Legislature(2017 - 2018)BARNES 124

02/13/2017 01:00 PM House RESOURCES

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01:00:46 PM Start
01:02:09 PM HB111
03:02:48 PM Adjourn
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Heard & Held
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**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 13, 2017                                                                                        
                           1:00 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 Mike Chenault (alternate)                                                                                        
Representative Chris Tuck (alternate)                                                                                           
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 111                                                                                                              
"An  Act  relating  to  the  oil  and  gas  production  tax,  tax                                                               
payments,  and  credits;  relating   to  interest  applicable  to                                                               
delinquent  oil and  gas  production tax;  and  providing for  an                                                               
effective date."                                                                                                                
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 111                                                                                                                  
SHORT TITLE: OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                          
SPONSOR(s): RESOURCES                                                                                                           
02/08/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/17       (H)       RES, FIN                                                                                               
02/08/17       (H)       TALERICO OBJECTED TO INTRODUCTION                                                                      
02/08/17       (H)       INTRODUCTION RULED IN ORDER                                                                            
02/08/17       (H)       SUSTAINED RULING OF CHAIR Y23 N15 E2                                                                   
02/08/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/08/17       (H)       Heard & Held                                                                                           
02/08/17       (H)       MINUTE(RES)                                                                                            
02/13/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
WITNESS REGISTER                                                                                                              
LISA WEISSLER, Staff                                                                                                            
Representative Andy Josephson                                                                                                   
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   On behalf of  Representatives Josephson and                                                             
Tarr,  co-chairs  of  the  House  Resources  Standing  Committee,                                                               
sponsor, provided a presentation related to HB 111.                                                                             
ACTION NARRATIVE                                                                                                              
1:00:46 PM                                                                                                                    
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee meeting  to order at  1:00 p.m.   Representatives Tarr,                                                               
Birch,  Drummond,  Parish,   Rauscher,  Talerico,  Westlake,  and                                                               
Josephson  were present  at the  call to  order.   Representative                                                               
Johnson arrived as the meeting was in progress.                                                                                 
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
1:02:09 PM                                                                                                                    
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE  BILL  NO.  111,  "An  Act relating  to  the  oil  and  gas                                                               
production tax,  tax payments, and credits;  relating to interest                                                               
applicable  to  delinquent  oil   and  gas  production  tax;  and                                                               
providing for an effective date."                                                                                               
1:03:04 PM                                                                                                                    
LISA  WEISSLER,  Staff,  Representative  Andy  Josephson,  Alaska                                                               
State  Legislature, on  behalf of  Representatives Josephson  and                                                               
Tarr,  co-chairs  of  the  House  Resources  Standing  Committee,                                                               
sponsor of HB  111, provided a brief  personal background related                                                               
to her  involvement with  Alaska's oil and  gas resource  law for                                                               
the  past  36  years,  beginning with  her  participation  during                                                               
debate on the Petroleum Production  Tax (PPT) [passed in the 24th                                                               
Alaska  State  Legislature], and  instituted  in  2006.   In  the                                                               
context  of HB  111,  she  said she  compiled  a  history of  tax                                                               
credits  in order  to aid  the committee's  understanding of  the                                                               
bill.    Ms.  Weissler  paraphrased  from  a  document  entitled,                                                               
"Alaska's Oil and Gas Production Tax  [ - ] Tax Credits History,"                                                               
and dated 2/13/17, provided in the committee packet as follows                                                                  
[original punctuation provided]:                                                                                                
     The Petroleum Production Tax (PPT)                                                                                         
     In 2006,  after fifty-one  years of  a gross  value oil                                                                    
     and  gas  production  tax, Alaska  switched  to  a  net                                                                    
     profit  tax system  known as  the Petroleum  Production                                                                    
     Tax or "PPT." Reasons for  the change included that the                                                                    
     existing  gross  tax  system   resulted  in  almost  no                                                                    
     production  tax  revenue   from  even  very  productive                                                                    
     fields; the system was unable  to adjust for increasing                                                                    
     oil prices and differences  in field conditions between                                                                    
     the  North  Slope  and  Cook  Inlet;  and  it  provided                                                                    
     insufficient incentives for  investment in Alaska's oil                                                                    
     and  gas  fields.  The PPT  was  intended  to  increase                                                                    
     Alaska's share  of oil  production revenue  and provide                                                                    
     incentives for oil  and gas companies to  invest in the                                                                    
        Major Producers'  Incentives. It  was believed  that                                                                  
     the  tax  advantages of  the  net  profit system  would                                                                    
     increase   the   major  producers'   (ExxonMobil,   BP,                                                                    
     ConocoPhillips) investment in  enhanced production from                                                                    
     the large legacy Prudhoe Bay  and Kuparuk oil fields. A                                                                    
     taxpayer  could deduct  certain  operating and  capital                                                                    
     lease  expenditures  as  part of  the  calculation  for                                                                    
     determining their  tax liability. In addition,  the PPT                                                                    
     offered a  20 percent tax credit  for qualified capital                                                                    
     expenditures. In  effect, the more a  producer spent in                                                                    
     Alaska's oil fields, the lower their tax.                                                                                  
        Independent Companies'  Incentives. The  PPT offered                                                                  
     several tax credits  to encourage independent companies                                                                    
     to  explore   for  and  develop  smaller   oil  fields.                                                                    
     Companies  could  accrue  the  20  percent  credit  for                                                                    
     qualified  capital expenditures,  including exploration                                                                    
     costs. In  addition, a producer with  less than 100,000                                                                    
     barrels production  per day could  qualify for up  to a                                                                    
     $12  million tax  credit provided  the  producer had  a                                                                    
     positive tax liability. The PPT  also provided a credit                                                                    
     of up  to $6 million  annually for oil or  gas produced                                                                    
     from  leases outside  Cook Inlet  and  the North  Slope                                                                    
     (known as "Middle Earth").                                                                                                 
       Net Operating  Loss. The PPT provided  for a carried-                                                                  
     forward  annual   loss  credit,  referred  to   as  net                                                                    
     operating loss  (NOL). Net  operating losses  are lease                                                                    
     expenditures that  would be deductible except  when the                                                                    
     deduction would cause the net  value of taxable oil and                                                                    
     gas  to be  less than  zero. A  percentage of  the lost                                                                    
     deductions  are converted  to tax  credits that  can be                                                                    
     applied  against   future  tax  obligations.   The  PPT                                                                    
     provided for a 20 percent net operating loss credit.                                                                       
     The NOL  credit was  introduced primarily as  a benefit                                                                    
     to independent companies who would  not have enough oil                                                                    
     production to  generate a  tax liability  against which                                                                    
     to apply their lease  expenditure deductions. The major                                                                    
     producers were  expected to have enough  production tax                                                                    
     liability  to   realize  the  full  benefit   of  their                                                                    
     deductions in the year the expenditure occurred.                                                                           
        Tax  Credit  Purchase.  Because  explorers  and  new                                                                  
     producers would not  produce enough oil or  gas to have                                                                    
     much  of a  tax liability  against which  to apply  tax                                                                    
     credits,  independent companies  doing business  in the                                                                    
     state  asked  the  legislature to  establish  a  credit                                                                    
     purchase  program. As  originally  introduced, the  PPT                                                                    
     legislation   allowed  certain   tax   credits  to   be                                                                    
     transferred and  traded on the  open market.  Since the                                                                    
     market  was  limited  to  the  three  major  producers,                                                                    
     independent  companies were  concerned  they would  not                                                                    
     receive full  value for their credits,  while the buyer                                                                    
     could  apply  100 percent  of  the  credit against  the                                                                    
     buyer's tax liability.                                                                                                     
     The final  PPT included  a provision  for the  state to                                                                    
     provide  for  the  purchase  of  certain  tax  credits.                                                                    
     Because   legislators   and  administration   officials                                                                    
     worried  about the  potential impact  to state  revenue                                                                    
     should  oil  prices  drop, purchases  were  limited  to                                                                    
     companies  producing not  more than  50,000 barrels  of                                                                    
     oil  per  day and  there  was  a  $25 million  cap  per                                                                    
     company.  In addition,  an  applicant  was required  to                                                                    
     incur  a  qualified  capital   expenditure  or  be  the                                                                    
     successful bidder for a state  oil and gas lease within                                                                    
     24 months after applying  for a transferable tax credit                                                                    
     certificate. The purchase payment  could not exceed the                                                                    
     total of the expenditures or bid.                                                                                          
     Tax credits  that qualified for  purchase were  the net                                                                    
     operating loss  credits, qualified  capital expenditure                                                                    
     credits and  credits offered  under a  2003 exploration                                                                    
     credit program.                                                                                                            
     2007  Alaska's Clear and Equitable Share (ACES)                                                                            
     In  2007,  changes  were  made to  the  PPT  under  the                                                                    
     Alaska's Clear  and Equitable  Share Act  or"ACES." The                                                                    
     changes  were made  because of  lower tax  revenue from                                                                    
     higher than  anticipated lease  expenditure deductions.                                                                    
     A corruption  scandal that tainted the  vote of several                                                                    
     legislators during  the PPT  debate led  legislators to                                                                    
     be  more  receptive  to   making  changes.  Though  the                                                                    
     administration considered  switching the tax  system to                                                                    
     a gross value tax, they  concluded that a gross tax was                                                                    
     not flexible enough to  address the differences between                                                                    
     oil and  gas fields,  and didn't account  for expensive                                                                    
     resource  development such  as heavy  oil. Among  other                                                                    
     things,  ACES retained  the PPT  tax  credits and  cash                                                                    
     purchase program;  and established  an oil and  gas tax                                                                    
     credit fund to pay for the credits.                                                                                        
     The Oil and Gas Tax Credit Fund and Credit Purchases                                                                       
     ACES established the  oil and gas tax credit  fund as a                                                                    
     way  to purchase  qualifying credits  more efficiently.                                                                    
     The amount of money available  to the fund was based on                                                                    
     a set percentage of production  tax revenue; 10 percent                                                                    
     when oil prices  were $60 or more, 15  percent when oil                                                                    
     prices  were  less  than  $60.   The  $25  million  cap                                                                    
     established  under  the  PPT   was  repealed.  The  $25                                                                    
     million  per  company  cap  was  lifted  because  small                                                                    
     producers found the cap too low to be useful.                                                                              
     In  response to  legislators' questions  regarding what                                                                    
     would  happen to  the fund  if oil  prices dropped,  an                                                                    
     administration  official   explained  that  regulations                                                                    
     would  determine how  to allocate  payments when  there                                                                    
     was  an insufficient  fund balance.  He  said, "a  long                                                                    
     period of  low prices could lead  to insufficient money                                                                    
     in the fund  after lots of credits have  been paid out,                                                                    
     and  the  legislature might  choose  to  not spend  the                                                                    
     money  on credits."  He stated  that remaining  credits                                                                    
     not  purchased by  the state  could  either be  carried                                                                    
     forward  or transferred  to  another  taxpayer who  had                                                                    
     sufficient tax liability.                                                                                                  
       Appropriations  to the  Oil and  Gas Credit  Fund. In                                                                  
     2008, the first  year after the oil and  gas tax credit                                                                    
     fund   was  created,   the  legislature   followed  the                                                                    
     prescribed formula in appropriating  money to the fund.                                                                    
     Starting  in 2009,  the legislature  provided an  open-                                                                    
     ended appropriation  to cover  all tax  credit purchase                                                                    
     applications.   During   the    following   years   the                                                                    
     legislature  continued   this  practice,   creating  an                                                                    
     expectation  among  oil  and  gas  companies  that  all                                                                    
     qualifying credits would be purchased.                                                                                     
       Easing  Restrictions. In  2010, the  requirement that                                                                  
     an applicant  incur a qualified capital  expenditure or                                                                    
     buy  a  state  oil  and  gas lease  to  qualify  for  a                                                                    
     purchase payment  was repealed.  This was done  to help                                                                    
     companies get project financing    companies looking to                                                                    
     invest wanted  to know  they would  get full  value for                                                                    
     the credit  without worrying  about whether  the credit                                                                    
     would meet the  investment requirement. The legislature                                                                    
     also  added a  new  tax well  lease expenditure  credit                                                                    
     program  targeted at  Cook  Inlet  gas exploration  and                                                                    
     production. The  new credits could be  purchased by the                                                                    
       Tax Credit Purchases  and Private Financing. In 2013,                                                                  
     the legislature  passed an amendment to  the production                                                                    
     tax  that specifically  allowed for  the assignment  of                                                                    
     production  tax  credits   to  a  third-party  assignee                                                                    
     without  the  state's  consent.  This  meant  companies                                                                    
     could use their tax credits  as collateral for loans or                                                                    
     sell  credits  to  a bank  or  investment  institution.                                                                    
     There  is  evidence  the provision  went  farther  than                                                                    
     intended. The provision was offered  as an amendment in                                                                    
     House  Finance  to  a Senate  bill  dealing  with  fish                                                                    
     taxes.  An administration  official testified  that the                                                                    
     amendment  would help  open private  equity markets  to                                                                    
     smaller  investors  in  the  state.  When  asked  about                                                                    
     whether   the   provision   applied  to   North   Slope                                                                    
     producers,  the   maker  of  the  amendment   said  she                                                                    
     "believed  that  the  amendment applied  only  to  Cook                                                                    
     Inlet and Middle  Earth" and to gas.  The senator whose                                                                    
     bill was  being amended stated  "The goal was  to bring                                                                    
     additional gas  to Cook Inlet consumers."  As it turned                                                                    
     out, the amendment  applied to both oil and  gas and to                                                                    
     all net  operating loss, qualified  capital expenditure                                                                    
     and well lease expenditure credits.                                                                                        
        The  Sure Thing.  In  2015,  a Wall  Street  Journal                                                                  
     article  titled   "How  Wall  Street  Makes   Money  on                                                                    
     Alaska's Oil  Tax Breaks" described how  Alaska oil and                                                                    
     gas companies  would sell their  rights to a  credit or                                                                    
     use the rights as collateral  for a loan. The companies                                                                    
     would  give up  between  five to  twenty  percent to  a                                                                    
     lender or  buyer, who  would get  the right  to collect                                                                    
     the entire  state payment. It has  become apparent that                                                                    
     lenders saw little risk given  the state's track record                                                                    
     in   fully    funding   tax   credit    cash   purchase                                                                    
        Not  Such a  Sure  Thing  After All.  The  estimated                                                                  
     amount of  purchasable credits  grew from  $180 million                                                                    
     in  2009  to  $700  million   in  2015.  In  2015,  the                                                                    
     legislature  passed  an   open-ended  appropriation  to                                                                    
     cover  all  purchase  applications. Had  the  statutory                                                                    
     formula been followed,  approximately $91 million would                                                                    
     have been available for  appropriation. With oil prices                                                                    
     plummeting  and  a  $3 billion  deficit,  the  governor                                                                    
     vetoed  $200 million  of  the  appropriation. In  2016,                                                                    
     facing a  $4 billion  deficit, he vetoed  $430 million,                                                                    
     leaving  the  $30  million required  by  the  statutory                                                                    
     formula.  The question  remains  how to  deal with  the                                                                    
     remaining tax credit purchase applications.                                                                                
     2013 - Senate Bill 21                                                                                                      
     In 2013,  oil and  gas companies' discontent  with some                                                                    
     ACES  provisions  and  concerns about  declining  North                                                                    
     Slope  oil  production and  the  fracking  boom in  the                                                                    
     Lower 48  led the  Parnell administration  to introduce                                                                    
     Senate   Bill   21.   Administration   officials   also                                                                    
     expressed concern that their  analysis of $6 billion in                                                                    
     tax  credits  found  no  direct  connection  to  future                                                                    
     production.  They worried  that if  oil prices  dropped                                                                    
     and  company investments  increased,  the state  budget                                                                    
     would have  a deficit  of billions  of dollars  and the                                                                    
     state would "still be on the hook for the credits."                                                                        
       Tax Credit Policy  Change. For North Slope companies,                                                                  
     SB  21 changed  the  state's oil  tax  policy from  tax                                                                    
     credits  based  on  investment   to  credits  based  on                                                                    
     production;  the  more  production from  a  field,  the                                                                    
     lower the tax.  The theory was that  companies would be                                                                    
     more  inclined  to invest  in  the  state and  increase                                                                    
     their production.                                                                                                          
       SB 21 Tax Credit Changes.                                                                                              
     SB  21  repealed   the  qualified  capital  expenditure                                                                    
     credit  for North  Slope oil  and  gas activities.  The                                                                    
     credit remained in place for other areas of the state.                                                                     
     SB 21  included a gross  value reduction (GVR)  where a                                                                    
     certain  percentage of  "new oil"  on  the North  Slope                                                                    
     would  be tax-free.  The  bill added  a  $5 per  barrel                                                                    
     credit  for  production  that   qualified  as  new  oil                                                                    
     subject to the  gross value reduction. The  GVR and new                                                                    
     oil credit applied for the life of the field.                                                                              
     For production  that did not  qualify as new  oil, such                                                                    
     as oil from the Prudhoe  Bay oil field, a sliding-scale                                                                    
     production  based tax  credit  was added;  from $8  per                                                                    
     barrel when the gross value of  oil was $80 or less, to                                                                    
     $1 per  barrel between $140  and $149 gross  value, and                                                                    
     zero  after  that.  The credit  is  not  available  for                                                                    
     purchase by the state.                                                                                                     
     For the North Slope, SB  21 increased the net operating                                                                    
     loss  credit  to 45  percent  until  2016 to  ease  the                                                                    
     transition  away  from  qualified  capital  expenditure                                                                    
     credits.  After  2016, the  percentage  was  set at  35                                                                    
     percent    the same as  the new production tax  rate of                                                                    
     35 percent.  For other  areas, the rate  was set  at 25                                                                    
         2014    Repeal   Referendum.   In    2014,   public                                                                  
     dissatisfaction  over the  new oil  and gas  production                                                                    
     tax system  prompted a  citizens' referendum  to repeal                                                                    
     SB 21. The  repeal would have reinstituted  ACES in its                                                                    
     entirety. Among other issues,  supporters of the repeal                                                                    
     argued that  over time an increasing  percentage of oil                                                                    
     would  qualify  for the  new  oil  tax breaks  and  the                                                                    
     state's   percentage    of   profit    would   decrease                                                                    
     indefinitely into the future.  There were also concerns                                                                    
     that  tax credits  on  production  would not  encourage                                                                    
     Alaska  investment since  the credits  did not  require                                                                    
     instate  investment. The  opposition argued  SB 21  was                                                                    
     working   to  attract   Alaska  investment   and  would                                                                    
     increase   state   revenue   over  the   long-term   by                                                                    
     increasing production. The referendum  failed by a vote                                                                    
     of 99,855 (52.7 percent) to 89,608 (47.3 percent).                                                                         
     2016  HB 247                                                                                                               
     Starting  in 2015,  oil prices  dropped from  over $100                                                                    
     per barrel to  below $40 per barrel. With  a $4 billion                                                                    
     deficit, the state  could no longer afford  all the tax                                                                    
     credit incentives  offered as part of  Alaska's oil and                                                                    
     gas  production tax.  To ease  the  pressure on  future                                                                    
     state  budgets, the  administration introduced  and the                                                                    
     legislature  passed HB  247 making  changes to  several                                                                    
     tax credits.                                                                                                               
     ? HB  247 amended Cook  Inlet tax credits to  phase out                                                                    
     by 2018,  including the net operating  loss credit. For                                                                    
     Middle  Earth, credits  were approximately  halved. The                                                                    
     bill also placed a cap  on cash purchases to individual                                                                    
     companies;  $35  million  would be  purchased  at  full                                                                    
     value,  and  another  $35   million  discounted  by  25                                                                    
     percent.  Any  additional  credits  would  have  to  be                                                                    
     carried into a  future year for either  a cash purchase                                                                    
     or use against a tax liability.                                                                                            
     ? For North Slope activities,  HB 247 added a provision                                                                    
     to the  gross value reduction  setting a time  limit on                                                                    
     how  long  the  oil   would  be  considered  "new"  oil                                                                    
     excluded  from taxation.  The  reduction expires  after                                                                    
     seven years of  production or three years  if the price                                                                    
     of oil is greater than $70 per barrel.                                                                                     
     2017  What's Next                                                                                                          
     Most of  the changes in  HB 247 took effect  on January                                                                    
     1,  2017. There  are  still credit  programs and  other                                                                    
     provisions   that  could   cost  the   state  millions,                                                                    
     possibly billions, in the coming years.                                                                                    
        Net Operating  Loss. The  North Slope  net operating                                                                  
     loss  credit remains  at 35  percent. Without  changes,                                                                    
     there  is   the  risk  the   credits  could   take  the                                                                    
     production  tax  to zero  and  increase  the amount  of                                                                    
     credits  available  for  purchase. The  risk  increases                                                                    
     with  continuing low  oil prices  and increasing  North                                                                    
     Slope activities.                                                                                                          
       Minimum Floor. Starting with  the PPT, the production                                                                  
     tax included a tax floor  of not less than four percent                                                                    
     of the gross  value when oil prices were  more than $25                                                                    
     per  barrel. While  the  sliding-scale  per barrel  tax                                                                    
     credit  cannot  reduce  a North  Slope  producer's  tax                                                                    
     liability below  the floor, net operating  loss credits                                                                    
     can take the tax to  zero. Purchasable credits can take                                                                    
     the tax below zero.                                                                                                        
       Migrating  Credits. Currently,  a taxpayer  can apply                                                                  
     sliding-scale  per barrel  tax credits  that cannot  be                                                                    
     used  in one  month to  offset a  tax liability  from a                                                                    
     different month  in that calendar year.  This occurs in                                                                    
     a  year where  the minimum  tax  is in  effect in  some                                                                    
     months and not in others in a year.                                                                                        
         Outstanding  Credit   Purchase  Applications.   The                                                                  
     Department  of Revenue's  Fall 2016  Forecast estimates                                                                    
     there will be over  $887 million in outstanding credits                                                                    
     available to purchase  at the end of  fiscal year 2018,                                                                    
     assuming around  $74 million is appropriated  under the                                                                    
     credit  fund  statutory   formula.  If  cash  purchases                                                                    
     continue  to   be  permitted  and   appropriations  are                                                                    
     limited to the statutory  formula over the next decade,                                                                    
     this balance  is expected  to grow  to $1.6  billion by                                                                    
     the end of fiscal year 2026.                                                                                               
[During the  presentation the following questions  were asked and                                                               
1:14:53 PM                                                                                                                    
REPRESENTATIVE  BIRCH asked  whether net  operating loss  credits                                                               
(NOLs) were broadly supported by the legislature.                                                                               
MS. WEISSLER  was unsure,  and opined the  bigger concern  at the                                                               
time was  the cash payout, and  how to "level the  playing field"                                                               
for the  independent companies.    She  offered to  research this                                                               
1:25:27 PM                                                                                                                    
CO-CHAIR  JOSEPHSON questioned  why  the  legislature would  have                                                               
made a  change in policy allowing  a cashable credit to  be spent                                                               
outside  the  state  on an  outside  development  or  exploration                                                               
1:25:59 PM                                                                                                                    
MS. WEISSLER  explained that  was not the  intent of  the change;                                                               
the intent  was that the  money would  be invested in  the state,                                                               
however,  there  were  no  "sidebars"  limiting  the  law.    She                                                               
referred to a  Linc Energy 2013 annual report  that described how                                                               
the company  sold credits  to an  investment company  and applied                                                               
the cash to Alaska  and Gulf Coast costs.  She  said this was not                                                               
a policy  decision but  "trusting that they  would invest  in the                                                               
state - that was the intent."                                                                                                   
1:27:02 PM                                                                                                                    
REPRESENTATIVE PARISH,  noting there could again  be insufficient                                                               
money allocated to meet the  amount recommended in statute, asked                                                               
how the state determines which tax credits get paid.                                                                            
MS.  WEISSLER expressed  her understanding  allocating to  "first                                                               
in, first out" is how the pertinent regulations work.                                                                           
1:33:35 PM                                                                                                                    
REPRESENTATIVE BIRCH  inquired as  to how  a former  governor and                                                               
legislature could  have differed  by a significant  multiplier on                                                               
what was clear  and equitable about Alaska's  Clear and Equitable                                                               
Share (ACES) [passed in the 25th Alaska State Legislature].                                                                     
MS. WEISSLER pointed  out oil prices were high and  there "was an                                                               
atmosphere ... that was different from prior years."                                                                            
1:34:40 PM                                                                                                                    
REPRESENTATIVE BIRCH questioned when  tax credits first became an                                                               
inducement to investment and development in Alaska's tax policy.                                                                
MS. WEISSLER  recalled in 1978,  there was  a tax credit  tied to                                                               
leases and with certain requirements.   The Economic Limit Factor                                                               
(ELF) [passed in  the 10th Alaska State Legislature]  was its own                                                               
incentive in  1977.  The  administration at that  time determined                                                               
as  operating costs  go up  and  field production  goes down,  an                                                               
economic  limit  is reached,  thus  the  field will  not  produce                                                               
enough   to  balance   its  costs   during  further   production.                                                               
Therefore,  the  economic limit  factor  was  part of  a  formula                                                               
developed to bring the tax rate  down as fields decline, in order                                                               
to  give  companies  an  incentive  to  continue  producing  from                                                               
marginal fields, but there was not a credit system until PPT.                                                                   
CO-CHAIR  TARR,  elaborating  on Representative  Birch's  earlier                                                               
question,  confirmed   during  debate   on  ACES,   the  proposed                                                               
progressivity  rate  was  increased   from  0.2  percent  to  0.4                                                               
MS. WEISSLER  said that sounds  right.  She  agreed progressivity                                                               
increased exponentially with higher oil prices.                                                                                 
1:41:20 PM                                                                                                                    
REPRESENTATIVE BIRCH informed the committee  he has read that the                                                               
majors would not  make the investments today that  they made many                                                               
years  ago.    He asked  whether  HB  111  is  an increase  or  a                                                               
decrease, and  if approved,  for the broad  range of  the changes                                                               
the bill would net the state.                                                                                                   
MS. WEISSLER  said modeling  is needed  for the  specific changes                                                               
and numbers, and she deferred to the bill's fiscal note.                                                                        
1:42:57 PM                                                                                                                    
CO-CHAIR JOSEPHSON directed attention  to Ms. Weissler's estimate                                                               
that the  outstanding credits  are growing  by "only"  about $100                                                               
million  per year  over the  next decade,  and noted  this amount                                                               
could  be  offset  by  new  opportunities  on  the  North  Slope;                                                               
however, because the payments could  be capped at [$74 million by                                                               
the credit fund  statutory formula], the credits  can accrue into                                                               
the  billions  of dollars.    He  questioned  whether this  is  a                                                               
conservative number.                                                                                                            
MS. WEISSLER  said Alaska's  tax credit system  is an  unknown as                                                               
far as  companies' decisions  are concerned, and  on how  the tax                                                               
credits  factor in;  also, the  state's return  on investment  is                                                               
unknown.  She deferred the  question to the Department of Revenue                                                               
(DOR)  and  advised the  existing  system  lacks information  and                                                               
analysis on the state's return on investment.                                                                                   
[CO-CHAIR TARR passed the gavel to Co-Chair Josephson.]                                                                         
1:45:37 PM                                                                                                                    
The committee took an at ease from 1:45 p.m. to 1:50 p.m.                                                                       
1:50:28 PM                                                                                                                    
CO-CHAIR TARR  directed attention to  a document provided  in the                                                               
committee packet,  verbally identified  as a "cheat  sheet," that                                                               
will  help the  committee recognize  relevant sections  of Alaska                                                               
Statutes during  the sectional analysis  of HB  111.  One  of the                                                               
goals of the  proposed legislation is to  establish durability in                                                               
the state's  tax policy,  understand the  history of  the policy,                                                               
and only  make changes that  move the  state toward a  stable and                                                               
predictable tax  system at all oil  prices.  She pointed  out the                                                               
frequency of  repeals and reenactments of  tax policy legislation                                                               
illustrates the difficulty in making the right decisions.                                                                       
1:52:59 PM                                                                                                                    
REPRESENTATIVE  BIRCH returned  attention to  HB 111  fiscal note                                                               
Identifier:  HB111-DOR-TAX-02-10-17,  and asked if the  bill is a                                                               
$45 million tax  increase, raising to $85 million  in fiscal year                                                               
2023 (FY 23).                                                                                                                   
CO-CHAIR TARR explained  the one tax increase in the  bill is the                                                               
change in  the minimum tax from  4 percent to 5  percent; most of                                                               
the other changes  in HB 111 are prospective  in nature, changing                                                               
the state's  risk after the effective  date of 1/1/18.   She said                                                               
further  discussion on  the fiscal  note would  follow after  the                                                               
sectional analysis.                                                                                                             
CO-CHAIR TARR  paraphrased from the sectional  analysis for House                                                               
Bill 111, Version O, as follows [original punctuation provided]:                                                                
     Section 1.  Amends AS  43.05.225 regarding  interest on                                                                    
     delinquent  oil  and  gas production  tax  payments  to                                                                    
     remove  a  three year  limit  on  accrual of  interest.                                                                    
     Since 2014, the interest  rate for delinquent taxes was                                                                    
     set three  points above the  Federal discount  rate. HB
     247 added  a new  section increasing  the rate  for oil                                                                    
     and  gas to  seven  points above  the Federal  discount                                                                    
     rate compounded.  The higher rate applies  only for the                                                                    
     first  three years  after  the  tax becomes  delinquent                                                                    
     after  which  there  is   no  interest.  The  amendment                                                                    
     repeals  the three  year  limit  because zero  interest                                                                    
     discourages companies  from settling tax  disputes with                                                                    
     the state.                                                                                                                 
CO-CHAIR  TARR further  explained  the three  year limit  is                                                                    
removed because  it is  inconsistent with  existing statute.                                                                    
The Department  of Revenue (DOR)  has six years  to complete                                                                    
audits, due  to the complexity  of the tax system,  thus the                                                                    
three  year limitation  on interest  is a  "mismatch."   She                                                                    
acknowledged the industry's criticism  of the time the state                                                                    
requires  to complete  audits;  in fact,  no  audits of  the                                                                    
present system have been completed.   Co-Chair Tarr reviewed                                                                    
the  history of  this issue.   She  continued the  sectional                                                                    
analysis [original punctuation provided]:                                                                                       
     Section 2.  Amends AS 43.55.011(f) to  change the North                                                                    
     Slope minimum  tax from not  less than four  percent of                                                                    
     the  gross  value  to  five percent  for  oil  and  gas                                                                    
     produced after  2018. The section removes  the variable                                                                    
     minimum tax  that would occur  at sustained  oil prices                                                                    
     at below $25  per barrel; the five  percent minimum tax                                                                    
     would apply at all prices.                                                                                                 
     Note: The section ends the  minimum tax for oil and gas                                                                    
     in 2022.  That is not  the intent. The minimum  tax for                                                                    
     oil  should continue  past 2022.  In existing  statute,                                                                    
     the net  production tax on  gas will change to  a gross                                                                    
     value tax  system in 2022  and the minimum tax  for gas                                                                    
     will end. A  correction will be made in  a future draft                                                                    
     of the bill.                                                                                                               
CO-CHAIR TARR said  the 5 percent minimum tax would  apply at all                                                               
prices after 1/1/18.   In addition, there is a  drafting error to                                                               
be corrected by a later version of HB 111.                                                                                      
1:59:19 PM                                                                                                                    
CO-CHAIR  JOSEPHSON recalled  the increase  from 4  percent to  5                                                               
percent was proposed last year  and was related to the governor's                                                               
fiscal  plan and  its premise  that  all sectors  of the  economy                                                               
should participate  in solving  the state's  fiscal problem.   He                                                               
questioned   whether    the   increase    is   based    on   "the                                                               
administration's thinking, at least last year."                                                                                 
CO-CHAIR  TARR agreed.    During  the debate  on  Senate Bill  21                                                               
[passed in the 28th Alaska  State Legislature] oil prices ranging                                                               
from $30  to $40 per  barrel were  not considered.   However, the                                                               
price  environment  has  changed,  perhaps  for  the  foreseeable                                                               
future.     She  continued   the  sectional   analysis  [original                                                               
punctuation provided]:                                                                                                          
     Section 3. Adds  a new section to AS  43.55.011 to make                                                                    
     it  clear that  application  of any  tax credit  issued                                                                    
     under the  oil and gas  production tax may not  be used                                                                    
     to reduce the  minimum tax of five  percent. The second                                                                    
     sentence  in  this  subsection   relates  to  fixing  a                                                                    
     situation  where  a  taxpayer   can  apply  per  barrel                                                                    
     credits that  cannot be  used in one  month due  to the                                                                    
     minimum tax to offset a  tax liability from a different                                                                    
     month  in that  calendar year  (the "migrating"  credit                                                                    
     issue). This issue only occurs  in a year where the tax                                                                    
     rate is below the minimum  tax in some months and above                                                                    
     the minimum tax in other months in a year.                                                                                 
CO-CHAIR TARR  further explained the second  part of Section                                                                    
3  refers to  the migrating  credit issue  described in  the                                                                    
earlier presentation.  She  continued the sectional analysis                                                                    
[original punctuation provided]:                                                                                                
     Section  4. Amends  AS  43.55.020,  related to  monthly                                                                    
     installment  payments, to  reflect  the  change to  the                                                                    
     minimum  tax  in section  2  and  the migrating  credit                                                                    
     issue in section 3.                                                                                                        
     Section 5.  Changes the  carried-forward annual  loss                                                                      
     the  net operating  loss    credit  rate  on the  North                                                                    
     Slope from 35  percent to 15 percent.  After January 1,                                                                    
     2018, a  taxpayer will  only be able  to apply  for tax                                                                    
     credits up to 15 percent of their net operating loss.                                                                      
CO-CHAIR TARR further explained Section  5 does not eliminate any                                                               
of  the  state's  current  liability,   but  reduces  the  amount                                                               
companies can  earn.   The aforementioned  fiscal note  will show                                                               
additional information on the effect of Section 5.                                                                              
2:06:25 PM                                                                                                                    
REPRESENTATIVE BIRCH directed  attention to page 2  of the fiscal                                                               
note indicating $8  billion in tax credits have  been received by                                                               
companies.   Tax  credits are  meant to  incent certain  types of                                                               
behavior, such  as exploration, and  he questioned if  the amount                                                               
of  investment that  has  offset  the amount  in  tax credits  is                                                               
known.    For example,  whether  $8  billion  is offset  by  $100                                                               
billion worth of investment.                                                                                                    
CO-CHAIR  TARR   responded  net   operating  losses   (NOLs)  are                                                               
currently earned  at 35 percent  of loss, which  is approximately                                                               
one-third [of investment].   Net operating losses  are normally a                                                               
function of collecting  against an income tax,  and companies can                                                               
use NOLs  against a corporate income  tax.  She reviewed  some of                                                               
the state's  previous approaches to  taxes and methods  to incent                                                               
behavior, and  restated the legislation's  goal to  determine the                                                               
best  way  to provide  incentives  that  will result  in  desired                                                               
activities.    She  referred  to   previous  testimony  from  DOR                                                               
estimating that roughly one-half  of the previous incentives have                                                               
led  to  production;  however, at  this  time  policymakers  lack                                                               
sufficient access  to privileged  information to know.   Co-Chair                                                               
Tarr  continued  the  sectional  analysis  [original  punctuation                                                               
     Section  6.  Amends  AS   43.55.023(d)  to  remove  the                                                                    
     ability for taxpayers  to apply for a  cash payment for                                                                    
     net   operating   loss    credits   issued   under   AS                                                                    
CO-CHAIR   TARR  noted   the  cheat   sheet  provided   indicates                                                               
subsection (a) is a qualified  capital expenditure (QCE), and (l)                                                               
is  a  well  lease  expenditure   (WLE);  Section  6  limits  net                                                               
operating losses, but not does limit  QCE and WLE.  She continued                                                               
the sectional analysis [original punctuation provided]:                                                                         
     Section 7.  Amends AS 43.55.024(j), the  per barrel tax                                                                    
     credit,  from zero  to  $8  to zero  to  $5 per  barrel                                                                    
     depending  on the  price of  oil. The  most a  taxpayer                                                                    
     could receive  is a credit  of $5 per barrel  at prices                                                                    
     below $80.                                                                                                                 
2:11:25 PM                                                                                                                    
CO-CHAIR  TARR pointed  out Section  7  only addresses  non-gross                                                               
value reduction (non-GVR)  oil.  The bill does  not address gross                                                               
value reduction  (GVR) oil  as that was  addressed in  House Bill                                                               
247 [passed in the 29th  Alaska State Legislature].  As discussed                                                               
in the  earlier presentation,  there remains  the question  as to                                                               
whether some oil  was already going to be  produced, even without                                                               
financial  incentives.   She directed  attention to  the bill  on                                                               
page 14,  beginning on line 24  and continuing to page  15, which                                                               
read [in part]:                                                                                                                 
     (1) [$8 FOR EACH BARREL OF  TAXABLE OIL IF THE  AVERAGE                                                                    
     GROSS VALUE AT  THE POINT OF PRODUCTION FOR  THE  MONTH                                                                    
     IS LESS  THAN $80 A BARREL;  (2) $7 FOR EACH  BARREL OF                                                                    
     TAXABLE OIL  IF THE AVERAGE   GROSS VALUE AT  THE POINT                                                                    
     OF PRODUCTION FOR  THE MONTH IS  GREATER  THAN OR EQUAL                                                                    
     TO $80  A BARREL, BUT LESS  THAN $90 A   BARREL; (3) $6                                                                    
     FOR EACH BARREL OF TAXABLE  OIL IF THE AVERAGE GROSS AT                                                                    
     THE POINT OF  PRODUCTION FOR THE MONTH  IS GREATER THAN                                                                    
     OR EQUAL TO $90 ...                                                                                                        
CO-CHAIR TARR  said the change means  if prices go up,  the state                                                               
would see  some additional revenue,  although at  current prices,                                                               
the  producers' breakeven  price is  about $46  per barrel.   She                                                               
questioned whether the state wants  to issue a credit when prices                                                               
are between  $50 and $80  per barrel  and the producers  begin to                                                               
make a  profit.   She said this  is a policy  call that  does not                                                               
fundamentally change Senate Bill 21.                                                                                            
2:15:56 PM                                                                                                                    
REPRESENTATIVE JOHNSON expressed her concern that Section 7                                                                     
of the bill would affect the current increase in                                                                                
CO-CHAIR TARR  advised the  base rate  in ACES  was a  25 percent                                                               
credit,  which was  increased to  35 percent  in Senate  Bill 21,                                                               
along  with the  addition of  the per  barrel credit.   A  way to                                                               
simplify  the system  would be  to  adjust the  base rate,  which                                                               
would act like  "a reverse progressivity."  She has  asked DOR to                                                               
provide  modeling for  each section  of the  bill at  the hearing                                                               
scheduled for 2/17/17.                                                                                                          
CO-CHAIR JOSEPHSON  agreed production is up,  but because of                                                                    
the credit outlay, the state  will not gain net revenue from                                                                    
severance tax -  setting aside royalty - until  the price of                                                                    
oil increases,  thus the  bill seeks to  narrow the  span of                                                                    
the per barrel tax credit.                                                                                                      
REPRESENTATIVE PARISH  surmised "old oil"  gets an $8  per barrel                                                               
credit,  and  "new  oil"  gets  a $5  per  barrel  credit,  which                                                               
provides a competitive advantage to legacy fields.                                                                              
CO-CHAIR TARR  restated the  bill affects  non-GVR oil,  which is                                                               
old  oil, and  this provision  does  not apply  to new  oil.   As                                                               
discussed in the  earlier presentation, a net  profits tax system                                                               
is  generous   with  deductions   and  provides   incentives  for                                                               
producers; the  policy question is whether  additional incentives                                                               
are needed.   However,  she opined  35 percent  of the  base rate                                                               
would be unusually high.                                                                                                        
2:20:25 PM                                                                                                                    
REPRESENTATIVE BIRCH  referred to  an earlier  statement "setting                                                               
aside  royalty."    He  pointed  out  a  3  percent  increase  in                                                               
production does generate additional  royalty income to the state,                                                               
and questioned whether the primary focus  of the bill was on non-                                                               
royalty provisions.   Representative  Birch opined  royalties are                                                               
significant, and should not be set aside.                                                                                       
CO-CHAIR JOSEPHSON  said the  state owns  its royalty  share, and                                                               
the question is whether the  oil otherwise would not be produced.                                                               
He  said the  debate  has moved  to a  greater  focus on  royalty                                                               
because  that is  where the  current money  is, and  restated the                                                               
royalty "is  ours, sort  of by  definition."   Co-Chair Josephson                                                               
posited the reduction  from 35 percent to 15 percent  in NOLs for                                                               
the producers, is  argued by industry that in times  of low price                                                               
the  reduction discourages  their continuing  investment, because                                                               
the state  is not  there to  help them  in the  current low-price                                                               
2:22:18 PM                                                                                                                    
CO-CHAIR TARR said it's possible.   However, the producers always                                                               
benefit from deductions  for transportation, capital expenditures                                                               
(CAPEX),  and operating  expenditures  (OPEX), and  the NOLs  are                                                               
quite expensive for the state,  as reflected in the bill's fiscal                                                               
note.    She  opined  the  production  and  revenue  forecast  is                                                               
confusing  because  the  state  not only  has  the  liability  of                                                               
cashable  credits,  but also  lost  revenue  due to  low  prices.                                                               
Also, if prices  go up, the state will still  not benefit because                                                               
the carry-forward loss credits will  reduce any additional income                                                               
from higher  prices.  The effective  date of the bill  is 1/1/18,                                                               
so the  producers - even at  $30 per barrel  oil - due to  all of                                                               
the  deductions, will  still have  protection in  the system  for                                                               
years of  low prices,  but the  state has none.   In  response to                                                               
Representative  Birch on  his question  of royalty,  she said  in                                                               
Alaska, natural resources are common  property and on public land                                                               
the state gets its royalty  share; however, in other states where                                                               
oil  and gas  development happens  on private  land, the  royalty                                                               
goes to the landowner and taxes  go to the sovereign.  In Alaska,                                                               
the royalty share and tax revenue can get confused.                                                                             
CO-CHAIR  JOSEPHSON   asked  how  the  bill   would  affect  non-                                                               
producers; for example, currently if  a company spent $10 billion                                                               
to  develop a  large field,  the state  would be  responsible for                                                               
about one-third of  the cost of development.   However, under the                                                               
terms of HB  111, the state would be responsible  for 15 percent,                                                               
and would provide much less cash assistance after 1/1/18.                                                                       
CO-CHAIR  TARR  said  the  state  seeks  incentives  for  certain                                                               
behaviors and must decide what  it can afford and what incentives                                                               
will be  successful.  A future  section of the bill  will explain                                                               
how the bill will limit the  state's exposure, but not the amount                                                               
companies  can  earn.    She  continued  the  sectional  analysis                                                               
[original punctuation provided]:                                                                                                
     Section  8.  Amends  AS  43.55.028(a)  to  reflect  the                                                                    
     section  that  removes  the ability  for  taxpayers  to                                                                    
     apply  for  a  cash  payment  for  net  operating  loss                                                                    
     credits. The only  credits that may qualify  for a cash                                                                    
     payment are  the qualified capital  expenditure credits                                                                    
     in  AS  43.55.023(a)  and the  well  lease  expenditure                                                                    
     credits  in AS  43.55.023(l).  Under HB  247, for  Cook                                                                    
     Inlet,  the  qualified  capital  expenditure  and  well                                                                    
     lease  expenditure credits  apply only  to expenditures                                                                    
     incurred  before January  1, 2017.  Once those  credits                                                                    
     phase out, the  only credits that may  qualify for cash                                                                    
     payments  are   capital  expenditure  and   well  lease                                                                    
     expenditure credits acquired  by companies operating in                                                                    
     the area outside  Cook Inlet and the  North Slope known                                                                    
     as "Middle Earth.                                                                                                          
2:26:12 PM                                                                                                                    
CO-CHAIR  TARR  said  DOR  will provide  modeling  based  on  the                                                               
premise  that  the  state  paid  the  statutory  minimum  on  net                                                               
operating loss credits during past  years of high and low prices.                                                               
Also,  after QCE  and WLE  are phased  out, Section  8 will  only                                                               
apply to NOLs  for companies operating in Middle  Earth [the non-                                                               
North Slope, non-Cook  Inlet areas of the state].   She continued                                                               
the sectional analysis [original punctuation provided]:                                                                         
     Section  9.  Changes  AS   43.55.028(e)  to  limit  the                                                                    
     state's  purchase   of  credits  to  $35   million  per                                                                    
     company.  Only companies  with production  of not  more                                                                    
     than  15,000  barrels per  day  may  apply for  a  cash                                                                    
     payment.  Current law  sets the  purchase limit  at $70                                                                    
     million  and applies  to companies  with not  more than                                                                    
     50,000 barrels per day.                                                                                                    
CO-CHAIR TARR further  explained Section 9 - also in  the oil and                                                               
gas tax credit  fund - limits the state's purchase  of credits to                                                               
$35 million per company, reduced  from $70 million.  She reviewed                                                               
the history of the changes to  the limit, and observed these cash                                                               
payments  had the  original intent  to help  non-producers, small                                                               
companies, and independents with exploration and drilling.                                                                      
2:32:01 PM                                                                                                                    
REPRESENTATIVE  BIRCH advised  the  committee a  basic aspect  of                                                               
finance is the  time value of money.  He  questioned the value of                                                               
an incentive  a company would have  to wait 30 years  to receive.                                                               
Invoking a tax credit to  induce a behavior, and delaying payment                                                               
for  a long  time,  when the  tax credit  is  needed for  current                                                               
obligations, is disingenuous at the least.                                                                                      
CO-CHAIR  TARR acknowledged  there has  been extensive  debate on                                                               
this topic.   She agreed if  a company has "a  long time horizon"                                                               
for funding,  the net present  value of  the tax credit  is zero.                                                               
She  restated  the  prospective nature  of  the  legislation  and                                                               
pointed out companies  most impacted by this change  will have an                                                               
opportunity  to  evaluate  the   changes.    Also,  the  proposed                                                               
limitations may allow  the state to pay its  debts, creating more                                                               
stability, which also has value.                                                                                                
REPRESENTATIVE BIRCH said the  legislature appropriated the money                                                               
to  pay  the  tax  credits   and  the  governor  vetoed  payment.                                                               
Although  the proposed  legislation may  be prospective,  at this                                                               
time the  state has  a $1 billion  liability, and  businesses are                                                               
making  significant decisions  affecting  jobs and  opportunities                                                               
based on the state honoring its obligations.                                                                                    
CO-CHAIR  TARR  agreed  the  state   is  considered  an  unstable                                                               
business  partner  at  this  time; the  state  must  address  its                                                               
liability and also  meet its goal of stability  and durability of                                                               
its tax system at all prices.                                                                                                   
2:37:28 PM                                                                                                                    
CO-CHAIR  JOSEPHSON  clarified   the  aforementioned  legislative                                                               
appropriation was  $430 million,  not the entire  allocation, and                                                               
the legislature chose  not to override the governor's  veto.  Co-                                                               
Chair Josephson  opined the governor was  prepared to appropriate                                                               
$1 billion  to the  liability, and  the reason  for the  veto was                                                               
that the legislature did not produce a fiscal plan.                                                                             
REPRESENTATIVE  JOHNSON  appreciated the  historical  information                                                               
but urged the committee to focus  on what is proposed.  She asked                                                               
how many  companies are  producing not  more than  15,000 barrels                                                               
per day and will be affected by Section 9.                                                                                      
CO-CHAIR TARR said currently the  limit is 50,000 barrels per day                                                               
which  qualified   the  three  majors  and   Hilcorp;  after  the                                                               
reduction to 15,000, Caelus will be impacted.                                                                                   
CO-CHAIR JOSEPHSON added the statute  does not require credits to                                                               
be cashable, but  provides the option to  the legislature through                                                               
its  power of  appropriation.   He  stated  his personal  concern                                                               
about the state's failure to pay the credits.                                                                                   
REPRESENTATIVE  RAUSCHER observed  companies on  the North  Slope                                                               
have been  bought out over  the past 10-30 years,  and questioned                                                               
whether  bankruptcies are  due to  state inaction,  when what  is                                                               
desired  is  to  "help them  help  us."    He  asked if  after  a                                                               
bankruptcy or sale, the new buyers also acquire tax credits.                                                                    
CO-CHAIR  TARR  responded  it  would   depend  upon  whether  the                                                               
purchasers  used a  bank for  financing.   If a  bank lent  money                                                               
based on the state's payment  of tax credits, testimony from Bank                                                               
of America  revealed borrowers will  default without  the payment                                                               
of  the tax  credits,  and  after default  the  assets and  lease                                                               
become the  property of the bank  and would be sold.   Otherwise,                                                               
without bank financing, the credits go to the next owner.                                                                       
CO-CHAIR JOSEPHSON,  in response to Representative  Johnson, said                                                               
at least  12 companies in  the exploration and  development phase                                                               
are  affected by  the  reduction  in Section  9.    He urged  for                                                               
testimony from Caelus regarding the effects of the bill.                                                                        
2:43:46 PM                                                                                                                    
REPRESENTATIVE RAUSCHER  inquired as  to additional  testimony on                                                               
the bill.                                                                                                                       
CO-CHAIR TARR  said the bill  will be heard  for two weeks.   She                                                               
then  clarified   the  aforementioned  12  companies   are  those                                                               
currently awaiting payment,  and the change brought  by Section 9                                                               
also affects  Caelus.   She also  restated the  limit is  on cash                                                               
payments  for  NOLs.    Co-Chair  Tarr  continued  the  sectional                                                               
analysis [original punctuation provided]:                                                                                       
     Section  10. Adds  a  new section  to  AS 43.55.150  to                                                                    
     ensure that the gross value  at the point of production                                                                    
     does not go  below zero. The gross  value is determined                                                                    
     by  subtracting tariffs  and transportation  costs from                                                                    
     the West Coast  sale price per barrel.  The gross value                                                                    
     at  the   point  of  production  is   used  in  various                                                                    
     calculations throughout the production tax statute.                                                                        
     Section  11. Repeals  AS 43.55.028(g)(3).  The language                                                                    
     proposed  to be  repealed was  added in  HB 247.  If an                                                                    
     applicant wanted to  apply for the full  $70 million in                                                                    
     credits in one year, they  would receive 100 percent of                                                                    
     the first $35  million and 75 percent of  the other $35                                                                    
     million. This  was to give  applicants an  incentive to                                                                    
     wait and  collect credits in  a future year  and lessen                                                                    
     the cash outlay by the state in a single year.                                                                             
     Section 12.  (a) Sections  3 and 4    the  five percent                                                                    
     minimum tax  and resolution of the  migrating tax issue                                                                    
       apply  to credits applied  to reduce a  tax liability                                                                    
     for the tax year starting  on or after January 1, 2018.                                                                    
     (b) The  changes to  the net  operating loss  credit in                                                                    
     section 5  apply to lease  expenditures incurred  on or                                                                    
     after January 1, 2018.                                                                                                     
     Section 13.  If a person  has applied for  cash payment                                                                    
     of a net operating loss  credit before January 1, 2018,                                                                    
     the department may purchase the credit.                                                                                    
     Section  14.  The  change  to   the  interest  rate  is                                                                    
     retroactive to January 1, 2017.                                                                                            
2:49:01 PM                                                                                                                    
REPRESENTATIVE   JOHNSON  questioned   whether  the   legislation                                                               
creates a new tax rate effective retroactively to 1/1/17.                                                                       
CO-CHAIR  TARR explained  the retroactive  1/1/17 effective  rate                                                               
applies  to the  interest rate  and  not to  the tax  rate.   For                                                               
example, if  DOR finds delinquent  taxes after an audit,  it will                                                               
charge  an interest  rate for  the delinquent  amount during  its                                                               
settlement negotiations.   In further response  to Representative                                                               
Johnson, she suggested  the dates in question are  related to the                                                               
provisions of House Bill 247, that  are based on a calendar year,                                                               
and the one provision in  the proposed legislation, that is based                                                               
on the fiscal year, and therefore must be reconciled.                                                                           
CO-CHAIR  JOSEPHSON  surmised  industry files  [tax  returns]  in                                                               
spring,  thus  the  timing  should   not  create  a  problem  for                                                               
CO-CHAIR TARR  agreed the  timing is  challenging to  explain and                                                               
gave an  example:  during  calendar year  2016, taxes are  due in                                                               
2017, but  [filed] in fiscal  year 2018  (FY 18).   She continued                                                               
the sectional analysis [original punctuation provided]:                                                                         
     Section 15.  The change  to the  interest rate  and its                                                                    
     retroactivity is effective immediately.                                                                                    
     Section 16.  All other sections take  effect January 1,                                                                    
CO-CHAIR TARR  directed attention to  the fiscal note  summary of                                                               
revenue impact  on page  2, and the  total revenue  impact, total                                                               
budget impact,  and total fiscal impact  on page 4.   She pointed                                                               
out various elements of the fiscal note.                                                                                        
2:57:44 PM                                                                                                                    
CO-CHAIR  JOSEPHSON questioned  whether  the 35  percent NOL  was                                                               
intended  to parallel  the 35  percent "progressive  rate at  the                                                               
highest price per barrel."                                                                                                      
CO-CHAIR TARR said yes; however,  the rate is not progressive but                                                               
is a flat 35 percent tax rate.   In addition, she said, "It's not                                                               
really ever  35 percent because  you have credits you  can always                                                               
apply to it."                                                                                                                   
CO-CHAIR   JOSEPHSON  acknowledged   the   legislation  is   very                                                               
complicated and  urged the committee  to work with  the co-chairs                                                               
on developing consensus; he stressed  the state's cash obligation                                                               
to the industry is owed, but is untenable.                                                                                      
REPRESENTATIVE  TALERICO anticipated  many hearings  of the  bill                                                               
and testimony from all of the  affected parties.  He stated it is                                                               
very  difficult  for  the committee  to  determine  estimates  of                                                               
capital    expenditures   as    they    involve   drilling    and                                                               
infrastructure,    and    encouraged    additional    forthcoming                                                               
REPRESENTATIVE BIRCH directed  attention to page 4  of the fiscal                                                               
note  analysis that  indicated a  $45  million impact  in FY  18,                                                               
increasing to a  $300 million per year total fiscal  impact in FY                                                               
26;  he  concluded the  proposed  legislation  seeks to  add  $50                                                               
[million] to $300 million per year to state take.                                                                               
CO-CHAIR JOSEPHSON agreed.                                                                                                      
CO-CHAIR TARR cautioned  the analysis by DOR is based  on a five-                                                               
year  forecast  of  production,  and  thus  there  will  be  many                                                               
changes.   She noted the presentation  on the history of  oil and                                                               
gas  tax policy  was intended  to help  the committee  understand                                                               
previous decisions and thereby avoid repeating mistakes.                                                                        
[HB 111 was held over.]                                                                                                         
3:02:48 PM                                                                                                                    
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 3:02 p.m.                                                                 

Document Name Date/Time Subjects
HB111 ver O 2.8.17.PDF HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Fiscal Note DOR-TAX 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 Sectional Analysis 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Sponsor Statement 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 Supporting Document-Tax Credit History 2.13.17.pdf HRES 2/13/2017 1:00:00 PM
HB 111
HB111 Supporting Document - PowerPoint Sectional 2.13.17.pdf HRES 2/13/2017 1:00:00 PM
HB 111