Legislature(2017 - 2018)HOUSE FINANCE 519
04/07/2017 01:30 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 111 | TELECONFERENCED | |
| += | HB 115 | TELECONFERENCED | |
| += | SB 26 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
April 7, 2017
2:06 p.m.
2:06:31 PM
[Note: Meeting recessed and continued on April 8, 2017 at
1:59 p.m. See separate minutes dated April 8, 2017 for
detail.]
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 2:06 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
Jane Pierson, Staff, Representative Neal Foster; Ken Alper,
Director, Tax Division, Department of Revenue;
Representative Louise Stutes; Representative Andy
Josephson; Representative Geran Tarr.
SUMMARY
HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 111 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster reviewed 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."
2:07:19 PM
Co-Chair Seaton MOVED to ADOPT the proposed committee
substitute (CS) for HB 111, Work Draft 30-LS0450\M (Nauman,
4/6/17).
Representative Wilson OBJECTED.
JANE PIERSON, STAFF, REPRESENTATIVE NEAL FOSTER, explained
the changes in the CS with a document provided by the House
Finance Committee co-chairs titled "HB 111 - Comparison"
dated April 6, 2017 (copy on file). She read from prepared
remarks detailing the changes in the legislation:
In the Resources version, Section 1 was contingency
language, which is deleted from the finance version.
Section 1 of the finance version has to do with the
powers and duties of the commissioner under AS
31.05.030(n). It can be found on page 1 of the bill.
It deletes a reference to a 10 percent gross value
reduction under AS 43.55.160(g) in accordance with the
repeal of this provision.
Section 2 has to do with the Department of Revenue
disposition of tax information AS 40.25.100(a); it can
be found on page 2 of the finance version. It amends
disclosure of tax information in accordance with the
new provisions allowing certain tax credit and lease
expenditure information to be made public.
Section 3 is interest AS 43.05.225, found on page 2 of
the bill. It removes the three-year limit on interest
and is the same as was in the House Resources version.
The disclosure of tax and credit information, AS
43.05.230(a) was deleted and it referenced preapproval
small producer credit and the floor and disclosure of
tax information.
Section 4, disclosure of tax and credit information is
found in AS 43.05.230(l); it can be found on page 3 of
the bill. It provides for a report making certain oil
and gas tax credit and lease expenditure information
public.
Section 5, is disclosure of tax information, AS
43.05.230(m), found on page 3 of the bill. It adds
subsection (m) allowing disclosure of publicly
available production tax information or tax credit
information related to gas storage, service
industries, processing facilities, and adds subsection
(n) making public certain information regarding oil
refinery tax credits. It also allows for certain
confidential taxpayer information relating to tax
credits, to be disclosed.
2:11:11 PM
Ms. Pierson continued to address changes in the CS:
We deleted Section 5 of the Resources bill, which was
allowing certain confidential taxpayer information
related to tax credits, to be disclosed to legislators
in executive session, in conformance with a signed
confidentiality agreement.
Section 6, oil and gas production tax, AS 43.55.011(e)
is found on page 4 of the bill; it changes the tax
rate to 25 percent after January 1, 2018 and it
retains the 2022 change to gas rate after 2022, and
amended in accordance with the secondary tax bracket
provision. Setting a minimum tax at 5 percent was
deleted, leaving a hardened 4 percent floor. Minimum
tax is also deleted, which was making necessary
corrections to a piece that was eliminated in the
original HB 111.
Section 7, oil and gas production tax, AS 43.55.011(g)
is found on pages 5 and 6 of the bill; it establishes
an additional 15 percent tax bracket, triggered at a
production tax value of $60, which is equal to
approximately $100 ANS.
Section 8, is a minimum tax, AS 43.55.011(q), (r), and
(s), found on pages 6 through 8 of the bill. It
maintains the hardened minimum floor and is adjusted
in accordance with deletion of changes to the minimum
tax previously (r), which is deleted, previous (s) is
now (r). The per barrel credit that was found in
Section 7 of the House Resources version has been
deleted.
Section 9, payment of gas or tax for gas, AS
43.55.014(b) is found on page 8; it is conforming
language to the new tax rate in AS 44.55.011(e).
Section 10 is payment of tax, AS 43.55.020(a) on page
8 through 19 of the bill; it amends the section
governing tax payments and conforms language to the
new tax rate and the repeal of AS 43.160(g).
2:13:59 PM
Ms. Pierson continued to list the changes in the CS:
Section 11, payment of tax, AS 43.55.020(g), is found
on page 19; it makes conformation to the new tax rate.
Section 12 is also payment of tax, AS 43.55.020(h),
found on pages 19 and 20 of the bill; it is also
conforming to the new tax rate.
Section 13, payment of tax, AS 43.55.020(k), is found
on pages 20 and 21 of the bill; it is also conforming
to the new tax rate.
Section 14, payment of tax, AS 43.55.020(l), is found
on page 21; it is also conforming to the new tax rate.
Section 15, net operating loss, AS 43.55.023(b); it
eliminates net operating loss credits for the North
Slope and is the same as in the House Resources
version, but it has been amended for the repeal of AS
43.55.160(g).
Section 16, net operating loss, AS 43.55.023(c), can
be found on page 23. It's conforming an amendment to
reflect the hardened minimum floor and it is the same
as in the Resources version, except it reflects that
credits cannot reduce payments below the minimum
floor. The net operating loss was deleted, which was
Section 11 in the Resources version. Also deleted was
Section 12, which is language that was conforming to
the new hardened floor.
Section 17, non-transferrable tax credits, AS
43.55.024(i), is found on page 23 of the bill; it's a
conforming amendment to reflect the hardened minimum
floor and it remains the same as in the Resources
version. The per barrel credit found in AS
43.55.024(j) has been deleted from the House Finance
version. We are repealing the per barrel credit. The
dry hole credit, which was found in Section 15 of the
Resources version has been deleted.
2:16:40 PM
Ms. Pierson continued reviewing changes in the CS:
Section 18, exploration credit, AS 43.55.025(i) can be
found on page 23 of the bill; it's a conforming
amendment to reflect the hardened minimum floor and
remained the same as in Section 16 of the Resources
bill. The dry hole credit was Section 17 of the
Resources bill and that has been deleted from the
House Finance version. The oil and gas tax credit fund
found in AS 43.55.028(a) - the language was deleted
from the House Resources version so it is kept as is
currently in statute. The oil and gas tax credit fund,
AS 43.55.028(e), which changed the cash payment limits
on credits, was deleted from the House Finance
version, that too is kept as is currently in statute.
Sections 19 and 20, tax credit information, AS
43.55.030(a) and (e) is found on pages 23 through 55
of the bill. It requires taxpayers to report certain
information to the Department of Revenue, removes the
requirement to file a detailed description for the
purpose of the expenditure. New language is added to
ensure that the credits and carry forward lease
expenditures are reported by the lease or property to
which they were incurred.
Section 21 is gross value at the point of production,
AS 43.55.150; it can be found on page 25 of the bill.
It adds a new section to ensure that the gross value
at point of production does not go below zero and that
stays the same as was in the House Resources version.
Section 22, determination of production tax of oil and
gas, AS 43.55.160(a), is found on pages 25 through 27
of the bill and is conforming language to the new tax
rate.
Section 23, determination of production tax value of
oil and gas, AS 43.55.160(e), can be found on pages 27
and 28 of the bill and it conforms to net operating
loss carry forward provisions in Section 26 of the
bill.
2:19:19 PM
Ms. Pierson continued to highlight the changes in the CS:
Section 24, determination of production tax value of
oil and gas, AS 43.55.160(f), can be found on page 28
of the bill and it conforms to the new tax rate.
Section 25, determination of production tax value of
oil and gas, AS 43.55.160(h), is found on pages 29
through 31 of the bill. It is conforming to the new
tax rate and the calculation of the second tax
bracket. We eliminated AS 43.55.160(g) by repealing
it, which is a 10 percent GVR reduction for higher
royalty fields.
Section 26, is net operating loss carry forwards, AS
43.55.165(a), found on page 31 through 32 of the bill.
It adds AS 43.54.165(a)(3), allows 100 percent of net
operating losses to be carried forward when there is
production.
Section 27, also net operating loss carry forward, AS
43.55.165(m) and AS 43.55.165(n), is found on pages 32
and 33; (m) is a rollback provision on the net
operating losses, reducing the 100 percent lease
expenditures by 10 percent of the full original value
every year after seven years; (n) is a ring fence
provision, a carry forward lease expenditure can only
be applied to a lease or property where the
expenditure occurred. Section 26 of the Resources
version directed DNR to develop regulations to
establish a review process for DNR preapproval. This
has been deleted from the House Finance version.
Section 28, oil and gas competitive board, AS
43.98.050, on pages 33 through 35 is conforming to the
repeal of AS 43.55.160(g).
Section 29 is the repealers; it can be found on page
35 of the bill. It repeals AS 43.55.024(j), which is
the sliding per barrel credit. AS 43.55.029, third
party assignment of credits and AS 43.55.160(g), the
10 percent gross value reduction for higher royalty
fields.
Section 30 is the Cook Inlet working group, AS
43.98.050, found on pages 35 through 36, establishes a
legislative working group to analyze the Cook Inlet
fiscal regime; it stays the same as in the House
Resources version.
2:22:30 PM
Ms. Pierson continued to read the changes in the CS:
Section 31 is an applicability, the provision is found
on page 36 and reflects provisions relating to the
minimum tax floor - effective, January 1, 2018.
Section 30 of the Resources version has been deleted.
Section 32, transition, carry forward lease
expenditures, is found on page 36. The net loss carry
forward provisions apply to lease expenditures
occurred on or after January 1, 2018.
Section 33, transition tax credit assignments, is
found on pages 36 and 37 of the bill; it states the
department may continue to apply and enforce tax
credit assignments to third parties for credits
applied before January 1, 2018 and it remains the same
as in the House Resources version.
Section 34, transition payment of tax filing.
Taxpayers shall pay the tax as provided in current law
for a tax or installment payments or productions
before January 1, 2018. This has been amended in the
House Finance version for the new sections.
Section 35, is transition gross value reduction, found
on pages 37 and 38; a taxpayer who produces oil or gas
before January 1, 2018 qualifies for an extra 10
percent gross value reduction as provided in current
law for the oil and gas produced before that date.
Section 36, is transition - retroactivity regulations,
found on page 38 and allows for retroactivity of
regulations to carry out this act.
Section 37, also has to do with retroactivity. The
change is to delinquent interest in Section 3, it is
retroactive to January 1, 2017.
Section 38, is effective dates. Sections 3 (Interest
rates), 30 (Cook Inlet Working Group), 36
(retroactivity of regulations), and 37(delinquent
interest rates) take place immediately.
Section 39, is also effective dates found on page 38.
The reduction of net operating losses takes effect in
2018.
Section 40, is effective dates found on page 38. It
deals with all other sections of the bill and takes
place on January 1, 2018.
2:25:29 PM
Representative Wilson stated the bill was vastly different
than the prior bill version. She appreciated hearing the
changes, but she needed more detail. She asked if there was
a fiscal note.
Co-Chair Foster replied that the committee would address
the merits of the bill and receive additional explanations;
however, he wanted to have a working draft before the
committee.
Representative Pruitt OBJECTED to the working draft. He
supported the prior version over the current bill. He
emphasized that the CS did not represent a credit
discussion. He underscored that it would revamp oil taxes.
He opined that the new document was a way to destroy
industry. He stressed his frustration about the new bill.
He believed the CS constituted a complete rewrite of the
oil tax system. The CS would "ring fence" the net operating
loss (NOL) credits, if companies were able to keep them. He
stated that the bill would not even maintain a
competitiveness review board to provide information to the
legislature on the state's competitiveness in the industry.
He reiterated his objection to the work draft. He stressed
that the CS was not good for Alaska. He stated that "I
could not believe that you're going to ask me to go back to
the other one as the place to start from."
Co-Chair Foster stated if the committee adopted the CS the
intent was to hear modeling detail from DOR.
Vice-Chair Gara addressed some of the concerns that had
been vocalized. He thought it was clear that many House
Finance Committee members were uncomfortable with the two
tax rates under the current production tax system. He
addressed new fields (post-2003 fields) on the North Slope
that had a zero percent production tax rate on average up
to about $73 per barrel. The state currently paid tax
credits for fields that paid zero production tax - or some
fields paid a 4 percent production tax. He remarked those
rates would continue for at least five to seven years. He
continued that the next year there would be more credits
generated that would be owed to industry than would be
generated in production taxes. He stated that much of the
public believed it was an unfair transfer of a burden to
the public and an unfair benefit to the oil industry. He
stated that Mr. Rich Ruggiero [legislative consultant] had
talked about a fairer profits tax.
2:31:09 PM
Co-Chair Foster asked members to steer clear of debate and
making a case for the CS because the CS had not yet been
adopted. He detailed that if the work draft was not adopted
there would be nothing to debate regarding the new CS.
Representative Pruitt did not believe it was appropriate
for a committee member to tell other people they did not
understand. He also believed the comments strayed from the
differences between the previous bill version and the work
draft.
Representative Wilson stated her understanding that if the
work draft was adopted it would be committee members'
responsibility to find their own experts - she had not been
a part of writing the bill. She asked if the committee
would be hearing from industry again because she believed
the work draft constituted a total rewrite of the
legislation. She stressed that the state could lose the
industry due to the changes. She referred to statements
that production tax did not cover the number of credits
provided. She agreed, but noted there was also corporate
tax and royalties. She stressed that the state had
benefitted for years off the credits that were due at
present. She detailed that the money had been put into the
CBR instead of into the oil taxes. She continued that the
state had benefitted and had received the money. She opined
that it was not fair to the public to "only be taking it
from one or the other." She stated that the bill was
supposed to be about fixing the state's liability issue
regarding taxes it owed. She referred to testimony from an
expert who had been clear that a rewrite of the taxes was
not needed and that it could be dangerous to do what she
believed the current work draft did. She asked for the co-
chair's expectation and intent.
2:34:01 PM
AT EASE
2:35:00 PM
RECONVENED
Co-Chair Foster stated that the bill had been introduced a
few weeks earlier and the committee had heard from industry
and a number of experts. He believed the committee knew the
position of the various groups. He stated it was the intent
to see if the committee would adopt the working draft.
Representative Wilson MAINTAINED her OBJECTION to the
adoption of the work draft.
Representative Pruitt remarked that the work draft had come
from one of the co-chairs' offices. He wanted to understand
the intent of the bill going forward. He wanted to know if
the intent was to get as much money from the industry as
possible.
Co-Chair Foster replied that part of the answer would come
forward with the presentation from the Department of
Revenue (DOR).
Co-Chair Seaton relayed that as the bill had been
developed, part of the intent was to get a fair return for
Alaska at prices that had not been modeled during the
original timeframe, to generate production tax to pay back
cashable credits, and to eliminate the portion of the
budget gap resulting from the excessive amount credits.
A roll call vote was taken on the motion.
IN FAVOR: Gara, Grenn, Guttenberg, Kawasaki, Ortiz, Foster,
Seaton
OPPOSED: Wilson, Pruitt, Thompson, Tilton
The MOTION PASSED (7/4). There being NO further OBJECTION,
Work Draft 30-LS0450\M was ADOPTED.
2:38:03 PM
Co-Chair Foster relayed the committee would hear from DOR.
Representative Wilson stated that unless the committee
heard something different from DOR, the bill would impact
industry in a very different way than the prior bill
version. She believed the industry should have an
opportunity to weigh in.
Co-Chair Foster replied that as the end of session neared
nearing the pace accelerated and the goal was to get things
accomplished. He understood Representative Wilson's
comments and he would look into the suggestion.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
relayed he did not have a specific presentation and would
come back to the committee at 5:00 p.m. with modeling
detail and a new fiscal note. There were numerous changes
in the CS; the most fundamental was getting out of the
business of cash credits - of earning net operating loss
(NOL) credits subject to cash. He addressed that Mr.
Ruggiero had talked about simplifying the tax system with a
flat rate and including some step ups to the rate. There
was a disconnect in the current law where the effective tax
rates were lower than the nominal 35 percent tax rate,
which led to some unusual circumstances where NOLs were
carried forward and earned at 35 percent when the cash
payment for tax was somewhat less than that amount. He
believed it was the rationale of the previous committee to
reduce the carry forward to 50 percent, which aligned the
NOLs to 17.5 percent - closer to the effective tax rate.
The current CS changed that provision and all losses were
carried forward - all could be used against future tax
liability, but because the per barrel credit went away and
was replaced with a lower tax rate, the effective and
nominal tax rates were now the same thing. The value of the
carry forwards would be at the tax rate and people would
gain value from their losses in the future at the same rate
that people were paying profit taxes at present.
Mr. Alper continued that it was no big surprise that at
lower prices (between the breakeven point and around $80 to
$90 per barrel) there were relatively low effective tax
rates under the current tax law because of the per barrel
credit and the 35 percent rate. Throughout most of the
range it was the minimum tax - the 4 percent floor. The 25
percent net tax raised taxes in the $50 to $90 per barrel
range. He continued that the 25 percent net rate was
comparable to the original version of SB 21 [oil and gas
tax legislation passed in 2013] as initially proposed by
the former Parnell Administration. He expounded that the
taxes - at that range - were the same as what they would
have been had the original version of SB 21 had passed.
Mr. Alper explained that the progressive bracket created a
surtax on the portion of the profits (the production tax
value greater than $60 per barrel), which was very
different from progressivity under the prior Alaska's Clear
and Equitable Share (ACES) tax system. Only the portion of
the production tax value greater than $60 was paying the
surtax. For example, if a company had $70 per barrel in
profits, which would occur at oil prices of $110 to $115
per barrel, the first $60 would be taxed at 25 percent and
only the last $10 would be taxed at the 40 percent combined
rate (25 percent plus 15 percent surtax). He elucidated
that the actual taxes at the higher price ranges (greater
than $100 per barrel) were almost identical to the current
law's base tax. Therefore, at higher prices the bill did
not create a tax increase and at prices of $130 and above
it was a small tax cut. The real impact of the tax changes
was in the $50 to $90 per barrel range. The changes to the
carry forwards were much more foundational and on the
credit side of the equation. He relayed that he would be
back before the committee with additional information
beginning at 5:00 p.m.
2:44:06 PM
Representative Pruitt asked if Mr. Alper had advised the
governor on the makeup of the current bill version.
Mr. Alper replied on the negative. He had been in some
discussion with the co-chairs' offices in previous weeks so
he knew what they were working on and had informed the
governor several days earlier of some of the things he
thought were going to be in the bill. He expounded that
some of the information had turned out to be incorrect
because the direction had been changed several times in the
past few days.
Representative Pruitt asked for verification that Mr. Alper
had a decent understanding of the current bill version.
Mr. Alper answered that he had received the current version
of the bill that morning along with everyone else. He
confirmed that he was "more or less" familiar with all the
provisions.
Representative Pruitt asked if Mr. Alper would advise the
governor to sign the bill in its current form.
Mr. Alper replied that he did not know if it would be
appropriate for him to give that advice. He did not know
the situation well enough. He understood the intent of the
co-chairs and what they were trying to do with the
effective tax curves. He also understood the governor's
desire to get the state out of the cash credit business.
The bill met those needs. He did not know how he would
advise the governor and would need to study the bill in
greater detail. He added that inevitably the bill would be
debated by the Senate and much more would be learned about
all the various provisions included.
Representative Pruitt understood the need for the cashables
as well. He remarked that at some point the governor could
either reside over a state that decided it wanted to
destroy the oil industry or he could get active and become
involved. He thought it was time for the governor to step
in to communicate how he felt about the bill. He stressed
the bill was a terrible message to send to industry. He
referred to current price battles between Saudi Arabia and
Russia. He detailed that Saudi Arabia was looking to get
its market share back in Europe and because of that it
would lower its price. He requested that the governor get
involved. He thought the governor should be a part of
ensuring the viability of the oil industry.
2:47:07 PM
Vice-Chair Gara remarked that an important part of the bill
was to make sure that companies were taxed based on their
profitability. He detailed that what had formerly been a 5
percent gross tax that could have put companies under water
financially was replaced by a profits tax - companies would
not be taxed if they were not profitable. Profitable
companies would pay 25 percent of their profits. He thought
the previous speaker had made an overstatement. He did not
want to scare people about things they should not be scared
about.
Representative Wilson asked if the bill constituted a total
tax rewrite.
Mr. Alper answered that the bill was a partial tax rewrite.
He elaborated that it used elements of bills the
legislature had considered in the past; it included
elements of various versions of SB 21. He noted that large
portions of the statute would remain the same; therefore,
he would not characterize the bill as a complete tax
rewrite, but it was substantial.
Representative Wilson asked if the DOR modeling would be
based on numbers representing how much more the state could
take from industry.
Mr. Alper replied that he would not word it in the same
way. He answered that the modeling would show the effective
tax rates and the total revenue that would be brought in at
a range of prices and circumstances compared to the current
law.
Representative Wilson relayed that she had read the bill a
couple of times. She wanted to know what information the
department would provide later in the day to show what
impact taking away all credits would have.
Mr. Alper answered there were no credits removed in the
current version compared to others. The sliding scale
credit would be eliminated, but it was a counterbalance to
the 35 percent tax, which was also going away. The bill was
reverting to an earlier version of a bill [SB 21] that was
debated several years earlier.
2:50:06 PM
Representative Wilson stated that everything she had heard
about the original intent of the bill was that it was aimed
at taking care of one very specific point - how to pay the
owed cashable credits and to quit going more into the hole
regarding what was owed. She believed an expert had
testified and recommended to the committee that the issue
was something the committee could take care of in a bill
first.
Mr. Alper answered that Mr. Ruggiero had described it as
the most pressing issue. Many members of the legislature
and the governor had also characterized as the most
pressing issue facing the state in oil and gas law at
present. The issue of changing and simplifying the tax code
and getting rid of the per barrel credit was a part of Mr.
Ruggiero's recommendations. He recalled Mr. Ruggiero
pointing out to the House Resources Committee the inherent
distortion in the per barrel credit. He stated that the per
barrel credit threw numerous things off and there was
probably good public policy value in getting rid of it, but
what it should be replaced with was the pertinent question.
Representative Wilson recalled hearing that making too many
changes or turning too many knobs at one time could have
substantial negative consequences. She surmised that the CS
made numerous changes that had not been in the previous
bill version the committee had heard public testimony on.
Mr. Alper answered that he would prefer to describe the
components individually later in the day. He was uncertain
which changes Representative Wilson or other members found
problematic. He was happy to explain each of them. He
reiterated his earlier statement that at a wide range of
prices the effective tax (actual tax collected by the
state) was nearly identical to the status quo.
Representative Wilson assumed DOR's projection for oil in
the pipeline was based on current tax law. She asked if the
department would present updated numbers to show the
effects and possible negative impacts of the bill. She
believed the bill should scare the public.
Mr. Alper responded that the department was not in the
position to question how company decision making may change
based on any changes in the bill. He did not know how the
industry would react. He believed that like committee
members, companies were still trying to digest the language
in the CS. His staff was currently working to get the
changes modeled and the department would not be able to
contemplate behavioral changes. He concluded that once the
individual line items of the bill were considered, he did
not think it would add up to something quite as onerous as
it was being made out to be.
Representative Wilson stated that she found the magnitude
of the bill incredible. She noted that the department had
limited time to articulate a response to provide
information to the committee. She did not believe it was
fair to have a rushed response. She agreed that the
governor needed to weigh in on the issue. She underscored
that it would impact all Alaskans.
2:54:44 PM
Representative Thompson stated the CS appeared to be close
to a complete rewrite of SB 21. He did not believe SB 21
had been given an adequate chance to show how it had
impacted the industry and production. He was disappointed
that the DOR revenue forecast had not yet been published.
He remarked that the last revenue forecast had included oil
at $38 per barrel. He emphasized that the price had been
over $50 per barrel for quite some time. The last revenue
forecast had projected under 500,000 barrels per day for
the next year's production; however, production was
currently well over 550,000 barrels per day (not 490,000
dropping to 450,000). He hoped the modeling would take the
actual production into consideration. He stated that the
department was three weeks behind on getting its revenue
forecast out. He wanted to know what had been accomplished
and how changing everything would impact the status. He
hoped the modeling would reflect things that would be
coming out in the revenue forecast. He stated that the
committee did not have all the pertinent information and it
was difficult to make sound decisions when the bill may
reverse accomplishments that had been made.
Mr. Alper replied that the comment pertained more to the
revenue forecast than the bill. He corrected that the fall
forecast had included a price of oil for the current year
at $47 per barrel; the $39 per barrel figure had been from
the previous spring. The price of oil had tracked
relatively close to the fall forecast - the actual price
was a couple of dollars above the projected price. He noted
that production was also ahead of the forecast. When the
spring forecast came out - the following Friday - he
expected to see a small amount of additional revenue,
perhaps around $200 million. He did not like that the
department was a bit behind on its forecast. He referred to
a current newspaper article explaining that there was a
regulatory interpretation issue that DOR needed to get to
the bottom of. It had brought everything to a standstill -
the department had to publish an advisory bulletin and
rework many of the forecast assumptions, including the
sequencing of credits, how certain credits interacted with
each other, and how it would impact the anticipated amount
of purchased credits (where one company purchased them from
another). Given the circumstances the department could not
publish a revenue forecast with incomplete information,
which meant the process was delayed a couple of weeks. The
department was on target to provide the forecast to the
legislature the following week.
Representative Thompson referred to the $8 per barrel
credit. He asked for verification that if a company used
the credit they could not use any other credits to take the
amount below the [tax] floor.
Mr. Alper replied in the affirmative.
Representative Thompson asked what it meant that the $8 per
barrel credit was being eliminated.
Mr. Alper answered that the $8 per barrel credit had been
limited in SB 21 to go below the floor. The CS eliminated
the per barrel credit and the floor was hardened in other
specific language in several places in the bill. Therefore,
the 4 percent minimum tax would still be the hard floor -
no credits could be used to go below the floor. He referred
to the crossover point where the net tax and the gross tax
intersect on the graph - for the average producer it
happened around $73 per barrel. The CS drove the crossover
point substantially to the left at about $55 per barrel.
Only relatively low-priced production would actually pay
the 4 percent minimum tax and higher prices would be
subject to the new 25 percent net tax.
2:59:53 PM
Representative Tilton remarked that the state already
received more than the industry at all price points. She
wondered if the change was wise. She wondered what the goal
was. She thought the goal should be long-term production.
She was skeptical about the bill's ability to achieve that
goal.
Mr. Alper did not believe he was the appropriate person to
answer. He recognized the importance of the question, which
was up to the legislature to debate. His job was to
implement the taxes passed by the legislature.
Vice-Chair Gara compared the CS to the House Resources
Committee version. He stated that the Resources version had
a 5 percent gross tax (a percentage of revenue, not
profits) at $50 and above and a 4 percent gross tax at
prices below $50 per barrel. The CS returned to the SB 21
rates - zero at low prices, 1 percent at low prices,
increasing to 4 percent at $25. He asked for verification
that the rates in the CS remained the same [as in SB 21]
and had been hardened.
Mr. Alper replied that Vice-Chair Gara was describing what
happened to the minimum tax at very low prices below $25
per barrel. He agreed that the existing law, retained in
the CS, of a stairstep from zero below $15 per barrel, 1
percent above $17.50, and all the way up to $25 was the
same. He relayed that across most price points the current
CS was less onerous on the industry than the House
Resources Committee version.
3:02:45 PM
Co-Chair Seaton thought it was important to remember the
committee had heard testimony about the gross tax at 5
percent. He stated that industry had testified that the 5
percent gross tax represented a 25 percent increase in its
taxes. The change was eliminated under the current CS. The
current bill version included a net tax - if a producer did
not have much net income they would not pay tax. The 25
percent tax rate applied to net positive income. The prior
bill version would change the per barrel tax credits and
lowered where they were effective by about $20, which had
also been changed in the current CS. The current bill would
eliminate new cashable credits. Additionally, industry had
testified in opposition to only being able to carry forward
50 percent of NOLs - the current CS allowed industry to
carry forward 100 percent. The major elements of the CS
accomplished the established goals. He continued that all
the elements had been available to and testified on by
industry and the legislative consultant. He stated that the
consultant had testified that his preference would be to go
to a stepped net tax. He reminded committee members that
the bill did not include a change in progressivity as had
previously been the case where a higher tax applied to all
profits. He explained the tax under the current version was
more like an income tax. The bill included a new component
- a 15 percent additional tax, which was only taxed on the
amount above $100; it was bracketed just like an income
tax. The lower tax was paid if the production tax value was
lower than $60. He believed the model would show the CS
structure was beneficial across a wide range. The bill was
much simpler than having an interaction between a net tax
and gross sliding scale per barrel credits.
3:06:10 PM
Representative Guttenberg asked if the bill contained
anything that was unique or that had not been previously
discussed. He remarked that there were many concepts that
the legislature had discussed for years. He believed part
of the problem was that when one concept was changed in the
oil tax structure something else needed to be adjusted. He
asked if the bill contained anything new that had not
previously been analyzed.
Mr. Alper replied that many of the transparency components
were relatively new to the current year, but they had been
in the House Resources Committee version of the bill. The
current CS contained the ring fencing concept, which was
new. He believed the topic merited substantial discussion.
He had spoken with the co-chairs about their intent, which
in some ways stemmed from the previous committee's desire
for a preapproval process or some control over making sure
the state knew what it was getting when someone was
investing using state money. Ultimately the ring fence
language was intended to recognize that a company had carry
forwards from a project, but they had a loss - it only
kicked in when a company was operating at a loss. The
carried forward lease expenditures could only be used to
offset the production value from the actual property where
the initial investment had been made. He explained that it
took away the possibility that someone may spend a
significant amount of money and use the offsets to reduce
their taxes from another part of the North Slope. The more
dramatic possibility would be the failure circumstance. He
provided a scenario where a company spent a significant
amount of money and was unsuccessful. He detailed that the
company had $1 billion in carried forward lease
expenditures and was looking to get out of Alaska. Without
some sort of ring fence or limitation, the company could
sell its entire Alaskan subsidiary to a major producer for
any price. Under the circumstance, the buyer would be
purchasing the $1 billion worth of carried forward lease
expenditures and could use it to offset its production from
one of the major legacy fields. He believed it would be
detrimental and not fit within the intent of the program.
He understood the ring fencing language in the CS was a
means to prevent that from happening. He relayed that
everything else in the bill had been at a minimum
introduced as an amendment or in a previous version of
another bill; there was nothing brand new in the current
CS.
3:09:52 PM
Vice-Chair Gara requested to hear about the statutory
relief valve pertaining to royalty relief. He stated that
the provision had been included in all the state's recent
oil tax systems going back to the Economic Limit Factor
(ELF) system. He was interested to hear about the possible
royalty reduction depending on the royalty a field paid and
whether it was a new or existing field.
Mr. Alper clarified that royalty relief is a function of
royalty, which was a function of state lands and state
leases and fell within the Department of Natural Resources
(DNR) purview. He explained that a company made the case
that its field was challenged economically and could ask
for a reduction in the royalty rate for some period. He
stated that it was not unusual for the contractual 12.5
percent royalty to be reduced to something like 5 percent
for a number of years; 7.5 percent of the 12.5 percent
(two-thirds) would be foregone - the state would take less
royalty, which would help the field get over the hump.
After a designated period, the rate would increase to the
full amount. He stated that it was an application process
that required a best interest finding and quantitative
analysis; a report from DNR staff would determine whether
the application should qualify. The most recent royalty
relief case had been the Nuna field (Caelus's expansion
near Oooguruk) - the company had applied and had received
royalty relief. The company had testified that it was
contingent on meeting certain investment thresholds. He
furthered that because of the economy and the price of oil,
the development had been slowed down - the company would
likely have to reapply for royalty relief when the project
started back up.
Vice-Chair Gara stated that the basic standard for royalty
relief was if a company with a new or existing field proved
the field to be uneconomic under current conditions to the
department, it could receive the royalty reduction to try
to make the project economic.
Mr. Alper answered yes and that the question pertained to
DNR, which was outside of his expertise.
Representative Pruitt followed up on the NOL changes. He
questioned whether it was really possible to compare being
able to use the full 35 percent NOL credit to future
liabilities. He stated that in theory going back to the
current structure would make sense, but he viewed the ring
fencing as a dramatic shift. He asked if the value in ring
fencing remained for the companies in the same way that 100
percent of their NOLs would.
3:13:47 PM
Mr. Alper expressed uncertainty about his understanding of
the question. He relayed that typically once an investor
began making major investments they expected to be
producing oil within five or six years. Under the scenario
the company would have production and value and its carried
forwards would be used to offset production from that
field. The value of the ring fence was to ensure that the
tax reduction did not occur until the company successfully
developed the field it had been investing in in the first
place.
Representative Pruitt understood. He asked if requiring
companies to narrow [carried forwards] down to specific
fields would maintain the value for a company to continue
to invest in Alaska. He stated that currently a company
could take the losses against investment, which
incentivized them to invest. Whereas, the bill would
require a company to wait on that on the specific field. He
asked if the value to the company remained in the same
capacity if the ring fencing provision was implemented.
Mr. Alper did not believe he was qualified to answer the
question. He deferred to industry. He clarified the ring
fencing provision in the bill. He provided a scenario of a
company with existing production that was also investing in
a new field somewhere on the North Slope. The investment
would be fully usable, as it was presently, to offset the
company's taxes from the company's existing production; the
provision did not change the commingled nature of the North
Slope tax. The difference resided in a loss scenario. He
detailed that the carried forward losses were the only
thing that would be tied to the lease or property.
Representative Pruitt asked if the industry had asked for
ring fencing.
3:16:12 PM
Mr. Alper replied that he did not believe anyone would ask
for ring fencing. He detailed the purpose of ring fencing
was to protect the state's interest, most notably in the
failure scenario when a company with carried forwards was
unable to bring a field into production. Under the
scenario, in the absence of ring fencing, it would be
necessary to have some other means to protect the state
from carried forwards being used to offset taxes the state
would otherwise receive. He furthered that the goal was to
prevent a company from selling the carried forwards to a
major producer. He believed ring fencing seemed to be a
reasonably elegant way to accomplish the goal. The
protection was necessary in a world of large amount of
carried forward lease expenditures.
Representative Pruitt thought he had heard testimony
earlier in the meeting that industry had requested some of
the things in the CS. He did not recall the component being
requested.
Representative Ortiz asked if ring fencing was used
elsewhere in the United States or in other locations
competing [for investment] with Alaska.
Mr. Alper replied in the affirmative. He expounded that
field-based taxation was not unusual throughout the world.
He explained that before Alaska had switched to a net
profits tax with the Petroleum Production Tax [PPT] system
in 2006, ELF had been a ring-fenced tax - every field had a
separate tax. He elaborated that the Cook Inlet oil and gas
tax, which was still tied to ELF was a ring fence tax. The
specific reasons for bringing the structure back were
unique, but field-based taxation cost recovery was not
unusual.
Co-Chair Foster reminded committee members that amendments
on the bill were due the following day.
Representative Pruitt asked if the committee would hear
from Mr. Ruggiero [legislative consultant].
Co-Chair Foster replied that he would look into the
possibility.
Representative Pruitt asked if Mr. Ruggiero had been
involved in the current CS.
Co-Chair Seaton replied that Mr. Ruggiero had supplied the
model and had done follow up work on the model. Mr.
Ruggiero had suggested (to the committee) implementing a
stepped net tax - a better system that would eliminate some
of the current problems. He had also asked Mr. Ruggiero in
a prior committee meeting whether the state should use its
net tax system to offset royalties with the 10 percent
gross value reduction. Mr. Ruggiero's comment had been that
it did not make sense to use the tax system to lower its
royalties.
Representative Pruitt remarked that the CS included a
dramatic change. He thought it would be helpful to hear
from Mr. Ruggiero.
Co-Chair Foster relayed that he could check into the
possibility during the coming recess.
3:20:36 PM
RECESSED
5:08:29 PM
RECONVENED
Co-Chair Foster relayed that Mr. Ruggiero was not available
to testify. He discussed the agenda.
Mr. Alper provided a PowerPoint presentation titled "CS HB
111(FIN) Oil and Gas Production Tax and Credits: Analysis
of House Finance Committee Substitute" dated April 7, 2017
(copy on file). He turned to slide 3 and addressed the
minimum tax (floor). The purple text throughout the
presentation indicated new components of the legislation.
The House Resources Committee increased the minimum tax
rate to 5 percent at oil prices above $50 per barrel; it
had removed changes at zero to 3 percent. The CS under
consideration reverted to current law and maintained
minimum tax rates and structures from SB 21. The House
Resources Committee had hardened the tax floor, which
prevented all credits from being used below the minimum
tax. There were many circumstances in current law where a
taxpayer could go below the 4 percent with certain credits.
The House Finance Committee CS made an exception - the
small producer credit could still go below the minimum tax.
Mr. Alper addressed slide 4 related to the hardening of the
tax floor for gross value reduction (GVR) eligible new oil.
Under current law the $5 per barrel credit could reduce a
tax liability to zero. The House Resources Committee had
created a hard "adjusted" minimum tax where the 20 to 30
percent reduction was applied before calculating the
minimum tax. The effective minimum tax rate was between 2.8
and 3.2 percent for new oil. Whereas, HB 111(FIN) kept the
adjusted minimum tax structure. He explained that the
percent GVR benefit was eliminated and the effective
minimum tax was always 3.2 percent for new oil. He added
that new oil had a limited duration under current law that
had been changed the previous year in HB 247; GVR
eligibility was only good for between three and seven
years.
5:13:09 PM
Mr. Alper turned to slide 5 and explained the treatment of
North Slope NOLs. The 35 percent NOL credit - was the
biggest consternation about future state liabilities - and
was eliminated and replaced with a carry forward structure.
The House Resource Committee bill version had allowed for
50 percent carry forward of losses, with the possibility of
earning an "uplift" or interest of about 8.5 percent
annually for up to seven years. The finance version allowed
100 percent of losses to be carried forward without the
uplift. After seven years the carried forward value began
to decrease by 10 percent per year. Additionally, the
carried forward expenditures could only be used to offset
value from the lease or property where they were incurred
(ring fencing). The bill included reporting requirements to
ensure the state knew where expenses were incurred and
where they could be used.
Co-Chair Foster noted Vice-Chair Gara and Representative
Pruitt had joined the meeting. He recognized Representative
Andy Josephson in the audience.
Representative Wilson wanted to ensure she understood the
ring fence concept. She provided a scenario where she had
an oil field with two developments. She stated that
currently she could combine the losses and gains of the two
fields. She believed under the ring fencing concept the two
fields would become their own separate entities. She
continued that if there was a loss on one field and a gain
on the other, the loss could only be taken down to the
minimum and the full gain on the other field would be
counted. She asked for the accuracy of her statements.
Mr. Alper replied that the word "field" did not exist in
statute - statute referred to lease or property, which
usually meant a unit, which was defined in regulations. He
believed that two fields in the same unit would be
interpreted as one entity. The ring fence concept applied
to two very different production areas on different parts
of the North Slope. If one of the fields was making money
and the other was losing money, the losses on the field
losing money would have to be used against future gains
from that field. He provided a scenario where a large
producer made good money on legacy production and
reinvested a portion of profits in a new development. He
explained that the scenario was fine and was all part of
the intermixed tax structure on the North Slope. He
continued that it only became relevant if the company was
operating at a loss for the year for its North Slope
investments - at that point, the loss amount would be
locked into the field where incurred.
Representative Wilson used restaurants as an analogy. She
provided a scenario where she owned two very different
types of restaurants. Currently in her federal taxes she
would combine the two businesses together to determine her
gain or loss. She surmised that under the ring fencing
structure, if one restaurant had a loss she could only take
the tax minimum to 3.2 percent and could carry forward the
losses. She stated that the entire gain on the other
restaurant would have to be included. She continued that it
appeared the state would be charging less at the 25
percent, but in reality she could actually be paying more
under her example because the two restaurants could no
longer be combined.
Mr. Alper continued with the analogy. He detailed that if
the first restaurant was making $50,000 and the second
restaurant lost $40,000, the owner would pay taxes on the
$10,000 profit. However, if the second restaurant had a
$60,000 loss, the overall $10,000 loss (between the two
businesses) could only be carried forward and used against
the second restaurant's future profits.
5:18:05 PM
Representative Wilson thought Mr. Alper had previously
stated that two fields in different areas on the North
Slope could not be combined to have a loss or gain. She
thought that under the ring fencing structure, that would
no longer be possible.
Mr. Alper replied there were different degrees of ring
fencing. There was full ring fencing where every field had
a separate tax calculation and potentially separate
progressivity. He detailed that under ELF every field had
been separate and had a separate multiplier. That structure
was not in the CS. The taxation on all oil and gas on the
North Slope was a single tax or a "segment." He explained
that if the overall North Slope was operating at a loss,
the attachment of the expenditures associated with the loss
were tied to the field where they were incurred. In a
profit situation it was still a single combined tax.
Mr. Alper advanced to slide 6 and addressed the North Slope
tax rate, which was 35 percent of PTV less a per barrel
credit. The House Resources Committee bill version had
shifted the per barrel credit so the break points of the
different dollars (e.g. $3 to $4 or $2 to $3) were moved by
$20, meaning that the typical producer would receive $2
less in credits. The change resulted in a tax increase of
about $300 million. The House Finance Committee CS did not
include the provision and removed the entire per barrel
credit, replacing it with a lower tax rate. The current CS
reduced the base tax back to the original SB 21 rate of 25
percent at prices below about $90 to $95 per barrel. The CS
added a bracket of progressivity with a 15 percent surtax.
He acknowledged that it added up to a 40 percent tax, but
it was only 40 percent on profits that were greater than
$60 per barrel. The bracketed structure was similar to HB
110, a tax reform bill from 2011 offered by the former
Parnell Administration - the tax had stepped up, rather
than being a blanket tax increase across all price points.
The effective tax rates closely tracked current law at the
higher price rates. Additionally, the CS aligned the value
of the carry forward with the effective tax rate. He
explained that one of the structural errors in SB 21 was
that the NOL or loss rate at 35 percent was higher than the
effective tax rate companies pay when profitable at almost
any price. He detailed that the tax value of a loss became
greater than the tax value of a gain. He addressed ramping
down of NOL rates and noted that HB 247 (passed the
previous year by the House) had a 25 percent NOL rate that
was designed in part to rationalize the effective tax rate
with the statutory tax rate. The current CS resolved the
issue by removing the per barrel credit and using the 25
percent tax rate - it became the nominal and effective tax
rate. He furthered that if a company had a loss that was
carried forward, it was saving future taxes at the 25
percent rate. There was more parity for the companies
making money and the companies losing money.
5:22:19 PM
Representative Wilson asked why the bill used a production
tax value versus an actual barrel cost. She wondered who
determined what the value was.
Mr. Alper asked if Representative Wilson was referring to
the progressivity trigger point.
Representative Wilson referred to a bullet point on slide 6
that stated a bracket of progressivity was added [with a 15
percent surtax] on a portion of PTV greater than $60. She
stated it was not $60 per barrel and equated to a price of
around $94 to $95 per barrel.
Mr. Alper answered that it was closer to $104 to $105 per
barrel. The PTV was the statutory definition of net, it was
the profit. The production tax did not kick in until a
company had a profit. The 25 percent tax (or 35 percent tax
in current law) was calculated on PTV. He detailed that if
a company was making $1 per barrel, it was taxed at the 35
percent. The structure specified that if a company was
making $1 to $59 per barrel it was taxed at 25 percent. He
furthered that if a company was making $61 per barrel, $60
would be taxed at the 25 percent and the remaining $1 would
be taxed at 40 percent. Likewise, if a company was making
$100 per barrel, $60 would be taxed at 25 percent and $40
would be taxed at 40 percent. He concluded that because it
was a net tax, the trigger points for different breaks
should generally be tied to net amounts.
5:24:12 PM
Representative Wilson asked for verification that aside
from the small producer credit, there were no other credits
that would reduce the tax. She surmised that the profit
would be multiplied by the applicable tax percentage to
determine the amount owed.
Mr. Alper replied it was possible companies may have other
credits. For example, if a company was doing work in Middle
Earth and had capital, exploration, or well lease
expenditure credits, those credits could reduce a tax
payment below the statutory number, but not below the 4
percent floor.
Representative Wilson asked for verification that other
than the small producer credit, there would be no other
credits to reduce a company's tax on the North Slope.
Mr. Alper replied in the affirmative. However, if a company
had purchased credits from another company, it could use
the purchased credits to reduce its taxes below the
statutory rate, but not below the 4 percent floor.
Vice-Chair Gara spoke to the intention that at high prices
the tax rate would not exceed the 35 percent under SB 21.
He detailed that the surtax applied to a PTV greater than
$60. He explained that for a low profit field with high
costs the surtax may not kick in until $150 per barrel
because it had $90 in costs at the field. If a flat price
of oil was picked it would kick in much faster for the low
profit fields.
Mr. Alper replied in the affirmative. He detailed that it
would be the average comingled profits of the company's
overall North Slope operations. The higher the cost, the
higher the price would lead to the $60 PTV.
5:26:48 PM
Vice-Chair Gara asked for verification that if there was a
high-cost field that was not profitable until $80, the
structure requiring $60 of profits [PTV] before the surtax
kicked in, would be fairer (to the company) than attaching
the surtax at $100 per barrel.
Mr. Alper responded he was trying to steer clear of words
like fair, but Vice-Chair Gara's statements made sense.
Mr. Alper turned to slide 7 and addressed GVR. The CS
maintained the 3.2 percent modified hard floor introduced
in the House Resources Committee bill version. The CS also
maintained the $5 per barrel credit. He noted that the
other sliding scale per barrel credit had been eliminated
in the bill. He explained that the $5 per barrel credit
meant that GVR-eligible fields would pay no more than the
minimum tax up to prices of about $90 per barrel. New oil
would pay the 3.2 percent for a very wide range of prices.
The CS would eliminate the 30 percent GVR for high royalty
fields, which had been added in the late stages of SB 21.
Mr. Alper advanced to slide 8 and discussed other changes
in the CS. He explained that most of the other changes were
non-monetary and were more technical or impacted a policy
issue that did not necessarily have a cost. He stated that
the interest rate was one of the administration's
priorities. There was a problem with existing law where the
interest rate went to zero after three years on oil and gas
production tax. He explained the provision made it very
hard to get anyone to settle their taxes and pay an
assessment; it was cheaper to appeal and take the issue
through the court system if there was no interest
liability. He stated that the 7 percent interest rate in
the CS was more flexible and seemed fair; it was halfway
between the historic rate and the 3 percent implemented by
SB 21.
Mr. Alper continued to address other changes on slide 8. He
stated that the transparency sections were somewhat
different than what had been passed by the House Resources
Committee. The CS added references to the carried forward
lease expenditures - information would be provided to the
public - to the legal extent - regarding the amount of
carried forward lease expenditures a company had (its
credits earned but not cashed). The dataset became the
building block to enable DOR to administer the ring fence.
One of the potential problems with a ring fence was how
much work it could be for DOR staff. So long as the
taxpayer was providing the information regularly as part of
their tax filing, the department would have the
information. The CS maintained House Resource Committee
language specifying that the gross value at the point of
production (GVPP) could not go below zero. He spoke to a
scenario with a remote, single field with high
transportation costs. He stated that if the wellhead value
(the GVPP - the value after subtracting transportation)
went below zero, the negative value could not reduce taxes
from other fields.
5:30:51 PM
Mr. Alper continued to address other changes in the
legislation on slide 9. He relayed that there had been a
per barrel credit volatility problem associated with the
migrating credits. He detailed that if there were certain
months within a year with high prices and others with low
prices where some were above the minimum tax and others
were below it, the state could be liable for large refunds.
He expounded that credits earned in one month could have
been used in another. The issue was made moot by the
current version of the bill - it had been tied specifically
to the per barrel credit, which the CS eliminated. The CS
repealed the ability to assign a tax credit certificate to
a financial company through a third party where the credit
was paid by the state to a banker directly. He noted the
feature had been added in non-oil and gas legislation
several years earlier. Although the CS did not address any
Cook Inlet tax or credit issues (it addressed only the
North Slope), it would establish a new legislative working
group to look at possible future changes to be addressed in
a future legislative session. The Cook Inlet tax cap, the
ELF-based $0.17 on gas that was originally scheduled to
sunset in 2022 had been extended in HB 247 and was ongoing.
Co-Chair Foster recognized Representative Geran Tarr in the
audience.
5:32:30 PM
Vice-Chair Gara asked for verification that under the CS
there would continue to be no production tax on oil in Cook
Inlet.
Mr. Alper replied that HB 247 had changed the Cook Inlet
tax cap to $1 per barrel. For the most part Cook Inlet oil
production was taxed at the $1 rate.
Vice-Chair Gara stated that in two prior statutes there had
been a structure that migrated from a base-profits tax rate
that moved up. He stated that the inflection point was at
$60 in profits. He asked about the inflection point in
prior laws that contained the feature.
Mr. Alper replied that ACES had been a progressive tax
structure that had a 25 percent base rate. Under the ACES
structure the tax rate began to increase at $30 PTV - the
rate had increased by four-tenths of a percent for every $1
above $30.
Vice-Chair Gara asked for verification that PPT under the
former Murkowski Administration had a similar feature. He
asked where the point had occurred under PPT.
Mr. Alper replied that PPT, the original net profits tax
from 2006, included a 22.5 percent base rate that had
increased by two-tenths of a percent for every dollar above
$40 PTV.
5:34:28 PM
Mr. Alper advanced to slide 10 and addressed items that had
been removed from the bill including intent language
regarding appropriations (buying the backlog of credits);
executive sessions/legislative access to confidential
information under limited circumstances; the Department of
Natural Resources (DNR) preapproval process of lease
expenditures; the dry hole credit; and no changes had been
made to per-company credit cap, haircut, or barrels per day
cash thresholds. He elaborated that in many ways the ring
fencing provision compensated for the removal of the DNR
preapproval process language. He explained that if the
issue was that the state needed to ensure that a project it
was funding was in its best interest, the issue would be
resolved if no one would be getting the value until the
field came into production - if someone sold the lease they
would retrieve the value. He explained that the dry hole
credit had been a recommendation by Mr. Ruggiero as a way
of buying out a failure case carry forwards. He remarked
that he did not believe the dry hole provision in the House
Resources Committee version had been as intended. He
explained that the CS removed any changes made in prior
bill versions to the per-company credit cap ($70 million
per year). The discount companies had to take on the amount
of cash beyond $35 million had been taken out of the CS.
The House Resources Committee version had reduced the
barrels per day threshold from $50,000 to $15,000 (the size
company to become ineligible to get cash for credits), but
the current CS removed the change. He concluded that the
status quo was maintained for credits and company size. He
stated that the world of cash, caps, and thresholds would
be limited to Middle Earth under the CS. He detailed that
Cook Inlet credits were gone and North Slope credits would
be eliminated by the bill.
5:36:56 PM
Mr. Alper moved to slide 11 that contained a graph showing
effective tax rates (the amount of taxes received net of
credits as a percentage of profit) on legacy/non-GVR oil.
The blue line represented current law (SB 21). He stated
the curve to the left was unusual; it represented the
impact of the minimum tax - where the company got closer to
break even or losing money, the tax rate became higher. He
highlighted that in the low $70 range (at the bottom of the
point) the net profits tax kicked in and increased. The
jagged nature of the line represented the various stair
steps of the per barrel credit ($8 to $7 to $6 and so on
down to zero). He explained that the 35 percent statutory
tax rate was reached when the credit went to zero at about
$160 per barrel. The dotted blue line represented SB 21 NOL
rate at a range of prices. He detailed that the losses
under SB 21 were always earning at 35 percent, although the
tax rate was much lower. The red lines represented the
House Resources Committee bill. The impact on the left was
the 5 percent minimum tax and the impact on the right was
the $2 shift in the stagger to the per barrel credit; it
was a tax increase across all price ranges reverted to the
35 percent curve much more quickly. The value of losses was
at about 17.5 percent, which related to the idea of the 50
percent carry forward. He furthered that if a company took
half its losses, carried them into a future year, and used
them against the 35 percent tax rate - it was the
equivalent of a 17.5 percent NOL.
Mr. Alper continued to explain slide 11. The green line
represented the current CS; it included the 4 percent
minimum tax and should overlap the blue line on the left
side of the chart. The large horizontal segment of the line
at 25 percent reflected the 25 percent net profits tax that
kicked in at about $50 to $55 per barrel and went all the
way to where the progressive surcharge would start at about
$100 per barrel. The green curve bending upwards to the
right represented the weighted average of the 40 percent
tax for the high value and the 25 percent tax for the first
$60 of value. He elucidated that the line closely tracked
the status quo. The bill was close to revenue neutral above
oil prices of about $100 per barrel. He explained that
because there was no per barrel credit distorting the NOL
rate between the value of a loss and the value of a profit,
the NOL rate was the same as the profit rate - meaning a
company would get their losses, presuming the price of oil
was less than $100, at the 25 percent rate; if the price of
oil exceeded $100 the company would cash in its losses
(when it carried them forward) at a higher rate that
related to the tax rate they would be paying at that point.
There was some parity on both sides of the equation.
5:40:44 PM
Mr. Alper noted he had an additional slide not included in
the presentation meant to go between slides 11 and 12
related to effective tax rates for new/GVR oil. He intended
to address the slide at the end of the presentation. He
addressed a line graph on slide 12 related to total
production tax revenue. The red line represented the SB 21
status quo, the green line represented the House Resources
Committee bill version, and the purple line represented the
current CS. The slide showed a moderate increase in tax
revenue between oil prices of $55 or $60 to $90 or $100,
with the greatest impact around $80 per barrel. He pointed
to the space between the purple and red lines at those
prices and explained the difference was the same in dollar
value as the effective tax rate curve between the green and
red on slide 11. He noted that at higher oil prices actual
revenue came in slightly lower - there was a crossover at
around $100 to $110 per barrel. He stated that at $4
billion to $5 billion in revenue at very high prices, a
couple hundred million could get lost in the noise of the
underlying math - it was hard to tell what was really going
on. Effectively, in the current CS it was a minor tax
decrease at very high oil prices.
5:42:31 PM
Representative Wilson asked if SB 21 also had a $5 per
barrel credit before it had been turned into a sliding
scale.
Mr. Alper replied that there were three primary stages to
SB 21. The original version introduced by the former
Parnell Administration had been a 25 percent tax with no
per barrel credit. The bill version that had passed the
Senate was a 35 percent tax with a $5 per barrel credit.
The House Resources Committee had added the sliding scale
to replace the $5 [per barrel credit].
Mr. Alper addressed the fiscal note summary on slide 13. He
explained that the fiscal note narrative was still in
transit, but its tables were included in the presentation.
He highlighted that the tax impact was concentrated in the
$55 to $90 per barrel price range; it was the difference
between 35 percent minus the per barrel credit and $25
percent flat, which was higher. The crossover of the gross
and net tax moved substantially lower, from about $74 to
$55. He returned to slide 11 and explained the blue line
(current law) showed a crossover of the minimum and net
taxes at about $75 per barrel; whereas, the crossover in
the green line was at about $50 to $55 per barrel. He
returned to slide 13 and added there was a comparably small
revenue impact at high prices.
5:44:06 PM
Mr. Alper moved to slide 14 and addressed the fiscal note
summary related to the budget. He stated that tax credit
bills all had two halves: 1) how much money would be
brought in because of the tax change and 2) how
appropriations were changed. He detailed that the
appropriations side related to how many credits people were
earning and how much the state would be required to
appropriate to purchase the credits. He clarified that
because the bill came close to eliminating cash credits, it
would result in reduced spending. The long-term forecast
was for a cash credit demand of about $150 million per
year. He noted the estimate was on the low end and was
based on certain expectations of known company spending -
it did not include the possibility of some of the larger
multi-billion projects/discoveries moving forward. He
stated that whatever the number, it would be close to wiped
out by the bill - there would no longer be liabilities to
buy cash credits. The associated projects would not come
into production during the fiscal note period; carry
forwards would not turn into offset taxes during the
timeframe addressed in the fiscal note. He stated that
until a project was sanctioned, and its life cycle modeling
was generated, it would be difficult to see the impact of
the carry forwards.
Mr. Alper turned to a fiscal note table on slide 15,
showing the impact at forecast prices. He relayed the
information would be included in the fiscal note. He
pointed to a blue row on the table showing the revenue
impact of the 25 percent tax and elimination of the per
barrel and sliding scale credit - beginning at $20 million
in FY 18 through $100 million in FY 21 and continuing to
increase in later years to over $300 million. The revenue
was projected to increase because the higher forecasted oil
price. The maximum change showed up at about $80 per
barrel. Another blue row near the bottom of the page
represented cash credits. A substantial fraction of the
$150 million forecasted to be spent on credits was
disappearing ($130 million to $135 million). The yellow row
reflected the total of the bill's fiscal impact, which was
relatively modest in the short-term and over $400 million
in the out-years. He directed attention to the bottom row
on table "change in year-end balance due to proposal." The
item pertained to carried forward lease expenditures - it
was a new concept. He expounded that there were currently
no carried forward lease expenditures other than a small
amount of carried forward losses by major producers (the 14
shown in the status quo in FY 18). He furthered that
without credits companies would carry forward their losses
- in the future the state would see $160 million in revenue
lost (25 percent of $640 million) once the companies were
able to use the carry forward credits to offset their
production tax value.
5:48:16 PM
Mr. Alper advanced to slide 16 and addressed a fiscal note
table showing the bill's impact at a range of prices
including the forecast, $20, $40, $60, $80, $100, and $120.
He noted that slide 15 showed forecast prices - the price
was currently $47 per barrel and was projected at $50 for
the following year and was projected to increase into the
$70 to $80 range in out-years. He elaborated that an oil
price of $20 per barrel was difficult to model - especially
when sustained at that price - because company behavior
would change, and many would stop drilling wells at that
price point. At that price everyone operating in Alaska
would be losing money and large operating loss credits
would be earned. He noted it was difficult to contemplate
the $20 per barrel scenario ever happening. The $60 price
was closer to the forecast - it included a certain amount
of increased taxes due to the change in tax rate and per
barrel credit, in addition to the impact of the elimination
of the credits. He pointed out that the fiscal impact came
close to disappearing at oil prices of $120 per barrel with
the impact concentrating in the lower price ranges.
Mr. Alper moved to a slide separate from those in the
presentation titled "Fiscal Analysis: Effective Tax Rates
(New/GVR oil) (add between slides 11 and 12 of
presentation)" dated April 7, 2017 (copy on file). He
pointed out that the blue line showing the status quo and
the red line showing the House Resources Committee bill
version were the same beginning at $80 per barrel. He
explained that GVR oil under current law paid no tax
because the per barrel $5 credit could go to zero until
around $70 - at that point there was a 35 percent tax
reduced by the GVR itself, minus the $5 credit. The curve
increased and reached a maximum effective tax rate of
around 22 percent. The green line, representing the current
CS, came in higher at low prices due to the hard floor, but
lower at high prices because of the 25 percent base rate
(instead of the 35 percent base rate). He pointed to the
red line and noted the higher floor was visible to the
left. The minimum tax curve went to $90, which was the
impact of the lower 25 percent tax with the $5 credit. The
curve began increasing again at prices between $100 and
$105 per barrel because of the 25 percent net tax minus the
$5 credit. There was a bit of a bend in the curve where the
progressive tax kicked in above $105. He pointed out that
the green line tapered up and eventually caught up with the
red and blue line at about $160 per barrel. He elucidated
that although the bill raised taxes on GVR oil at low
prices, it lowered taxes on GVR oil at high prices.
Representative Pruitt asked when DOR projected oil prices
would reach $75.
Mr. Alper answered that he did not believe the forecast
price of oil was moving substantially over what had been in
the fall. He believed it would be in about three or four
years.
Representative Pruitt asked how the recent rulings by DOR
concerning tax credits would be impacted by the bill.
Mr. Alper believed Representative Pruitt was referring to
the ordering of credits advisory bulletin he had mentioned
earlier. He explained that the issue raised in the bulletin
had to do with the interaction of the per barrel credit
with other credits; because the per barrel credit would be
eliminated by the bill, the issue would be moot. The
advisory bulletin also related to the fact that certain
credits would harden the tax floor while others did not,
and how they would interact with each other. He explained
that because nearly all credits were hardened to the tax
floor in the bill, it would make moot most of the points
raised in the advisory bulletin.
5:54:27 PM
Representative Pruitt asked about credits that could
potentially be used in future years. He asked if the bill
would impact a company's ability to use credits in future
years since the advisory bulletin dealt with more recent
timeframes under the current tax structure - prior to HB
111. One of the issues the state was wrestling with was the
$500 million and growing pool of unpurchased credit
certificates largely as subject to the veto. He continued
that due to very low prices and major producers were at the
minimum tax, it was difficult for them to be able to buy
any. The department was hoping that prices would recover to
the point where some head room was afforded to give the
ability to purchase certain credits, which would recreate
the secondary market. He believed that ideally "we'd all
like that issue to go away as part of a broader solution."
Representative Pruitt asked about the administration of the
ring fencing. He discussed that currently taxpayers had a
consolidated return. He asked how the concept would impact
the administration for the department and companies.
Mr. Alper shared that he had a recent conversation with the
supervisor of the production audit group. He explained that
companies already reported their expenses to the lease or
property - the department already received the detailed
information. The bill added a new section in AS 43.55.030
(taxpayer reporting requirements) that tied to the
transparency section specifying the department would create
a report with the information and release it to the public.
He spoke to the importance of building more functionality
into the department's tax handling software to track the
information. For example, a company may have $300 million
worth of carry forwards, but half were from one field and
half were from another field - once the company began
earning a profit on the fields the department could track
them. He noted that the department's software was already
robust, it would merely need a new feature added. He added
that the department had included a $1.2 million fiscal note
to account for substantial programming time for the
contractor to build in the various tax changes. The number
had not been increased with the addition of the ring fence
feature.
Representative Pruitt addressed the auditing aspect. He
stated there were currently various scenarios auditors
faced due to the various tax regimes the state had
implemented in throughout the past six years. He reasoned
that adding another tax structure would bring another
challenge for companies to meet auditing requirements. He
wondered if there would be a need for additional auditors.
Mr. Alper responded that the department did not anticipate
new staff. There was an inherent time lag in the audit
process - longer than he was comfortable with. He relayed
that DOR had recently completed the series of 2010 tax
audits (which fell within the six-year statute of
limitations) - 2010 had been under the ACES tax structure.
He had one group of staff who were leading up the effort
and were fully enmeshed in all the nuances of ACES. The
department also had other staff concentrating on tax credit
reviews of current lease expenditures or exploration
credits for 2016, which fell under the SB 21 tax system. He
added that the group was also beginning to get HB 247-based
submissions for review. He expounded that his staff was
very capable and would adapt to the new regime.
6:00:02 PM
Representative Pruitt observed that the structure facing
DOR auditors was incredibly complex. He thought at one
point there had been a discussion about simplifying the
process. He reasoned that the bill would add an additional
and different layer of complexity for auditors to
understand. He asked if the structure would be more
difficult for the state to administer.
Mr. Alper acknowledged that the ring fence was complicated
and would be a challenge to administer. He believed it was
an important feature if the legislature's goal was to
create carry forwards. The feature would ensure the state's
interests were protected from carry forwards leaking from
project to project. He stated there were other ways to do
it. For example, he had spoken to a committee member about
possible claw backs where the state could recapture value
if a field changed hands. The preapproval mechanism in the
House Resources Committee version was another option. He
underscored that the department could administer the ring
fence provision. He assumed there would be some wrinkles in
figuring out how to do it, but that was the department's
job.
6:01:38 PM
Representative Pruitt remarked that current oil prices were
around $50 per barrel and that Mr. Alper had estimated the
price would potentially rise to $75 per barrel in the next
three to four years. He referred to the supplemental graph
related to effective tax rates for GVR oil (royalties were
not included). He noted the change was substantial. He
referred to a tax increase shown on the graph and asked if
the department anticipated a change in attitude regarding
investment decisions.
Mr. Alper replied that he did not know how companies would
react to what amounted to a tax increase at prices of $50
or $60 per barrel. He knew that many producers had been
supportive of SB 21 as it had been originally introduced -
they had preferred it to ACES. The current bill, across
that range of prices, imposed the original SB 21 structure.
He stated that the bill was worse on companies than current
law because of the per barrel credit, which resulted in
lower taxes at $50 to $60 per barrel. He believed companies
would not prefer the bill because it was only rational to
want to pay lower taxes. He was not in a position to say
whether the bill would impact companies' investment
decisions.
6:04:07 PM
Representative Wilson asked Mr. Alper to list the
difference between the current SB 21 tax structure and the
bill's tax structure.
Mr. Alper replied that the overarching change was that the
bill would eliminate the concept of cashable tax credits
for losses. He believed the reason the legislation had been
introduced to deal with the long-term liability of cash
credits. Beyond that issue, the bill changed the tax rate
and per barrel credit in a way that would raise revenue
during a certain range of prices. The third most
substantial change was the increased transparency that
would result from the bill - much more information would be
made public so that policy makers and the public would know
what was going on at a particular oil patch. He stated many
of the provisions would be pushing up against the limits of
taxpayer confidentiality.
6:06:01 PM
Representative Wilson referred to the state's current
cashable tax credit liability. She asked for clarification
on how many credits the state would be liable for that had
not been included in the appropriation vetoed by the
governor the previous year.
Mr. Alper answered that the pool of January 1, 2017 credits
was about $500 million and was an important number to have
because the regulations had changed with the passage of HB
247. The next $500 million appropriated would pay off those
credits in pro rata share. He continued that if the current
legislature appropriated $74 million (the number in the
House's version of the operating budget), roughly 15
percent of the January 1 liability would be paid off. He
furthered that if $400 million was appropriated, companies
would receive $0.80 on the dollar. The issuance of an
additional $500 million in credits was anticipated during
2017. By the time the bill's effective date was reached the
liability would be about $1 billion.
Representative Wilson referred to a tax rate change on
higher revenue. She asked if the change occurred at oil
prices between $60 to $85 per barrel. She asked about the
higher revenue range.
Mr. Alper addressed the change in the current bill from the
status quo. He stated that under the CS, increased revenue
would occur from the crossover point from the minimum tax
at around $50 to $55 per barrel up to around $90 to $100
per barrel.
Co-Chair Seaton remarked there had been a statement made
earlier that the CS would eliminate the competitive review
board. He clarified that the bill did not remove the
competitive review board.
Mr. Alper answered that there was an amendment to the
competitiveness review board sections to conform with the
elimination of the 30 percent GVR. He confirmed that the
competitiveness review board would remain in place in law.
6:08:52 PM
Co-Chair Seaton asked Mr. Alper to address cashable credits
and efforts to eliminate them. He asked for detail about
the components needed due to the elimination of cashable
credits, such as carried forward NOLs and the ring fence
provision.
Mr. Alper responded that the bill would eliminate cashable
credits. He explained that companies would hold onto the
value for use against future taxes. He stated that without
any further change, the action would preserve the existing
distortion between the nominal 35 percent tax rate and the
tax rate companies actually paid. He continued that the
bill's change to the 25 percent tax rate had been designed
to clean up the discrepancy. Although it was not a
mandatory change to get out of the cash credits business,
it resolved the remaining factor. He detailed that a
possible leakage of credits was created. There were
multiple ways to deal with the problem. He provided a
scenario where a company spent $1 billion and subsequently
decided the project was a failure. He questioned how the
company would reclaim value for the loss. The dry hole
credit, which had been in a previous version of HB 111, was
one way to address the problem. He explained that if the
state was not cashing out credits, the company could
potentially sell its investment for $0.05 on the dollar,
but the company purchasing the investment could potentially
use the carried forward credits to offset profits on
another one of its fields. He explained that the ability
for the situation to occur was way outside the intent of
the law, but it would be viable if the ring fence was not
included in the CS.
Mr. Alper continued that there were other options to
address the problem. He did not personally have a strong
preference about the option selected, but he emphasized
that the issue was a problem and something needed to be
done to prevent the leakage of value from field to field to
protect the state's long-term interest. The state did not
want the taxes from major producers to be lost because of
another company's failed project in another part of the
North Slope. He stated that the pieces were interlinked -
when one problem was solved, the next problem became more
visible. How far the committee wanted to go was the
decision of the committee. He agreed with Representative
Wilson's earlier observation that the bill made a
substantial change to the underlying tax system. He
questioned whether it was worth solving numerous problems
at the same time while making changes to the tax statutes
or if the legislature only wanted to solve the one largest
problem, while leaving other problems for a later year. He
stated that the question ultimately became the choice of
the legislature.
Co-Chair Seaton referred to the ring fencing and other
aspects of the bill. He had foreseen that there would be
less push to develop a field if NOLs could be transferred
when a field was under development was purchased and used
by another company for another location. He provided a
scenario where a project's internal rate of return was not
sufficient for one company to pursue, but it could be
profitable.
[Note: power outage caused computer shutdown.]
6:13:38 PM
AT EASE
6:18:42 PM
RECONVENED
Co-Chair Seaton spoke to the state's goal of trying to push
fields into production by offering credits, cashable
credits, and other incentives. He reiterated his concern
that switching from credits to carry forward losses could
mean a company could sell [a field] and make its NOLs
available for the purchasing company to use against another
property - it may be more advantageous to the purchasing
company than moving into production on the field. He asked
if there were alternatives to ring fencing that would
encourage projects to move forward into production.
Mr. Alper replied that if a company was stuck with not
getting value back until a project moved into production,
perhaps on the margins a company may be incentivized to
push forward even if the rates of return were not stellar.
He considered that if the carry forwards were sellable to a
company working someplace else it may create an incentive
to never bring a field into production. The counter
argument would be that the state was creating something of
less value because they were shackling a company to a
lease. He surmised that it may be true, but it may be a
good idea. The idea was that if the state was going to
provide a benefit, it should not be provided until the
state knew it was going towards producing oil in the
location the benefit was being received. He did not know
all the ways to accomplish the goal; there were many
sophisticated and modern ways to incentivize new oil, but
Alaska was not a production sharing, contract jurisdiction
- it was not doing a full field ring fence. The ring fence
was a relatively mild version of a separation from field to
field, but it would force a company to get a field into
production if they wanted to get their value back.
6:21:42 PM
Representative Wilson referred to the DOR fall revenue
forecast and the increase in oil production that had
occurred since the passage of SB 21. She believed everyone
understood there were issues with the cashable credits
because the state had not paid them on time like it was
supposed to. She remarked that the state now owed a debt.
She believed it appeared the "sweet spot" had been located
given the increased oil production. She thought it made
sense to take care of the major problem - the cashable
credits - before making any more changes that could cause
production to decrease again by around 3 percent annually.
She believed it was the first time in a long time where
production had increased.
Mr. Alper was not advocating for any bill or what needed to
be included. He observed that getting out of the cashable
credit business appeared to be a near consensus priority.
At that point it came down to how to implement the change -
there were certain questions that arose, such as what
happened to carry forwards, who could use them, whether
they were transferable, and what they should be valued at.
There were pro and con policy reasons for many of the
questions. He referred to the progressivity in the tax code
that created lower effective tax rates than statutory tax
rates so carry forwards were worth 35 percent when the tax
was less. He stated that the questions did not need to get
resolved at present, but they could be. He did not know
whether the items would damage the state's standing as a
competitive entity versus some other change. He understood
the concern and agreed it was an important debate to have.
He continued that once the one problem was solved, the next
problem was evident. The question was whether to address
the next problem at present or save it until later. He
reasoned that if the problem was saved until later the
state would get accused of changing oil taxes eight times
instead of seven times.
Representative Wilson countered that the current system was
working. She remarked that someone may disagree with her
statement. She noted that DOR compiled the revenue book and
assumed it was honest in its depiction of the increase in
oil production. She elaborated it was about 100,000 barrels
off compared to actual production. She stated it was a fact
that there was more oil currently coming down the pipeline.
She underscored there had been substantial concern about a
decrease in oil production when SB 21 was implemented. She
believed everyone could agree on the goal of increased oil
production. She referred to the current issue that needed
solving. She acknowledged there may or may not be other
problems. However, she stressed that oil was the number one
income provider to the state. She supported taking care of
the one issue. She agreed that the legislature may have to
consider the tax system again anyway because the bill may
result in a 3 percent decrease in production. She asked if
the scenario was a possibility.
Mr. Alper replied that he did not want to downplay the
importance of the increase in production. He stated it was
important to recognize that when the debate had started
over PPT (11 years earlier), production had been about
800,000 barrels per day and there had been a steady decline
since that time. He furthered that a couple of new fields
had come online. Additionally, there were some smaller new
fields actively under development that could hopefully
offset the natural decline of the other fields. There were
also the bigger discoveries such as Conoco's Royale,
Armstrong's Pikka, and Caelus's Smith Bay. The bigger
discoveries would be the ones to reverse the direction of
the North Slope. He explained that if the state were to
continue to pay 75 percent of companies' costs it could
probably guarantee a lot of that production, but the state
would not be receiving any value for it. He recognized that
production was essential, but the state also needed to
receive revenue. He remarked that it was not merely a jobs
program - the state required revenue to operate. The
balance was to produce revenue for the state and not drive
producers away. The goal was to ensure that what the state
spent on the industry was in line with the benefit it hoped
to receive at the back end. He did not know whether there
was a specific sweet spot and whether it existed at
present. He reasoned that if the cost of the flattening was
billions of dollars of future liability, a correction
probably needed to occur. He did not have sufficient detail
to conclude for certain. He noted that everyone had a
different opinion.
Representative Wilson agreed that everyone had an opinion
on what should or should not be done; however, she
emphasized that production was up at present and changes
made by the legislature in the next several weeks could
change that. She believed it was important to include in
the discussion. She wanted the public to understand there
was a way to take care of the cashable credits, while
keeping SB 21 intact, and to keep development moving in an
upward direction. She opined that if changes (other than
the elimination of the cashable credits) were made in the
legislation, some projects may not come online. She did not
want to lose sight of how much the state had gained. She
did not want to get greedy - the state received revenue
from production tax and royalties that went into the
Permanent Fund.
Mr. Alper responded that the status quo was unsustainable,
which he believed everyone accepted. It was important to
recognize that companies working in Alaska also knew that
the status quo was unsustainable. He furthered that the
companies the state hoped would move forward and produce
large fields knew that the 35 percent and higher cash
credits were not viable [for the state]. He stressed that
the companies needed to know what the system would be to
make investments in good conscience. He stated that the
companies could not invest under the belief that the status
quo would be in place for the next 10 years, because it
would not be; the state could not afford it. He recommended
settling on a decision for companies to make their
decisions.
Representative Wilson thought companies would appreciate it
because the state had yet to be able to settle on a
decision.
Vice-Chair Gara asked for DOR to come prepared the
following day to address the issue of fields that had come
online since the passage of SB 21. He remarked that
legislators had differing opinions about when the
investment had begun. He was interested in the Point
Thomson and CD5 fields specifically. He believed the
commitments on the two fields had occurred prior to SB 21.
Mr. Alper answered that CD5 had been in the works for a
long time; there had been some delays related to federal
permitting. The Point Thomson settlement had been in 2012.
He elaborated that producers that know the issue well had
testified to the committee that they had made commitments
to the projects since the passage of SB 21. He remarked
that it was hard to say - the internal process of all
companies was different and took multiple years. He
believed companies had been hoping for a tax reduction
package and once it happened they wanted to show their
satisfaction. He stated there was no way to determine
absolutely "what is because of something else." He hoped to
be only a spectator during the meeting the following day.
Representative Pruitt asked if Mr. Ruggiero would be
available to testify the following day.
Co-Chair Foster replied that staff had contacted Mr.
Ruggiero who had replied that he was not prepared to
testify.
[Note: power outage caused computer shutdown. The meeting
recessed until the following day at 1:00 p.m.]
HB 111 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster relayed the meeting would recess until the
following day when the committee would hear amendments to
HB 111 [see April 8, 2017 1:00 p.m. minutes for detail].
RECESSED
6:31:57 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSHB 111 Comparison ver. M.pdf |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |
| HB 111 - CS WorkDraft Bill ver M.pdf |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |
| HB111CS(FIN) - DOR Presentation - 4.7.17.pdf |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |
| DOR Present4a HB111 Reaction to HFIN CS 4-7-17.pdf |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |
| HB 111 4.7.17 Gara Oil Tax Documents for Distribution.PDF |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |
| HB111 - Supporting (040617).pdf |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |
| HB111 - Opposing (040617).pdf |
HFIN 4/7/2017 1:30:00 PM |
HB 111 |