Legislature(2005 - 2006)
01/28/2005 08:02 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| Overview by Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
January 28, 2005
8:02 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
OVERVIEW BY DEPARTMENT OF REVENUE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
WILLIAM A. CORBUS, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Offered an overview regarding the Department
of Revenue's fall forecast.
TOMAS H. BOUTIN, Deputy Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Presented an overview regarding the
Department of Revenue's fall forecast.
BRETT FRIED, Chief Petroleum Economist
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Answered questions and further explained
the fall forecast during the overview of the Department of
Revenue.
DAN DICKINSON, Director of the Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Answered questions and further explained
the Department of Revenue's oil and gas tax structure.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:02:52 AM. Representatives
Weyhrauch, Samuels, Wilson, and Moses were present at the call
to order. Representatives Rokeberg, Seaton, and Gruenberg
arrived as the meeting was in progress.
^OVERVIEW BY DEPARTMENT OF REVENUE
CHAIR WEYHRAUCH announced that the only order of business would
be the overview by the Department of Revenue.
8:05:07 AM
WILLIAM A. CORBUS, Commissioner, Department of Revenue, relayed
that he planned to briefly reiterate the structural deficit
discussed at the House Special Committee on Ways and Means on
January 14, 2005. In addition he described the administration's
solution in regard to the structural deficit.
COMMISSIONER CORBUS offered that there are two components of the
structural deficit: the revenue side and the spending side.
The Department of Revenue overshadowed that if the state
spending level assumed a spending level of $2.3 or $2.4 billion,
the Constitutional Budget Reserve (CBR) would run out at an
approximated date.
8:07:15 AM
CHAIR WEYHRAUCH stated the legislative budget books reveal that
Alaska could be heading toward another deficit, so it is
imperative to educate the legislature and the public about the
future realities of the state's deficit.
8:08:37 AM
COMMISSIONER CORBUS recapitulated the details of the January 14,
2005, meeting. He reviewed the state's long-term financial
situation: the short term, the long term, and the very long
term. The short-term fiscal year (FY) 2005 has a positive
outlook for the current financial structure, he noted. However
the future long term and very long term are not positive
outlooks for the financial structure of the state. He stressed
that unless there is future oil production: in the Arctic
National Wildlife Refuge (ANWR) and other oil producing centers
in Alaska, in addition to a pipeline, the future outlook will
continue to be bleak for the state. However, once these factors
are in place the financial structure of the state could look
positive. The Department of Revenue's fall revenue forecast
summarized what the future holds for Alaska's deficit.
8:12:28 AM
COMMISSIONER CORBUS reported that the Department of Revenue
considers the positive factors for the long-term picture to
include: the gas pipeline, ANWR, initiatives in the National
Petroleum Reserve (NPR-A) and Beaufort Sea, and further
developments in the central North Slope satellites. He related
his belief that the afore mentioned will occur and there will be
a significant amount of revenue when they do.
8:14:49 AM
COMMISSIONER CORBUS relayed that the administration continues to
support the percent of market value (POMV), and therefore would
encourage the legislature to reexamine the POMV. He said if the
legislature has another proposal to access the permanent fund to
help pay for the cost of government, the administration would be
willing to hear it. He informed the committee that the
permanent fund puts out a monthly projection as to what the
realized earnings reserve is going to be at the end of each year
for the next 10 years. "For the end of fiscal year 05, after
paying dividends and after inflation-proofing, that at the 50
percent confidence level from a probability perspective, that we
[the state] are looking at a $2.1 billion level of the realized
earnings reserve of the permanent fund."
COMMISSIONER CORBUS, in response to Chair Weyhrauch, said the
expected date for the aforementioned would be June 30, 2005.
COMMISSIONER CORBUS, in response to Representative Rokeberg,
said that the $2.1 billion was after inflation proofing.
8:17:44 AM
COMMISSIONER CORBUS recalled Governor Murkowski's January 13,
2004, State of the State Address in which he outlined a
financial plan to resolve the state's financial problems: the
first point being fiscal discipline, resource development,
enhancement of non-petroleum revenues, and lastly that the local
governments pay for the services they provide, he noted. The
aforementioned is still the administration's philosophy.
8:19:19 AM
COMMISSIONER CORBUS related that the administration is
interested in increased production on the North Slope. The
administration would like the oil pipeline to be operated at
full capacity. Currently, the pipeline is only operated at 50
percent capacity, he noted. The administration would welcome
proposals modifying the existing oil and gas tax regime. The
administration is also interested in proposals for tax
incentives to encourage that development, he said.
8:20:44 AM
REPRESENTATIVE WILSON asked if the administration was interested
in a tax if the pipeline is not "full."
COMMISSIONER CORBUS replied no, and suggested that the
administration is trying to find incentives to modify the oil
regime such that would encourage investment for increased
production.
8:21:31 AM
CHAIR WEYHRAUCH related that the House Special Committee on Ways
and Means also wants incentives to maximize private sector
investments and develop resources, particularly in the oil
sector, while optimizing the state's revenue.
8:22:06 AM
COMMISSIONER CORBUS informed the committee that non-petroleum
revenues make up 15 percent of the state's revenue base. The
Department of Revenue has suggested enhancement of taxes to that
particular base. Although there are no proposals from the
administration for changes to that base, there are in-house
examinations of alcohol taxes and licensing fees, as well as
non-petroleum corporate income tax reforms, he noted.
8:23:26 AM
REPRESENTATIVE ROKEBERG highlighted the history of the state's
alcohol taxation issues, when the twenty-second legislature took
the initiative to raise alcohol taxes to the highest in the
United States. Representative Rokeberg inquired as to why the
administration would be reexamining the issue of alcohol
taxation so shortly after the aforementioned change.
8:24:13 AM
COMMISSIONER CORBUS explained that the Department of Revenue is
examining the issue because the cost of alcoholism for the state
is greater than the revenues received from alcohol taxes.
8:24:44 AM
COMMISSIONER CORBUS, in response to Representative Gruenberg,
agreed that such is true for many other industries.
8:24:55 AM
REPRESENTATIVE GRUENBERG suggested then that the same philosophy
should be applied throughout the other industries for which that
is true.
8:25:06 AM
COMMISSIONER CORBUS stated that there have been attempts at
taxation efforts for various other industries throughout the
years, but that those were not always well received by the
legislature. However, this administration has made no attempt
to address alcohol as of yet.
8:25:39 AM
REPRESENTATIVE GRUENBERG opined that there are a number of
industries that have been given more tax breaks than the
hospitality industry. Furthermore, [those tax breaks] have not
produced sustainable revenue the state needs, he noted.
8:26:19 AM
REPRESENTATIVE ROKEBERG commented that Commissioner Corbus'
rationale for addressing this taxation issue stems from the
desire to impact the cost of delivering health services to the
citizens of Alaska who qualify under the state umbrella. He
suggested that this is an issue that should be emanating from
the Department of Health and Social Services rather than the
Department of Revenue. However, he acknowledged that the
Department of Revenue is responsible for developing taxation
policies and collection.
BRETT FRIED, Chief Petroleum Economist, Department of Revenue,
in response to Representative Rokeberg, related that projections
for FY 2005 are lower than FY 2004 because the method of accrual
adds 15 days.
8:28:52 AM
REPRESENTATIVE ROKEBERG asked what the administration's apparent
objective is to socially engineer less alcoholic consumption.
COMMISSIONER CORBUS relayed that the administration is not in a
position to defend anything just yet.
8:29:25 AM
REPRESENTATIVE ROKEBERG inquired as to whether the
administration has reviewed other jurisdictions to analyze the
levels of social engineering that would be necessary to make a
social impact on alcoholic consumption.
8:29:39 AM
COMMISSIONER CORBUS stated that [the administration] is
analyzing a number of factors, but is not prepared to make a
statement on the issue at this time. He pointed out that
alcohol taxes and non-petroleum corporate income taxes are areas
of which the administration wants to make sure that the
constituencies are paying their "fair share."
8:30:38 AM
REPRESENTATIVE ROKEBERG asked if the non-corporate taxes include
non-corporate taxes of Subchapter S corporations, limited
liability companies (LLC's), limited liability partnerships
(LLP's) and other limited partnership business organizations.
8:30:59 AM
COMMISSIONER CORBUS stated the Department of Revenue has
examined: the Subchapter S, tax laws carried forward, carried
back, non paid taxes, tax refunds, and approval of the federal
income tax credits, and, again, the administration is just
looking and is not in a position to defend anything, he
reiterated.
8:32:13 AM
REPRESENTATIVE SAMUELS noted that if the alcohol tax proposal
were to move forward, he would question whether the goal is to
have social change or to collect money. Representative Samuels
asked if there is a proposed timeframe for the issue of S
corporations and LLC's.
8:33:31 AM
COMMISSIONER CORBUS, in response to Representative Samuels first
question, specified that the Department of Revenue has looked at
the alcohol tax from a revenue perspective, and cannot comment
any further on that issue. In regard to the second question, he
said there are no suggested timeframes.
8:34:13 AM
REPRESENTATIVE GRUENBERG observed that Alaska is currently in
the third year of this administration and the committee has been
looking at these same issues for three years. "Time's getting
short," he noted.
CHAIR WEYHRAUCH commented that placing things on the table is
one matter while enacting them is another.
8:35:55 AM
REPRESENTATIVE SEATON recalled Commissioner Corbus' statement
regarding the administrative goal of having the constituencies
contribute their "fare share." Representative Seaton asked
whether the administration has given any consideration of the
two bills in the House that were proposing taxes on the cruise
ship industry.
8:36:50 AM
COMMISSIONER CORBUS reviewed that during the last two sessions
of the Alaska State Legislature the administration was
successful in getting four general taxes installed: the studded
tire tax, the car rental tax, the tobacco tax increase, and the
increased business license fees. The administration also
proposed increases to gaming taxes, a seasonal sales tax, an
increase to the motor fuel tax, and a visitor tax package. The
legislature did not follow through with the latter four
proposals. In response to Representative Seaton's question,
Commissioner Corbus stated that he was not aware of any other
proposals regarding the visitor industry.
8:38:01 AM
REPRESENTATIVE SEATON turned attention to the differences
between gross extraction tax of the oil and fishing industries.
For the oil and fisheries tax there is a gross initial tax on
the gross value. However, mining taxes he explained are based
on a net value instead of the gross value of the resources being
extracted. Representative Seaton asked whether there has been
any analysis on the reason for the different tax scenarios
between the industries.
8:39:18 AM
COMMISSIONER CORBUS suggested to Chair Weyhrauch that the House
Special Committee on Ways and Means devote a session to non
petroleum taxes.
8:39:58 AM
CHAIR WEYHRAUCH relayed that the House Special Committee on Ways
and Means plans to do such a session. Chair Weyhrauch said the
overviews are helpful in terms of what to expect from the
executive branch. He surmised that although the executive
branch is willing to look at the initiatives coming from the
Alaska State Legislature, the executive branch may not introduce
any initiatives itself.
COMMISSIONER CORBUS agreed.
8:40:40 AM
CHAIR WEYHRAUCH surmised then that if the House Special
Committee on Ways and Means or the people of Alaska would like
to see a full range of revenue measures on the table, it is
incumbent upon the legislative branch to introduce those
proposals in order to illicit the administration's reaction to
them.
8:40:58 AM
REPRESENTATIVE GRUENBERG suggested that the proper approach
would be for the legislature and the administration to work
together. The legislature, he offered traditionally seems to be
more reactive than proactive, while under the Constitution there
is a strong executive branch to which one looks to for
leadership and planning. To place all the responsibility on the
legislature is fairly tough, he remarked. Therefore he urged
the administration to reconsider its position on this matter.
8:43:05 AM
COMMISSIONER CORBUS opined that the history of this
administration has not been reactive. The administration, he
related, is willing to work and discuss proposals that the
Alaska State Legislature brings before it.
8:43:56 AM
CHAIR WEYHRAUCH stated that he now understands the
administration's perspective and will discuss with the committee
potential approaches. Historically, the House has stepped-up
for many revenue measures and actively promoted the state's long
term fiscal health, he relayed.
8:45:27 AM
TOMAS H. BOUTIN, Deputy Commissioner, Department of Revenue,
commented that in his discussion with credit rating analysts and
investment bankers, they characterize this administration as
showing leadership, which is reflected in the state's credit
ratings. Credit rating analysts, he related, report they have
seen more progress in the gas pipeline, fiscal policies, fiscal
restraint, and fiscal management during the last couple of years
than since statehood.
MR. BOUTIN relayed that because interest rates continue to fall,
earlier this week the State Bond Committee (SBC) was able to
refinance a third of its outstanding lease debt. The State Bond
Committee authorized a competitive Internet auction, which
elicited a record number of bidders; 10 bidders total. The
final maturity of the debt that issued new bonds is 2013. The
winning bidder bid a true interest cost of 3.0125 percent. This
saves the state, in debt service, about $136 million per year.
This is a net present value savings of about 3.6 percent. The
net present value savings is one of the measures of refunding,
he noted. The debt issue was successful both in terms of the
number of bidders and the aggressiveness of the bidding, he
noted.
8:50:55 AM
REPRESENTATIVE ROKEBERG asked about the details of the recently
sold outstanding debt.
8:51:25 AM
MR. BOUTIN stated that on June 30, 2004, there was $72 million
of lease debt outstanding. The state advertised the debt at
$27.2 million. Given the aggressive nature of the bid, it was
grossed down and turned out to be $25,725,000 outstanding. This
reduced the amount of lease debt the state has outstanding by a
couple of million dollars, according to Mr. Boutin. The state
allowed premium bond bids.
8:52:42 AM
REPRESENTATIVE ROKEBERG asked if all the tranches of refinancing
are maturing at 13 percent.
8:52:50 AM
MR. BOUTIN explained that the state refinanced with level debt
service. The state refinanced four different projects: the
Palmer Fire Facility, the Fairbanks Courthouse, the Soldotna
Maintenance Facility, and the Anchorage Health Lab. In summary
the state was refinanced with level debt services out to 2013.
In further response to Representative Rokeberg, Mr. Boutin
confirmed that the projects were tax exempt because they are for
public purpose. He noted that the refinanced debt was also tax
exempt, and this refunding is referred to as a current refunding
because all the bonds are callable. The Internal Revenue Code
has severe restrictions on refinancing debt that is not yet
callable, he noted. These bonds are callable now, but were not
a year ago.
8:53:52 AM
REPRESENTATIVE ROKEBERG asked if the newly issued bonds were
callable.
MR. BOUTIN replied no, and explained that the newly issued bonds
are not callable. The Department of Revenue decided to seek the
lowest true interest cost by having non-callable bonds since it
is a short final maturity date of 2013. It is also important to
consider the interest rate environment, he noted.
8:54:35 AM
REPRESENTATIVE ROKEBERG asked about how Alaska compared, on a
global perspective, with current debt financing. He also asked
what were the opportunities to do more refinancing in the near
future. Taking into consideration the lower interest rates over
the last few years and the prospect of rising rates in 2005 and
beyond, he asked whether Alaska would have an opportunity to
lock in some of these lower rates. He posed the question, what
in terms of refinancing or coming to the market can Alaska look
forward to. He asked:
If, in fact, the legislature authorizes any bonds in
this current legislative cycle, for the 2006 capital
budget for example; how long does that take? And can
we try to move it rapidly to capture some more rates
before they start accelerating upwards, which short
term rates already have.
8:55:42 AM
MR. BOUTIN stated that the general obligation (GO) bonds the
state issued in April 2003 are being watched closely, because
the yield curve flattened and some of those maturities could
"come into the money" for refinancing. To further explain the
direction of the interest rates since 2003, Mr. Boutin explained
a specific state lease deal done through a municipality. That
deal is currently "in the money" because it was done through a
municipality as the issuer. Since the municipality was the
issuer, the terms had to be negotiated. Mr. Boutin predicted
that the municipality probably would not accept a competitive
sale and would probably insist on a negotiated sale. There are
negotiations that occur when state debt is issued through a
municipality rather than the SBC, he noted. The state is
constantly looking for refinancing opportunities, he said.
8:57:45 AM
REPRESENTATIVE ROKEBERG asked about the GARVEE [Grant
Anticipation Revenue Vehicles] bonds. He asked if there are
ways to expedite going to the bond market. He also asked if
there are any timing issues that the legislature should be aware
of that would help capture rates in the rising market.
8:58:29 AM
MR. BOUTIN explained that GARVEE bonds are a special provision
in federal law that allow issuers to issue debt that is 90
percent dependent upon expected federal transportation receipts.
Of the $463 million of general obligation bonds, that the state
sold in April of 2003, $102 million were GARVEE bonds. In
response to Chair Weyhrauch, Mr. Boutin specified that GARVEE
bonds are for transportation projects approved by the federal
government.
8:59:33 AM
REPRESENTATIVE ROKEBERG inquired as to the amount of the
governor's transportation capital budget.
COMMISSIONER CORBUS offered to provide the committee with those
figures.
9:00:02 AM
REPRESENTATIVE GRUENBERG inquired as to the amount of the lease
debt sale on January 25, 2005.
MR. BOUTIN stated that the amount finally issued was
$25,725,000.
9:00:29 AM
REPRESENTATIVE GRUENBERG asked what the difference was between
the state issuing bonds and the municipalities issuing bonds.
He inquired as to the advantages and disadvantages of both,
specifically for school construction.
9:00:48 AM
MR. BOUTIN explained that for school construction projects,
municipalities issue their own debt. He noted that
"occasionally the state has used municipalities to be the issuer
of its own lease debt."
9:01:42 AM
MR. BOUTIN, in response to Representative Seaton, specified that
the total outstanding state lease debt June 30, 2004, was $72
million.
9:01:50 AM
CHAIR WEYHRAUCH asked why those particular public purpose
projects were funded by the bond sale.
MR. BOUTIN stated that those particular projects were from quite
some time ago and lower interest rates allowed refinancing. The
state waited until the bonds became callable because it is more
efficient than advanced refunding, also because of the strict
restrictions from the Internal Revenue Code on advanced
refunding.
9:02:44 AM
CHAIR WEYHRAUCH commented that last year the House passed a bill
that identified bonding as the source for financing for some
projects. At the time, the administration was not interested in
issuing additional debt until other issues, such as POMV, were
dealt with. If the House were to introduce and/or pass another
bill identifying important projects to the state and wanted
those projects constructed under the use of bond sales, would
the administration be adverse to bond sales as of this year, he
inquired.
9:03:43 AM
MR. BOUTIN relayed that Governor Murkowski has committed to
credit rating agencies that there will be no new general fund
debt until reoccurring revenues match expenditures, which refers
to a fiscal plan. However, from time to time there are small
projects that need to be funded from the general fund.
9:05:28 AM
CHAIR WEYHRAUCH surmised then that the answer to his question is
"maybe."
9:05:38 AM
MR. BOUTIN, in response to Representative Seaton, replied that
the SBC does not issue the student loan corporation bonds. The
SBC deals only with lease debt, international airport revenue
bonds, and general obligation bonds.
9:06:09 AM
REPRESENTATIVE WILSON surmised that the administration's intent
is: "For the credit rating of the state, it is wiser for us to
have a fiscal plan in place before we start looking at any other
kind of bonding..."
9:06:45 AM
MR. BOUTIN stated that was "absolutely true." The state's
current credit rating agencies rate the state as if there was
already a fiscal plan in place.
9:07:34 AM
REPRESENTATIVE ROKEBERG asked if the bond ratings would be
affected if the Alaska State Legislature and the people were to
adopt a balanced budget constitutional amendment.
MR. BOUTIN answered that the rating analysts and the credit
rating agencies would have to read the amendment beforehand to
analyze its potential impact. The first concern that a credit
rating analyst has about a balanced budget plan is whether it
restricts flexibility so much that debt service or needed
services could not be met. Credit analysts like to see ongoing
expenditures met with reoccurring revenues rather than with one-
time sources of cash.
9:09:49 AM
DAN DICKINSON, Director, Tax Division, Department of Revenue,
talked about the Tax Division's responsibilities for the general
fund unrestricted revenue, FY 2004. In FY 2004 the total
unrestricted general fund was "$2.4 billion in" and about "$2.4
billion out." Last year $5 million was withdrawn from the CBR,
and therefore it was essentially a break even year. When
breaking down the $2.4 billion, one must consider the oil and
gas that flow into that number. There are 3 tax types that are
the responsibility of this division: property tax, production
tax, and the oil and gas income tax, which brought in about $1
billion last year. The Department of Natural Resources and the
Division of Oil and Gas administer the oil and gas royalties
program, which brought in about $1.1 billion. The four oil and
gas revenue sources brought in $2.1 billion to the general fund.
9:11:59 AM
REPRESENTATIVE GRUENBERG asked if it is normal for the oil and
gas types of taxes to equal the royalties.
MR. DICKINSON replied no, stating that it was merely
coincidental. The explanation for that happening is that the
property tax is fairly insensitive to price and the severance
taxes or production taxes have fallen dramatically. The effects
of the ELF over time have made it so that production tax is one
half of the royalty. The income tax fluctuates dramatically
depending on worldwide events. Fundamentally, modeling shows
that the refining margins have been driving income taxes.
9:13:50 AM
CHAIR WEYHRAUCH pointed out that on page 3 of Mr. Dickinson's
presentation packet, it shows a static property tax revenue and
a static corporate income tax.
9:14:13 AM
MR. DICKINSON replied that the property tax is fairly static.
The increased investments occurring are just about offset by the
depreciation of the assets in place. If one were to assume that
ANWR and the gas pipeline were in place during the years 2011
and 2012, as production started there would be dramatic
increases in the property taxes, he noted.
9:15:00 AM
MR. FRIED explained that historically property taxes seemed
highly volatile. Thus forecasting into the future with the same
flat price and the same refinery margin makes the projections
look static. While in reality it is going to be much more
volatile.
9:15:32 AM
MR. DICKINSON added that looking at the property tax projection
chart showed a shrinking royalty and an even more shrinking
production tax.
9:15:40 AM
MR. DICKINSON relayed that the oil and gas taxes constitute $2.1
billion. The Tax Division has responsibility for 19 tax types
and fees that total $142.1 million which include: fisheries
taxes, corporate income taxes, non oil and gas, sin taxes, tire
taxes, and various others. The Tax Division is also responsible
for $165.5 million in general fund revenues that are not
administered by the Tax Division and include: the one tax type,
miscellaneous fees, charges, investments, earnings, and fines.
The two of these combined responsibilities yield about $300
million.
9:17:23 AM
MR. DICKINSON, focusing on page 3 of the presentation packet,
explained the expected forecast for the next 10 years. The Tax
Division's unrestricted oil revenue projections expect that the
average productions and prices will yield a decline.
9:17:47 AM
REPRESENTATIVE ROKEBERG asked if the unrestricted oil revenue
projections were based on the current structures and whether or
not the projections included the administrative order.
MR. DICKINSON replied that the projections do not include the
administrative order.
9:18:30 AM
REPRESENTATIVE ROKEBERG relayed that although the projection
graphs were useful it would be more helpful to see a graph circa
1986 to see what the relationship has historically been between
production taxes and other tax forms. These are trend
projections but past projections might yield a better
perspective for the committee, he noted.
9:19:00 AM
MR. DICKINSON referred the committee to page 85, of the Tax
Division Revenue Sources Book. The appendix entitled
"Historical Petroleum Revenue," dates back to circa 1978.
MR. DICKINSON discussed Alaska oil production projections as
illustrated by the graph entitled, "Alaska Oil Production, 1995-
2020."
9:21:17 AM
MR. DICKINSON explained that even when gas and oil volumes are
constant the prices fluctuate and thus the revenues fluctuate as
well. Hence, no projection is flawless.
9:22:15 AM
MR. DICKINSON explained the oil and gas taxes:
The property tax is a 20 mill tax. In other words, 2
percent of the assessed value every year. There has
been a credit for that against any local assessment,
in so far is the jurisdiction primarily Valdez, the
North Slope Borough, the Fairbanks and North Star
Borough, and Kenai. If those jurisdictions have a
local assessment then they, dollar-for-dollar, reduce
the states take from the property tax. Nonetheless,
the state is still responsible for assessing the
entire amount determining the entire value. There are
three different sets of rules: one for exploration
property, one for production property, and one for
pipelines. The thing you see here is the assessment
for exploration property. Like I said there are
different rules for the other assets. What we have
been trying to do is bring for the production assets
... to focus on valuing. Taking asset valuations and
have them relaying to through-puts so that producers
or taxpayers can better understand and have sort of a
direct and quantifiable measurement that we can look
at. And if production falls, we say the value fell,
of that asset, if production rises the value has
risen. So we are exploring within the range of the
statutory and regulatory requirements...
9:25:05 AM
REPRESENTATIVE GRUENBERG asked if there was any type of property
in the industry that was not currently taxed.
9:25:16 AM
MR. DICKINSON replied that there are specific exemptions for
office buildings or normal vehicles. However, in general the
major assets are all taxed under Property Tax, AS 43.56.
9:25:48 AM
REPRESENTATIVE GRUENBERG surmised personal property that is
unique to the industry is included within the tax.
9:26:01 AM
MR. DICKINSON answered yes, and offered that Trans-Alaska
Pipeline System (TAPS) is considered personal property.
9:26:17 AM
REPRESENTATIVE ROKEBERG asked what the local tax mill rates are
for the various jurisdictions along the TAPS, North Star
Borough, Fairbanks, Valdez, and the others.
9:26:35 AM
MR. DICKINSON referred to Table 4.7 on page 35 of the Revenue
Sources Book, which illustrated the effects of the mill rates.
He specified that Valdez has a 20 mill rate, which means that
the state receives no property taxes for the portion of the
pipeline, the Valdez marine terminal, and other associated
assets in Valdez. The North Slope Borough has a mill rate of
about 18.5 so the state receives about 1.5 mills, which is about
92.5 percent North Slope Borough and 7.5 percent for the state.
Those two mill rates have been constant over the last few years.
Kenai is under 10 mills. Fairbanks and the North Star Borough
are something above 10 mills.
9:28:03 AM
MR. DICKINSON, in response to Representative Gruenberg, relayed
that the municipalities are free to adopt any mill rate up to 30
mills. However, in practice 20 mills becomes the cap because
below 20 mills the taxpayer doesn't care. Mr. Dickinson
highlighted that the mill rate used for oil and gas and non-oil
and gas personal property must be the same.
9:29:29 AM
REPRESENTATIVE ROKEBERG suggested that this is a prime example
of one group working to further production and transportation of
the state's natural resources, which is of concern.
9:29:57 AM
MR. DICKINSON relayed that the gross tax for assets in Valdez
was $13.3 million and the local share was $13.3 million and the
state's share was zero.
9:30:38 AM
MR. DICKINSON explained the income tax, AS 43.20. The income
tax is a sliding scale up to 9.4 percent over $100,000 of
income. Mr. Dickinson said:
Start with the federal taxable income...and the monies
that are not oil and gas they have a three factor
apportionment, in other words, you would look at total
U.S. income and then you'd figure out how much was
Alaska income by multiplying through by three factors:
the first one is property, the second one is payroll,
and the third one is sales.
MR. DICKINSON relayed that once a company becomes a producer of
oil then the payroll factor is replaced with a production
factor. For an oil and gas company the Tax Division also takes
into account its worldwide income and the various entities that
compose that unitary group. The unitary group's worldwide
income is totaled and from that total the Tax Division devises
the proportion of business that was generated in Alaska.
Continue the formula as follows: after totaling in the three
factors, multiply through, and come up with a proportion of that
worldwide income that is believed to be Alaskan income, and
multiply that times the 9.4 percent.
9:32:25 AM
REPRESENTATIVE WILSON asked what the percentage of the Alaska
gas and oil production amounted to in comparison with a global
scale production for the three main producers.
9:32:41 AM
MR. DICKINSON said that he cannot mention specific numbers,
although President Marshal of BP Alaska announced publicly that
1 in 10 barrels of its production comes from Alaska.
9:33:15 AM
REPRESENTATIVE ROKEBERG asked whether the specific numbers could
be released to the committee or if the information was not privy
to public record.
9:33:42 AM
MR. DICKINSON, in response to Representative Rokeberg, specified
that specific numbers are confidential. However under Alaska
Statute legislators could review those figures in an executive
session. Some companies are explicit regarding its Alaska
holdings, such as ConocoPhillips Alaska, Inc, while others are
not.
REPRESENTATIVE ROKEBERG asked if Mr. Dickinson could provide the
committee with approximations that would not violate the
confidentiality rules.
9:35:28 AM
MR. DICKINSON stated that he would examine that option.
9:36:05 AM
REPRESENTATIVE ROKEBERG opined that it is important when
discussing the tax regime to have an understanding about the
relative weighing of each particular tax paying petroleum
company in the state. In addition he stated it is important for
the committee to know what the petroleum companies' interests
are in the state and their ability to move capital and make
investments in Alaska.
9:36:18 AM
REPRESENTATIVE ROKEBERG also noted that the formula for the
income tax would be more helpful if there was an example using
numbers to show how the tax works, particularly when the
transition from the production and the payroll is deleted.
9:36:54 AM
CHAIR WEYHRAUCH said it would be informative to chart the
process of oil "Start with the oil, translate that into money,
and then what money is being paid out to which jurisdictions,
including the state. And track that oil through the line and
which entities are involved in payment."
9:38:15 AM
REPRESENTATIVE GRUENBERG recalled that Mr. Dickinson mentioned
that there are some 400-related corporations that are within the
net of the unitary group. Although non-oil type companies have
used licensing agreements to escape local corporate taxes he
related his understanding that the unitary tax concept escapes
the problem. He asked if any sophisticated legal setups, legal
corporate licensing, or anything else has been used to escape
from corporate taxes.
9:39:45 AM
MR. DICKINSON stated that is a problem that Alaska does not
have. Of all the 400 businesses that are entities of the
unitary group, only four or five are doing business in Alaska.
The tax filing of major corporations are of massive quantity.
The tax laws are also very complex and ever changing. Due to
those factors the Tax Division is unable to audit all of it
line-by-line.
9:43:41 AM
REPRESENTATIVE SAMUELS asked if the Alyeska Pipeline Service
Company was considered an Alaskan corporation and what was the
classification of taxes it paid.
9:44:10 AM
MR. DICKINSON said that he was unable to explain taxpayer
specifics. However, when there is a joint venture there are
certain rules that apply and joint ventures are called "pass
through entities." Mr. Dickinson stated that although he is not
implying that Alyeska is a "pass through entity," generally
joint ventures tend to use a pass-through structure, so that the
taxes pass through to the owners.
9:44:48 AM
REPRESENTATIVE SAMUELS surmised that "if the tariff goes up then
that profit of the tariff moves onto the company. And then it
gets incorporated into the worldwide net income for the five
owners and Alyeska then does not pay corporate income tax."
9:45:07 AM
MR. DICKINSON reiterated that he is not suggesting Alyeska is a
joint venture. If Alyeska was a stand-alone Alaska corporation,
then it would pay tax on that and it would pass through to the
owners.
9:46:24 AM
MR. DICKINSON moved on to the production tax, AS 43.55. The
basic rule is to take 15 percent of non royalty production,
multiply that by the ELF, and multiply that by the gross value
at the wellhead. The 15 percent is replaced by 12.25 percent
for the first 5 years of commercial production. The gross value
at the wellhead is market value at destination, subtract from
that the transportation cost to the point of production,
subtract tankering cost, subtract or add from that quality bank,
and subtract the Trans-Alaska Pipeline System or upstream
pipelines.
9:48:19 AM
CHAIR WEYHRAUCH asked about where the 15 percent portion of that
formula was derived from.
9:48:39 AM
MR. DICKINSON specified that the 15 percent was from the
statute, AS 43.55.011.
CHAIR WEYHRAUCH surmised then the two policy issues that the
legislature could have jurisdiction over are the 15 percent
figure and the ELF.
9:48:54 AM
MR. DICKINSON related his belief that the Alaska State
Legislature would have jurisdiction over all of the proposed
issues. He stated that "It was an explicit consideration on the
legislators part to exempt non-royalty production."
9:50:02 AM
MR. DICKINSON went on to explain the details of the ELF. The
ELF is a factor between zero and 1. The following definition of
ELF was cited from the Fall 2004 Revenue Sources Book pages 25
and 26:
The ELF depends on total daily oil production and
average daily per well production from each producing
field.
The statutory production tax rate on oil is 12.25% of
its value at the point of production for the first
five years of field production and 15% thereafter.
There is a minimum tax of 80 cents per taxable barrel.
The effective tax rate is calculated by multiplying
the statutory tax rate, even if it is the minimum 80
cents per barrel, times the ELF.
The ELF formula results in lower effective tax rates
for smaller, low production fields and higher tax
rates for longer, highly productive fields. There is
a unique ELF for every combination of total daily
field production and average daily per well
production.
The taxable value of oil is determined by deducting
allowable marine and pipeline transportation costs
from the destination value of the oil and its
disposition point. This point is defined as either a
third-party sale or delivery to the producer's own
refinery. The destination value for most dispositions
is tied by regulation to the West Coast spot price of
ANS [Alaska North Slope] crude oil.
9:55:52 AM
MR. DICKINSON stated:
The administrative order simply took some fields who
were paying zero ELF, and, in other words, the law
said needed a lot of help -- needed basically all
their production in order to cover their cost. We
determined that that was not the case. The law
specifically gives us the authority to aggregate
fields together if, in fact, the legislative intent is
not being followed and you find situations where ...
you see there is ... a lot of production above the
economic limit ... which the applications requested by
the producers below the economic limit and that's the
decision we made. One other very important point I
want to make is that when a producer is going to
create a development they can come and under our
regulations can apply the Department of Revenue, say
we'd like to get an advanced ruling on the tax
treatment, we issue that. And I think it's very
important to say that this decision did not affect any
of our advanced ruling letters. I think the governor
was very firm yesterday in saying that we don't intend
to affect any of those and we are not going back on
any promises we have made that the industry has relied
on.
ADJOURNMENT
9:57:16 AM
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:57 a.m.
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