Legislature(2017 - 2018)HOUSE FINANCE 519
03/21/2017 09:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 21, 2017
9:46 a.m.
9:46:41 AM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 9:46 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Scott Kawasaki
ALSO PRESENT
Lisa Weissler, Staff, Representative Andy Josephson;
Representative Geran Tarr, Sponsor; Representative Andy
Josephson, Sponsor; Ken Alper, Director, Tax Division,
Department of Revenue.
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 111 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster addressed the meeting agenda.
HOUSE BILL NO. 111
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to interest
applicable to delinquent oil and gas production tax;
and providing for an effective date."
9:47:49 AM
LISA WEISSLER, STAFF, REPRESENTATIVE ANDY JOSEPHSON,
addressed the sectional analysis for the bill.
Section 1. It is the intent of the legislature that,
contingent on passage of a fiscal plan, a substantial
portion of outstanding credits eligible for purchase
will be purchased.
Ms. Weissler expounded that the amount of outstanding
credits under current law amounted to $900 million.
Representative Wilson asked whether the section was legal.
She wondered about "tying an obligation" to passage of a
bill. She believed that the intent language "sounded like
blackmail."
REPRESENTATIVE GERAN TARR, SPONSOR, answered that
Legislative Legal Services did not point to the language as
problematic, which they did with other provisions when
drafting the bill. She thought that since intent language
was uncodified there was not a legal issue.
Ms. Weissler relayed that under current law, payment of the
outstanding credits was "discretionary." The statues
authorized that if the balance of the fund used to pay
credits was insufficient, the amount available was
allocated among the applicants "by regulation." She
furthered that the credits still existed and could be
carried forward, transferred, or sold. She observed that
the legislature wanted to pay the credits when sufficient
funds were available.
Representative Tarr related that after hearing testimony
from banks that held credit certificates and some of the
companies waiting for credit payments, she wanted the bill
to express the interest of the House Resources Committee in
addressing the obligation "contingent on passage of a
fiscal plan." She indicated that the statutory minimum
payment was $76 million, which extended the payments over
decades. She voiced the desire to pay the debt off "much
sooner."
Representative Wilson stated the bill addressed oil taxes
and not a fiscal plan. She wondered whether the language
was in the appropriate vehicle. Representative Tarr
referred to HB 247 [HB 247 Tax; Credits;Interest;Refunds;O
& G - CHAPTER 4 4SSLA 16 - 06/28/2016] from the previous
year related to oil and gas taxes and credits. She
recounted that the governor had created a fund to pay down
the credit balance. She maintained that it was uncertain
what amount the state could afford to pay towards the
credit balance lacking a fiscal plan; therefore, the House
Resources Committee elected not to attach a fund or fiscal
note related to the credits. She felt "a sense of urgency
to come up with a solution on how to pay the obligations."
Co-Chair Foster noted that he would request a legal opinion
for Section 1.
Representative Pruitt believed the concern expressed by
Representative Wilson was relevant. He spoke to the meaning
of the term fiscal plan. He stated that the language was
very "vague." The state had an obligation it needed to pay,
but he was very uncomfortable with the vagueness of the
language in Section 1 referencing a fiscal plan. He urged
the committee to proceed with "caution" and characterized
the language as "for lack of a better term, extortion."
9:55:20 AM
Representative Tarr stated that the alternative was not
including any language regarding paying the "obligations at
all." She emphasized that the intent was to pay the credit
obligations. She relayed that under the current statutory
minimum, the payments would extend over many years. She
advised that one option was not addressing the credits at
all, another was paying the credits over many years, and
another option devised a solution like the intent language,
"to make it a more short-term problem."
Co-Chair Foster interjected that the committee would
revisit the issue after obtaining a legal opinion.
Vice-Chair Gara emphasized that the section was merely
intent language. He informed the committee that intent
language was non-binding and was not subject to legal
analysis. He spoke about a fair fiscal plan. He countered
that the intent language "was not extortion, it was logic."
He interpreted the intent language that if the state had
sufficient funds the credits would be paid at a faster
pace, but lacking funds the state was not able to pay the
credits.
Representative Pruitt responded that the language put him
in an uncomfortable position of voting for a bill that was
predicated on another bill passing the legislature.
Co-Chair Foster spoke to the importance of the issue.
Ms. Weissler addressed Section 2 of the bill:
Section 2. Amends AS 43.05.225 regarding interest on
delinquent oil and gas production tax payments to
remove a three-year limit on accrual of interest.
Since 2014, the interest rate for delinquent taxes was
set three points above the Federal discount rate. HB
247 added a new section increasing the rate for oil
and gas to seven points above the Federal discount
rate compounded. The higher rate applies only for the
first three years after the tax becomes delinquent
after which there is no interest. The amendment
repeals the three-year limit because zero interest
discourages companies from settling tax disputes with
the state.
Ms. Weissler elaborated that the section removed the three-
year limit and was included because the limit "worked
against the Department of Revenue's (DOR) attempts to
settle tax disputes."
Representative Tarr interjected that current statute
provided DOR six years to complete the audits and that the
limit conflicted with the statute. She thought that making
improvements to the auditing system could assist in
completing the audits more quickly, which was in everyone's
best interest.
9:59:45 AM
Co-Chair Foster recognized Representative Josephson in the
audience.
Representative Wilson underscored that the three-year limit
had not stopped DOR from completing the audit, but the
interest could not accrue after year three. She asked
whether the interest would not accrue after three years if
the state was unable to complete an audit within the time
period. She noted that the audit could proceed up to six
years. Representative Tarr replied that a prolonged audit
was not only the fault of the state. She detailed that each
side had responsibility for the length of time it took to
audit a disputed tax issue. Representative Wilson
emphasized that the audits would continue after three
years, only the interest on delinquent tax ceased accruing.
Representative Thompson asked when the "clock started
ticking" when taxes were disputed.
Representative Tarr answered that if the taxes were
delinquent the interest would begin to accrue after the
taxes were due. She pointed out that the interest was
applied equally to an underpayment or overpayment. She
noted that many audits took the entire six years to
complete. She relayed that there had been much discussion
about how to fix the problem resulting in audits proceeding
more quickly. She suggested directing questions to DOR
regarding how to make the audit process less complex.
Representative Thompson wanted to ensure the provision was
not retroactive. Representative Tarr answered that the
section was retroactive to January 1, 2017 in order to
prevent a time lag in the way the provision was applied to
the delinquent taxes.
10:03:44 AM
Vice-Chair Gara wondered whether the interest referred to
in the bill was the only interest charged on delinquent
taxes. Ms. Weissler deferred to DOR on the question.
Vice-Chair Gara asked whether the delinquent tax provision
only applied to the amount of tax that was underpaid.
Representative Tarr responded in the affirmative. She
furthered that in some instances the interest paid had been
more than the amount owed. She believed that scenario was a
reason for the criticism of the current system. She felt
that everyone benefitted if audits could be completed more
quickly. She favored the legislature acting to address the
issue even if additional staffing was necessary to solve
the problem.
Ms. Weissler addressed Sections 3, 4, and 5:
Section 3. Amends AS 43.05.230(a) in accordance with
the addition of information requirements related to
tax credits (see sections 20 to 22).
Section 4. Amends AS 43.05.230(l) to allow the
Department of Revenue (DOR) to make public (1) the
aggregate amount of oil and gas production tax credits
issued to a person in the preceding calendar year and
(2) expenditure descriptions added by sections 20 and
21 of the bill.
Section 5. Adds a new subsection (m) to AS 43.05.230
allowing DOR to disclose confidential tax information
relating to oil and gas tax credits to legislators, an
agent of a legislator or legislative committee, or a
legislative contractor in executive session in
conformance with a signed confidentiality agreement.
Ms. Weissler pointed out that Sections 3 and 4 were related
to the public disclosure of information regarding tax
credit certificates. Section 5 was relevant to the
disclosure of confidential information concerning tax
credits. The confidential information would be disclosed to
the legislature subject to a confidentiality agreement. She
delineated that the tax credits referred to in both
sections were transferrable, related to investment credits
and would only apply to Middle Earth tax credits if HB 111
was adopted. She addressed Section 6:
Section 6. Amends AS 43.55.011(f) to change the North
Slope minimum tax to 5 percent of the gross value at
the point of production when the average West Cost
price per barrel for Alaska North Slope crude oil is
$50 or more; and 4 percent when the average price is
less than $50; removes the variable minimum tax that
would occur at sustained oil prices below $25 per
barrel. Applies the minimum tax to gas produced on and
after January 1, 2018 and before 2022; and to oil
produced on and after January 1, 2018. In 2022, the
net production on gas will change to a gross value tax
system and the minimum tax for gas will end.
Ms. Weissler elaborated that Section 6 applied to
provisions in SB 138 [SB 138 Gas Pipeline; AGDC; Oil & Gas
Prod. Tax - CHAPTER 14 SLA 14 - 05/08/2014] that changed
the gas tax in 2022 to a gross value tax system and
eliminated a minimum tax on gas.
10:07:20 AM
Vice-Chair Gara asked whether the bill retained the 3
percent minimum tax when the price dropped below $25 per
barrel and 2 percent below $20 per barrel. Ms. Weissler
answered that the section did remove the variable sliding
scale minimum tax. She turned to Section 7 that contained
the hardening of the minimum tax floor:
Section 7. Adds a new subsection (q) to AS 43.55.011
to provide that the application of any tax credit
issued under the oil and gas production tax may not be
used to reduce the minimum tax with the exception of
oil subject to the gross value reduction. For oil
subject to the reduction, subsections (q) and (s)
provide that the minimum tax will be calculated on 70
or 80 percent of the gross value at the point of
production to ensure companies receive benefit from
the gross value reduction. New subsection (r) prevents
a taxpayer from applying per barrel credits that
cannot be used in one month due to the minimum tax
floor to offset a tax liability from a different month
in that calendar year (the "migrating" credit issue).
This issue only occurs in a year where the tax rate is
below the minimum tax in some months and above the
minimum tax in other months in a year.
Ms. Weissler expounded on Section 7. She drew a picture to
demonstrate that the minimum tax only applied to oil that
was not subject to the gross value reduction (GVR).
Representative Tarr furthered that the section was added in
recognition that the GVR provisions had been put in place
for the early stages of production, which allowed the full
value of the GVR reduction to be realized.
10:10:00 AM
Ms. Weissler continued to address Section 7, new subsection
(r). She relayed that the subsection prevented companies
from saving the sliding scale per barrel credit for months
when it then could be applied to decrease taxes below the
minimum floor. The language was intended to stop the
practice.
Representative Guttenberg asked how difficult it would be
to monitor. Ms. Weissler deferred the question to DOR.
Representative Tarr interjected that currently the
department was performing monthly estimates and the "true-
up" process happened yearly. She expected that the true-up
process would uncover any unrealized credits and apply them
appropriately.
Ms. Weissler addressed Section 8:
Section 8. Amends AS 43.55.020, related to monthly
installment payments in accordance with the changes to
the minimum tax in sections 6 and 7.
Ms. Weissler noted that the section contained conforming
language. Ms. Weissler turned to Section 9:
Section 9. Eliminates the North Slope carried-forward
annual loss (net operating loss) credit.
Ms. Weissler moved to Sections 10 and 11:
Section 10. Amends AS 43.55.023(c) in accordance with
the hardening of the minimum floor in section 7.
Section 11. Amends AS 43.55.023(d) to remove the
ability for taxpayers to apply for a cash payment for
net operating loss credits issued under AS
43.55.023(b).
Ms. Weissler expounded that if the bill passed the only
cash credits left were for the Middle Earth qualified
capital expenditure credit, well lease expenditure credit,
and the exploration credit.
Representative Wilson referred to $900 million previously
mentioned in the intent language. She asked what portion of
the $900 million would be able to be used as a cash payment
and what amount could be used as deductions. Ms. Weissler
answered that the $900 million in credits were already "on
the books" and the amount would not change.
Representative Tarr added that the Middle Earth credits
were due to expire on a timeframe set in existing statute.
Ms. Weissler moved to Sections 12 through 14:
Section 12. Amends AS 43.55.024(g) in accordance with
the hardening of the minimum floor in section 7.
Section 13. Amends AS 43.55.024(g) in accordance with
the hardening of the minimum floor in section 7.
Section 14. Amends AS 43.55.024(j), the sliding scale
per barrel tax credit, to $8 at oil prices less than
$60; $7 at $60 to less than $70; $6 at $70 to less
than $80; $5 at $80 to less than $90; $4 at $90 to
less than $100; $3 at $100 to less than $110; and zero
when oil prices are $110 and above.
Vice-Chair Gara asked Ms. Weissler to repeat the sliding
scale numbers. Ms. Weissler complied.
10:15:20 AM
Representative Guttenberg stated that the difference
between $99 and $100 was $0.99 for the calculation of oil
tax revenue for the state. He asked how the issue was dealt
with. Representative Tarr reminded the committee that she
distributed an analysis of the per barrel credit ["CS HB
111 Analysis of Per Barrel Credit by Rep. Tarr" (copy on
file)]. She answered that an amendment had been offered in
the past during the SB 21 [SB 21 Oil And Gas Production Tax
- CHAPTER 10 SLA 13 - 05/21/2013] deliberations to address
the issue and "smooth out the formula." The amendment did
not pass, but she still possessed the legal language to
address the $99.99 to $100 problem. Representative
Guttenberg asked how the department dealt with the issue at
present. Representative Tarr replied that the department
followed the strict price guidelines and used the $0.99 cut
off. She reiterated that a formula existed that would
address the issue.
Ms. Weissler addressed Sections 15 through 17:
Section 15. Amends AS 43.55.025(g) in accordance with
the addition of a dry hole credit in section 17 of the
bill.
Section 16. Amends AS 43.55025(i) in accordance with
the hardening of the minimum floor in section 7.
Section 17. Adds a new subsection (q) to AS 43.55.025
to allow an explorer to take a purchasable tax credit
of 15 percent of exploration expenditures incurred for
drilling that results in a dry hole. The credit may be
allowed only if (1) the explorer has no oil or gas
production; (2) all service contracts are paid in
full; (3) the lease is returned to the state; and (4)
the expenditure is not the basis for another credit
claimed under the production tax.
Ms. Weissler indicated that Section 17 contained a new idea
proposed by the consultant, Rich Ruggiero, Castle Gap
Advisors, LLC, which changed the net operating loss credit
that resulted in a dry hole to a net operating loss carry
forward.
Representative Guttenberg stated that not every well
drilled was meant for production. He asked whether the
section specifically dealt with holes drilled for
production. Ms. Weissler stated the provision applied
exclusively to production wells.
Co-Chair Seaton asked whether the provision applied to
issues prior to unitization. He wondered whether a non-
productive lease area could be returned. He asked about the
size of the lease that would be returned to the state for
the dry hole. Representative Tarr answered that the issue
had not been "flushed out" in prior discussion. She thought
that the provision would be "geared toward the early
exploration work." She spoke to the risk involved in the
early stages of development and ensuring that some
compensation was received for the work if unsuccessful. She
voiced that by revoking the lease the opportunity existed
to offer the lease to another entity in the future.
Co-Chair Foster invited Representative Josephson to
testify.
10:21:22 AM
REPRESENTATIVE ANDY JOSEPHSON, SPONSOR, shared that the
bill would end cash credits on January 1, 2018 except for
Middle Earth credits. He relayed that the previous
committee believed that adoption of a fiscal plan could
bring "some solace and comfort to principally the
independents, to continue their work given that passage of
the bill would be some statement by the legislature that
future cash credits would be unaffordable." He referenced a
comment about the audit period and concern about the fact
that interest earned was greater than the delinquent tax.
He clarified that the concern was addressed in SB 21 and
may have gone too far by creating a 3-year limit on
interest when the appeals and litigation process could last
much longer.
Vice-Chair Gara asked whether the exploration credit
referenced in Sections 17 applied within a lease that was
already producing or not in production.
Ms. Weissler did not know the answer. She surmised that the
idea was to compensate for the operating losses for a dry
hole. She qualified that the explorer had "to have no oil
or gas production." She deduced that if the explorer was in
the middle of a lease with other wells that were producing
they already had a tax liability and the section was not
applicable. Vice-Chair Gara ascertained that if the section
only applied to entities not in production the answer was
acceptable. He asked whether the credit only applied after
exploration was unsuccessful and the lease was returned to
the state. Ms. Weissler replied in the affirmative. Vice-
Chair Gara asked Ms. Weissler to repeat her explanation of
Section 16. Ms. Weissler replied that the section reflected
the hardening of the minimum floor.
Representative Wilson referred to Section 17, page 20,
lines 5 through 7. She read the following:
…A credit under this subsection may only be allowed if
(1) the explorer does not produce oil or gas in the
calendar year in 6 which the credit is earned;
Representative Wilson asked whether it took longer than one
year to produce oil after drilling the hole. She added that
"explorers and developers were not necessarily the same
company."
10:27:11 AM
Ms. Weissler responded that the provision related to an
explorer that was not producing anything to eliminate tax
liability. She indicated that the explorer chose to take
the credit. Representative Wilson thought the answer did
not make sense. She understood the reason for the
provision, but she thought that new areas took longer to
get to the point of production. She wondered if it was
possible to meet the one-year expectation.
Representative Tarr answered that the section was much more
limited in scope to areas where nothing was found. She
elucidated that the companies would still be compensated to
encourage risk. She thought that the DNR could speak more
to the topic. She noted that more detailed information was
available, and it was less and less likely the circumstance
would happen in the future. She recalled a situation in
Middle Earth where a company thought an area was promising
but the drilling was unsuccessful and thought the provision
was more applicable to a similar circumstance. She
indicated that Middle Earth had not had much development in
contrast to the North Slope where more information was
available.
Representative Wilson could not imagine any company
anywhere drilling in a location they did not expect to find
oil. She expressed doubt that the expectation could be met.
She wanted to avoid unintended consequences.
Co-Chair Seaton referred to the company Caelus Energy
Alaska. He hypothesized a situation where the company
drilled dry holes in a new field. He deemed that the
company could not claim the tax because other fields were
in production. He asked whether a new company without any
other development could use the credit that reimbursed 15
percent of expenses, if it was not deducting the expenses
off any other exploration or production tax. Representative
Tarr replied in the affirmative.
10:32:40 AM
Vice-Chair Gara spoke to the intention in Section 17 and
asked for clarification about Representative Wilson's
concerns.
Representative Wilson asked whether the provision pertained
only to situations where no oil was found. Representative
Tarr answered that the exploration company would have to
apply for the credit and meet certain stipulations. She
indicated that one of the stipulations to receive the
credit was that no oil or gas was found in the one-year
period the credit was earned. Representative Wilson asked
what happened if oil was found but not produced within one
year. Representative Tarr replied that the credit was for
companies that were unsuccessful. She furthered that the
state wanted to balance the risk for companies that engaged
in work and were unsuccessful. She related that the credit
was used elsewhere to incentivize companies that typically
were very successful at exploration.
10:36:02 AM
Representative Wilson asked whether unsuccessful was
defined as finding nothing. She wondered what made the
exploration unsuccessful. Representative Tarr pointed to
line 2 of Section 17 and read the phrase "for drilling that
results in a dry hole." She observed that a dry hole
suggested that there wasn't enough for production.
Representative Pruitt inquired about the genesis of the
section. Representative Tarr replied that the previous
[House Resources] committee had listened to a variety of
industry representatives, public testimony, and its
consultant. She elucidated that the committee heard a lot
of testimony regarding the high cost of development and
related risk in the state. The provision was chosen as a
tool to incentivize and attract exploration work in the
state. The specific suggestion was offered by the
consultant and industry representatives.
Representative Pruitt surmised the section would apply to a
brand-new company that would have to fail. He was unsure of
the definition for a dry hole. He was trying to determine
the need for the section. He was uncertain about being
supportive of any new credits.
Representative Tarr referred to a slide that had been
provided by either DOR or the consultant, Rich Ruggiero
that depicted the development profile of a major field. She
remembered that once peak production declined the major oil
producers were less interested in the field. She related
that when production was trending downward it was
beneficial to attract new entrants who were willing to
explore for the remaining oil in the field. She stated that
over the last several years "quite a number of new
companies" came to the state to engage in exploration work.
She delineated that some companies like Great Bear only
engaged in exploration work and the incentive was intended
for explorers. She furthered that transitioning to a net
profits system that carried forward losses to a tax
liability and eliminated cashable credits only befitted
producers. Production tax liability was not applicable to
exploration companies; the credit incentivized exploration
work in the state.
10:43:09 AM
Representative Pruitt interpreted that the section
specifically applied to an explorer but intended that the
explorer would turn into a producer. He deduced that if a
company was solely an explorer the credit could not be
transferred. He wondered what the value of the credit was
for explorers who would not "make it to production" but
also could not transfer the credit. Representative Tarr
answered that the explorer received a cash credit for 15
percent of the exploration costs; the value would be the
cash payment the company received. She reiterated that some
companies were more interested in exploration work.
Representative Pruitt thought there was a goal to move away
from cash credits, which he endorsed. He was skeptical
about adding a new one. He spoke to the potential
utilization of the credit. He thought the credit was
contrary to the intent of the legislation. Representative
Tarr replied that the bill was taking a different direction
in the overall tax system. She offered that the state
learned a valuable lesson in avoiding situations where the
state became "over obligated." The bill changed the system
to one where losses were a deduction against taxes. If a
company never became a taxpayer the opportunity could not
be realized. The credit was "isolated" to a group of
companies that would not become producers. The credit
incentivized continued exploration and helped ensure that
work continued in all stages of development to halt the
decline in production. She suggested that the incentive was
beneficial for Cook Inlet and noted the success of
incentives that increased production.
10:47:00 AM
Representative Tarr recommended that if cashable credits
were unacceptable other incentives should be established to
ensure that exploration continued in the state.
Representative Josephson interjected that the existing cash
credit system was unsustainable. He relayed that Mr.
Ruggerio suggested that the exploration credit was an
option to consider. The "uplift feature" incentivized
independents to remain in the state. In consultation with
DNR and DOR, the credit was perceived as a modest cash
credit.
Representative Pruitt asked about the precise definition
for a dry hole. Representative Tarr responded that it would
be best to consult with DNR. She added that a definition
was not included in the bill, but the regulations would be
definitive.
10:50:04 AM
Representative Guttenberg expressed his long-time support
for explorers who were at the "high risk end of the
equation." He asked whether the credit applied
independently to each lease the explorer held.
Representative Tarr indicated that each lease was
independent and handled separately. Representative
Guttenberg inquired whether the credit applied if the
explorer had another lease in production. Representative
Tarr referred to page 20, lines 5 and 6 and read the
following:
…A credit under this subsection may only be allowed if
(1) the explorer does not produce oil or gas in the
calendar year in 6 which the credit is earned;
Representative Tarr pointed out that the credit was lease
specific provided that the explorer was not currently a
producer.
Co-Chair Seaton mentioned that he did not see a provision
in the section that authorized the state to acquire the
data regarding the lease. He thought the provision seemed
like it was designed for the small companies that explored
and sold the lease to a major oil company to develop. He
commented that the provision enabled the company to "sell
the investment" the state made in the company or if they
drilled a dry hole the state paid the cash credit. He
wondered how the credit corresponded with the claw back
provision if oil eventually was discovered and the lease
was sold. He inquired whether the state could "retrieve"
the states cash credit investment from the transaction
sale. He wondered whether it was part of the previous
discussion. Ms. Weissler responded that it was not part of
the discussion. She reiterated that a dry hole made a
company eligible for the credit and if it was not and the
lease was sold, she presumed that the costs would be
recovered through the sale of the lease. Co-Chair Seaton
was trying to figure out if the credit was fair and
balanced.
10:55:18 AM
Representative Tarr answered that a dry hole was the only
circumstance that the company was eligible for the credit
and they would also be required to relinquish the lease
back to the state. She detailed that the other circumstance
would enable the losses to be carried forward; if the
company sold the lease the value of the carry forward
losses became part of the commercial transaction.
Representative Josephson encouraged the committee to ask
the department to add a claw back provision.
Vice-Chair Gara was trying to determine whether the
existing language worked. He asked whether exploration
expenditures were a "limited scope of expenditures" and if
they were defined somewhere. Representative Tarr answered
that exploration expenditures were currently defined in
statute.
Ms. Weissler moved on to Sections 18 and 19:
Section 18. Amends AS 43.55.028(a) in accordance with
section 11 that removes the ability for taxpayers to
apply for a cash payment for net operating loss
credits.
Section 19. Amends AS 43.55.028(e) to limit the
state's purchase of credits to $35 million per
company. Only companies with production of not more
than 15,000 barrels per day may apply for a cash
payment. Current law sets the purchase limit at $70
million and applies to companies with not more than
50,000 barrels per day.
Ms. Weissler elaborated that Section 19 only applied to
Middle Earth if the bill passed as written. She moved on to
Sections 20 through 22:
Section 20. Amends AS 43.55.030(a) to require an oil
and gas producer to submit to DOR information required
under regulation and, for each expenditure that is the
basis of a credit under AS 43.55.023 or AS 43.55025, a
description of (1) the expenditure, (2) the purpose of
the expenditure, and (3) a description of the lease or
property for which the expenditure was incurred.
Section 21. Amends AS 43.55.030(e) to require an
explorer or producer without production to submit to
DOR information required under regulation and, for
each expenditure that is the basis of a credit under
AS 43.55.023 or AS 43.55025, a description of (1) the
expenditure, (2) the purpose of the expenditure, and
(3) a description of the lease or property for which
the expenditure was incurred.
Section 22. Requires the department to annually report
to the legislature the information collected under new
subsections AS 43.55.030(a) (10) and (e).
Ms. Weissler suggested that if net operating loss credits
were eliminated Sections 20 and 21 would need to be amended
to reflect net operating loss deductions. She mentioned
that DOR noted that Section 22 was not necessary since
reporting requirements already existed in statute.
10:58:53 AM
Ms. Weissler moved to Section 23, which was new:
Section 23. Adds a new section to AS 43.55.150 to
ensure that the gross value at the point of production
does not go below zero. The gross value is determined
by subtracting tariffs and transportation costs from
the West Coast sale price per barrel. The gross value
at the point of production is used in various
calculations throughout the production tax statute.
Ms. Weissler moved to Sections 24 through 25:
Section 24. Amends AS 43.55.160(e) in accordance with
section 25 that provides for the carry-forward of net
operating losses.
Section 25. Amends AS 43.55.165(a) to add a new
subsection (3) that allows 50 percent of net operating
losses to carry forward to when a taxpayer has
production. The carry forward and uplift proposed in
section 26 allows producers to recover costs before
paying production tax.
Ms. Weissler noted that Section 24 was conforming language.
She addressed Section 26:
Section 26. Amends AS 43.55.165 to add new subsections
(m) and (n). Subsection (m) provides an uplift for
seven years of seven percentage points above the
Federal Reserve rate for the 50 percent in net
operating losses carried forward to production.
Subsection (n) directs the Department of Natural
Resources to develop regulations to establish a review
process for pre-approval of lease expenditures that
will generate a carry-forward annual loss.
Ms. Weissler elaborated that Section 26 subsection (m),
stated that the Federal Reserve rate was currently 8
percent. She furthered that the consultant suggested adding
the timeline to incentivize more rapid production. She
reported that subsection (n) "needed work" and offered her
assistance. She detailed that the intent was to enable the
government and industry to work together to ensure that
both entities' needs, and policies were being met. She
noted that the subsection was incomplete and did not
adequately convey the intent. She moved to Section 27:
Section 27. Repeals AS 43.55.028(g)(3) that set the
purchase of $70 million in tax credits at 100 percent
of the first $35 million and 75 percent of the other
$35 million in a year; repeals AS 43.55.028(g)(3) that
allowed for the assignment of production tax credits
to a third-party assignee.
Ms. Weissler explained that AS 43.55.028(g) (3) in Section
27 was repealed due to the change to a $35 million cap in
the legislation. She pointed to AS 43.55.028(g) (30) and
noted that the statute was added to a fish tax bill in 2013
and was believed to exclusively apply to Cook Inlet gas.
The statute was no longer necessary because of the
elimination of cash credits. In addition, the statute
caused more problems for the state due to the transfer of
credits to banks, which changed "the whole dynamic of the
incentive system." She addressed the remainder of the
sections:
Section 28. Establishes a legislative working group to
analyze the Cook Inlet oil and gas fiscal regime.
Section 29. Applicability. Provisions relating to the
minimum tax, migrating credit, net operating loss
credit, and repeal of third-party assignments apply on
or after January 1, 2018.
Section 30. Transition: carried-forward losses and
lease expenditures. The department may purchase
purchasable tax credits earned before January 1, 2018.
The net operating loss carry forward provisions added
sections 25 and 26 apply to lease expenditures
incurred on or after January 1, 2018.
Section 31. Transition: assignment of tax credit
certificates. The department may continue to apply and
enforce tax credit assignments to third-parties for
credits applied for before January 1, 2018.
Section 32. Transition: payment of tax; filing.
Taxpayers shall pay the tax as provided in current law
for a tax or installment payment for production before
January 1, 2018.
Section 33. The change to delinquent interest in
section 2 is retroactive to January 1, 2017.
Sec. 34. The intent language, delinquent interest
provision, Cook Inlet Working Group, and retroactivity
of the delinquent interest provision are effective
immediately.
Sec. 35. All other sections take effect January 1,
2018.
11:04:15 AM
AT EASE
11:12:07 AM
RECONVENED
Co-Chair Foster noted the committee would stop the
presentation at noon. The subsequent DOR slides would be
heard during the afternoon meeting.
Representative Pruitt asked whether he could assume that
the presentation was on behalf of the governor.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
answered in the affirmative but qualified that he was doing
his best to analyze the nuances in the bill. He could not
speak to the governor's opinion on every detail of the
legislation. He voiced that he was present to merely
explain the bill and not take a position on HB 111.
Representative Pruitt asked whether the governor was
supportive of the current legislation. Mr. Alper answered
that the governor did not typically take a position on
legislation while under the committee process. He stated
that some elements in the bill were similar or identical to
provisions in previous legislation introduced by the
governor. He did not want to speak for the governor beyond
what was previously introduced by him. Representative
Pruitt asked at what point Mr. Alper had first received
copies of the current version of the legislation. Mr. Alper
answered that he had seen the committee substitute (CS) at
the same time as the public. He had spoken with the House
Resources Committee chairs prior to the introduction of the
original bill. He was not involved in the creation of the
legislation. He shared that his role was to provide some
technical guidance.
11:16:00 AM
Mr. Alper provided a PowerPoint presentation titled "New
Sustainable Alaska Plan, Pulling Together to Build Our
Future; CSHB 111(RES)\N by the House Resources Committee,
Oil and Gas Production Tax and Credits: Background and Bill
Analysis" dated March 21, 2017 (copy on file). He began
with a table of contents on slide 2:
Background on Alaska's oil and gas taxes and analysis
of CS HB 111(RES)\N
· Money- how oil has funded the state in the past
· Transition- how we've adapted to falling prices
· Credits- what we know, what has accrued
· Last year's HB247 and remaining concerns
· Overview of CSHB 111(RES) with detail of selected
tax sections
· Fiscal note
Mr. Alper turned to slide 3: "History Of Oil And Gas Taxes
In Alaska."
Four Main Sources of State of Alaska Oil Revenue
Property Tax ($0.1 billion in FY12, $0.1 billion in
FY16) Pipeline, Equipment, Facilities Numbers are
state share; $0.4 is shared with local governments
Royalty ($2.9 billion in FY12, $1.2 billion in FY16)
Landowner's share, usually 12.5%. Most North Slope
production is on State land. At least ¼ of royalties
go to the Permanent Fund
Production Tax ($6.1 billion in FY12, $0.2 billion
in FY16) Based on net profits; most tax legislation
in recent years is over this tax. North Slope 35%
less a variable "per taxable barrel" credit
Corp. Income Tax ($0.6 billion in FY12, $0.0 billion
in FY16) Taxes remaining profit after production tax
Global asset apportionment; 9.4%, but effectively
closer to 6.5% Total dropped from $9.7 billion to
$1.5 billion in 4 years
Mr. Alper elaborated that the zero-amount depicted for
corporate income tax in FY 16 was "a bit of a distortion."
He explained that companies made quarterly estimated tax
payments, which in the calendar year 2014 amounted to
overpayments due to price decreases in 2015. The large
refunds in FY 15 for the estimated overpayments were
reflected against revenue in FY 16.
11:21:49 AM
Vice-Chair Gara asked about corporate income tax related to
worldwide apportionment. He asked whether the zero-amount
in FY 16 meant that no profits were realized in Alaska or
if it reflected worldwide profits and specific Alaska
figures were unknown. Mr. Alper answered that the amount
reflected worldwide profitability apportioned but not
specifically Alaskan profitability. He reiterated that the
zero amount was due to the Alaska specific circumstance
when the companies overpaid estimated taxes during calendar
year 2014 and the zero-amount reflected the states refund.
Representative Pruitt asked what the profitability would
have been if the refund was not due. Mr. Alper answered
that he would provide a precise number but estimated that
the number ranged from $50 million to $100 million. He
turned to slide 4 titled: "The History Of Oil And Gas Taxes
In Alaska."
Six changes to the production tax since 2005:
1. 2005: Gov. Murkowski aggregates Prudhoe Bay
satellite fields for ELF calculation
2. 2006: Petroleum Production Tax "PPT" changed from
taxing gross revenue to net profits (needed for Gov.
Murkowski's "stranded gas act" gasline)
3. 2007: Alaska's Clear and Equitable Share "ACES"
corrects revenue shortfalls due to bad cost estimates
in PPT. Major tax increase
4. 2010: Cook Inlet Recovery Act "CIRA" provided
additional credits outside the North Slope targeted at
southcentral gas supply issues
5. 2013: SB 21 was a tax cut at most prices (small tax
increase at low prices) and provided "new oil"
benefits
6. 2016: HB 247 began tax credit reform, phasing out
Cook Inlet credits and limiting "new oil" benefits
Mr. Alper explained that the Economic Limit Factor (ELF)
calculation was a multiplier applied to the tax rate
between zero and one which resulted in the owners of the
fields paying a lower rate. He added that Governor
Murkowski "chose to count them as one thing," which lead to
a $150 million tax increase. The limit factor only stayed
in place for about 15 months until the Petroleum Production
Tax (PPT) bill in 2006 was adopted. He spoke to the Alaska
Supreme Court decision on December 2016, ruling in the
state's favor on the "Prudhoe Bay aggregation" case that
would have cost the state a total of $500 million from the
accumulated interest on the original $150 million. He
indicated that the switch to a net profits tax required an
estimate of a per barrel cost. The revenue estimate was
$800 million less than estimated due to higher than
anticipated costs per barrel, which lead to the creation of
Alaska's Clear and Equitable Share (ACES) tax system under
Governor Sarah Palin. He reported that the Cook Inlet
Recovery Act [HB 280 Natural Gas: Storage/ Tax Credits -
CHAPTER 16 SLA 10 - 05/12/2010] was targeted at the gas
shortfall in Southcentral Alaska and was created to ensure
an adequate gas supply. The act added many new credits and
expanded existing credits. The credits applied to oil and
gas in Cook Inlet and became a large portion of cashable
credits. He noted that SB 21 partially hardened the minimum
tax floor. When the price of oil dropped to $60 and below,
the state received approximately $100 million more in
production tax than it would have under ACES. However, the
tax cut in SB 21 amounted to approximately $1 billion at
$120 per barrel price of oil, which was the price of oil at
the time was bill was in the committee process.
11:27:28 AM
Mr. Alper addressed the final point on slide 4 related to
HB 247 that phased out the Cook Inlet credits. He reported
that the bill would change oil taxes for the seventh time
in 12 years.
Mr. Alper moved to slide 5 titled "Government Take."
Government Take Oil as a percentage of government
•In high price / high revenue years, oil has provided
90% or more of state UGF revenue
•FY2017 estimated at 67% of revenue
o In FY2017 oil revenues are only covering 22% of
the budget. About 2/3 is being paid out of
savings
Since TAPS, in years 1978 -2016, Alaska has received
$141 billion in petroleum revenue
•Since the switch to Net, in years 2007 -2016, Alaska
has received $64 billion
•Highest single year was 2008: $11.3 billion
Any discussion of the appropriate state "share" needs
to clarify- "share of what?"
Mr. Alper pointed out that in FY 17 the state received
approximately $1 billion in unrestricted oil and gas
revenue. He addressed the share received by government and
defined what comprised oil revenue beginning on slide 6
titled "Government Take:"
• Market Value? (sales price, or "ANS")
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Presentation - HB 111 Background and Bill Analysis - 3.21.17.pdf |
HFIN 3/21/2017 9:00:00 AM |
HB 111 |