Legislature(2017 - 2018)HOUSE FINANCE 519
06/07/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Oil & Gas Tax Fiscal Overview Related to Hb 111: Fiscal Impact Comparison by the Department of Revenue | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
FIRST SPECIAL SESSION
June 7, 2017
1:34 p.m.
1:34:32 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:34 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative David Guttenberg
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Scott Kawasaki
Representative Jason Grenn
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue; Ken
Alper, Director, Tax Division, Department of Revenue;
Representative Andy Josephson; Representative Justin
Parish; Representative Charisse Millett; Representative
Chuck Kopp; Representative Dan Saddler; Representative Dave
Talerico; Representative Ivy Spohnholz; Representative Sam
Kito; Representative Geran Tarr.
SUMMARY
PRESENTATION: OIL & GAS TAX FISCAL OVERVIEW RELATED TO HB
111 (OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS): FISCAL
IMPACT COMPARISON BY THE DEPARTMENT OF REVENUE
[NOTE: The following presentation contains content relating
to HB 111. The bill was no longer in the House Finance
Committee's possession.]
^PRESENTATION: OIL & GAS TAX FISCAL OVERVIEW RELATED TO HB
111: FISCAL IMPACT COMPARISON BY THE DEPARTMENT OF REVENUE
1:35:06 PM
HOUSE BILL NO. 111
OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
1:35:14 PM
Co-Chair Foster reviewed the meeting agenda.
Representative Wilson noted it was unusual to hear a
presentation related to a bill that had been reported out
of the committee and was currently in conference committee.
Co-Chair Foster replied the intent was to let the public
know about the differences in the bill.
Vice-Chair Gara thought it was important to correct any
misapprehension legislators may have about the content of
both bill versions.
Representative Wilson had no problem with receiving extra
information. She wanted the public to understand any
changes to the bill would occur in conference committee.
She referred to back up in the committee's folder and
remarked that the data was from the spring forecast. She
requested updated information. She referenced Caelus Energy
and asked whether the commissioner could address their
concerns.
Co-Chair Foster underscored that the meeting was purely
informational.
Co-Chair Seaton confirmed that no changes were being
proposed in the committee, as those were the purpose of the
conference committee. The meeting will help the legislature
understand the parameters of the different bill versions.
The committee would not be discussing any negotiations or
changes that would be addressed by the conference
committee.
Co-Chair Foster added that the presentation consisted of 17
slides.
1:39:50 PM
Representative Pruitt noted that all of the committee
members had dealt with the bill previously. He was
concerned that conference committee had not yet met and the
finance committee was having a discussion about the content
of the conference committee. He added that no committee
members were part of the conference committee.
Co-Chair Foster acknowledged Representatives Sam Kito, Andy
Josephson, Justin Parish, Dave Talerico, Chuck Kopp,
Charisse Millett, Ivy Spohnholz, and Dan Saddler in the
audience.
Representative Guttenberg had been told the Senate had made
considerable changes to HB 111, but he had not read that
bill version. He hoped to gain a better understanding of
the changes and believed the current meeting would be
educational.
1:42:32 PM
Representative Wilson wanted to ensure the public realized
that the legislators had voted to concur or not concur with
the Senate's version. She believed the majority of the
legislators had made sure they knew the facts about the
bill before voting on the House floor.
Vice-Chair Gara agreed that the hope was all legislators
had read the bill. However, he had learned that all
legislators did not know about the reduction in oil tax or
the added $1.4 billion in credits in the Senate version.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
clarified the presentation predated a recent compromise
proposed by the governor. The department had been asked to
do a comparison between the House and Senate versions of
the legislation. The administration intended to avoid
policy discussions, which were under the purview of the
conference committee. The presentation would simply present
the technical details of both bill versions.
1:45:32 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "New Sustainable
Alaska Plan, Pulling Together to Build Our Future: HB 111
Oil and Gas Production Tax/Tax Credits Comparison of House
and Senate Versions" dated June 2, 2017 (copy on file). He
outlined that there were two sections of the presentation;
one detailing the fiscal impacts and the second the
differences between the two versions. He stated there were
three main things to focus on when examining the changes in
the legislation versions. The first change regarded the
actual taxes paid to the state, the second the state's
obligations to credit payments, and the third change was
the concept of carried forward value. He provided a summary
of fiscal impacts on slide 3 "Summary of Fiscal Impacts:
Comparative Fiscal Note Analysis - Tax."
1:47:23 PM
Mr. Alper indicated the chart showed a side-by-side
comparison of the House and Senate bill versions of HB 111.
The bills were most different in how they treated revenue,
primarily because the Senate version did not substantially
modify the underlying SB 21 [oil and gas production tax,
th
28 Legislature] tax system, whereas the House version
changed the base tax rate from 35 percent to 25 percent and
eliminated the sliding scale credit. The graph showed
forecasts for FY 19, FY 22, and FY 25, tied to assumptions
from the spring revenue forecast on price and production.
There were some small negative numbers shown related to the
Senate bill, but he cautioned not to get too fixated on
those numbers. He detailed that those represented the
elimination of cash credits. He provided an example of a
small oil project (Mustang) coming into production in 2022,
under the Senate bill they would have a suite of carry
forwards that would be used to offset taxes, and that would
appear on the fiscal note as a small reduction in tax
revenue for the state, however, it was more than counter
matched on the state's outlay that was not paid out. The
House numbers showed positive revenue which had to do with
getting rid of the per barrel credit which brought
everything to the 25 percent base tax rate. The effect tax
rate below $100 per barrel was below 25 percent once the
sliding scale per barrel credit was accounted for.
1:49:28 PM
Mr. Alper turned to slide 4: "Summary of Fiscal Impacts:
Effective Tax Rates - 'Legacy' Oil." The red line
represented the status quo which was ACES, and also the
Senate bill which did not change ACES. The line went up to
35 percent at the end, showing the effective tax rate at
very high prices when the sliding scale went to zero. As
the per barrel credit went from $1 to $8 to eight, the
stair step of the effective tax rate steps down to around
ten percent at the $70 to $80 per barrel price. At lower
prices the minimum tax kicked in and the four percent floor
would become a higher and higher percentage of profits, and
the effective tax rate would get higher. The dotted red
line represented the net operating loss (NOL) or carry
forward loss rate of status quo. Regardless of the tax rate
companies were paying, they received 35 percent benefit for
losses with which to offset taxes. The per barrel credit
was eliminated in the House bill. There was no dotted blue
line, only the solid blue line. The effective tax rate
remained 25 percent until the progressive tax feature of
the House version for profits of greater than $60 per
barrel, or $100 per barrel oil prices, were reached. The
triangle-shaped area between the red and blue lines between
$50 and $100 per barrel reflected the tax increase in the
House version of the bill.
Vice-Chair Gara referred to the red line and asked whether
it represented the percentage of profits paid by a company
in production tax.
Mr. Alper replied in the affirmative.
Vice-Chair Gara stated that current prices were about $50
per barrel, but below $70 per barrel the state was only
getting 4 percent tax because the profits tax rate was so
low.
Mr. Alper answered in the affirmative. He detailed the
actual tax calculation was two calculations in parallel.
One was the 35 percent tax minus the per barrel credit ($8
at low prices), if that number is less than gross value,
then four percent of gross value was what was paid.
Vice-Chair Gara referred to mention of a 35 percent tax
that would not be paid until oil reached $160 per barrel,
which had never been reached to date.
Mr. Alper answered in the affirmative, that the tax
calculation was 35 percent, but was reduced by the per
barrel credit that lead to an actual tax rate that was
always less than 35 percent except at very high prices.
Vice-Chair Gara spoke to the revenue in taxes. He noted
that the Senate version would reduce production tax revenue
compared to current law by $15 million by 2020. He asked
for verification and a reason why this would be the case.
Mr. Alper replied that the small negative numbers in the
Senate bill had to do with reclassifying of spending which
would have been paid as credits. A small portion of that
would be used by companies to offset their own taxes. The
savings to the state of not paying out those credits in the
Senate version was greater than the tax decrease, but it
did show up as a small tax decrease.
Vice-Chair Gara stated this regarded legacy oil and the
higher tax rates. He noted there was a lower tax rate for
other fields. Under the Senate proposal, for the higher tax
rate there is nothing beyond the 4 percent minimum on an
average North Slope field until around $72 per barrel.
Mr. Alper replied that the Senate version did not change
the status quo. The current crossover between the minimum
tax and the net profits tax was around $73 per barrel.
1:55:13 PM
AT EASE
1:56:07 PM
RECONVENED
Representative Wilson thanked Representative Saddler for
providing her with a question. She asked what the graph on
slide 4 would look like if the companies were represented.
Currently the companies kept less than what the state took.
She wondered how much more of a profit the state would be
taking.
Mr. Alper answered that it was important to remember that
production tax was only one of four state tax mechanisms
that the state received from oil companies. Currently
companies would have to pay the state royalty, the
production tax, corporate income tax, property tax, and the
federal corporate income tax. The company percentage tended
to increase as the price went up. The government take was
greater than 50 percent and certainly what the companies
were keeping was less than half the profits.
Representative Wilson referred to slide 3 and asked which
prices were referred to in 2019, 2022 or 2025.
Mr. Alper replied that he did not have precise numbers on
hand; by order of magnitude the forecast for FY 19 was
around $55, FY 22 looked at prices of $60 and FY 25 at $70.
He referred to the graph on slide 4 shows the maximum gap
between the two versions. The tax increase embedded in the
House version hit its maximum around the $70 oil price.
Representative Wilson asked if they just discussed price,
not volume forecasts.
Mr. Alper replied that the forecast volume decline was
approximately four percent. Slow steady decline in
production was predicted in the forecast. By 2025 it was in
the low 400,000 barrel volume area. None of the proposed
large projects were built into the forecast at present.
Representative Wilson noted the discussion had occurred in
the past. She remarked that in the past two years they had
not seen the 4 percent decrease, but an increase. She asked
how the numbers on slide 3 would change if actuals were
used for 2017.
Commissioner Hoffbeck answered that the average price for
FY 17 was currently running about $0.50 less per barrel
than the forecast. It was expected the fiscal year would
end up there. Production was currently 5,000 to 6,000
barrels per day above the forecast. However, currently they
were seeing standard seasonal declining production. It was
expected to be slightly higher than forecast, by around
3,000 to 5,000 barrel a day.
Representative Wilson asked whether production was around
544,000 barrels per day currently. Commissioner Hoffbeck
answered it would be close to that figure in the current
month.
Representative Wilson stated it was not 4 percent less than
what they had. She understood using forecasts but felt
using specific numbers was helpful. She liked presentations
to reflect both.
2:02:02 PM
Representative Ortiz referred to slide 4 and to the price
drop to $70 barrels followed by a slight increase with the
hardening of the floor.
Mr. Alper replied it was the existence of a floor rather
than its hardening or not.
Representative Ortiz asked if the tax floor was equally
hardened by both versions of the bill.
Mr. Alper replied in the affirmative. The NOL credit would
be eliminated; it would become simply carried forward
losses. NOL credits can be used in certain circumstances to
reduce tax payments below the minimum tax. They were earned
one year and used in the following year. Due to the
elimination, companies would be compelled to pay the
minimum tax under either version of the bill that they
would not under the status quo. Under either version of the
bill, the floor would be hardened.
Representative Pruitt referred to slides 4 and 5 that
addressed tax rates. He discussed a conversation about
credits. He asked for verification that the only reason the
slides were included were due to the House version of the
bill. He clarified that the Senate version of the bill
pertained to oil and gas credits, whereas the House version
also related to taxes.
2:04:58 PM
Mr. Alper believed the statement was reasonable. He had
referred to three types of impacts embedded in the bill:
tax, credit, and carry-forward impacts. The tax impacts
were concentrated in the House version of the bill. He
would not go as far as to say the Senate version included
no tax impacts. It included minor changes related to
interest rates and hardening the floor. For the most part
the presentation was to present contrasts to the status
quo, which was the Senate version of the bill.
Vice-Chair Gara asked Commissioner Hoffbeck whether his
projection was that prices would be slightly lower than
forecast. He asked whether he was saying there was a 4
percent decline.
Commissioner Hoffbeck clarified that he had not brought up
the 4 percent. He elaborated that a 3 percent to 4 percent
decline was embedded in the forecast, but May [2017], the
most recent completed month, was currently three percent
higher than the previous year. A downturn was about to
begin. Additionally, a maintenance turnaround had not
occurred the preceding year. There would most likely be one
in the current year, which would mean substantially less
production in the early months of the following fiscal
year. Large fields, once they peaked, usually presented a
fairly predictable decline. There was no assumption in the
forecast that the fields had bottomed out. The fields would
continue to decline.
Vice-Chair Gara observed that the blue line on slide 4
represented the House version of the bill. He asked for
confirmation that the 25 percent tax rate was only on
profits.
Mr. Alper replied that the 25 percent was on profits. He
pointed to a hook on the graph at the end at the $50 point.
It indicated where the minimum tax would kick in. In the
House bill the cross-over point between minimum tax and net
tax moved from $73 or $74 to about $50 per barrel. The
state's 4 percent piece would still be there, but only at
very low prices.
2:09:31 PM
Vice-Chair Gara stated that a number of legislators had
agreed that in the former tax system, Alaska's Clear and
Equitable Share (ACES), the 25 percent tax rate jumped
quickly to a higher tax rate. He asked whether the House
version stayed at 25 percent for the first $50 or $60 of
profit. He asked how that compared to the current system.
Mr. Alper responded that the House bill had a 15 percent
bracket of surtax above $60 per barrel profit production
tax value. The House and Senate bills were essentially
revenue neutral to each other at high prices. The tax
increase in the House version was concentrated on the lower
price points, between $50 and $100 per barrel. The greatest
impact was at $70 or $80 per barrel. ACES would appear
below 25 percent. At lower prices, the effective tax rate
of ACES included 20 percent capital credit, so it would be
represented by a diagonal curve from below 25 percent,
crossing over the blue line to $80 dollar range, then would
go up above the blue line to show a higher effective tax
rate at higher prices.
Co-Chair Seaton asked about the relative impact on revenue,
[between the two bills] at $73 per barrel, of the carry
forward rate identical to the effective tax rate [in the
House version], compared to the Senate version in which the
carry forward rate is so much higher than the effective tax
rate.
Mr. Alper replied that he would address the carry forwards
in later slides. The House and Senate versions had
different tax rates. When it came time to count them, the
House version would have a lower value, which impacted the
conversion of carry forwards to future tax value. He would
address the issue in later slides.
Representative Wilson asked why the analysis began at $50
per barrel prices rather than at zero, given that the bill
came about due to low prices.
Mr. Alper replied that below break-even, or about $40 per
barrel, the effective tax rate became greater than 100
percent and the information became hard to graph once the
vertical line went off the chart.
Representative Wilson asked whether there was a point at
which companies did not pay anything.
Mr. Alper replied that a 4 percent minimum tax was the
governing calculation at those lower prices. The larger
companies could not get those if they produced more than
50,000 barrels per day. They would carry their NOLs
forward. Companies could reduce their payments to zero with
the use of credits in certain circumstances.
Representative Wilson stated that the biggest concern
seemed to be the cashable credits.
2:14:40 PM
Mr. Alper agreed that cashable credits were still the
primary focus of the legislation. The fact that the state
owed a lot in obligations and was trying to avoid paying
for those credits into the future was one of the core
reasons the bill was introduced.
Mr. Hoffbeck reiterated that they did not want to get into
policy discussions. The presentation was aimed at laying
out the details and differences of the two versions only.
Representative Wilson disagreed. She elaborated that it
would be hard to compare without discussing policy in the
two versions. She stated it would be hard to discuss the
differences without addressing the current legislation as
well as past legislation.
Representative Pruitt stated that it was a policy call, and
did not see how discussion of policy could be avoided. He
believed there were some things the governor wanted to see.
He remarked that the governor had spoken out about policy
in the days leading up to the present meeting. He asked if
that influenced the conversation. He thought if the two
bodies came to agreement but the governor was not in
agreement, the whole process would have to start over. He
asked whether the thoughts of the governor should be heard
in the meeting.
Commissioner Hoffbeck respectfully disagreed with the
statements. He clarified the policy issues would be
addressed in conference committee and the straight layout
of the nuts and bolts comparison of the legislation was the
focus of the presentation.
Representative Pruitt agreed that the conference committee
should be having the conversation.
Vice-Chair Gara wanted to clarify that his intention for
the bill had been to get a fairer tax for the people of
Alaska.
2:19:25 PM
Mr. Alper summarized that both versions of the bill were
more or less revenue neutral at higher prices and moved to
slide 5: "Summary of Fiscal Impacts: Effective Tax Rates -
'New' Oil." New oil was eligible for the gross value
reduction (GVR). The red line showed status quo, not
impacted by the Senate version. It showed the 35 percent
tax as impacted by the GVR reduction and then further
reduced by the flat tax credit of $5. As there was no hard
floor on GVR oil, the tax rate was effectively zero below
around $70 per barrel. The tax rate never gets close to 35
percent as there was always the $5 credit which did not
decline to zero. The red dotted line was the carry forward
rate for GVR oil. In status quo there was still the 35
percent benefit for losses or incremental spending. The
House bill was the blue line. The House bill hardened the
floor for GVR oil, which was not something in current law.
The House bill hardened the floor to 3.2 percent, which is
why it looked like a tax increase at the lower price points
below $70 per barrel. There were two different inflection
points at $90 and $110, which have to do with keeping the
$5 barrel credit. The House bill eliminated sliding scale
credit for old oil, did not remove $5 credit on new oil,
but did reduce the base tax from 35 percent to 25 percent.
The combination resulted in a tax decrease on GVR oil,
which is why the blue line is below the red line at higher
prices and was above red line at lower price points. The
effective tax rates are in fact decreased on GVR oil in the
House bill at a variety of price points.
2:22:04 PM
Representative Wilson used Caelus as an example of new oil.
She asked what the differences under the two versions could
mean for producers of new oil.
Mr. Alper explained the basic principle of the GVR. He gave
the example of a small field with $100 million in gross
value. If it were old oil, its profits would be taxed at 35
percent and it would receive the per barrel credit. Gross
value reduction means that the first 20 percent is taken
off the top, so rather than $100 million, it would be taxed
on $80 million plus any subtractions from that. New oil was
not held to the minimum tax, and could go to zero. The
current legislation stated that there was time limit to
receiving those benefits, sometime between three and seven
years. The Senate version made no changes. In the House
version, the floor was hardened. Beyond where minimum tax
is a factor, there was the change in the tax rate from 35
percent to 25 percent, resulting in a tax cut which
appeared on the graph as above and below the line.
2:25:18 PM
Representative Wilson spoke to an announcement from Caelus
about production. She asked if the numbers changed for 2019
and 2022.
Mr. Alper answered the Caelus had announced that it would
not be drilling the follow up project in Smith Bay. The
company had drilled two wells and thought it would produce
several billion dollars' worth of oil. The well that was
intended for the following winter would not be drilled. No
production from that field had been built into the ten-year
forecast. Potential credits or tax offsets the company
would earn as it would be deferring the project from 2018
to 2019, but no modifications in production were within the
forecast.
Representative Wilson thought there were only a few
companies currently moving forward in finding new oil. She
asked whether what was happening in statute would impact
current production.
Commissioner Hoffbeck stated that the department was not
prepared to discuss Caelus's decision. Nothing had changed
since the bill was before the committee early in the year.
Representative Wilson felt that things had changed. While
she understood the commissioner was trying to keep policy
out of the discussion, she felt that changes were being
made to the voter initiative on SB 21.
Mr. Alper responded that both versions would be making
changes to SB 21 that the voters voted for. It was
reasonable to state that the House version made more
significant changes, however both made changes to the
original initiative SB 21. He wanted to make one comment
about Caelus' announcement. He suggested that the bigger
concern was the uncertainty rather than specific changes to
policy.
Representative Wilson stated her concern that whatever was
done in committee during the current meeting might impact
future production.
2:29:51 PM
Representative Ortiz referred to slide 5 of the
presentation. He wondered whether, if the price of oil
remained below $70 per barrel, there would not be any
effective tax in the Senate's version.
Mr. Alper responded in the affirmative. He added that it
really meant that it remained status quo. The big change
was that after several years, it changed back to legacy
oil, so that benefit would not go on indefinitely.
Representative Ortiz asked if by several years he meant
three years. Mr. Alper replied that he meant several as in
between three and seven years, depending on the price of
oil.
2:31:28 PM
Vice-Chair Gara asked if the Senate version and current law
allowed for zero production taxes, as long as oil prices
remained below $70 per barrel, for seven years.
Mr. Alper did not believe Vice-Chair Gara had specified
that he was referring to new GVR oil, but assuming that,
the answer was yes.
Vice-Chair Gara asked if possible reserves in Arctic
National Wildlife Refuge (ANWR) would be considered new oil
under the Senate version, and were it to open, it too would
present zero production tax for seven years.
Mr. Alper responded that he was correct. He added that
anything that happened there in the future would
automatically fall into the category of new oil.
Vice-Chair Gara wanted people to understand which fields
would fall under the GVR field categories. He mentioned
Oooguruk and Nikaitchuq as well as Point Thomson.
Mr. Alper responded that it was not a good idea to mention
specific fields. He indicated that Point Thomson was a
field that was created after 2011. They would benefit from
the GVR statutes as well.
Vice-Chair Gara asked about the blue line that went to 3.25
percent minimum tax on new oil.
Mr. Alper responded that it was the 4 percent that could be
reduced by 20 percent, to 3.2 percent.
2:34:16 PM
Vice-Chair Gara mentioned that Mr. Alper had heard a lot of
questions about Caelus. It was his understanding that only
two wells had been drilled there, not enough to know how
much oil was producible or how much oil might be there.
Mr. Alper did not have very much expertise on the project.
It was a good 100 miles from any infrastructure. If the
project was as large as it seemed, it would be a large,
expensive project that would employ a lot of people, but
would not see production for some years.
Vice-Chair Gara thought it was an exaggeration to state
there were 200,000 barrels per day. It was not even
delineated enough to be an SEC [Securities and Exchange
Commission] bookable reserve.
Commissioner Hoffbeck stated he would leave it up to Caelus
to respond to questions about its field.
2:36:00 PM
Representative Pruitt asked what percentage of the total
was new oil that fell under the rate on slide 5.
Mr. Alper answered that there was a table showing that
information in the Revenue Sources Book. The table had
changed dramatically after HB 247 [oil and gas tax
th
legislation passed in 29 Legislature]. Currently 7 to 10
percent was eligible for GVR. The trend had been towards an
increase, but now that production tended to fall off after
three to seven years, the forecast showed a decrease of new
oil qualifying as new by 2025. That could change if one of
the large projects began producing. He could provide the
chart to the committee.
Representative Pruitt mentioned being aware of a slight
change in total price. He asked if it was estimated that
there would be a tax increase based on the current estimate
for any new oil, or 7 to 10 percent, for around six years.
Commissioner Hoffbeck responded that the only forecast that
had changed was for the current year.
2:38:37 PM
Co-Chair Foster reminded the committee to stick to the
presentation and to avoid policy discussions.
Mr. Alper continued to slide 6: "Summary of Fiscal Impacts:
Comparative Fiscal Note Analysis - Budget":
· Because both bills effectively eliminate cash
credits, they are very similar in the way they
reduce the future demand for state spending
· The slight differences have to do mostly with the
Senate also eliminating cash for Middle Earth
credits
· The long term figure of $150 million per year
reflects the forecast assumption for credit cash
demand
o This number could be substantially higher
if one or more large projects is
sanctioned
o In that case, either bill would have a
much greater budget impact.
Mr. Alper stated that as the current credits were earned,
they appeared as a budget item, as an expected demand on
state appropriations. Both bills eliminated cash credits,
so that future demand decreases at similar rates. The
Senate version eliminated credits for Middle Earth while
the House version retained them. The number was relatively
small, around $10 million. The long-term estimate was that
about $150 million worth of cash credits would be earned in
future years. However, if a large project like Smith Bay
were to move forward, that number would increase. If the
state was getting out of the business of cash credits, that
meant reducing the budget by $150 million per year into the
future. For the North Slope, both bills were eliminating
cash credits for operating losses. Likewise, status quo had
already eliminated cash credits for Cook Inlet in the bill
that passed the legislature in the previous year [HB 247].
That left the difference between the two bills in the
Middle Earth regime.
Vice-Chair Gara suggested that cash credits could be
eliminated and replaced with a brand new credit that cost
just as much money to the people of the State of Alaska.
He asked for confirmation that $150 million was the cost of
cash credits in the estimate going forward, and that $145
million per year with carry forward credits over the next
ten years was what was proposed in the Senate version.
Mr. Alper replied that the next slide looked at the issue
as alluding to the counting of the carry forward value, but
the Senate bill was maintaining the same tax rate
structure, the same idea of valuing spending in terms of
its tax offset value. Whatever was not being paid in a
credit was simply getting converted into a future offset
against taxes. The numbers were, by their nature, going to
be very similar. The number that appeared as a carry
forward value in the Senate was very similar to the amount
being offset in credits not being paid. It was a major
difference because it concerned the time-value of money -
the state would not be paying that or getting those offsets
from taxes until some future year, as opposed to the
present. Generally speaking, the state did not expect to
see it until that company was paying taxes, meaning it will
be an offset from taxes rather than a cash appropriation
made by the legislature.
2:42:46 PM
Vice-Chair Gara queried whether the Senate bill would
replace cash credits of $1.5 billion with carry forward
credits of $1.45 billion over the next ten years. Mr. Alper
replied in the affirmative.
Vice-Chair Gara stated that he personally considered the
current cash credit system sort of a pig and saw the above-
mentioned proposal as lipstick on a pig.
Mr. Alper advanced to slide 7: "Summary of Fiscal Impacts:
Comparative Fiscal Note Analysis - Impact of Carried
Forward Liability":
With the elimination of cash credits, an important
variable is the future impact of carried forward
losses
These are listed as a "tax equivalent," as they will
be used to offset future taxes outside the fiscal note
period
Tax Value of Carry-Forwards in Fiscal Year 2027
House is $610 million; Senate is $1,445 million
The difference is primarily driven by four factors:
1. Senate includes Middle Earth carry forwards (~$60
million)
2. House requires using carry forward lease
expenditures to zero PTV while still paying
minimum tax (~$60 million)
3. Tax value of carry forwards is 35% in Senate bill
vs. 25% in House bill (~$400 million)
4. House bill reduces value of carry forwards after
7 years (~$300 million)
Mr. Alper stated the House version was still paying for
Middle Earth, while the Senate version was not. The other
issue had to do with how they were used. In the House
version, a company could use $100 million in carry forwards
to reduce the profits to some small number and it would be
the equivalent of paying the minimum tax; however, it would
take $200 million to bring the value to zero. The House
version would state that companies could use the whole
$200 million to drive the value to zero but would they
still pay the minimum tax which would result in a certain
loss of carry forward credits. The Senate version stated
specifically that the companies did not have to waste the
credits and therefore got to save more to carry them
forward to use against a future year. It made a small
difference in the fiscal note, but could grow to a large
number, of around $60 million between the two bills, in the
future. The big dollar differences had to do with the taxes
themselves. He used an example about an oil company with
$1 billion in carry forward losses. In the Senate version,
that was worth $350 million as it reduced profits by $1
billion. The House bill had a 25 percent calculation so the
$1 billion would be worth $250 million, as they are
multiplied by what the tax rate is.
Mr. Alper highlighted that the biggest difference between
the two versions was that the Senate valued carry forwards
at 35 percent, and the House at 25 percent. This element
was worth about $400 million difference between the two
versions of the bill. The other large component related to
an erosion of value. The Senate version says they can be
used indefinitely. The House says the value gets reduced by
10 percent after seven years, which would sunset the value
of carry forwards, while the Senate version says they can
be held indefinitely. The House version says that if they
cannot be used within seven years, they lose 10 percent in
value per year starting in year eight. That was a
cumulative reduction in value that begins to appear in some
of the fiscal analysis in the House version, making $300
million difference in the two bills. If one added $60
million plus $60 million plus $400 million plus $300
million, it gets close to the $800 million total difference
between the two versions.
2:48:36 PM
Vice-Chair Gara surmised that the House bill followed the
normal process that other countries do for profits taxes in
that deduction percentage is roughly the same as the tax
percentage - 25 percent tax means a 25 percent deduction.
Mr. Alper did not want to opine on the word "normal." He
stated House version tax rate was aligned with the value
given to spending.
Vice-Chair Gara referred to chart seen in February, showing
13 percent profits tax rate at $80 per barrel for North
Slope oil. Under the Senate version, companies would pay a
13 percent profits tax rate but get a 35 percent deduction,
or triple the effective tax paid.
Mr. Alper answered that the chart in the memo showed the
same data set in the graph in slide 4. The effective tax
rate 13 percent at $80 oil, and the value of the losses was
35 percent, so what he was saying was correct.
Vice-Chair Gara asked whether the Senate version included a
9 percent tax rate at $75 per barrel prices, and a 35
percent deduction, while the House version there was only a
25 percent tax rate and a 25 percent deduction.
Mr. Alper replied in the affirmative. He elaborated House
bill did not have a gap between tax rate and deduction
rate.
Representative Wilson referred to testimony by Rich
Ruggiero [Castle Gap, legislative consultants] in which he
stated that all regimes allowed companies to recover all of
their costs.
Mr. Alper replied in the affirmative. It was fundamental
tenet of a profits based system that companies get to
deduct all expenses. The devil was in the details. There
was a difference between the statutory tax rate of 35
percent and the effective tax rate due to the per barrel
credit. Mr. Ruggiero had not really addressed this, but had
spoken about 100 percent carry forward.
2:52:11 PM
Representative Wilson believed Mr. Ruggiero had made it
pretty clear that a company should be allowed to put that
money back into their activities. She found it hard to
understand only considering the production tax, but not the
other taxes involved.
Co-Chair Seaton requested to return to the topic at hand.
Representative Wilson clarified that she was not asking the
presenters to respond on the other taxes she had mentioned.
She wanted to ensure the public realized the production tax
only represented a small portion of what the state received
from companies.
Representative Pruitt referred to the term "carry forward."
He asked for verification that carry forwards were a
portion of the cost of doing business. He asked if any
companies did not allow for the opportunity to recoup some
portion of their costs.
2:55:10 PM
Mr. Alper answered that the carry forward was all of the
spending that exceeds revenue, or the sum total of losses.
In the current law, they were turning the losses into
credits. The House and Senate bill versions had different
tax rates, but both bills allowed for 100 percent carry
forward use. The 100 percent carry forward was calculated
at a different tax rate. The House version reduced the
value of the carry forward after seven years. He agreed
that it could lead to a circumstance where a company did
not recoup 100 percent of the value in the future.
Co-Chair Seaton added that the carry forward was intended
to be an incentive to bring a field into production in the
nearer term rather than sitting on it for an extended
period. The policy basis for that item was developed on the
incentive to bring a field into production in order to
receive the full value of carry forwards. He pointed out
that if a company paid a 20 percent tax rate to the federal
government and could write off expenses, it would get 20
percent utilization of that money. If it paid 35 percent
tax rate it would get 35 percent utilization. The
difference between the two bills was that one said a
company got 100 percent utilization at the effective tax
rate. The other says the company got 35 percent regardless
of the tax rate paid.
2:58:07 PM
Representative Pruitt referred to point 4 on slide 7. He
asked if $100 million is invested into a field, and the
time value erodes, why would a company sit on it for seven
years, then put it into production. It will erode on its
own. It would not affect the state so much as the company's
own shareholders. He queried whether the company should be
determining their own timeframe if the money had been
invested. There was no reason for the shareholder not to
get a return sooner than later. He did not think point 4
brought things on early, only that the company could use
all of the credit.
Co-Chair Seaton replied that the discussion could be had on
policy outside the present meeting.
Vice-Chair Gara referred to a statement that a company
should be entitled to sit on a field for as long as it
determined. He disagreed with that as Exxon had sat on the
Point Thomson field for 30 years and the field ended up
being a zero percent tax field.
Representative Pruitt thought the statement was misleading.
He clarified that Point Thomson did not sit on the field
awaiting changes in policy, but changes had been made in
the timeframe. It was also part of the leases, however they
were not talking about leases. He stated once investment
had been made and a loss was incurred, it was carried
forward.
3:01:57 PM
Mr. Alper moved to slide 9: "Differences between House and
Senate Credit Issues: Treatment of Carried Forward losses":
· Both bills eliminate the NOL credit for the North
Slope and replace it with a structure of carried
forward lease expenditures
· Both bills allow for 100% of carry-forward,
without any "uplift" (interest)
· House bill has provision where carry-forward
balances lose 10% of their value per year after
seven years
· Senate bill also eliminates the NOL credit for
Middle Earth, and repeals the underlying NOL
credit statute AS 43.55.023(b)
Mr. Alper explained that the black, blue, and red text on
the next group of slides indicated items which were in both
versions, the House version, and the Senate version,
respectively.
3:04:21 PM
Mr. Alper advanced to slide 10: "Differences between House
and Senate Credit Issues: Use of Carry Forward Losses:
Ringfence Issues":
Ringfence Issue
· Both bills have no restriction if the producer
does not have an overall loss in the year the
costs are incurred; spending on a new project can
offset current taxes
· House bill requires carry forwards to only be
used to offset value from the property where
originally incurred
· Senate bill allows carry forwards to be used off
lease
Minimize Loss of Credits Issue
· House bill requires carry-forwards to be used to
zero production tax value, while producer still
pays minimum tax
· Senate bill allows taxpayer to use only as much
as they want / need to protect use of per-barrel
credits so that no carry forwards are "lost"
Mr. Alper stated that neither bill had any limitation if
spending was done by a company that had other production in
the state that it could be offset from, such as Conoco's
Willow project. The difference was that Conoco could
develop the field while still operating Kuparuk and own a
substantial interest in Prudhoe Bay. Conoco could be
spending profits in real time on the new field. If it did
not put the company in a loss circumstance, no carry
forward would be issued. The spending from the new field
could offset profits from the new field. This was current
law and neither version changed that in any way. The House
bill put in the restriction that if a loss occurred, it
could only be used to offset production from that
particular field. That could happen if the price of oil was
low enough or spending was so high that it more than offset
their profits. The loss would be tied to that field and
would also impact the Armstrong project. The Senate
language did not include the restriction. If a company had
other production or sells a fraction of the project to
another company and that company has projects in Alaska,
the issue was establishing which controls were on the
migration of the losses from the original project to offset
some other currently producing field. He spoke to
minimizing the loss of credits. The House version stated
that the company had to use carry forwards to get to zero
and there may still be the minimum production tax. The
amount resulting in the 4 percent had no tax value to the
company. The Senate version says the taxpayer can conserve
carry forwards and only use what was needed to result in
the minimum tax payment without losing any of the benefit
they may have coming to them.
3:08:03 PM
Representative Guttenberg spoke to the carry forwards in
the Senate bill which allowed them to be used "off lease."
He asked how far off lease the carry forwards could be
used.
Mr. Alper replied that this regarded a segment in the
regulations, and they could be used anywhere on the North
Slope.
Representative Guttenberg asked whether it could be used
anywhere, for any purpose, as long as it was on the North
Slope.
Mr. Alper answered that if a company was holding carry
forwards from one field on the North Slope, they could be
used to offset taxes on another field.
Representative Guttenberg asked if the audit requirements
for both locations got looked at in the same way.
Mr. Alper was unsure what Representative Guttenberg meant
by audit requirements. He detailed the value of the carry
forward loss was established in the year in which it was
accrued. It did pose the question of a lease expenditure
accrued in 2018 and put against production in 2023. There
was not currently a statute of limitations and it would
need to be looked at. There would be the same level of
scrutiny on carry forwards as was currently on current year
expenses.
3:10:25 PM
Representative Guttenberg asked whether, if a company was
working on a lease and had a wellhead expenditure and took
it off lease, it did not matter if there was work on a
wellhead on an off-lease project but was the value of the
credit that migrated.
Mr. Alper responded in the legislation there was not talk
of credits. They were now known as lease expenditures.
Subsequently, the definition was broadened to include prior
year spending that had been carried forward. It did not
matter what type of activity it was used for.
3:11:36 PM
Mr. Alper turned to slide 11: "Differences between House
and Senate Credit Issues: Use of Carry Forward Losses:
Middle Earth Issues." The term Middle Earth had been
developed during the petroleum production tax (PPT) debates
and referred to everything in Alaska that was not North
Slope or Cook Inlet. There was a separate range of taxes
for Middle Earth.
· House bill made no changes to existing Middle
Earth credits (15% NOL; 10% Capital; 20% Well)
plus the 40% Exploration credit (through 2021)
· Remaining credits remain eligible for cash refund
· Senate bill eliminates the 15% NOL credit for
Middle Earth, in effect reducing state support
from between 25%-55% to between 10%-40%
· Senate bill makes remaining Middle Earth credits
ineligible for cash refund
· Senate bill allows ME Exploration Credits to
offset the company's corporate income tax
o Provisional (unusable) certificates awarded at
time of application in order to preserve place
in line
o Seismic Exploration credits repealed in 2018
3:15:51 PM
Representative Guttenberg asked when the seismic
exploration credits ended. He asked whether they were cut
off in the middle of a project, or after the project ended.
For example, if there was a two-year exploration program in
2017 and had to end the second part of project in 2018. He
asked whether, once a program was approved for credits, it
would be allowed to continue until it was done.
Mr. Alper answered that the sunset dates related to the
date the work was done. Work had to be completed by the
sunset date. In the current law for Middle Earth that was
January 1, 2022. A 2021 program would be covered, but a
2022 program would not be. The Senate version of the bill
meant it would occur in 2018. Any seismic work done before
January 1, 2018, but anything beyond that date would not.
Representative Guttenberg thought it would be frustrating
for numerous people working on a multi-year program.
Vice-Chair Gara thought the difference was small in terms
of dollars. He asked what Middle Earth credits were
expected to cost in the current and following fiscal years.
Mr. Alper answered the numbers were quite small, almost all
regarded Middle Earth, and was estimated to be plus or
minus $10 million. The spending was not currently in the
forecast.
Vice-Chair Gara referred to the fiscal note on the Senate
version showing a cost of $1.45 billion and asked whether
it factored in the Middle Earth provision.
Mr. Alper answered that the second subtotal on the fiscal
note tables called "total budget impact" shows the
reduction in the state's anticipated appropriation. The
Senate bill was slightly larger by $5 million to $10
million per year in the out years. The difference was that
the Senate eliminated the Middle Earth credits but the
House did not. That appears as a $5 million to $10 million
gap between the two bills.
Vice-Chair Gara asked if the carry forward numbers factored
in Middle Earth and the North Slope.
Mr. Alper pointed to slide 7 and the four points. The
Senate version was taking credits the House would still be
paying cash for and turning them into carry forwards. The
total across ten years was $60 million.
Vice-Chair Gara spoke to the cost of the Senate version of
$1.444 million versus the House version of the bill
$610 million. He asked whether that included Middle Earth
and North Slope.
3:21:30 PM
Mr. Alper answered that the number was all-inclusive across
the entire state. The Senate figure includes Middle Earth.
The figure did not appear in the House as it was not making
changes to Middle Earth.
Mr. Alper discussed slide 12: "Differences between House
and Senate Credit Issues: Purchasable Credits and Tax
Credit Fund":
· Both bills retain ability to get cash for remaining
"corporate income tax" (refinery, LNG storage) credits
which will all be sunset by 2020
· House bill retains the tax credit fund structure,
primarily due to the continuation of Middle Earth
credits
· Senate bill repeals the tax credit fund once all
outstanding credits are paid off, or in 2022,
whichever is later
Mr. Alper elaborated the fund in AS 43.55.028 would cover
the obligation of the state prior to the effective date of
the bill. On the later date between January 1 after all
credits are paid or January 1, 2022 [whichever is later],
the Senate bill would repeal "the .028 fund section."
3:23:57 PM
Mr. Alper scrolled to slide 14: "Differences between House
and Senate Tax Issues: Tax Rates and Production Credits":
· House bill reduces the base tax rate from 35% of
Production Tax Value to 25%, and eliminates the
$0 to $8 sliding scale per barrel credit
· House bill has a "surtax" of 15% of that portion
of PTV greater than $60
· Net effect is a tax increase of $100 to $300
million at oil prices between $50 and $100 with
the greatest impact in the $60-$80 range. Revenue
neutral at higher oil prices
· Senate bill retains all major SB21 features, so
that it is essentially neutral from a revenue
perspective
Mr. Alper detailed slide 15: "Differences between House and
Senate Tax Issues: Minimum Tax 'Floor' and GVR 'New Oil'":
· Both bills retain the 4% "floor tax rate
· Both bills, by eliminating the North Slope NOL
credit, effectively harden the floor against
major producer losses
o Only a material impact at oil prices of about
$40 or below
· House bill hardens the minimum tax for GVR-
eligible "new" oil, preventing the $5 per-barrel
credit from being used below the floor.
o House adds a modified 3.2% minimum tax for GVR,
based on a 20% reduction below the base 4% tax
rate
· House bill eliminates the 30% GVR for high
royalty fields
· Senate bill makes no changes to either issue
Mr. Alper elaborated that there was another provision in
existing state law specifying that if the land was all
state leases with royalty of greater than 12.5 percent,
then the company received an extra benefit of 10 percent.
That provision was removed in the House version and all new
oil would only get 20 percent GVR.
3:27:31 PM
Vice-Chair Gara referred to discussion about the GVR. He
asked for verification that there was not a 30 percent
reduction in the tax rate.
Mr. Alper responded it excluded 20 percent from the volume
from taxation. The baseline is 20 percent or 30 percent
lower and the same costs could be subtracted from it, so it
tended to multiply the impacts. For a 20 percent GVR, the
reduction in tax would be some number greater than 20
percent.
Vice-Chair Gara queried whether at very low prices the low
floor was the same in both bills and in the status quo.
Mr. Alper answered that it got to 4 percent at an average
annual price greater than $25 per barrel. Should the price
drop that much, there would eventually be one percent
minimum tax, and zero at $15 and less.
Co-Chair Seaton asked for an explanation of the difference
between royalty and GVR.
Mr. Alper replied that GVR would eventually be subject to
the 35 percent tax rate. A 20 percent GVR equated to a 7
percent reduction in gross tax rates. Twenty percent of the
value is no longer subject to that 35 percent tax and 35
percent of 20 percent is 7. By adding an extra 10 percent
gross reduction, it created a tax benefit that was the
equivalent of an addition 3.5 percent of the gross, or 10.5
percent. In regards to how that related to high royalty
th
structures, the typical state share was 1/8 or 16 2/3
percent, which was being targeted by the provision. By
giving a 3.5 percent additional gross benefit, the 30
percent GVR clawed back a fairly substantial portion of the
incremental royalty between 12.5 and the 16 2/3.
3:31:51 PM
Co-Chair Seaton asked whether the 10 percent additional for
the high royalty fields was equivalent to a reduction of
3.5 percent royalty.
Mr. Alper responded in the affirmative and that a 16.6
becomes equivalent to 13.1 percent royalty.
Co-Chair Seaton spoke to sliding scales royalties that were
bid terms. He asked whether the state could be giving up
more of the royalty and going down below 12.5 percent
royalty.
Mr. Alper responded that he had recently received a
regulatory clarification and that any additional royalty
payment for the net profit share would not count towards
the greater than 12.5 percent and only the baseline would
have to be greater than 12.5 percent to trigger the
incremental feature.
Co-Chair Seaton asked whether that was also true for
sliding scale royalty.
Mr. Alper was not prepared to answer the question. He
suggested speaking with the Department of Natural
Resources.
3:33:35 PM
Mr. Alper scrolled to slide 16: "Differences between House
and Senate Tax Issues: Interest on Delinquent Taxes":
· Both bills eliminate the "three years then zero"
interest provision for Oil and Gas Production Tax
as passed by HB247 in 2016
· House bill retains the 7% plus federal reserve
rate, compounding for Oil and Gas Production Tax
· House bill retains the 3% plus federal reserve
rate, simple interest, for all other taxes
· Senate bill recombines all taxes under the same
interest structure, as it was before 2017
· Senate bill has 3% plus federal reserve,
compounding, for all taxes
Mr. Alper highlighted that the House version retained a
bifurcated system, whereas the Senate version aligned all
bills, and this was something that needed to be addressed
in conference committee.
3:35:43 PM
Representative Wilson asked how much money was really being
discussed.
Mr. Alper indicated that the amount was indeterminate in
the fiscal note. The number depended on how large the audit
assessment was to be in a few years. The difference of
compound interest became a very big part. Three years ago,
when ACES-era interest was compounding, 60 percent of the
total was interest, and only 40 percent was principle.
Whereas in the newer audits in which three years of the
lower interest rate of SB 21, more like one-third interest
and two-thirds principle. A big difference accrued over a
number of years. It was a question of synergy between
different taxes. From the state's point of view, there was
a certain opportunity cost if a company does not pay its
taxes, as the money would have to come out of state
savings. The expected rate of return on savings was 7
percent. He reiterated that these were policy decisions
that should be made in conference committee.
3:37:30 PM
Representative Wilson was not talking about the policy
call, she was talking about what had happened in the past.
She was looking for interest collected for FY 15 and FY 16.
She asked whether there was some line in the budget that
showed interest collected for those years, at the end of
the six-year audit cycle.
Mr. Alper responded that there was a firm grasp of oil tax
as it involved relatively limited audits and they were
released on an annual cycle. He could provide the
communications back and forth about what portion was
interest and what was principle. It was important to note
that the money went to the Constitutional Budget Reserve
(CBR) and was not General Fund money. He was sure interest
was tracked separately. He did not have the total at hand.
Representative Wilson stated companies paid what they
thought their taxes should be. The audit addressed what the
department determined rather than the companies. Companies
were not going six years without paying any production tax
at all.
Mr. Alper indicated that certainly what she was saying was
true. What she was describing was not the end of the
process. There was an appeals process and a settlement or
decision which usually fell somewhere in the middle.
3:40:01 PM
Representative Wilson was curious about the figure. She did
not want to argue about a small amount. She would like to
know interest over last couple of years.
Mr. Alper would provide numbers for the last three audit
cycles.
3:40:51 PM
Representative Pruitt asked whether over the prior two
years there had been an instance in which those audits were
completed before the six year statutory maximum timeline.
Mr. Alper relayed that the extension of the audits to six
years was part of the ACES bill. It first affected 2007
taxes. The department had stayed close to the statutory
timeline. The previous March was the deadline for 2010
taxes. Those for 2011 were nearing completion. By the
following spring the department would have 2012 and in
following fall those for 2013. The division was on target
to meet the deadlines.
Representative Pruitt was glad to hear Mr. Alper's
response. He asked if there had been interest that the
state had to pay during Mr. Alper's tenure. He asked
whether taxes were accruing due to things being found in
the audits.
Mr. Alper responded in the affirmative. He suggested there
could be a situation in which an audit assessment was
triggered and a company would choose to pay the entire
assessment in order to forestall additional interest and
then go through the appeals process which could go on for a
couple of years. In that the scenario the state was paying
the company back the difference plus all of the interest.
Vice-Chair Gara referred to a deficit in auditors at the
department.
3:44:39 PM
AT EASE
3:44:53 PM
RECONVENED
Mr. Alper replied that he was very proud of the
department's audit team. He was not advocating for more or
fewer auditors.
3:45:58 PM
AT EASE
3:46:03 PM
RECONVENED
Mr. Alper addressed slide 17: "Differences between House
and Senate Tax Issues: Other Miscellaneous Issues":
House
· Prevents Gross Value at the Point of Production
from going below zero for a particular property
· Eliminates the ability assign tax credit
certificate payments to a third party financer
· Adds transparency / public reporting related to
credits and lease expenditures held by companies
· Adds a new legislative working group to look at
Cook Inlet and Middle Earth taxes
Senate
· In certain circumstances allows use of purchased
credit certificates against prior-year tax
liabilities, including penalties and interest
Mr. Alper spoke to a recent report of which companies had
been paid cash credits for a total of around $73 million.
The House version would expand upon that transparency
feature. The Senate version would allow a certificate to be
used against prior-year taxes with certain limitations,
specifically having to do with the CBR. Article 9,
Section 17 states that if there is an administrative
proceeding, the results of that have to go to the CBR. The
Senate bill was not trying to circumvent the provision but
additional liabilities from past years could be offset with
credit certificates.
3:49:19 PM
Co-Chair Foster referenced the complex issues in the bills.
He asked Mr. Alper to provide a very broad explanation of
the differences between the two bills.
Mr. Alper complied. At the broadest level, both versions
eliminated the idea that the state was going to be writing
checks to oil companies for tax credits based on work being
done. Both versions changed it to a structure in which
companies would use the carry forwards to offset future
taxes. Both bills maintained a net profit-based tax which
means that company spending is an integral part of the tax
calculation. All of the spending that was no longer turning
into credits would be turned to offsets later. Beyond that,
the House version made certain formula changes to the tax
itself that lead to a tax increase of a couple of hundred
million dollars per year that the Senate version did not
make. Otherwise the differences were relatively technical
and not big-dollar items but which certainly merited
further discussion in conference committee.
Co-Chair Foster added that both House and Senate versions
eliminate cashable credits, the Senate version does not
raise additional revenue whereas the House version does.
Mr. Alper replied that the statement included the
fundamental differences and similarities of the bill
versions. He added that his contact information was
available on the presentation if people wanted to follow
up.
Co-Chair Seaton noted that the synopsis did not really
cover the future liability difference of $800 million
between the two bill versions.
Mr. Alper answered that what he had described was part of
changing the tax rate. He stated that it was
counterintuitive that the House version raised more revenue
by lowering the tax rate, but that was what happened. It
also eliminated the per barrel credit. A major difference
was because the House had a lower rate, the House version
lowered the value of the spending against taxes.
Essentially there was no longer such a thing as a credit,
instead it was carrying forward losses, which did not get
value until they were used. The state's obligation in terms
of future tax offsets was lowered.
Vice-Chair Gara referred to statements that the Senate bill
eliminated $1.50 billion in cash credits, however, it was
replaced by $1.45 billion in carry forward credits. He
hoped people understood that this meant it was nearly net
zero.
3:55:23 PM
Mr. Alper answered it was a net profits tax. The companies
are spending money and net profits tax means that the
company gets that value back somehow in the future. The
Senate bill made many fewer changes to how the things were
valued and the net result was a revenue neutral change over
the long-term. It was different in that the payments were
no longer in the budget; there was no longer an
appropriation battle over how much to spend on tax credits
in a given year. It was seen passively as a reduction from
future taxes. The House bill also had that - there was
still a large number in the future that would be used to
offset taxes, but conceptually it was the same thing.
Companies were losing money, they were carrying those
losses into the future, and they would use those losses
against future taxes.
Co-Chair Seaton asked for clarification on the use of loss
carry forwards down to zero.
Mr. Alper responded that the House version was requiring
the use of carry forwards and then paying the minimum tax,
and the Senate was only requiring the amount used down to
the minimum tax. This showed up in the analysis in two
different places. In both circumstances, the tax payer was
paying a minimum tax. In the Senate version there was a
slightly larger carry forward number because they could be
conserved for a future year. They also appeared in the
analysis of the life cycle of project field analysis. New
fields accrue the same lease expenditures. For the first
few years, they would pay minimum tax even at high prices.
In the Senate bill, six or eight years on they would still
be paying the minimum tax as they were using carry
forwards. In year seven and eight, in the House version,
there was higher revenue. It appeared in the lifecycle
analysis mid field life as one or two years of higher
revenue in the House version.
3:58:35 PM
Co-Chair Seaton asked if applying to zero and stopping at
the minimum tax was a difference between status quo and the
Senate version of the bill. He asked if more carry forward
occurred for legacy fields in the Senate bill but not in
the status quo.
Mr. Alper replied that it was important to distinguish
between current year and carry forwards when discussing
status quo. Within the current year, the company did not
get a loss until it went below zero. A company could be
forced to pay the minimum tax while earning small or zero
profit then certain lease expenditures would be lost as
they are only allowed to get credits or the carry forward
to the amount below zero. With carry forwards, there was
discussion of the hard floor and other restrictions. Under
current law there was generally not any loss of the value.
There were restrictions on what could be used and if the
credits could not be used, they could be carried forward.
There were use them or lose them credits within a single
year, such as the small producer credit or the $5 per
barrel credit. That was status quo. In both versions of the
bill, the going to zero within a year was unchanged. The
only difference was in the carry forward scenario. House
carry forwards go to zero and then they would pay minimum
tax, whereas in the Senate version companies could use only
as much as want to in order to pay the minimum tax.
Co-Chair Seaton referred to slide 10 related to the use of
carry forward losses. He spoke to the protection of the use
of per barrel credits.
Mr. Alper answered that it was a change between the version
that passed the Senate Resources Committee and what passed
the Senate. The committee had said that the company only
needed to use the amount to get to the minimum tax
calculation, but that calculation assumed zero per barrel
credits. He spoke to chart showing how much per barrel
credits were earned and used at different price points. It
was visible how much it stepped up from zero to $8 as the
price got lower until about $90 per barrel. Once the
minimum tax was reached, more and more of the per barrel
credits would be unusable. By the time $50 per barrel, only
about a dollar in credit could be used. At around $55 per
barrel, a company might be able to use $2 per barrel
credit. The Senate Resources version would have eliminated
that credit for them. The way it was re-worded in the
Senate Finance language, the company would use only the
amount necessary to arrive at a calculation in which they
would receive the same benefit as the $2 credit. This meant
the company would be using less of the carry forwards and
able to use them to carry into a future year.
4:02:52 PM
Co-Chair Seaton referred to status quo where expenditures
were used up. He surmised that the Senate version currently
says they can be carried forward to offset future taxes.
Mr. Alper answered that status quo was based on current
year taxes, then applying carry forwards to that amount.
The Senate version said that a company should not lose any
current year credits and should therefore be able to
protect the carry forwards to use in a subsequent year.
Vice-Chair Gara referenced slide 7 and asked about credit
provisions in the bill versions. He clarified that the
Senate version was for $1.45 billion over the next ten
years, whereas the House version was $610 million over the
next ten years.
Mr. Alper replied that $610 million was originally
$640 million in early April. The department had refigured
the fiscal note based on the spring forecast to have an
apples-to-apples comparison. It may not have been attached
the House version.
4:04:58 PM
Vice-Chair Gara clarified that no member on the current
committee had tried to keep down the number of auditors in
DOR.
Representative Wilson asked about number 3 on slide 7. She
asked for clarification on the tax value of carry forwards
in each of the versions.
Mr. Alper spoke about losses. There was a certain forecast
for company spending that would result in a loss of about
$4 billion over the next ten years. Lease expenditures in
Alaska are generally around $4 billion per year but mostly
from major producers and were used to offset revenue. There
was also $4 billion in losses, either due to lack of
production or high spending. Four billion dollars was in
company hands and that would be used in some way to offset
future tax. In SB 21 the tax was calculated at 35 percent,
so $1.4 billion was tax offset value of the carry forward.
The House version reduced the rate to 25 percent. The $4
billion would be used to offset at the 25 percent level or
$1.0 billion. The calculation of turning the $4 billion
into a tax benefit was the difference between $1.4 billion
and $1.0 billion, which was the $400 million shown in the
slide.
Representative Wilson asked whether there would be
$400 million that the company would not be able to get back
under the analogy.
Mr. Alper replied in the negative. He explained that
companies were getting the $4 billion in losses at whatever
the tax rate was. If the tax rate was increased, the value
of the carry forward would increase. If the tax rate was
reduced 10 percent then the $4 billion would only be worth
$400 million, but it would still be the value of the $4
billion but it would be used at whatever the tax rate was
when it came to be used.
4:08:02 PM
Representative Wilson asked for verification that under
either bill, companies would get $400 million but it would
be calculated differently. She was trying to determine how
the number became larger in the Senate version.
Mr. Alper answered the difference was that companies would
get the $4 billion calculated against the tax rate. The $4
billion subtracted from profits and taxed at 35 percent was
more that at 25 percent. It was the same $4 billion, but
because the tax rates were different, the impact of the tax
calculation would be different.
Representative Wilson referred to point 3 on slide 7 and
asked for verification it spoke to only the tax rate not
the investment.
Mr. Alper answered they were speaking to the $4 billion
figure. Much of that money was being accrued in 2018 and
2019, but if they were not in production and therefore the
money would not be used until 2026 or 2027, the 10 percent
subtraction would start to kick in. In this way, instead of
$4 billion, under the House version it would be $3.5
billion and that, with the further addition of the tax
calculation, was another $300 million between the two
versions.
Representative Wilson noted it related to the life cycle
Mr. Alper had mentioned earlier. She asked whether he was
using the life cycle to show that a company would not see
that deduction until year 8, 9, or 10.
Mr. Alper answered that the lifecycle analysis was
theoretical and abstract. The $300 million was the actual
number in the ten-year forecast of what was believed would
be spent and how much of that money would lead to actual
production within the fiscal note period. It was money
being spent that the state do not see coming into
production in the following ten years.
4:11:06 PM
Representative Wilson stated that in the House version
companies were penalized if there was nothing to write it
off against.
Mr. Alper replied the numbers showed as money that had not
been used. The money existed on the companies' books to be
spent from 2028 and beyond on taxes. On the House side some
value had been lost so that by 2027 the number had gone
down to $600 million.
Representative Wilson asserted that regardless of position,
she believed everyone wanted to see an increase in
production on the North Slope. She thought that was the
issue ultimately.
Commissioner Hoffbeck replied that he believed that both
the House and Senate did what they thought was in the best
interest of both industry and the state. He believed a
compromise was needed.
Representative Wilson supported compromise, but not if it
decreased production.
4:13:19 PM
Representative Ortiz referred to the $800 million
difference in carry forward value between the two bill
versions. He asked if that was separate from the added
revenue in the House version of up to $200 million.
Mr. Alper responded it was separate. He referenced
companies holding carry forward credits and detailed that
slide 7 depicted what the numbers would be and what they
were worth in 2027.It was completely separate from the tax
calculation.
Representative Ortiz asked about the ultimate difference in
revenue between the two versions.
Mr. Alper replied that the House bill included $200 million
per year in tax. On the budget side, the Senate bill
eliminated roughly $1.5 billion in cash credits and
replaced them with about $1.5 billion in offsets in the
future. The House version eliminated the cash credits and
replaced them with a smaller number of offsets for the
future. That was a second place in which the total grand
value was larger on the House side.
4:15:26 PM
Representative Ortiz asked about the total value difference
between the two bills by 2025.
Mr. Alper provided the caveat that this assumed ten years
of forecasts and prices and production. He stated sum total
of revenue in the House version was about $1.5 billion over
ten years. The sum total of the difference between the two
bills in tax carry forwards was another $800 million and
there was a grand total of about $2 billion difference
between the two bills.
Representative Pruitt referred to number 1 on slide 7. He
suggested that carry forwards or NOLs were not credits but
a reduction. Saying there was an additional $60 million in
carry forwards failed to recognize that if it was not a
carry forward it would be cash that the state needed to pay
out. It did not recognize that those would have to be paid
in cash at some point in the future.
Mr. Alper agreed and added that both bills were fully
eliminating cash credits. The House version was keeping
them in Middle Earth. The sum total of the Senate bill was
about $80 million higher over the ten-year period. That $80
million almost matches $60 million in additional carry
forwards in the Senate version. It was net zero between the
two bills for the particular line item.
Representative Pruitt stated that the goal in HB 247 was to
protect the NOL credits "as essential playing fields
levelers between incumbent producers and newcomers" ["Key
Goals and Features of HB 247 - Governor's Oil and Gas Tax
Credit Reform Bill", dated January 20, 2016]. He asked if
point 4 on slide 7 was eroding the ability for smaller
companies with less money to compete with bigger players.
Commissioner Hoffbeck answered that it had all been part of
the total fiscal package. The fiscal package had morphed
and there were provisions that were and were not in the
original package. They were currently in a position where
everyone needed to compromise.
Representative Pruitt spoke to a less capitalized company.
He asked if there was potential to lose some smaller
companies if they are not as capitalized as others, since
they could not place deductions going past the seven years,
based on how long it took to recoup their costs.
4:20:48 PM
Commissioner Hoffbeck answered there was nothing the state
could do that would match paying cash for the credits. It
had been a substantial benefit that was not paid in other
locations and the state could no longer afford. It would
certainly be a lesser benefit. The impact was still to be
seen.
Representative Pruitt referred to allowing companies to
carry liability forward. He agreed that cash was an
incentive but he was concerned that cost write-offs and
caps could reduce the perspective of smaller companies.
Commissioner Hoffbeck answered that the severance taxes
were a separate area. The rules put in place are different
by jurisdiction. He believed the House and Senate had
crafted bills that they believed were in the best interest
of the state and of industry. He did not know whether it
would have an impact.
4:23:07 PM
Mr. Alper discussed making major changes and stated if
there were any change in industry behavior, the reduction
in value and loss of cashable credits would be large
determiners in that.
Vice-Chair Gara spoke to the difference between not getting
as much revenue, because companies deduct their carry
forward credits from the revenue they give the state, and
cash credits which the state paid out. He surmised that
having $150 million in payouts and getting $150 million
less in revenue, from a budgeting stand point for the
legislature, was the same thing.
Mr. Alper replied in the affirmative but underlined that
earlier he had mentioned that there was a time issue as
well. The cash obligation was in real time and a lot of the
carry forward obligations were many years in the future.
Vice-Chair Gara stated he would argue that given the level
of credits, since the state was not paying them on an
annual basis, there was time value to that as well. The
state was not paying that $1 billion of credits every year,
but over many years. He asked for verification that the
Senate version contained $1.445 billion in liability to the
state, and the House version $610 million. He asked whether
that was roughly an average of about $84 million a year
difference between the two versions.
Mr. Alper replied in the affirmative, stating that the
first year or two were immaterial.
Vice-Chair Gara stated that the Senate version cost an
extra $84 million a year that would have to be covered
somehow. He thought it was notable that the amount was
similar to what the Senate had proposed cutting from budget
for the University and K-12. He thought it was similar to
the governor's fuel tax and that the legislature could
adopt the fuel tax to pay for that $80 million difference
which would go straight to cash credits. He did not feel
like it was making progress, whereas they had come up with
a fair credit system for the oil industry.
4:26:15 PM
Commissioner Hoffbeck thanked the committee for the
opportunity to put the information out there. He stressed
the need for compromise. The administration thoroughly
believed all parties had put forward what they believed was
in the best interest of the state, but it was time for a
compromise.
Co-Chair Seaton thanked the presenters.
ADJOURNMENT
4:27:46 PM
The meeting was adjourned at 4:27 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0111-fiscal note from Senate finance.pdf |
HFIN 6/7/2017 1:30:00 PM |
HB 111 |
| CS HB111 FIN_(House bill updated for Spring forecast).pdf |
HFIN 6/7/2017 1:30:00 PM |
HB 111 |
| DOR HB111 Bill Comparison Presentation - House Finance 6.2.17.pdf |
HFIN 6/7/2017 1:30:00 PM |
HB 111 |
| 2007 Audit Assessments memo to Alper.pdf |
HFIN 6/7/2017 1:30:00 PM |
DOR Response |
| 2008 Audit Assessments memo to Alper.pdf |
HFIN 6/7/2017 1:30:00 PM |
DOR Response |
| 2009 Assessment Memo to Alper.pdf |
HFIN 6/7/2017 1:30:00 PM |
DOR Response |
| 2010 Assessment Memo to Alper.pdf |
HFIN 6/7/2017 1:30:00 PM |
DOR Response |