Legislature(2009 - 2010)BARNES 124
03/29/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB337 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 337 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 29, 2010
1:16 p.m.
MEMBERS PRESENT
Representative Craig Johnson, Co-Chair
Representative Mark Neuman, Co-Chair
Representative Bryce Edgmon
Representative Kurt Olson
Representative Paul Seaton
Representative Peggy Wilson
Representative David Guttenberg
Representative Scott Kawasaki
Representative Chris Tuck
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 337
"An Act relating to interest on certain underpayments or
overpayments for the oil and gas production tax, to certificates
for certain oil and gas production tax credits for qualified
capital expenditures, and to alternative tax credits for
expenditures for certain oil and gas development and exploration
activities for the oil and gas production tax; relating to the
use of the oil and gas tax credit fund to purchase certain tax
credit certificates; and providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 337
SHORT TITLE: OIL AND GAS PROD. TAX: CREDITS/INTEREST
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/10/10 (H) READ THE FIRST TIME - REFERRALS
02/10/10 (H) RES, FIN
03/10/10 (H) RES AT 1:00 PM BARNES 124
03/10/10 (H) Heard & Held
03/10/10 (H) MINUTE(RES)
03/27/10 (H) RES AT 10:00 AM BARNES 124
03/27/10 (H) Heard & Held
03/27/10 (H) MINUTE(RES)
03/29/10 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
DONALD BULLOCK JR., Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 337, answered
questions.
PAT GALVIN, Commissioner
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Reviewed the differences between HB 337 as
originally introduced and the proposed committee substitute,
Version R.
MARCIA DAVIS, Deputy Commissioner
Office of the Commissioner
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: During the hearing on HB 337, answered
questions.
ACTION NARRATIVE
1:16:31 PM
CO-CHAIR CRAIG JOHNSON called the House Resources Standing
Committee meeting to order at 1:16 p.m. Representatives Seaton,
P. Wilson, Olson, Edgmon, Guttenberg, Tuck, Kawasaki, Neuman,
and Johnson were present at the call to order.
HB 337-OIL AND GAS PROD. TAX: CREDITS/INTEREST
[Contains discussion of HB 308]
1:17:32 PM
CO-CHAIR JOHNSON announced that the only order of business is
HOUSE BILL NO. 337, "An Act relating to interest on certain
underpayments or overpayments for the oil and gas production
tax, to certificates for certain oil and gas production tax
credits for qualified capital expenditures, and to alternative
tax credits for expenditures for certain oil and gas development
and exploration activities for the oil and gas production tax;
relating to the use of the oil and gas tax credit fund to
purchase certain tax credit certificates; and providing for an
effective date."
1:17:45 PM
CO-CHAIR JOHNSON noted that two proposed committee substitutes
have been drafted for the committee to choose from [Version R,
labeled 26-GH2057\R, Bullock, 3/29/10, and Version E, labeled
26-GH2057\E, Bullock, 3/29/10]. He explained both versions are
identical, except Version R would provide the Alaska Retirement
Management (ARM) Board with the ability to purchase the tax
credit certificates. He pointed out, however, that according to
a [3/28/10] memorandum from [Mr. Don Bullock of] Legislative
Legal and Research Services, Version R violates the single-
subject clause. He said his preference is to adopt Version E
and add the ARM Board provision as an amendment, but that he
will yield to the committee's preference.
1:19:26 PM
REPRESENTATIVE SEATON noted [Mr. Bullock's] memorandum states
"may" expose the enactment to legal challenge. He distributed a
4/7/08 memorandum from [Mr. Alpheus Bullard of] Legislative
Legal and Research Services which details the Alaska Supreme
Court decisions in this regard. To support his opinion that the
two subjects are congruous because both relate to the proposed
tax credits, Representative Seaton read the following portions
of the 4/7/08 memorandum [original punctuation provided]:
The standard adopted by the Alaska Supreme Court in
regard to the single-subject requirement states that
an "act should embrace some one general subject; and
by this is meant, merely, that all matters treated of
should fall under some one general idea, be so
connected with or related to each other, either
logically or in popular understanding, as to be parts
of, or germane to, one general subject." ... The
Alaska Supreme Court has held that the purpose of this
constitutional provision is to guard against ... "the
practice of 'deliberately inserting in one bill
several dissimilar or incongruous subjects....'"
Alaska's single-subject rule has been interpreted by
the Alaska Supreme Court to permit very broad subject
matter in a bill without violating the single-subject
requirement. In construing the single-subject rule,
the court will "resolve doubts in favor of validity."
... Specifically, the court has held that bills
relating to such broad themes as "civil actions",
"taxation", "transportation", and "land" are
acceptable.
1:22:19 PM
CO-CHAIR JOHNSON stated he had both versions drafted because it
is difficult to project what the courts will do.
REPRESENTATIVE KAWASAKI suggested that if an amendment has not
already been drafted for inserting the ARM Board provision into
Version E, it may be easier to start with Version R and delete
the ARM Board provision if the committee so chooses.
CO-CHAIR JOHNSON agreed this would also be appropriate, but said
he still prefers to start with Version E.
1:23:18 PM
REPRESENTATIVE GUTTENBERG pointed out that while the legal
opinion is simple the listing of who can do something then
raises the question of whether that means everyone else is
excluded. He inquired whether listing the ARM Board in this
particular case would prohibit anyone else from being able to
purchase the credits.
DONALD BULLOCK JR., Attorney, Legislative Legal Counsel,
Legislative Legal and Research Services, Legislative Affairs
Agency, responded he thinks the maxim being referenced is that
when a list of things is put into statute, the implication is
that there are other similar things that may be added to that
list. He said this particular case, however, has to do with the
authority of the ARM Board to enter into negotiations to buy the
credits at a discount and then sell them to the Department of
Revenue for full fare.
1:25:43 PM
REPRESENTATIVE GUTTENBERG asked whether authorizing the ARM
Board to do this would exclude any other state entity from also
doing the same thing. He maintained that listing who can do
this infers that those not listed cannot do it.
MR. BULLOCK replied in this case it is not a list; it is
specific authority being granted to the ARM Board.
1:26:05 PM
MR. BULLOCK, in response to Representative Seaton, stated he is
very familiar with the concepts and broadness addressed in [Mr.
Bullard's] 4/7/08 memorandum. He said the concern expressed in
his [3/28/10] memorandum is that this case has to do with the
authority of the ARM Board to do something. While it happens to
deal with tax credits, the substantive part of the ARM Board-
related sections in Version R deal with the power of the ARM
Board. Since the revenue from taxes is used throughout the
state, the question is where to draw the line as to what is put
into it because this is a revenue-related bill. Therefore, in
his opinion, Version R raises a serious single-subject problem.
CO-CHAIR JOHNSON understood Mr. Bullock to be saying it is not
because it relates to taxes, but because it is expanding the
power of a board.
MR. BULLOCK answered right; the substance of it is to give a
power to the ARM Board.
1:27:49 PM
REPRESENTATIVE SEATON said the 4/7/08 memorandum comes from a
previous bill dealing with scallop and crab licenses and Alaska
Regional Development Organizations (ARDORs) that came before the
House floor. It was ruled that this was not a violation of the
single-subject rule because ARDORs have some tie to economic or
potential economic functions across the state. He said he
believes this issue is much more closely related than scallop
and crab licenses and ARDORs.
REPRESENTATIVE SEATON moved to adopt the proposed committee
substitute (CS) for HB 337, labeled 26-GH2057\R, Bullock,
3/29/10 ("Version R"), as the work draft. There being no
objection, Version R was before the committee.
1:29:37 PM
PAT GALVIN, Commissioner, Department of Revenue, reviewed the
differences between HB 337 as originally introduced and the
proposed committee substitute, Version R. He said Conceptual
Amendment 1 presented to the committee on 3/27/10 [and included
in Version R], would make two changes to the governor's original
bill. It would put infield drilling credits under AS 43.55.023,
the capital credit section of law, rather than putting them
under AS 43.55.025, the exploration incentive credit, as
originally proposed. This new language is the same language
used in HB 308. The types of activities the administration had
intended to address are still addressed, but just structured
differently within the statute. The administration was
concerned about how to describe the eligible expenditures if the
credit was put under AS 43.55.023; however, HB 308 was
subsequently amended to tighten the language of AS 43.55.023 to
intangible drilling expenditures, a well-established principal
under federal tax law that the department can comfortably
implement. Two other types of wells are added that were not
included in the governor's original bill - injection wells and
stratigraphic test wells - to those eligible for the proposed
additional credit. The implication remains the same as the
governor's original concept in terms of what is being provided
this additional incentive.
1:31:55 PM
COMMISSIONER GALVIN said Conceptual Amendment 1 also includes
provisions dealing with the calculation of interest rates for
the underpayment or overpayment of previous tax liabilities.
The rate under current law is the higher of 11 percent or the
Federal Reserve rate plus 5 percent. Under HB 308, the 11
percent would be removed and the float above the Federal Reserve
rate would be lowered to 3 percent. Conceptual Amendment 1
would remove the 11 percent floor and keep the Federal Reserve
rate plus 5 percent. This particular interest rate section of
the tax code also deals with other tax categories, he explained.
A previous alteration of the interest rate was not completely
captured by the conforming amendment in HB 308, so Conceptual
Amendment 1 would conform Sections 1 and 2 to existing law;
other sections make the reference clear that it is to this
particular method of calculating the tax.
COMMISSIONER GALVIN noted that in addition to the
aforementioned, Version R would add measures regarding the ARM
Board, along with conforming amendments to marry the different
concepts together.
1:34:31 PM
COMMISSIONER GALVIN, in response to Representative Tuck,
confirmed that the interest rate provision is under Section 4 of
Version R. In further response, he confirmed that the language
on page 3, line 1, Version R, which deletes 5 percent above the
Federal Reserve rate and inserts 3 percent is a mistake that was
missed and is not the administration's intent.
CO-CHAIR JOHNSON observed that this error is in both Version R
and Version E. In response to Commissioner Galvin, he agreed
that a correcting amendment is needed.
1:36:00 PM
CO-CHAIR NEUMAN voiced his concern about the single-subject
clause and asked whether having the ARM Board in the bill title
will affect the Department of Revenue.
COMMISSIONER GALVIN declined to comment on the single-subject
issue, saying that that issue is for the committee and its
attorneys to discuss. Regarding the provision in Version R that
would remove the obligation for a small producer to continue
making investments to qualify for state purchase of its credit
certificates, he said the intent is to provide a new entrant the
ability to get full value for its credit and not have to sell it
at reduced value to an existing producer. This provision would
provide full reimbursement for just about every credit
certificate that the small producer could not take off of
existing production. He said he therefore does not anticipate
that the small producer would have to go to the ARM Board to
sell the certificate at a discount when it can come to the
Department of Revenue and receive full dollar-for-dollar value.
1:38:59 PM
CO-CHAIR NEUMAN understood Commissioner Galvin to be saying that
to take advantage of these credits it would be better for the
small producer to not sell the certificates to the ARM Board.
COMMISSIONER GALVIN replied it is up to the taxpayer receiving
the certificate to decide what to do to get value for it. He
said he would anticipate that if a taxpayer had the option of
submitting the certificate to the Department of Revenue for 100
percent of the value or going to the ARM Board to have the board
buy the certificate for up to 92 cents on the dollar, that the
taxpayer would choose the former. The only situation where that
might not be the case is if the taxpayer had other tax
obligations to the state that the Department of Revenue would be
obligated to offset before payment could be made. He said he
thinks that would be a rare instance given the types of
companies that would likely come forward with this type of
credit certificate, and therefore he does not anticipate the ARM
Board provision being utilized much, if at all.
1:40:24 PM
CO-CHAIR NEUMAN said HB 337 is a very important bill to both the
governor and the chair because the intent is to help create job
opportunities. He inquired whether a reviser's bill in the
House Rules Standing Committee would be a better way to do this.
COMMISSIONER GALVIN answered he does not know if the reviser's
bill would be a place to put an ARM Board authorization to buy
tax credits. While he can speak to his anticipation of what
value a taxpayer will be looking for, he said the committee
needs to talk to Mr. Bullock regarding the question about the
risk of legal exposure.
CO-CHAIR NEUMAN asked whether there are better places besides
the title of HB 337 to provide opportunities to expand the
purchase of the different production credits.
COMMISSIONER GALVIN responded he is unaware of any other bill in
the body right now that adjusts the powers of the ARM Board. He
said the remainder of HB 337 is about as close as one can get
for providing a market for tax credits.
1:43:08 PM
CO-CHAIR NEUMAN inquired whether Commissioner Galvin thinks
taxpayers would take advantage of selling these credits if there
was new legislation that expanded ARM Board authorities.
COMMISSIONER GALVIN replied the other provisions of HB 337
establish the state as the primary market for these certificates
at full value on the dollar. He said he does not think there is
a particular need to expand the market by including the ARM
Board, so including the ARM Board as a provision in either this
bill or another bill would not make it any more attractive.
1:44:40 PM
REPRESENTATIVE SEATON said House Bill 48, a bill that passed the
House but died in the Senate, would have provided for the ARM
Board to buy these tax credits. At that time, as now,
statements were made that the state would buy enough so that
another vehicle was unnecessary. He reminded members of recent
statements before the committee that people trying to sell these
credits could not get them reimbursed through the state fast
enough and the credits could not even be sold elsewhere for 50
cents on the dollar.
COMMISSIONER GALVIN recalled House Bill 48 was considered in
February 2007, but it was not until the following fall under
Alaska's Clear and Equitable Share (ACES) that a change was made
to allow the state to buy back a certain portion of the
certificates. A caveat of that change was that the taxpayer had
to continue its investment, so the department is required to
hold the certificates until the taxpayer demonstrates that
additional spend and this is what creates the lag time in terms
of a taxpayer's ability to have the state buy the credits. The
intention of HB 337 is to remove all restrictions to quick
processing of the certificates. He allowed that the ability to
get the certificates filled is a valid concern, so he does not
think it is damaging to the issue to provide taxpayers with [the
ARM Board] alternative. However, he said he does not think it
is likely because he believes the department is the place where
taxpayers will to want to sell their certificate.
1:47:20 PM
REPRESENTATIVE SEATON noted the committee has received testimony
that there is a problem with speed of audits being available; he
surmised that that would be the certificate issuance. He
understood there is a $25-million-per-year limit for the state
to purchase credits.
COMMISSIONER GALVIN answered no, not any longer. In further
response, he said the ACES legislation removed the limit
entirely.
CO-CHAIR JOHNSON added he thinks the ARM Board provision does
not do anything and may jeopardize the future of the bill. An
amendment may be made to take out the provision, he advised.
1:48:36 PM
REPRESENTATIVE GUTTENBERG, referenced page 2 of the Department
of Revenue's 4-page 3/29/10 handout and noted that well-related
credits are something new.
COMMISSIONER GALVIN said right, they are a separate, additional
credit for all wells.
REPRESENTATIVE GUTTENBERG understood the graph on page 2 shows
what the production tax revenue would have been in fiscal years
(FY) 2008 and 2009 had this credit been in place, along with the
projected revenue for fiscal years 2010-2013.
COMMISSIONER GALVIN replied all figures are approximations.
[The numbers depicted on the graph for production tax revenue
and the amount of additional well-related credits, respectively,
are approximately: FY 2008 - $2.4 billion and $245 million; FY
2009 - $3.1 billion and $255 million; FY 2010 - $2.1 billion and
$297 million; FY 2011 - $2.4 billion and $327 million; FY 2012 -
$2.6 billion and $336 million; FY 2013 - $2.9 billion and $390
million.]
1:49:45 PM
REPRESENTATIVE GUTTENBERG noted that over $1 billion in
[additional] credits is projected for fiscal years 2010-2013.
He asked what assumptions are built into those credits; for
example, increased production or the price of oil or both.
COMMISSIONER GALVIN answered the Department of Revenue's fiscal
note for HB 337 puts an indeterminate number on the impact of
the credits because the department did not incorporate those
potential changes in the amount of production; it is not the
price that determines this. Using the figures from fiscal years
2008 and 2009, the department estimated the operating
expenditures it believed would qualify for the credit, which was
25 percent, and did the same for capital expenditures. Those
approximated percentages were then applied to the department's
current projections for operating and capital expenditures for
fiscal years 2010-2013 to derive the numbers shown on page 2.
Because the department would expect there to be additional
investment as a result of these [new] credits, which would
result in additional production, there would be a potential
change from these numbers. There would be more expenditures
than what the department is currently projecting, which would
create more credits, but the at same time there would be more
production which would create more state revenue, which is why
the fiscal note was left as indeterminate in terms of the actual
impact on state revenue. However, the department wanted to show
committee members what the magnitude of this proposed new credit
might be, based upon current projections.
1:52:20 PM
REPRESENTATIVE GUTTENBERG inquired whether the information used
for these estimations came from the old standard deduction.
COMMISSIONER GALVIN responded no, other data became available to
the department to calculate those projections. He pointed out
that this is getting into the realm of confidential data.
REPRESENTATIVE GUTTENBERG surmised these numbers could be
significantly lower or higher without increase in production.
COMMISSIONER GALVIN replied correct. These numbers are based
strictly upon the expected expenditure levels and what the
resulting credits would be. They are not intended to represent
the potential change in revenue, so they are not affected by
production.
REPRESENTATIVE GUTTENBERG presumed that without being affected
by production, the expense of the credit being applied for could
be greater or less regardless of production in any given year.
COMMISSIONER GALVIN answered correct.
1:54:18 PM
REPRESENTATIVE KAWASAKI said he believes the word "incurred"
should be added to page 6, line 26, after "expenditure", given
it is the department's intent that the credit be for well-
related expenses incurred between the six years after June 30,
2010, and before July 1, 2016. In response to Co-Chair Johnson,
he said he is comparing the wording of Version R and Conceptual
Amendment 1 that was discussed on 3/27/10, and the word
"incurred" is missing from Version R.
COMMISSIONER GALVIN recommended the word "incurred" be included
in Version R.
CO-CHAIR JOHNSON requested Representative Kawasaki to make note
that an amendment is needed for this because the intent is to do
what was agreed upon.
1:57:00 PM
CO-CHAIR NEUMAN, in regard to there being several effective
dates and the department's workload, asked whether the effective
dates in the sections applicable to ACES should be February 28,
2007, and the other effective dates should be January 1, 2010.
MARCIA DAVIS, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, responded that Version E [and Version R]
did pick up the portions of ACES that needed to be retroactive
to ease the department's workload. The date that was not pushed
back was the tax credit itself, which is in Section 19, page 9,
lines 5-6, of Version R. She said the insertion of subsection
AS 43.55.023(m) is the proposed new ACES capital credit, so it
would be helpful to the department for that date to remain at
July 1, 2010, because it is the expenditures incurred from that
date forward that are being talked about. In further response,
she said the credit is to induce new and additional investment
and that past behavior cannot be changed by making the credit
retroactive.
2:00:04 PM
CO-CHAIR NEUMAN inquired about the retroactive effective date of
January 1, 2010, for Section 9 in Version R.
MS. DAVIS noted that Section 9 relates to the current
requirement that credits be split over two years. She said the
effective date of January 1, 2010, is set where it needs to be
set because it enables the credits that happen in 2010 to be
good in 2010. For credits that happened in 2009, half were good
in 2009 and half were good in 2010, so making those credits
retroactive would not change any financial impact on the
taxpayer. In further response, she said the effective dates in
Version R for Sections 7-9 should be okay. The retroactive date
[for Section 7] goes back to the beginning of ACES and the
petroleum production profits tax (PPT), and is the provision
that would give the department the ability to waive interest on
an underpayment of tax during the time when there was not a
regulation.
CO-CHAIR NEUMAN said he has talked to other members of the
administration who felt otherwise about the dates.
2:02:07 PM
COMMISSIONER GALVIN, in response to Representative Tuck,
confirmed the production tax depicted on page 2 of the 3/29/10
handout is expressed in millions of dollars. He further
confirmed the scale shown for fiscal year 2010 is the same as
that for fiscal years 2008 and 2009. He clarified that the
number in the box [on top of the blue bar] does not correspond
to the entire bar; it only represents the amount of credit.
2:03:11 PM
REPRESENTATIVE TUCK understood this graph depicts the expected
capital credits that are both capital and operating
expenditures, and has nothing to do with the potential
production increase with those credits.
COMMISSIONER GALVIN replied correct. He pointed out that page 3
of the handout provides a breakdown of the capital and operating
expenditures that went into the boxes on page 2. The numbers do
not directly track because page 3 deals with the calendar year
2009 as opposed to the fiscal year 2009. The blue bar on the
left of page 2 represents the capital expenditures for that year
[about $2 billion], the small grey box represents the 20 percent
capital credits that accrue from the blue bar [$370 million],
and the white box represents what the department estimates to be
the additional credits that would be created by the proposed 30
percent infield credit [$90 million]. Regarding the bars
depicted on the right of page 2 for operating expenditures
[totaling about $1.9 billion], he explained that there is no
[grey] box next to the blue bar because there is currently no
capital credit for operating expenditures. However, a portion
of the operating expenditures would qualify for the proposed new
credit and that would generate the additional $150 million shown
in the white box. Thus, the $90 million and $150 million boxes
would correspond to a box on page 2 if there was a box for
calendar year 2009. In further response, he confirmed that the
reason for the differences [in the white boxes] on the two pages
is that one is for fiscal year and one is for calendar year.
2:06:09 PM
COMMISSIONER GALVIN, in response to Representative Seaton,
clarified that of the capital and operating expenditures the
department expects to qualify for this credit, an additional
credit beyond what is in current law will be generated, and this
additional amount is depicted in the white boxes [on page 2 of
the 3/29/10 handout]. Thus, for fiscal year 2009, it is not
that $255 million of the expenditures qualify for the credits;
it is that of the expenditures that qualify, the result will be
an additional $255 million in credit above what those
expenditures qualified for previously.
2:07:23 PM
REPRESENTATIVE SEATON asked whether there is anything depicting
the approximate amount of well-related expenses for those years.
COMMISSIONER GALVIN directed attention to page 3 of the handout
and noted that of the $370 million in credit generated from 2009
capital expenditures, an additional $90 million of credits would
be created. This means about $900 million of the total capital
expenditures would be expected to qualify for this additional
credit because the proposed credit would add an additional 10
percent. For the operating expenditures, $150 million of
additional credit would be created; this would be about $500
million in operating expenditures because the credits would go
from 0 percent to 30 percent.
2:08:56 PM
REPRESENTATIVE SEATON inquired where the operating credits that
would apply from this are located in Version R. He said he
thought that in the earlier bill there were credits for well-
related expenditures and that operating expenditures were
amended out of the bill.
COMMISSIONER GALVIN explained that under the current system,
capital expenditures and operating expenditures are separated
based upon a particular definition of what qualifies as a
capital expenditure. However, HB 337 would use the definition
of intangible drilling expenditures to determine which
expenditures qualify. This definition includes some capital
expenditures and some operating expenditures and under HB 337
all intangible drilling expenditures would qualify for this 30
percent credit. Thus, there is no section of HB 337 that says
operating expenditures do not qualify for the proposed new
credit. The charts in the handout are based upon past tax
returns and depict that portion of current capital expenditures
the department expects will qualify for this new credit and what
the implication of the new definition would be for the current
division between capital and operating expenditures.
2:11:45 PM
COMMISSIONER GALVIN, in response to a further question from
Representative Seaton, explained that the numbers depicted in
the handout are nearly the same whether for Version R or the
governor's original bill, which would have made the provision
under AS 43.55.025. The difference is that well workovers and
other activities that increase production will be eligible for
this proposed credit and there is not a distinction as to
whether they are operating or capital expenditures. The
language in HB 337 gives this additional credit, whether in AS
43.55.025 under the original bill or in AS 43.55.023 under
Version R. Therefore, it is not a function of whether it is
production or development.
2:14:03 PM
COMMISSIONER GALVIN, in response to Representative Tuck,
confirmed that page 7, lines 13-21, where well-related
expenditure is defined, is what is being referred to. In
further response, he said this would not include disposal wells.
2:15:06 PM
REPRESENTATIVE GUTTENBERG inquired whether the Department of
Revenue has talked with the Department of Natural Resources to
determine whether any of this work is already scheduled to be
done to stem the decline in the production rate. Or, he asked,
is all of the work being talked about meant to increase
production above that line.
COMMISSIONER GALVIN said he does not think there is a
straightforward answer as to whether it would increase or
decrease the line. All of the expenditures the department would
expect to qualify for this are intended to result in production.
2:16:26 PM
REPRESENTATIVE GUTTENBERG asked whether credit would be given
for something that is already scheduled to be done.
COMMISSIONER GALVIN answered there has been conversation with
the Department of Natural Resources regarding whether there is a
distinction to be made between what is planned to be done and
what is not, and DNR's plans do not get to the "granularity"
where the Department of Revenue can use them for that purpose.
The issue the department faces with trying to target incentives
to only incremental additional production is that there is no
baseline with which to compare it to, that if there is no
additional investment there would be a decline curve that is
much steeper than what the department projects.
2:17:34 PM
REPRESENTATIVE GUTTENBERG inquired whether that is the
expectation with going ahead without any additional well work or
with what is already scheduled, or is this meant to incentivize
work above that to increase that.
COMMISSIONER GALVIN responded the issue faced by the department
is that production forecasts are based upon what the companies
have provided the department in terms of their expected
production profiles based upon their expected investment rules;
it is not detailed on a well-by-well basis. For that reason, HB
337 makes an across-the-board proposal for an economic incentive
to do this type of drilling. He said he fully anticipates there
are going to be expenditures that qualify for these additional
credits that would have been done anyway. However, there are
workovers and additional wells that will be drilled that would
not have been done without this additional boost. The
department believes it is in the state's interest to provide a
credit targeted for the work it is trying to incentivize, which
would result in more jobs and more production.
2:20:01 PM
REPRESENTATIVE GUTTENBERG allowed that some wells need rework
just to stay even. He asked whether there is some way to hook
this credit onto increased production.
COMMISSIONER GALVIN replied one thing that can be relied upon is
that companies are going to be investing in this type of
expenditure solely because of the expectation it will result in
more production than if they did not do the investment.
CO-CHAIR JOHNSON opened public testimony.
The committee took an at-ease from 2:22 p.m. to 2:28 p.m.
2:28:11 PM
CO-CHAIR JOHNSON left public testimony open after ascertaining
no one wished to testify today.
REPRESENTATIVE SEATON moved to adopt Amendment 2, labeled 26-
GH2057\R.1, Bullock, 3/29/10, written as follows [original
punctuation provided]:
Page 7, line 2:
Delete "that expenditure"
Insert "the expenditures during a calendar year
that exceed the average annual well-related
expenditures for the calendar years 2008, 2009, and
2010; the producer or explorer shall submit the amount
of well-related expenditures for each of the years
2008, 2009, and 2010 at the time an election is made
to apply the credit authorized by this subsection"
CO-CHAIR JOHNSON objected for discussion purposes.
2:29:26 PM
REPRESENTATIVE SEATON explained the figures for the 20 percent
capital expenditure credit show that a significant amount of
work goes on in the oil fields. He observed that the proposed
additional credit would be almost twice as large for operating
expenditures as for capital expenditures. Amendment 2 would
incentivize the additional work that is being talked about. The
current level of expenditures has been fully economic at 20
percent capital, he maintained, so Amendment 2 would stimulate
the desired activity without expending money for those things
that have been economic to date.
2:31:05 PM
CO-CHAIR JOHNSON said he does not think it is obvious that
anything has been economic.
COMMISSIONER GALVIN recognized that the objective of Amendment 2
covers the earlier discussion with Representative Guttenberg
about whether there is a mechanism that could parse out the work
that would be done anyway from the work that would be
incentivized. He said he thinks this is a difficult exercise to
pursue or achieve, and creates complications and anomalies with
regard to individual taxpayers that would be counter to the
intent of the bill. From a structural standpoint, it creates a
circular math equation that would need to be worked out in terms
of averaging the 2008, 2009, and 2010 calendar years since the
bill would become effective July 1, 2010.
REPRESENTATIVE SEATON moved Conceptual Amendment 1 to Amendment
2 to strike "and 2010" from lines 4 and 6 of the amendment.
Thus, the average would be for the years 2008 and 2009. There
being no objection, Conceptual Amendment 1 to Amendment 2 was
passed.
2:34:19 PM
CO-CHAIR JOHNSON asked when a workover in 2008 would be planned
and budgeted for.
COMMISSIONER GALVIN responded he does not know because it would
be different for each company, although it would probably be
shorter than the timeframe for exploration and new development.
REPRESENTATIVE SEATON reminded members that in previous
testimony companies stated they continuously look at a number of
projects to decide what is economic. Infield drilling projects
do not have the same kind of reservoir risks and are the
shortest terms, he opined, which is why the amendment does not
include the year 2007, the year that ACES started.
2:35:47 PM
REPRESENTATIVE GUTTENBERG said Representative Seaton's point
about 2007 is well taken. He asked whether taxpayers applying
for this proposed credit would be able to go back and amend
their tax returns to add work that was not eligible for the
credit at that time.
COMMISSIONER GALVIN replied no, the additional credit is only
available for expenditures that are incurred from July 1, 2010,
forward.
2:36:52 PM
REPRESENTATIVE GUTTENBERG inquired whether that would still be
the case if there is a two-year average under this amendment.
COMMISSIONER GALVIN explained that a difficulty in implementing
Amendment 2 would be the new definition of well-related
expenditures in HB 337, which cuts expenditures along a
different line than current statute. By default, taxpayers
would have to provide updated information to describe what they
believe would qualify as a well-related expenditure in 2008 and
2009 because a significant portion of that will be operating
expenditures that did not qualify for credit then and so would
not have been quantified in that way in those tax years. To
have something to compare it to on a go-forward basis, the
taxpayers will have to give additional data for 2008 and 2009 to
define what the well-related expenditures are for those years.
2:38:51 PM
REPRESENTATIVE SEATON said defining these credits for well-
related expenditures does not mean the companies would receive
credits for those, just that they must do the corollary of
pulling out the capital and operating expenditures for 2008 and
2009.
COMMISSIONER GALVIN pointed out that taxpayers would be
motivated to define 2008 and 2009 as extremely small investment
years. They will want to define everything out of those years
to make that number small since it is the difference between
those years and 2010 forward that qualifies. That will put the
Department of Revenue in the inverse of the standard deduction
situation where the department will have to audit the 2008 and
2009 claims of well-related expenditures to try to say there are
other costs the taxpayers did not claim that should have been
included. Amendment 2 would thus be difficult administratively.
2:41:30 PM
CO-CHAIR NEUMAN presumed the July 1, 2010, effective date for
Section 11, which is the section Amendment 2 deals with, would
add another layer of complication.
COMMISSIONER GALVIN answered it would require the department to
do a lot of interpreting through regulations or other means to
understand what the intent would be.
CO-CHAIR JOHNSON said he cannot support Amendment 2 because of
the additional work it would put on the Department of Revenue
and because it is splitting hairs. He maintained his objection
to Amendment 2.
2:43:14 PM
REPRESENTATIVE SEATON said Amendment 2, as amended, would mean
that any additional well-related activities above a taxpayer's
average expenditures in 2008 and 2009 would receive the
additional enhanced tax credit. This way the state would not be
giving additional credit for the same amount of work a taxpayer
has been doing infield.
REPRESENTATIVE P. WILSON understood that if Amendment 2 passes,
the state will be paying less than it would otherwise.
CO-CHAIR JOHNSON clarified the state is issuing credit and is
not actually paying anything.
REPRESENTATIVE P. WILSON pointed out that that still results in
less revenue to the state.
CO-CHAIR JOHNSON agreed.
A roll call vote was taken. Representatives Seaton, Guttenberg,
Kawasaki, and Tuck voted in favor of Amendment 2, as amended.
Representatives Olson, Edgmon, P. Wilson, Neuman, and Johnson
voted against it. Therefore, Amendment 2, as amended, failed by
a vote of 4-5.
2:45:42 PM
REPRESENTATIVE GUTTENBERG explained that the amendment he wishes
to move is conceptual because it was for a different version of
HB 337. He moved to adopt Conceptual Amendment 3, labeled 26-
GH2057\A.1, Bullock, 3/29/10, written as follows [original
punctuation provided]:
Page 1, line 2:
Delete ","
Insert "and"
Page 1, lines 3 - 4:
Delete ", and to alternative tax credits for
expenditures for certain oil and gas development and
exploration activities for the oil and gas production
tax"
Page 3, line 7:
Delete "AS 43.55.025(f) [AS 43.55.025(f)(2)]"
Insert "AS 43.55.025(f)(2)"
Page 3, line 9:
Delete "AS 43.55.025(f) [AS 43.55.025(f)(2)]"
Insert "AS 43.55.025(f)(2)"
Page 4, line 5, through page 9, line 5:
Delete all material.
Renumber the following bill sections accordingly.
Page 9, lines 11 - 25:
Delete all material.
Renumber the following bill sections accordingly.
Page 10, lines 2 - 6:
Delete all material.
Renumber the following bill sections accordingly.
Page 10, line 19:
Delete "Sections 4 - 12 of this Act take"
Insert "Section 5 of this Act takes"
Page 10, line 20:
Delete "sec. 17"
Insert "sec. 9"
REPRESENTATIVE GUTTENBERG said HB 337 would give credits for
doing well-related work, which the state has never done before,
and Conceptual Amendment 3 would eliminate the credit for all
well-related work that is in the bill.
2:47:37 PM
REPRESENTATIVE P. WILSON objected and asked whether all the
definitions would have to be changed.
REPRESENTATIVE GUTTENBERG stated that previous to HB 337, well
credits did not exist. Conceptual Amendment 3 would take out
the well-related credits in this bill, making things as they
were before this bill. In further response, he confirmed the
amendment would mean that HB 337 would not have any tax credits
for well-related work.
CO-CHAIR JOHNSON said what is being talked about is infield
drilling, which is the major purpose of HB 337. The intent of
the bill is to increase production and jobs in the places where
it is known that there is oil.
2:48:54 PM
CO-CHAIR NEUMAN understood that Conceptual Amendment 3 would
remove any credits for the reworking of wells.
REPRESENTATIVE GUTTENBERG replied yes.
CO-CHAIR NEUMAN maintained there would have been a terrible
impact on the amount of oil through the Trans-Alaska Pipeline
System (TAPS) had many of the wells not been reworked to date.
The ability of new technology to produce more oil from those
wells is why they are being reworked; plus, it is much cheaper
to rework wells than to drill new ones. Producing more oil from
existing wells creates jobs and more revenue, probably more
revenue than the state's cost for the increase in credits. He
said taking away the proposed incentive for reworking wells is
inappropriate, so he cannot support the amendment.
2:51:02 PM
REPRESENTATIVE GUTTENBERG explained he is introducing Conceptual
Amendment 3 because the purpose of HB 337 is to incentivize well
rework using a new definition and a new credit, but there is no
guarantee written into the bill that any rework, jobs, or
increased production will happen. Since the first well was
drilled at Prudhoe Bay, industry knew that after a certain
period of time it would need to rework the wells because these
things were defined in the development plans for Prudhoe Bay,
Kuparuk, and elsewhere. When the state put out these leases
many years ago, there was an expectation that this work would
happen. Had Alaska exercised its sovereignty, the work would
have been done at the start of the decline. Instead, industry
was in harvest mode and uninterested. Now, industry is
interested because it has to be; both industry and the state
have a large vested interest in keeping the facilities pumping
and oil moving through the pipeline. Industry did not undertake
this work during the years of the economic limit factor (ELF)
when there were no taxes. Now, taxes are moderate and industry
is looking to erode them for work it would be doing anyway.
2:54:40 PM
REPRESENTATIVE GUTTENBERG continued, saying he would like to see
industry do something new for the credits, but instead HB 337
would give credits for those things industry was already
expected to do. The analysis of revenue is incomplete because
the production increase is unknown. The bill would give away
over $1 billion, and possibly more, in the next four years.
While the bill gives industry more money, it would not benefit
the state because there is no guarantee of increased production
or jobs. He said he would like to hear discussion on why it is
thought that HB 337 will incentivize industry when past
incentives have not resulted in the desired changes.
2:57:06 PM
CO-CHAIR NEUMAN commented that these things will only happen if
it is economical. The state must create an environment that
industry will thrive in or else industry will go elsewhere since
these are global companies. Almost 30 percent of all the jobs
in Alaska are somehow connected to what is happening in Prudhoe
Bay because the producers look to Alaska companies to do this
work. The intent of HB 337 is to spur new jobs through new
production and exploration, which has been lacking. He inquired
how many people working in Prudhoe Bay are employed by [Alaskan]
subcontractors.
COMMISSIONER GALVIN responded he does not have those numbers
with him, although these numbers were looked at during earlier
versions of the bill.
2:59:29 PM
CO-CHAIR NEUMAN said he is trying to ensure that most of the
companies doing this rework are Alaskan. He asked whether the
lack of new investment was the original intent of the bill.
COMMISSIONER GALVIN replied the intent of HB 337 is to target
the state's tax incentives, in terms of reducing the tax burden
on the taxpayer, to those that are actually doing the work and
to ensure that it is tied to the amount of work the taxpayer
does. The more investment, the more jobs created, the more tax
benefit the taxpayer will receive.
3:00:23 PM
CO-CHAIR NEUMAN surmised this is based upon the department's
internal information and is a strategic move within the
administration after weighing the tax incentives and the value
they would create for the state.
COMMISSIONER GALVIN answered the general reaction to the current
tax structure was an increase in the total amount of
expenditures, along with an increase in the number of jobs,
although there has since been some level of decline. However,
there was a decrease in the number of wells being drilled, so
the department looked to a bill that would target this issue and
that is why HB 337 increases the amount of credits available for
well-related work. He said the department believes the overall
tax structure still provides a very attractive investment
climate for new development projects and exploration plays, but
the department is trying to increase the incentivizing nature of
the tax towards drilling more wells.
3:02:03 PM
CO-CHAIR JOHNSON inquired how much money would need to be
invested to rebate $1 billion.
COMMISSIONER GALVIN responded that dependent upon whether the
expenditures are for operating or capital, between $5 and $10
billion in additional spending would generate a $1 billion
rebate for the additional credits that would result from HB 337.
REPRESENTATIVE GUTTENBERG, at the request of Co-Chair Johnson,
withdrew Conceptual Amendment 3 so the committee could adjourn
without any business before it. There was no objection to the
amendment being withdrawn.
[HB 337 was held over.]
3:04:05 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSHB 337 v.R.pdf |
HRES 3/29/2010 1:00:00 PM |
HB 337 |
| CSHB 337 Amendment A.1 3.29.10.pdf |
HRES 3/29/2010 1:00:00 PM |
HB 337 |
| HB 337 Conceptual Amendment to A 7.46 3.29.10.pdf |
HRES 3/29/2010 1:00:00 PM |
HB 337 |
| CSHB337(RES)-REV-TAX-03-29-10 Oil and Gas Tax Adjustments.pdf |
HRES 3/29/2010 1:00:00 PM |
HB 337 |
| CSHB 337 v. E 3.29.10 12.30pm.pdf |
HRES 3/29/2010 1:00:00 PM |
HB 337 |
| HB 337 DOR info to add credits.pdf |
HRES 3/29/2010 1:00:00 PM |
HB 337 |