committee hoped. The consultant
provided suggestions about adding clarifying language. The
committee left the bill purposefully vague because the
regulators at the Department of Natural Resources (DNR), in
consultation with the industry folks providing the
information, would be best suited to make the decisions.
She thought that leaving the language somewhat vague would
allow the regulatory process to occur without micromanaging
the type of information the state would receive. It would
allow regulators and DNR to work through the process
together. She relayed that anytime regulations went out
there was a public comment period. She imagined industry
folks would way in. It seemed the process would provide the
best work product. She remarked that she did not have any
personal attachment as to how that was define in statute.
She was amenable to a clearer definition. The committee
looked at the opportunities that existed in the current the
way work was done. She relayed that a plan of development
was not done until something was unitized, which was far
along in the work. She suggested the state wanted to be
more engaged in the early part. She suggested that the plan
of approval was one way in which the state could be more
engaged. A second means was through a provision worked on
in HB 247 in the prior year.
Representative Tarr reiterated her affection for delving
into details. One of the things she was trying to figure
out was how to better understand the overall tax system.
She looked at numbers including the over $100 million spent
on things in production and the other $100 million on
things not in production. She wanted to understand why the
state had spent $100 million and more on credits that had
not lead to production. From her point of view, it was not
a good use of state dollars. The committee worked with the
Alaska Oil and Gas Association (AOGA) to get their input on
an amendment, Amendment 45 to HB 247. She elaborated that
through a confidentiality agreement the state would have
access to some information. However, the legislature would
not be able to leave the room with information, take
photos, or write down any information. Criminal penalties
would be imposed in doing so. She also relayed that because
the information was privileged tax information members
would be subject to a background check and finger printing
by the Department of Revenue, as they were federal Internal
Revenue Service requirements. If legislators wanted to have
some access to certain information they would be subject to
the same procedures. She thought it was quite restrictive
in nature and she thought it was like giving up a person's
first-born child. She understood from the companies' view
point why the information was so sensitive and why they
would be very careful. She thought there might be people
who would not be able to keep information confidential
after seeing it. She thought those individuals should not
sign confidentiality agreements or have access to the
information. She would approach it as a learning
opportunity. She thought knowledge was very powerful and if
legislators were able to answer some of their unanswered
questions they might do a better job of deciding how to
regulate the issue.
4:42:44 PM
Representative Tarr continued that Representative Josephson
had a bill, HB 99 [legislation introduced in 2017 - Short
Title: OIL & GAS TAX CREDIT REPORTING] that would require
public reporting of aggregate credit amounts. The
information would not be broken down by company. However,
public reporting would be available. Alaskans would be able
to weigh in on state dollars being spent. She thought in
going forward with a fiscal plan Alaskans might be asked to
contribute to the state's fiscal future and more stable
budgeting. She thought it was very appropriate for Alaskans
to know where state dollars were being spent. The resources
committee had approached the transparency need for
information in three ways: preapproval, access for
legislators, and publicly reported transparency provisions.
4:43:56 PM
Representative Guttenberg wanted to target credits related
to getting production online instead of funding major
maintenance or other things on projects that might be done
anyway. The state did not know and that was problematic.
Representative Tarr agreed with Representative Guttenberg.
Co-Chair Seaton commented that most of the charts showing
the economics of SB 21 were based on oil priced between $80
to $120 per barrel. He noted only one chart encompassing
$60 pricing, the lowest presented. Everything else was
based on prices of $80 to $100. He mentioned that
Chesapeake Energy had a probability of 80 percent (P80) -
the price would range from $50 to $70 per barrel for the
following 10 years. No one paid any attention to the
published P80. Alaska's companies would not divulge their
P80 number. He asked if there was anything in her bill
regarding reinvestment in Alaska.
Representative Tarr responded that there was not. She
reported that under ACES to earn a credit there was a
requirement that dollars be invested in Alaska. The
requirement went away in SB 21. She restated prior to SB
21. She explained that under current law a company doing
work in Alaska as well as elsewhere might have a loss
earning a credit. That credit could essentially subsidize
work outside of Alaska. She suggested that the legislature
might want to revisit the policy call. She added that some
Alaska hire provisions were incorporated in HB 247
[Legislation passed in 2016 - Short Title:
TAX;CREDITS;INTEREST;REFUNDS;O and G]. It outlined that
there would be priority given to companies with a higher
Alaska hire percentage. She thought feedback would be
helpful, as there were possibly some challenges to how the
policy was implemented.
4:47:08 PM
Co-Chair Seaton asked if there were any provisions in the
bill linking the percentage of credit a company would earn
to the percentage of royalty it paid to the state.
Representative Tarr responded in the negative. She thought
his point was something that should also be considered by
the legislature. She reported that Caelus Energy had
royalty relief on a couple of their projects. It was
expected that their application would be under
reconsideration soon. In addition to other things that kept
Alaska attractive in a low-price environment, companies
could come to the state and request royalty relief. There
were many articles in the Anchorage Daily News that had
reported on the issue.
Co-Chair Seaton clarified that he was talking about a
little something different. He provided an example of a
private royalty on private land. He wondered if the state
would pay full deductibility and full credits if the
development occurred in an area that did not generate
royalties or offshore under HB 111. Representative Tarr
responded affirmatively. She explained that all fell under
the net profit system. The royalty was not considered under
that system.
4:49:08 PM
Representative Kawasaki returned to the question about the
preapproval process in Section 20 and 21. He wondered if it
would allow the department to deny a request if there was a
process in place.
Representative Tarr indicated that it was not clearly
defined in statute whether there would be a denial. She
indicated that the committee had gone around and around
trying to determine the best way to approach the issue. The
committee concluded that the people best suited to make an
evaluation would be the resource managers and the
companies. She suggested if it was determined that the
department should not be allowed to deny expenses, then it
should be expressly outlined in statute. She used the Smith
Bay development as an example of a project very far away
from existing infrastructure and would be extremely costly
to develop. The development of the project was estimated at
$10 billion. The state would allow the project to carry
forward 50 percent of the losses, earn the interest, and
deduct it once becoming a tax payer in addition to the GVR
provisions. She suggested that in such a circumstance where
a good portion of the value was lost in a low-price
environment the state might not think it was reasonable.
She thought the state needed to determine the level of
scrutiny necessary. The state needed to make sure not to
over-obligate itself. She pointed to the United Kingdom and
Norway as examples. She reported that virtually everything
was found online such as lease expenses, capital
expenditures, personnel costs, losses, joint venture
agreements, and planned activities. There were other
jurisdictions where details were being reported publicly.
The folks from development companies had to go to their
board of directors to make the case why dollars should be
invested in Alaska rather than other places. They had to
provide details and certain information to their board to
obtain approval for their own capital spend. In turn, it
was the same kind of information the committee hoped would
be shared with the state.
Representative Tarr suggested that the state could do other
things. She noted that in the governor's State-of-the-State
address he talked about building gravel roads and of the
changing climate limiting the number of days ice roads were
available. Currently, people were talking about putting in
permanent gravel roads. It would change the amount of time
the work would be able to be done in a year. She argued
that by having better information the state could possibly
make the circumstances more attractive for companies. She
did not want to approach things in such a way that the
anticipated outcome would be negative. She thought more
information was a good thing rather than a bad thing. She
believed that it would allow parties to work better
together.
Representative Kawasaki agreed that the state needed more
information. He thought the state's regulators needed
information. He expressed a concern that the state would
have an opportunity to say no. He also argued that if a
regulator did not want oil and gas development in a certain
region they could potentially deny a company the ability to
receive credits making it a political issue. He would have
to hear more about the preapproval process and how it
worked in practice.
Vice-Chair Gara commented on having once tried to increase
a $.05 per barrel surcharge by $.01 and was told that it
was excessive. He mentioned the 1 percent increase from 4
percent to 5 percent. He asked if she had looked at the
interplay between that and what a company could get in
royalty relief. He explained that royalty relief could
bring a company's 16 percent or 12.5 percent down to 3
percent or 5 percent. Therefore, a company could get a 7
percent to 11 percent reduction in the royalty by showing
that without royalty relief a field would not be
economical. He asked if what he described came into play
when deciding on a 1 percent tax change.
Representative Tarr responded, "Yes." She added that in
total all the other provisions made any new development
attractive including the GVR and the royalty relief
provisions. She furthered that because the opportunities
existed and because companies had no complaints nothing was
changed regarding that option.
Co-Chair Foster concluded by providing the agenda for the
following day.
HB 111 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
4:56:20 PM
The meeting was adjourned at 4:56 p.m.