Legislature(2017 - 2018)BARNES 124

01/30/2017 01:00 PM RESOURCES

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Audio Topic
01:01:47 PM Start
01:04:54 PM Presentation(s): Tax Division Update, Department of Revenue
03:05:18 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Update: Status of the Oil & Gas Tax Regime in TELECONFERENCED
AK: HB 280 (2010), SB 21 (2013), HB 247 (2016)
- Randall Hoffbeck, Commissioner, Dept. of
Revenue
- Ken Alper, Tax Div. Director, Dept. of Revenue
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                     ALASKA STATE LEGISLATURE                                                                                 
                HOUSE RESOURCES STANDING COMMITTEE                                                                            
                         January 30, 2017                                                                                       
                            1:01 p.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Andy Josephson, Co-Chair                                                                                         
Representative Geran Tarr, Co-Chair                                                                                             
Representative Dean Westlake, Vice Chair                                                                                        
Representative Harriet Drummond                                                                                                 
Representative Justin Parish                                                                                                    
Representative Chris Birch                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative George Rauscher                                                                                                  
Representative David Talerico                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Chris Tuck (alternate)                                                                                           
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                              
Representative Mike Chenault                                                                                                    
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION(S):  TAX DIVISION UPDATE~ DEPARTMENT OF REVENUE                                                                    
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
KEN ALPER, Director                                                                                                             
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided a PowerPoint presentation                                                                       
entitled, "Alaska's Oil and Gas Taxation-Status Report," dated                                                                  
1/30/17, and answered questions.                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:01:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee meeting  to order at  1:01 p.m.   Representatives Tarr,                                                               
Birch,  Drummond,   Johnson,  Parish,  Talerico,   Westlake,  and                                                               
Josephson  were present  at the  call to  order.   Representative                                                               
Rauscher arrived  as the meeting  was in progress.   Also present                                                               
was Representative Chenault.                                                                                                    
                                                                                                                                
CO-CHAIR TARR made opening remarks.                                                                                             
                                                                                                                                
^PRESENTATION(S):  TAX DIVISION UPDATE, DEPARTMENT OF REVENUE                                                                   
  PRESENTATION(S):  TAX DIVISION UPDATE, DEPARTMENT OF REVENUE                                                              
                                                                                                                                
1:04:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR  announced [that the  only order of  business would                                                               
be  a presentation  by  the  Tax Division  of  the Department  of                                                               
Revenue.]                                                                                                                       
                                                                                                                                
1:04:57 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  Director, Tax Division, Department  of Revenue (DOR),                                                               
said DOR is responsible for  collecting and administering most of                                                               
the taxes for the state.  He  advised that oil and gas issues are                                                               
complex  and  contentious  and  his  presentation  would  provide                                                               
"facts and  figures."  Oil  and gas  taxation is a  collection of                                                               
four major revenue  items that fund most  of Alaska's operations:                                                               
property tax on oil and  gas infrastructure and facilities raises                                                               
approximately $0.1  billion per  year, and approximately  $0.4 of                                                               
that is shared with local  governments; royalty [landowner share]                                                               
raised $1.2  billion in  fiscal year  2016 (FY  16) and  at least                                                               
one-quarter of that is deposited  into the Alaska Permanent Fund;                                                               
production  tax -  which  is  a net  profits  tax  - raised  $0.2                                                               
billion in FY 16; corporate  income tax is an apportionment share                                                               
tied to  global earning and is  reduced to a negative  for FY 16.                                                               
Mr. Alper pointed out that in  FY 12, the state collected a total                                                               
of $9.7 billion in oil and  gas taxes and royalty revenue, and in                                                               
FY 16 the total was reduced to $1.5 billion (slide 3).                                                                          
                                                                                                                                
MR.  ALPER returned  to the  topic of  property tax,  noting that                                                               
property tax  statutes are relatively unchanged  since the 1970s,                                                               
although property assessments, such  as the Trans-Alaska Pipeline                                                               
System  (TAPS),  are  often  litigated.   Royalties  are  set  by                                                               
contract and  the terms of  the leases, and he  described aspects                                                               
of state  land ownership  and subsurface  minerals rights  on the                                                               
North Slope and elsewhere (slide 4).                                                                                            
                                                                                                                                
1:10:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TALERICO asked  whether property  tax assessments                                                               
on infrastructure  have held  a constant value,  in spite  of the                                                               
fluctuation in oil prices.                                                                                                      
                                                                                                                                
MR.  ALPER said  yes, and  pointed out  that the  assessments may                                                               
vary, but  the underlying  statutes have not  changed much  in 40                                                               
years.                                                                                                                          
                                                                                                                                
REPRESENTATIVE TALERICO  understood that  Alaska cannot  sell its                                                               
subsurface  mineral rights,  but under  the terms  of the  Alaska                                                               
Statehood Act [passed  in the 85th U.S. Congress],  the state has                                                               
the option of returning said rights to the federal government.                                                                  
                                                                                                                                
MR. ALPER agreed.                                                                                                               
                                                                                                                                
REPRESENTATIVE  JOHNSON   requested  a  comparison   of  Alaska's                                                               
corporate income tax to that collected by other states.                                                                         
                                                                                                                                
MR. ALPER offered  to provide specifics, and  added that Alaska's                                                               
corporate income tax rate statutes  are similar to those of other                                                               
states.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  BIRCH  questioned   whether  Alaska's  Clear  and                                                               
Equitable  Share   (ACES)  [passed  in  the   25th  Alaska  State                                                               
Legislature] would  generate less revenue today  than Senate Bill                                                               
21 [passed in the 28th Alaska State Legislature].                                                                               
                                                                                                                                
MR. ALPER  said he would provide  a complete answer later  in the                                                               
presentation.                                                                                                                   
                                                                                                                                
CO-CHAIR JOSEPHSON,  referring to  corporate income  taxes, asked                                                               
whether Alaska  is in the  minority of states  that do not  tax S                                                               
corporations,    limited   liability    companies   (LLCs),    or                                                               
partnerships.                                                                                                                   
                                                                                                                                
1:13:58 PM                                                                                                                    
                                                                                                                                
MR. ALPER  responded that the  aforementioned entities  are taxed                                                               
through each state's personal income tax;  it is hard to tax said                                                               
entities through a corporate income  tax because the earnings are                                                               
not retained  by the company,  but are  passed on to  the owner's                                                               
individual income, and Alaska does  not have an individual income                                                               
tax.  He returned attention  to royalties, and listed the factors                                                               
affecting royalties.   In most  states royalties go to  a private                                                               
landowner,  but as  the owner  of the  resource, Alaska  collects                                                               
royalty in  kind - meaning  in oil - or  as money.   He cautioned                                                               
that in  the future,  as oil  not in the  central North  Slope is                                                               
developed, royalties will pay a  lower rate that is proportionate                                                               
with the  share of  the federal royalty;   for  example, offshore                                                               
three to six miles, the state collects 27 percent (slide 5).                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON surmised that  from production offshore beyond                                                               
six  miles from  the shoreline,  the only  benefits to  the state                                                               
would be applicable property and equipment taxes, and jobs.                                                                     
                                                                                                                                
MR. ALPER  stated that  a large  discovery offshore  would reduce                                                               
the tariff  on transportation through  the pipeline,  which would                                                               
benefit  the state,  but there  is  no specific  revenue tied  to                                                               
offshore oil development.                                                                                                       
                                                                                                                                
REPRESENTATIVE   PARISH  said   he  expects   that  the   federal                                                               
government  would  negotiate  royalty  rates  within  the  Arctic                                                               
National  Wildlife  Refuge  (ANWR)  and  the  National  Petroleum                                                               
Reserve Alaska  (NPRA).   He inquired as  to whether  the federal                                                               
government could set the federal royalty rate at zero.                                                                          
                                                                                                                                
1:18:10 PM                                                                                                                    
                                                                                                                                
MR. ALPER explained  that the royalty set with  the oil companies                                                               
is on  a case-by-case  basis, usually at  12.5 percent.   Certain                                                               
statutory requirements are that a  portion of the federal royalty                                                               
goes to the state where  the asset is located; regarding offshore                                                               
oil development,  he advised that there  is pending congressional                                                               
legislation that  may benefit Alaska  and other states  that have                                                               
offshore development off  of their borders.   In further response                                                               
to Representative Parish,  he said in the Gulf  of Mexico, beyond                                                               
six  miles, producer  states  get a  three-eighths  share -  37.5                                                               
percent - and  Alaska gets 27 percent [from three  to six miles].                                                               
This  is  related   to  the  state's  connection   to  the  outer                                                               
continental  shelf  (OCS),  where   there  is  no  longer  active                                                               
exploration underway.                                                                                                           
                                                                                                                                
MR.  ALPER returned  to the  corporate  income tax,  which is  an                                                               
apportionment  formula based  on a  company's worldwide  earnings                                                               
and Alaska's  proportion of its  income tied to  sales, property,                                                               
and  barrels  of  oil  produced.   The  focus  of  the  following                                                               
discussion will be  directed to the production  or severance tax,                                                               
where there have been recent  changes; however, he cautioned that                                                               
often  the  numbers  discussed   are  in  the  aggregate  because                                                               
information  related  to  a  specific  taxpayer  is  confidential                                                               
(slide 6).  Mr. Alper identified  the years between 1977 and 2005                                                               
as a  stable period in the  history of oil and  gas taxes, during                                                               
which  there  was   a  one  percent  gross  tax   on  Cook  Inlet                                                               
production, and  an additional  gross tax  based on  the Economic                                                               
Limit Factor (ELF) [passed in  the 12th Alaska State Legislature]                                                               
formula.    He described  the  purpose  and  effects of  ELF,  as                                                               
modified, on state revenue; for  example, by 2005 most oil fields                                                               
were paying less than one  percent tax, and the legislature began                                                               
efforts to reform oil and gas taxes (slide 7).                                                                                  
                                                                                                                                
1:23:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON  assumed  that  currently,  the  state  would                                                               
collect more  revenue from a 15  percent gross tax, but  during a                                                               
period  with oil  prices  at  $130 per  barrel,  the state  would                                                               
collect less from a 15 percent gross tax.                                                                                       
                                                                                                                                
MR. ALPER  explained that revenue from  a net tax is  less at low                                                               
oil prices and more at high  prices.  In 2006, when the Petroleum                                                               
Production   Tax  (PPT)   [passed  in   the  24th   Alaska  State                                                               
Legislature] began to  tax net profits, the  weighted average ELF                                                               
tax on a  barrel of oil produced  on the North Slope  was about 7                                                               
percent;  now,  most of  the  oil  is  taxed at  the  alternative                                                               
minimum tax  affected by Senate  Bill 21:   4 percent.   However,                                                               
the ELF  formula has  not been  modeled for  the last  ten years,                                                               
thus the  actual ELF tax  is difficult  to determine.   Mr. Alper                                                               
turned to the  years between 2005 and 2017 -  the volatile period                                                               
of oil and  gas taxes - as  evidenced by the fact  that the state                                                               
has  changed taxes  six times  over  the last  [eleven] years  as                                                               
follows (slide 8):                                                                                                              
                                                                                                                                
   • 2005, ELF aggregation by executive order                                                                                   
   • 2006, PPT                                                                                                                  
   • 2007, ACES                                                                                                                 
   • 2010, Cook Inlet Recovery Act [passed in the 26th                                                                          
     Alaska State Legislature]                                                                                                  
   • 2013, Senate Bill 21                                                                                                       
   • 2016, House Bill 247 [passed in the 29th Alaska State                                                                      
     Legislature]                                                                                                               
                                                                                                                                
1:26:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH asked  if any of the  foregoing changes were                                                               
tax increases.                                                                                                                  
                                                                                                                                
MR. ALPER answered  that the [2005 aggregation]  was an increase;                                                               
PPT was  neutral; ACES was  an increase; Cook Inlet  Recovery Act                                                               
was a decrease; Senate Bill 21 was  a tax cut, except at very low                                                               
prices it is a small increase;  House Bill 247 was a reduction in                                                               
some benefits.   In further response to  Representative Birch, he                                                               
acknowledged that Senate  Bill 21 was a tax  cut; although Senate                                                               
Bill 21 has  netted the state about $100 million,  at the time of                                                               
the legislation, the  price of oil was about $100  per barrel and                                                               
the fiscal notes  described a [$500 million] to  $700 million tax                                                               
cut.                                                                                                                            
                                                                                                                                
MR.  ALPER  provided further  details  related  to the  executive                                                               
order by former Governor Frank  Murkowski that aggregated Prudhoe                                                               
Bay satellite fields into a higher  ELF multiplier (slide 9).  In                                                               
2006, PPT was  passed, and he provided details leading  up to the                                                               
PPT legislation and the aftermath thereof (slide 10).                                                                           
                                                                                                                                
1:30:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH  asked  for   further  details  and  costs                                                               
related  to the  legal challenge  of former  Governor Murkowski's                                                               
executive  order  that  aggregated  Prudhoe Bay  fields  for  tax                                                               
purposes.                                                                                                                       
                                                                                                                                
MR. ALPER said  that the Department of Law  represented the state                                                               
and  he  would provide  information  regarding  the cost  of  the                                                               
litigation.                                                                                                                     
                                                                                                                                
CO-CHAIR JOSEPHSON recalled that the  tax credits provided by PPT                                                               
in 2006 were an outlay of $56 million.                                                                                          
                                                                                                                                
MR. ALPER responded:                                                                                                            
                                                                                                                                
     The key portion of the  capital credit was not anything                                                                    
     we  might  have  spent  ...   the  capital  credit  was                                                                    
     embedded as  a component of  the PPT tax for  the major                                                                    
     taxpayers, so  if a,  if a  major producer  might have,                                                                    
     let's  call it  a  billion dollars  in taxable  profit,                                                                    
     they would  then multiply it  by the tax rate  and then                                                                    
     from  that, subtract  their capital  credit.   It would                                                                    
     come  off the  top before  they paid  the tax,  and the                                                                    
     great  bulk  of this  capital  credit  was ...  revenue                                                                    
     foregone, rather than any outlay of the state.                                                                             
                                                                                                                                
CO-CHAIR   JOSEPHSON  questioned   whether  11   years  ago   the                                                               
commitment was  under $100 million,  and in the last  fiscal year                                                               
it was over $700 million.                                                                                                       
                                                                                                                                
MR.  ALPER  said,  "...  yes,  there was  a  ramping  up  of  our                                                               
obligation for cash  tax credits."   He explained  that after the                                                               
passage of the Cook Inlet Recovery  Act the amount for Cook Inlet                                                               
grew, and the current year's  obligation is estimated to be about                                                               
$700 million.   However, after the actions taken  by the governor                                                               
and the legislature,  the state spent $498  million [for credits]                                                               
in FY 16.   Mr. Alper  directed attention to the ACES tax system,                                                               
and provided  details on the  ensuing debate that was  focused on                                                               
progressivity  and on  the windfalls  from high  oil prices  that                                                               
resulted  in  large budget  surpluses,  savings  accounts, and  a                                                               
large  capital budget.    The  Act also  created  the tax  credit                                                               
repurchase fund and the formula  for annual appropriations (slide                                                               
11).   In 2010, the  Cook Inlet Recovery  Act did not  change the                                                               
ACES tax,  but was targeted at  Cook Inlet and expanded  to other                                                               
areas, and created  a tax credit to build a  gas storage facility                                                               
in Kenai.   He  provided details surrounding  the intent  and the                                                               
effects  of this  legislation, noting  that by  FY 14,  more than                                                               
one-half  of repurchased  credits  were outside  the North  Slope                                                               
(slide 12).                                                                                                                     
                                                                                                                                
1:37:56 PM                                                                                                                    
                                                                                                                                
MR. ALPER  continued to the  current tax regime, Senate  Bill 21,                                                               
legislation  that   intended  to   increase  investment   in  new                                                               
production  on  the  North  Slope.   He  provided  details,  most                                                               
notably that most of the revenue  impact is at high prices, which                                                               
will be explained later in the presentation (slide 13).                                                                         
                                                                                                                                
REPRESENTATIVE  BIRCH asked  for  confirmation that  if ACES  had                                                               
been  restored, "the  delta there  is about  $100 million  a year                                                               
today."                                                                                                                         
                                                                                                                                
MR.  ALPER agreed.     He  then directed  attention  to the  most                                                               
recent tax  change -  by House  Bill 247  - that  represented the                                                               
governor's intent to  slow the rate of the growth  of the state's                                                               
obligations and liabilities.  He  provided details of the changes                                                               
in the  final bill  that "left  the fundamental  tax calculations                                                               
intact ... we weren't changing SB 21 per se ...." (slide 14).                                                                   
                                                                                                                                
CO-CHAIR  JOSEPHSON referred  to transparency  and expressed  his                                                               
understanding that  only officials  of the Department  of Natural                                                               
Resources  (DNR) perhaps  the Department  of  Revenue (DOR)  know                                                               
which North Slope fields earned credits for a certain company.                                                                  
                                                                                                                                
1:42:18 PM                                                                                                                    
                                                                                                                                
MR. ALPER  responded that for  tax purposes, a company  files one                                                               
tax  return for  all its  operations  on the  North Slope,  which                                                               
explains why  tax credits impact  a new company  differently than                                                               
they impact  an existing  producer; House  Bill 247  requires the                                                               
state to report  the name of each company and  the amount of cash                                                               
received  for tax  credits per  year.   Said  reporting does  not                                                               
include the  use of the money,  or which company has  credits but                                                               
did not receive payment.                                                                                                        
                                                                                                                                
CO-CHAIR  JOSEPHSON  surmised that  House  Bill  247 reduced  the                                                               
annual cap to approximately $60 million.                                                                                        
                                                                                                                                
MR. ALPER said  there was not previously a limit,  and House Bill                                                               
247 established  a $70  million limit  in statute  - and  that is                                                               
further affected  by the  "hair cut" provision  - thus  a company                                                               
taking cash  to the  cap would receive  $61.25 million  per year.                                                               
In  further  response  to  Co-Chair  Josephson's  question  about                                                               
whether cash credits are subject to appropriation, he remarked:                                                                 
                                                                                                                                
     ... there's  no requirement to appropriate  anything at                                                                    
     all.  The  [$]70 million company cap  is obviously moot                                                                    
     in a year  where there's only $30 million  in the fund,                                                                    
     so  that we  haven't actually  used that  provision for                                                                    
     anything yet.   Had it been in place five  years ago it                                                                    
     would have been quite material.                                                                                            
                                                                                                                                
MR. ALPER  began to explain how  oil has funded the  state; since                                                               
FY  78,  Alaska has  received  $141  billion in  total  petroleum                                                               
revenue, which  he described  as 27 percent  of the  oil's market                                                               
value and  35 percent of the  oil's wellhead value.   He provided                                                               
further details  on past unrestricted general  fund (UGF) revenue                                                               
and  the FY  17  oil  revenue forecast  (slides  15  and 16).  In                                                               
response  to Co-Chair  Tarr, he  clarified that  the oil  revenue                                                               
that makes up over 90 percent  of UGF is the non-Alaska Permanent                                                               
Fund portion of  royalties; about 30 percent of  royalties do not                                                               
go through the budget, but  go directly into the Alaska Permanent                                                               
Fund.    Mr. Alper  directed attention  to a graph  that depicted                                                               
the state's share  of the market value of  petroleum revenue from                                                               
1978 through  2016 (slide 17).   He pointed out that  the revenue                                                               
was lower in the earlier  years because there was less production                                                               
and a  high tariff on  TAPS; however,  the wellhead value  in the                                                               
earlier years is higher (slide 18).   The wellhead value is known                                                               
in tax law as the gross  value at the point of production (GVPP).                                                               
Slide 19  was an  annotated version of  slide 18  and illustrated                                                               
that beginning  in 1978 revenue  hovered around 32  percent, with                                                               
the exception of 1994, during which  there was a large payment of                                                               
royalty  settlement money  to the  Constitutional Budget  Reserve                                                               
Fund  (CBRF).   As more  wells were  drilled, ELF  rates for  the                                                               
larger  fields declined,  thus revenue  started  to decline  from                                                               
1998 to  2005; after the change  to a net profits  system - which                                                               
collects high revenues  when prices are high -  during the period                                                               
from 2007 to 2013 revenues averaged  41 percent.  When oil prices                                                               
fell, from  2014 to 2016,  revenue also fell to  approximately 26                                                               
percent (slides 18 and 19).                                                                                                     
                                                                                                                                
1:50:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH asked  how much  revenue was  lost to  the                                                               
state  due   to  companies'   business  decisions   "of  drilling                                                               
additional wells to drive down the, the rate in a given field."                                                                 
                                                                                                                                
MR. ALPER  was unsure; however,  [the decline beginning  in 1998]                                                               
was due  to a natural  occurrence in  that more wells  were being                                                               
drilled, which was  changing the [ELF] multiplier,  and there was                                                               
an  emphasis  on  the  Prudhoe Bay  satellite  fields  that  were                                                               
aggregated in 2005.  He offered to research this question.                                                                      
                                                                                                                                
MR.  ALPER turned  to the  present and  discussed the  meaning of                                                               
percent of  value (POV).  Currently,  production of approximately                                                               
185  million total  barrels  at  $50 per  barrel  is worth  $9.25                                                               
billion on the  market, and each 1 percent of  total market value                                                               
is about  $90 million to  the state treasury; the  wellhead value                                                               
is about  $7.4 billion, and each  1 percent of wellhead  value is                                                               
about $75 million.    He further described the  impacts of adding                                                               
tax, or  reducing credits,  to the value  of taxable  and royalty                                                               
barrels of oil, concluding that  additional revenue of about $450                                                               
million reaches  a revenue percentage  of 32 (slide 20).   During                                                               
the ACES  tax regime, the  state earned high revenue  because oil                                                               
prices  were high  and costs  were low;  however, because  prices                                                               
were  high,   the  oil  industry   searched  for   and  developed                                                               
challenging fields  where the cost  to produce oil costs  $40 per                                                               
barrel.   He directed attention  to a graph that  illustrated the                                                               
increase in lease expenditures for  producing fields from 2007 to                                                               
2016.   Noting the decrease of  total cost in 2016,  he explained                                                               
that  companies  deduct  costs  against  taxable  barrels,  which                                                               
increases [taxable] total cost by  10-15 percent (slide 22).  The                                                               
steps  of Senate  Bill 21  tax calculations  for legacy  oil were                                                               
illustrated   on   slide   23.     Mr.   Alper   clarified   that                                                               
transportation  costs are  about  $10 per  barrel, including  the                                                               
TAPS tariff and transportation to  a refinery, and production tax                                                               
value is also referred to as PTV or net profits before tax.                                                                     
He  observed, "You  could  get a  sense that  SB  21 was  written                                                               
around  higher  prices;  at  any  price  below  [$]90,  that  was                                                               
considered very low, so oil is  receiving a credit at the maximum                                                               
level, $8  per barrel" (slide  23).  Slide 24  illustrated Senate                                                               
Bill 21  tax calculation for  a range of  oil prices from  $40 to                                                               
$140  per barrel,  as  per  the DOR  Revenue  Sources Book  (RSB)                                                               
Spring  2016.     Transportation   and  lease   expenditures  are                                                               
constant, but  as the  PTV (net) goes  higher, he  estimated that                                                               
the "crossover [from  the minimum tax to  $7.12 calculated level]                                                               
is  maybe [$]65,  $68  a barrel."    He stressed  that  in a  net                                                               
profits tax, price impacts are  magnified through the tax system,                                                               
whereas a  gross tax has a  more linear relationship of  price to                                                               
tax.                                                                                                                            
                                                                                                                                
1:59:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR compared  the  costs illustrated  on  slide 22  to                                                               
those of  slide 24, and pointed  out that under a  net profit tax                                                               
system, transportation costs and  lease expenditures are deducted                                                               
from the production tax; for example,  at $40 per barrel, the PTV                                                               
is  negative  in  value.     She  advised  that  in  a  low-price                                                               
environment  under  a  net  system,  there  are  deductions  that                                                               
protect the industry, but do not protect state.                                                                                 
                                                                                                                                
MR. ALPER restated that the minimum tax is 4 percent of GVPP.                                                                   
                                                                                                                                
CO-CHAIR  JOSEPHSON  questioned  whether  at less  than  $60  per                                                               
barrel, the state's share is larger than that of the industry.                                                                  
                                                                                                                                
MR.  ALPER, referring  to information  gleaned from  industry tax                                                               
returns, said  that the breakeven  price of an average  barrel of                                                               
oil produced  on the North Slope  last year was $45,  and for the                                                               
current year  is $41, due  to cost containment measures  taken by                                                               
the  industry.   In further  response to  Co-Chair Josephson,  he                                                               
agreed that  the industry  is in an  unfavorable position  and is                                                               
suffering from low oil prices around the world.                                                                                 
                                                                                                                                
CO-CHAIR JOSEPHSON remarked:                                                                                                    
                                                                                                                                
     On  the  other hand,  the  minimum  tax  is, is  not  a                                                                    
     minimum tax  because - depending  on the facts  of each                                                                    
     field - because of a  number of features can that drive                                                                    
     the  tax rate  beneath the  4 percent  floor.   Is that                                                                    
     correct?                                                                                                                   
                                                                                                                                
2:05:57 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  responded  that  new  oil  -  gross  value  reduction                                                               
eligible oil - is  not subject to the minimum tax,  and can pay a                                                               
zero  rate;  in  addition,  credits  can be  used  to  bring  tax                                                               
payments  below  the minimum,  which  led  to debate  related  to                                                               
"hardening the  floor, making it  so that certain taxes  can't be                                                               
used  so as  to  protect the  minimum  tax for  the  state."   He                                                               
stressed there  are other taxes  in addition to production  tax -                                                               
such as royalty and corporate income  tax - and production tax is                                                               
a severance  tax to  pay the state  for removing  a non-renewable                                                               
resource that cannot be replaced;  in fact, there is thought that                                                               
a severance  tax should  be paid under  any conditions,  which is                                                               
the intent of the minimum tax.                                                                                                  
                                                                                                                                
CO-CHAIR TARR  returned attention  to slide  24, and  stated that                                                               
changes   to   operating    expenditures   (OPEX}   and   capital                                                               
expenditures (CAPEX)  such as  layoffs and  scaled-back drilling,                                                               
would lag behind price changes, albeit depressing PTV.                                                                          
                                                                                                                                
MR. ALPER  agreed that  as companies cut  their costs  and reduce                                                               
their breakeven  price, the state  benefits somewhat,  except for                                                               
job losses.   The information on  slide 24 is complicated  and he                                                               
summarized the important points as follows (slide 25):                                                                          
                                                                                                                                
   • the price of oil fell by 50 percent                                                                                        
   • the wellhead value declined by 54 percent                                                                                  
   • the taxable net declined by 75 percent                                                                                     
   • production taxes paid declined by 92 percent                                                                               
 • due to the impact of the variable per barrel credit - the                                                                    
     tax paid at $120 per barrel was $26.32 and the tax paid at                                                                 
     $60 was $2.03 per barrel - there was a reduction from $4                                                                   
     billion to $325 million per year in production taxes                                                                       
                                                                                                                                
2:10:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  questioned whether  the state  "bought into                                                               
this ... as far as the volatility goes ...."                                                                                    
                                                                                                                                
MR. ALPER acknowledged that the  state chose taxing on net, which                                                               
is known  to be higher  at high prices  and lower at  low prices.                                                               
He  turned attention  to  the  types of  credits  and provided  a                                                               
history and the  economics of the system  of exploration, capital                                                               
expenditure, and carried forward  annual loss credits (slide 27).                                                               
Not  shown  on   slide  27  is  the  exception   to  the  expired                                                               
exploration credits related  to Middle Earth that  will remain in                                                               
effect until  2022.  In response  to Co-Chair Tarr, he  said Cook                                                               
Inlet is defined in statute  as the Cook Inlet Sedimentary Basin,                                                               
water and  land; the land north  of latitude 68 degrees  north is                                                               
considered  the North  Slope; everything  else  is Middle  Earth.                                                               
Returning  to credits,  he clarified  that  carry forward  annual                                                               
loss  credits are  generally known  as net  operating loss  (NOL)                                                               
credits, and  pay a company for  a percentage of its  losses that                                                               
are  not  tied to  a  specific  project.   He  characterized  the                                                               
aforementioned credit  as "the  main thing, when  we look  at our                                                               
future credit  burden .... What we're  going to be paying  in the                                                               
future  is  this 35  percent  North  Slope  NOL if  anything  big                                                               
happens  ...."    Returning  to  a  previous  question,  he  said                                                               
"stackability" is in effect when a  company has both an NOL and a                                                               
capital, well, or exploration credit, and he gave an example.                                                                   
                                                                                                                                
2:17:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON   inquired  as   to  whether  a   company  in                                                               
production could  have an NOL if  the price of oil  were $100 per                                                               
barrel, because the company would be making a profit.                                                                           
                                                                                                                                
MR. ALPER said  the price of oil  does not matter.   If a company                                                               
is  developing,  and  is  not  in  production,  its  spending  is                                                               
effectively a loss.   In further response  to Co-Chair Josephson,                                                               
Mr.  Alper  explained that  an  NOL  affects producers  and  non-                                                               
producers differently.  He remarked:                                                                                            
                                                                                                                                
     Conoco recently  announced their Willow major  find ...                                                                    
     [that  is  expected]  to  produce  a  hundred  thousand                                                                    
     barrels  of oil  a day,  [located] twenty  or so  miles                                                                    
     west of  existing infrastructure. ... Conoco  is also a                                                                    
     partner in  Prudhoe Bay and  Kuparuk, and  the existing                                                                    
     producing  fields on  the North  Slope.   They will  be                                                                    
     able to take  that spend on a  month-to-month basis and                                                                    
     subtract  it from  their profits  from their  producing                                                                    
     fields, and  reduce their tax liability,  more or less,                                                                    
     in real  time.   They will  reap the  benefits of  a 35                                                                    
     percent  write-off,  from  month  to  month.    If  say                                                                    
     Armstrong  ... found  a similarly  sized field  ... and                                                                    
     spent  several   billion  dollars  ...  they   have  no                                                                    
     recourse  other than  a cashable  tax credit  system to                                                                    
     get paid  back, to get  any sort of  short-term benefit                                                                    
     from the state on that.  ... [This credit] creates some                                                                    
     form of  equity in  tax treatment between  the producer                                                                    
     and the non-producer.                                                                                                      
                                                                                                                                
REPRESENTATIVE BIRCH inquired  as to how and when  the state will                                                               
pay the tax credits it has offered and has an obligation to pay.                                                                
                                                                                                                                
2:21:23 PM                                                                                                                    
                                                                                                                                
MR.  ALPER  responded that  tax  credits  are used  generally  to                                                               
offset future taxes,  which was the intent of the  tax credits as                                                               
written;  in fact,  the  tax credit  certificates  issued by  the                                                               
state can be  used for that purpose.    The state  also agreed to                                                               
buy them  back at  face value subject  to available  funds, which                                                               
was  unique.   He said  that the  credits submitted  for purchase                                                               
will have  funds appropriated as necessary;  however, the statute                                                               
that  created the  tax credit  fund gives  a formula  based on  a                                                               
percentage of  revenue.  In  the most recent budget  the governor                                                               
used the  statutory formula,  reasoning that  the credits  do not                                                               
lose value, can be used to  offset future taxes, and can be sold.                                                               
Last year the original version of  House Bill 247, as part of the                                                               
governor's fiscal  package, had a fiscal  note to pay all  of the                                                               
tax credits from  CBRF.  The governor was expecting  the bill and                                                               
other revenue measures  to pass.  The measures did  not pass, and                                                               
the fiscal note was not funded  either, which left the tax credit                                                               
balance as  an obligation.   As to the  question of when  the tax                                                               
credits will  be paid, Mr.  Alper opined the legislature  and the                                                               
governor  will address  that  as soon  as  the underlying  fiscal                                                               
problem is resolved.                                                                                                            
                                                                                                                                
REPRESENTATIVE  WESTLAKE,  as  an aside,  suggested  latitude  68                                                               
degrees north includes offshore.                                                                                                
                                                                                                                                
REPRESENTATIVE  PARISH  asked  whether  the  state  pays  credits                                                               
immediately rather  than, for  example, in  the instance  where a                                                               
customer buys  $100 worth of  goods, and receives a  store coupon                                                               
worth $25 off their future purchase.                                                                                            
                                                                                                                                
MR.  ALPER  said yes.    In  further response  to  Representative                                                               
Parish, he  recalled that this  practice was  established because                                                               
the  state  had  a  policy  to  diversify  the  North  Slope  and                                                               
encourage new  companies to invest.   Also, at that  time, Alaska                                                               
could afford the credit obligations,  but as revenue has reduced,                                                               
the credit obligations have not.                                                                                                
                                                                                                                                
2:26:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PARISH  asked what proportion of  NOL credits have                                                               
gone to small producers.                                                                                                        
                                                                                                                                
MR. ALPER estimated that about  two-thirds of the NOL credits the                                                               
state has  issued have gone  to the  major producers, but  not in                                                               
cash; major  producers must use  the credits to offset  or reduce                                                               
their tax payments.   About one-third has been  in checks written                                                               
to smaller  companies that produce  less than 50,000  barrels per                                                               
day or are not producing at all.                                                                                                
                                                                                                                                
MR.  ALPER,  in response  to  Representative  Rauscher, said  the                                                               
split of new  [companies] versus old was  relatively stable until                                                               
affected by the recent economy and  activities in Cook Inlet.  In                                                               
further response  to Representative Rauscher, he  elaborated that                                                               
the last couple of years have been "an aberration."                                                                             
                                                                                                                                
MR.  ALPER  returned  to the  presentation  and  described  small                                                               
producer  credits,   per-taxable  barrel  credits,   and  credits                                                               
against corporate income taxes.   He stressed that to qualify for                                                               
cash, a  company must produce  less than 50,000 barrels  per day;                                                               
companies larger  than that must  "carry forward" to  use against                                                               
future year's  taxes (slide 28).   In response to  Co-Chair Tarr,                                                               
he clarified that  the cash credits are  considered a repurchase,                                                               
not a refund.   Mr. Alper returned to the  history of tax credits                                                               
and said  that from  FY 2007  through the end  of 2016,  about $8                                                               
billion  in state  credit money  has been  spent or  foregone, of                                                               
which $4.4  billion are  credits against  tax liability  and $2.3                                                               
billion have been paid to  repurchase credits on the North Slope.                                                               
Outside the North  Slope, there are $0.1  billion credits against                                                               
tax  liability and  $1.2  billion have  been  paid to  repurchase                                                               
credits  (slide 29).   Slides  30,  31, and  32 provided  further                                                               
details on the  distribution of the nearly $3.5  billion in state                                                               
repurchased  credits through  FY  16, described  by location  and                                                               
project.  Slide 30 was corrected  to read:  $0.9 billion and $0.3                                                               
billion.                                                                                                                        
                                                                                                                                
2:39:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON  expressed his concern  that the state  made a                                                               
$1.5 billion investment for the  equivalent of five months of oil                                                               
production.                                                                                                                     
                                                                                                                                
MR. ALPER  stated this is  incremental production  from generally                                                               
smaller and more  challenged fields.  An issue  facing the credit                                                               
system is  that if a  larger project  is developed using  the tax                                                               
credit  system,  both  volumes   and  liabilities  will  increase                                                               
dramatically.     He  provided   a  production  tax   graph  that                                                               
illustrated the  historical and forecast  costs of  statewide tax                                                               
credits and production  tax by three colored bars  for each year:                                                               
production taxes without  any credits are shown on the  left as a                                                               
pink bar; production taxes paid  after credits are used to offset                                                               
tax liability are  shown in the middle bar; the  net effect after                                                               
cash credits  are paid is shown  on the right  as a red bar.   At                                                               
the outset and through the early  years, tax credits truly were a                                                               
reinvestment of  surplus revenue to  build for the  future (slide                                                               
33).  In regard to FY 15, FY 16, and FY 17, he remarked:                                                                        
                                                                                                                                
     If the  credits were  being paid at  the rate  at which                                                                    
     they are  being earned,  we would actually  be spending                                                                    
     substantially  more on  tax credits  then  we would  be                                                                    
     receiving in the production taxes that support them.                                                                       
                                                                                                                                
MR.  ALPER provided  a similar  graph that  illustrated statewide                                                               
tax  credits and  all unrestricted  petroleum revenue  except for                                                               
the "permanent  fund piece" (slide 34).   In regard to  FY 17, he                                                               
said the  forecast assumes  $700 million in  credits is  paid, as                                                               
opposed to the  actual amount of $30 million that  was spent, and                                                               
that the blue line  on the graph is also out  of date.  Regarding                                                               
forthcoming legislation with the intent  to "harden the floor" he                                                               
cautioned  that the  issue  is  this:   A  company  with a  carry                                                               
forward loss could reduce its  payments below the minimum tax and                                                               
possibly to  zero.   In response to  Co-Chair Tarr,  he confirmed                                                               
that the  minimum tax is  4 percent for  legacy oil and  less for                                                               
new oil.                                                                                                                        
                                                                                                                                
2:44:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   TALERICO   recalled  previous   testimony   that                                                               
companies  have  cut  their  expenses,  impacting  net  operating                                                               
losses and  reducing the  cost to  produce a barrel  of oil.   He                                                               
asked  whether  assumptions  related  to  factors  impacting  net                                                               
operating losses are "figured in."                                                                                              
                                                                                                                                
2:44:35 PM                                                                                                                    
                                                                                                                                
MR. ALPER  advised that slides 33  and 34 have not  been updated;                                                               
however,  in  the  RSB  and other  DOR  official  forecasts,  the                                                               
assumption of  companies' profits and  losses, and the  impact to                                                               
future tax  revenue, has  been fully  incorporated.   He stressed                                                               
that slides  33 and 34  illustrate that  when the state  had more                                                               
revenue, the  credits "meant something  very different  than they                                                               
do  in the  current context."     He offered  to provide  updated                                                               
slides to  the committee.   Mr. Alper  directed attention  to the                                                               
aforementioned credit  appropriation formula AS  43.55.028(b) and                                                               
(c), and  described the use of  and possible uses of  the formula                                                               
(slide 35).   He added that  in FY 18, DOR anticipates about $490                                                               
million  in production  tax; 15  percent of  $490 million  is $74                                                               
million, which  was in  the governor's  budget proposal,  and the                                                               
same formula  was used to  determine the related  governor's veto                                                               
of  $30 million  in  FY 17.   Continuing  details  of tax  credit                                                               
history were presented on slide 36.                                                                                             
                                                                                                                                
2:50:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON  suggested  that  with  $3  billion  to  $3.5                                                               
billion in CBRF,  even with a cut to the  budget of $0.5 billion,                                                               
the  state [budget]  would almost  drain CBRF,  thus funding  the                                                               
aforementioned without a fiscal plan is "absurd."                                                                               
                                                                                                                                
MR. ALPER  recalled that one  year ago  it was expected  that the                                                               
CBRF   balance  would   be  $6   billion  or   $7  billion,   and                                                               
appropriating $1  billion to clear  a major state  liability made                                                               
more sense.  He cautioned that  CBRF money is needed for a crisis                                                               
such as  a geological disaster.   Returning to  the presentation,                                                               
he provided further details on  tax credit certificates that have                                                               
been  paid,   transferred,  are  ineligible,  and   are  awaiting                                                               
repurchase (slide 37).                                                                                                          
                                                                                                                                
REPRESENTATIVE TALERICO asked  whether the aforementioned credits                                                               
were all acquired in FY 17,  or if some were from previous fiscal                                                               
years.                                                                                                                          
                                                                                                                                
MR.  ALPER  responded  that most  were  expenditures  during  the                                                               
calendar year 2015;  as NOL credits require an  annual profit and                                                               
loss statement,  applications are submitted  at the end  of March                                                               
and that is  the start of a 120-day processing  time.  Therefore,                                                               
NOL  credits are  generally  issued  in July  and  August.     In                                                               
further  response  to  Representative  Talerico,  he  offered  to                                                               
provide additional  information on the state's  current liability                                                               
on an  annual basis, and directed  attention to a graph  from the                                                               
RSB Fall  2016, which illustrated  how the credit  liability will                                                               
grow  over  the next  few  years,  based on  certain  assumptions                                                               
(slide 38).                                                                                                                     
                                                                                                                                
2:56:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  opined that  postponing the payment  of tax                                                               
credits for  ten years  will not provide  the benefits  that were                                                               
intended.                                                                                                                       
                                                                                                                                
MR. ALPER agreed,  and restated that the state  is only obligated                                                               
to pay under the credit  appropriation statutory formula and that                                                               
tax credits were  designed to offset future taxes.   He continued                                                               
with  details  on  the  options   for  companies  holding  credit                                                               
certificates (slide  39).  He  further explained that  the option                                                               
to  sell  certificates  to  a  company with  a  tax  liability  -                                                               
generally  one of  the three  major producers  - is  rarely taken                                                               
because the  state buys  certificates for  100 percent  [of their                                                               
value] and  a third-party buyer  would negotiate a purchase  at a                                                               
discount;  however, under  present  circumstances, "we're  seeing                                                               
credits change  hands."  Furthermore,  there are  restrictions on                                                               
how many  credits a company can  buy to the amount  it can offset                                                               
from the  taxes that it owes;  in addition, NOL credits  can only                                                               
offset 20 percent  per year.  Conversely,  exploration credits do                                                               
not have  that restriction thus a  company can offset all  of its                                                               
taxes  with   exploration  credits,   and  he   anticipated  that                                                               
exploration credits will be found in the secondary market.                                                                      
                                                                                                                                
MR. ALPER turned to the  major provisions and regional impacts of                                                               
House Bill 247, the tax  credit reform bill, and provided details                                                               
(slide 40).   He  noted that a  qualified capital  expenditure is                                                               
known  as QCE  and  a well  lease expenditure  is  known as  WLE.                                                               
Regarding a statewide impact, the  bill changed the interest rate                                                               
charged   on  delinquent   production  taxes,   carved  out   the                                                               
production tax, and  increased the interest rate  for three years                                                               
and then  dropped it  to zero  which, he  opined, will  cause tax                                                               
disputes in future years.                                                                                                       
                                                                                                                                
3:03:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR recalled  that the intent of the surety  bond is to                                                               
protect local Alaska  businesses if companies go  out of business                                                               
and local vendors are not paid.                                                                                                 
                                                                                                                                
CO-CHAIR JOSEPHSON questioned whether  the intent of the increase                                                               
in interest rates  is to ensure audits are completed  in a timely                                                               
manner.                                                                                                                         
                                                                                                                                
MR.  ALPER  said the  provision  is  related  to audits  and  the                                                               
statute of limitations.  He  acknowledged, "It's unfortunate that                                                               
we  have been  pushing  the six-year  limit  and especially  when                                                               
interest rates were  higher.  ...  Eleven  percent compounded for                                                               
six years kind  of doubles your cost, and  companies were finding                                                               
that  quite onerous,  and  deservedly so."    The provision  also                                                               
eliminated  compound   interest,  and  then  after   three  years                                                               
interest goes to  zero.  He cautioned that the  problem with this                                                               
part of the  provision is that if an audit  assessment ends up in                                                               
litigation for five more years  after the audit, no interest will                                                               
accrue, and  thus there  is no  incentive for  a company  to ever                                                               
settle a tax issue.                                                                                                             
                                                                                                                                
3:05:18 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                     
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 3:05 p.m.                                                                 

Document Name Date/Time Subjects
DOR Present Oil Tax Status Report HRES 1-30-17 final ka.pdf HRES 1/30/2017 1:00:00 PM
Status Update on Oil and Gas Tax Regime in Alaska