Legislature(2005 - 2006)SENATE FINANCE 532
04/19/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 305 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 19, 2006
9:06 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
9:06:51 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, C0-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Also Attending: SENATOR TOM WAGONER; DARWIN PETERSON, Staff to
Senator Lyda Green; DAN DICKINSON, CPA, former Director of the
Tax Division, secured as a consultant by the Office of the
Governor
Attending via Teleconference: There were no teleconference
participants
SUMMARY INFORMATION
SB 305-OIL AND GAS PRODUCTION TAX
The Committee reviewed and adopted a committee substitute. The
bill was held in Committee.
CS FOR SENATE BILL NO. 305(RES)
"An Act providing for a production tax on oil and gas;
repealing the oil and gas production (severance) tax;
relating to the calculation of the gross value at the point
of production of oil or gas and to the determination of the
value of oil and gas for purposes of the production tax on
oil and gas; providing for tax credits against the tax for
certain expenditures and losses; relating to the
relationship of the production tax on oil and gas to other
taxes, to the dates those tax payments and surcharges are
due, to interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with the
royalty owners; relating to flared gas, and to oil and gas
used in the operation of a lease or property under the
production tax; relating to the prevailing value of oil or
gas under the production tax; relating to surcharges on
oil; relating to statements or other information required
to be filed with or furnished to the Department of Revenue,
to the penalty for failure to file certain reports for the
tax, to the powers of the Department of Revenue, and to the
disclosure of certain information required to be furnished
to the Department of Revenue as applicable to the
administration of the tax; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the tax, and to the
deposit of tax money collected by the Department of
Revenue; amending the definitions of 'gas,' 'oil,' and
certain other terms for purposes of the production tax, and
as the definition of the term 'gas' applies in the Alaska
Stranded Gas Development Act, and adding further
definitions; making conforming amendments; and providing
for an effective date."
This was the eleventh hearing for this bill in the Senate
Finance Committee.
Co-Chair Green moved to adopt committee substitute version 24-
GS2052\P as the working document and objected for purposes of
discussion. She anticipated that each person would find areas of
the proposed Petroleum Production Tax (PPT) bill they could
support and other areas they might wish to change. The desire
was to produce a PPT bill that would generate widespread support
in the effort to protect the State and promote additional
industry investment.
Co-Chair Green, referencing a summary sheet of the provisions
proposed in Version "P" [copy not on file], noted that many of
its components aligned with those of CSSB 305(RES). These
included the provisions pertaining to the private royalty tax
rate; the special gas progressivity; the five year lookback
transition period with a two for one recoupment for capital
expenditures; the interest only provision pertaining to the safe
harbor outstanding tax balance; the allowance of a six month
transition period in which the severance tax would be paid under
the tax provisions of the current tax regime, Economic Limit
Factor (ELF), with a seventh month PPT true-up; disallowing
spill surcharge payments to be either creditable or deductible;
the specification that the credits could only be applied to the
PPT; allowing 20 percent of any transferred credits to be
applied to the tax limit; disallowing any provision through
which the State could refund a company for their credits;
specifying that the point of production for gas would be
upstream of the gas treatment facility; and allowing
catastrophic oil spill expenses pertaining to leases to be a
deductible expense.
Co-Chair Green expressed that the transition treatment "credit;
and no oil price test" provision and the termination year of the
transition period proposed in Version "P" were essentially the
same as those of CSSB 305 (RES). While the termination year was
the same, the date had been changed from March 31 to June 30 of
2013.
Co-Chair Green stated that minor revisions were made regarding
the base allowance provision and the treatment of the Department
of Natural Resources (DNR) royalty values in Version "P" as
compared to CSSB 305(RES).
Co-Chair Green also noted that the safe harbor language in
Version "P" specified a 95 percent monthly tax payment with an
annual true-up rather than the quarterly true-up proposed in
CSSB 305(RES).
9:11:38 AM
DARWIN PETERSON, Staff to Senator Lyda Green, clarified that
Version "P" would apply a Progressivity element to both oil and
gas. He noted however that the Gas Revenue Exclusion section of
the bill would "lift the bar so high that Progressivity, in
essence, was not applicable".
9:12:14 AM
Senator Bunde suggested that Version "P" would be easier to
compare to other bills were it depicted as a fourth column on
the bill comparison sheet provided by the Department of Revenue
and discussed on April 12, 2006.
9:12:47 AM
Co-Chair Green began to individually address the language
changes in Version "P". The phrase "An Act repealing the oil
production tax and the gas production tax" had been moved to the
forefront of the bill's title on page 1 line 1 rather than being
on line 3 of the title in CSSB 305(RES). In addition, the words
"oil or gas" on line 3 and line 10 of the bill's title had been
changed to "oil and gas".
9:13:31 AM
Senator Bunde asked whether this was the result of a drafting
change or whether changing to word "or" to "and" could be
considered a substantial change.
Co-Chair Green remarked that changing the language to "oil and
gas" would "make a difference".
Mr. Peterson expressed that changing the word "or" to "and"
would provide consistency in the bill as the phrase "oil and
gas" was included in other sections of the bill.
Co-Chair Green communicated that moving the phrase "An Act
repealing…" to the first line implied its importance.
Co-Chair Green noted that no changes were made on page 2 of
Version "P" in respect to CSSB 305(RES).
Co-Chair Green specified that Version "P" decreased the
production tax rate "of the taxable oil and gas as calculated
under AS 43.55.160" from 25 percent to 22.5 percent. This change
was located in Sec. 5 subsection (e) page 3 line 18.
Co-Chair Green stated that the private royalty tax rate on
leases was addressed in Sec. 5 subsection (f)(1) and (2) page 3
lines 20 through 28 of Version "P" as follows.
(1) the rate of tax levied on oil produced from a
lease is equal to five percent of the gross value at the
point of production of the oil;
(2) the rate of tax levied on oil produced from a
lease is equal to 1.667 percent of the gross value at the
point of production of the gas";
Co-Chair Green added that the Sec. 5 subsection (f)(3) language
depicted on page 3 line 29 through page 4 line 6 was added "to
prevent gaming … between an oil company and a private royalty
owner" to reduce taxes. Were this to occur, the rate would
revert to the standard 22.5 percent on oil and 7.5 percent on
gas.
Mr. Peterson noted that the terms of the private royalty section
in CSSB 305(RES) had "craved out Cook Inlet for oil and gas".
Version "P" eliminated that provision and would apply a five
percent a private royalty owner tax rate on oil and a 1.667
percent private royalty owner tax rate on gas statewide.
Senator Hoffman asked the percentage rates specified in CSSB
305(RES).
Mr. Peterson responded that the gas rate on private royalty
leases in Version "P" was similar to that specified for Cook
Inlet in CSSB 305(RES). Furthermore, Version "P" would allow
other basins such as the Nenana Basin to be taxed at that rate.
A single statewide tax on gas would be easier for the Division
of Tax, Department of Revenue to calculate.
Senator Hoffman understood therefore that a single private
royalty lease gas tax rate would apply to Cook Inlet, Bristol
Bay, Nenana Basin, and the North Slope.
Co-Chair Green affirmed.
9:17:22 AM
Senator Stedman desired that the overall affect of the
provisions in Version "P" on Cook Inlet be revisited after the
bill in its entirety had been reviewed.
Co-Chair Green agreed, but noted that questions pertaining to
Cook Inlet would be welcome at any time during the discussion.
Co-Chair Green next addressed the Progressivity element in the
bill as depicted in Sec. 5 subsection (g) and (h) on page 4
lines 7 through 21. The Progressivity Trigger proposed in
Version "P" would be $45 per barrel of oil after costs. That
would be "equivalent to a higher" Alaska North Slope (ANS) West
Coast price. This would be a "more proper calculation" since
Progressivity would be based on net value.
Co-Chair Green specified that the $40 ANS market price
Progressivity trigger specified in CSSB 305(RES) would have been
"a lower threshold" than that proposed in Version "P". She had
been concerned about "the inequities" that might have occurred
were the $40 ANS price utilized as a trigger point as that rate
might have increased several times before the effective date of
the bill.
Co-Chair Green stated that the language in Sec. 5 subsection (g)
and (h) also simplified language as it would apply "the same tax
base for the Progressivity tax and the PPT".
Co-Chair Green pointed out that while the Progressivity element
would also apply to gas, Version "P" added a gas revenue
exclusion in Sec. 26 on page 18, beginning on line 6.
9:19:45 AM
Senator Bunde observed that the Progressivity rate would be
1/20th of one percent.
Co-Chair Green affirmed.
9:19:57 AM
Co-Chair Green stated that no change was made to Sec. 6 of the
bill.
Co-Chair Green stated that the change from a 95 percent monthly
tax payment safe harbor with a quarterly true-up to a 95 percent
annual true-up was depicted in Sec. 7 subsection (a) on page 5
lines 1 through 10. She specified that 95 percent of the private
royalty lease tax and 95 percent of the Progressivity tax would
also be due monthly. The annual true up date would be March 31,
of the year following the calendar year.
Senator Bunde asked the interest penalty rate that would be
applied were the tax paid less than the 95 percent minimum.
Co-Chair Green stated that the interest penalty would be 11
percent. This mirrored the penalty levied in CSSB 304(RES).
Co-Chair Green identified Sec. 9 and Sec. 10 as being conforming
language.
Co-Chair Green stated that the language "produced but not sold,
or if oil or gas is produced and" was added to Sec. 11
subsection (f) page 6 line 12 to "more accurately reflect" State
Statute and current practice.
9:21:47 AM
Co-Chair Green pointed out that Sec. 12. subsection Sec.
43.55.024 (a)(1)(A) on page 6 line 29 of Version "P" would
increase the credit rate from 20 to 25 percent.
Co-Chair Green recalled hearing that "a one percent rise in the
tax rate is equivalent to about a five or six percent" credit
rate increase. The decision was made to increase the credit rate
in Version "P" to a point that would "offset" the difference in
the tax rate in SB 305 over the original 20 percent tax
proposal.
9:22:21 AM
Co-Chair Green hoped that would incentivize further investment
in the State. A company electing to take the credit provided
under subsection (A) would be prohibited from utilizing other
credit provisions in the bill and visa versa. In other words,
"double dipping" would not be allowed.
Co-Chair Green also noted that language in Sec. 12 "restated"
provisions included in SB 185, in that an entity receiving
credits for geological or geophysical activities would be
required to share that seismic data with the Department of
Natural Resources. As specified in current State Statute, such
data would be kept confidential for ten years.
Co-Chair Green pointed out that language in Sec. 12 subsection
(a)(1)(B) specified the "loss carry forward rate at 22.5"
percent. That would coincide with the tax rate.
9:23:46 AM
Co-Chair Green advised that no changes were made on page 8 of
the Version "P" relative to CSSB 305(RES).
9:23:52 AM
Co-Chair Green stated that language in Sec. 12 subsection (h)
and (i) on page 9 contained "conforming amendments to comply
with the new [PPT] effective date" of July 1, 2006.
Co-Chair Green communicated that the phrase "extended period of
disuse" had been deleted from Sec. 12 subsection (h)(2) because
that language "was too vague".
Co-Chair Green also noted that language in Sec. 12 subsection
(h) would maintain the current practice of excluding "ordinary
and necessary business expenses" from qualifying for credits.
9:24:42 AM
Co-Chair Green communicated that conforming amendments were
utilized in Sec. 12 subsection (j)(2) page 10 line 22 in order
to simplify the reporting of expenditures. Such expenditures
must qualify under federal income tax standards.
9:25:08 AM
Co-Chair Green informed the Committee that Sections 13 through
17 on pages 11 - 14 would extend the exploration provisions of
SB 185 on a statewide basis for ten years. She pointed out that
language in Sec. 15 subsection (f)(5), page 13 lines 24-26,
would clarify existing language pertaining to the exploration
expenditure limit of $20,000,000 on exploration activities in
Cook Inlet. This language reads as follows.
…after the end of the calendar year following the calendar
year in which the total of production tax credit
certificates issued by the department under this section
based on exploration expenditures for Cook Inlet prospects
reached $20,000,000,
Co-Chair Green explained that this "clarifying" "language would
require the Department of Natural Resources (DNR) to review the
program the year prior to the limit being reached. Any project
conducted that final year that had Department approval would be
allowed even though the $20,000,000 limit might be exceeded. At
that point, this Cook Inlet provision would terminate.
9:26:52 AM
Senator Stedman asked how the 20 percent exploration credits
referenced in Sec. 13 subsection (a)(1) page 11 lines 9 and 10
and the 40 percent credits referenced in Sec. 13 subsection (a)
(3) and (4) on page 11 lines 13 through 16 would mesh with the
25 percent credit proposed in Sec. 12 subsection (a)(1)(A).
Co-Chair Green stated that the exploration credits in Sec. 13
referred to the credit provisions of SB 185.
9:27:43 AM
Senator Stedman asked why someone would choose a 20 percent
credit when a 25 percent credit was available.
9:28:14 AM
DAN DICKINSON, CPA, former Director of the Tax Division, secured
as a consultant to the Office of the Governor, affirmed that
Sec. 13 would extend current law enacted by SB 185. He
understood that the question was why a person would elect the 20
percent credit when a 25 percent credit was available or why
they would take a 25 percent credit when a 40 percent credit was
available. The intention was to accommodate exploration project
decisions that had been made under the provisions of SB 185. The
desire was simply to "not change those rules". The language
could be considered "superfluous" as it was likely that "people
would apply for the new credits" that would be established by
this bill.
9:29:41 AM
Senator Olson surmised therefore that extending the provisions
of SB 185 would allow for a "smoother transition with the least
amount of misunderstanding".
Mr. Dickinson affirmed.
Co-Chair Green noted that no changes had been made to the
provisions depicted on page 15. She noted that Sec. 20 reflected
a conforming amendment pertaining to the March 31 filing date
for adjustments or corrections relating to the prior year's
reportings.
Co-Chair Green stated that no changes were made to Sec. 21. The
changes in Sec. 22 on page 16 were conforming amendments.
9:30:31 AM
Co-Chair Green noted that Sec. 25 subsection (d) on page 17
lines 10 through 17 was new language.
9:31:09 AM
Co-Chair Green specified that Sec. 26, page 18 beginning on line
6, related to the new gas revenue exclusion. This section
addressed "one of the dilemmas" with the proposed PPT; that
being how "to determine the" costs of oil and gas "when they're
together and in the same area and in the same pipe, etc." While
the same PPT base would be applicable to both oil and gas, the
effective tax rate for gas would be lowered in that only one of
every three dollars of gas revenue would be subject to the 22.5
percent PPT rate. In other words, each dollar of gas revenue
would be taxed at one-third the PPT rate or a 7.5 percent tax
rate.
9:33:02 AM
Senator Stedman concluded that the intent was to apply the same
tax structure statewide and then address the tax on gas in this
manner.
Co-Chair Green affirmed.
Mr. Peterson agreed that the tax base would be uniform
statewide. The gas revenue exclusion rate was specified in Sec.
26 subsection Sec. 43.55.160(a) on lines 10 and 11 of page 18.
9:34:00 AM
Mr. Dickinson reiterated how difficult it was to "parcel the
costs between" oil and gas produced at a production facility.
Imposing a separate tax on oil and gas would also be tedious.
Thus, the decision to approach the issue from a gross value at
point of production position was the preferred method.
9:35:07 AM
Senator Olson asked the reason why specifying a gas tax rate of
7.5 percent had not been preferred to the one-third of the gross
value at the point of production of the gas language.
9:35:21 AM
Mr. Dickinson responded by exampling the activities associated
with a platform producing both oil and gas in Cook Inlet. He
noted that the costs of that production would qualify for a 22.5
percent deductible under the PPT under the conditions of Version
"P".
Mr. Dickinson communicated that there had been no enthusiasm for
applying a lower rate for gas at the platform level as other
factors such as those experienced under a private lease
situation, would come into play.
Senator Olson asked whether geographical differences would also
be a consideration.
Mr. Dickinson clarified that Version "P" did not include any
geographical considerations.
Senator Olson acknowledged.
Co-Chair Green noted that the intent was to simplify the
calculation.
9:37:00 AM
Co-Chair Green referred the Committee to language in Sec. 26
subsection (c)(1)(B) page 19 lines 24 through 30. The intent of
this language was to clarify that were there no existing or
clear industry standards, "existing DNR standards may be used"
in calculating costs.
Co-Chair Green noted that, in order to eliminate confusion, a
listing of what would and would not be considered "direct costs"
was provided in Sec. 26 subsection (d), page 20 line 11 through
page 21 line 20.
Co-Chair Green noted that the term "1/12" was added to the
language in Sec. 26 subsection (f) on page 22 lines 29 through
31. The language read as follows.
(f) In place of the adjusted lease expenditures for a
month under (a) of this section, a producer may, at any
time, elect to substitute, for every month of a calendar
year, 1/12 of the producer's adjusted lease expenditures
for the calendar year. ….
9:39:34 AM
Co-Chair Green directed attention to the "revised base allowance
language in Sec. 26 subsection Sec. 43.55.170(b)(4), page 24,
lines 12 through 14. The language in this subsection was similar
to that of CSSB 305(RES), but "was somewhat enhanced". While
each company would continue to receive a 5,000 per day barrel
allowance, language specifying an annual maximum of 14 million
barrels was added. In addition, the Department of Revenue (DOR)
would be required to provide a report to the Legislature in 2015
"as to the effectiveness of this program" as well as a
recommendation as to whether it should be extended.
Co-Chair Green next noted that the $.01 surcharge and the $.04
surcharge specified in Sec 27 subsection (a) page 24 line 29 and
Sec. 29 subsection (a) page 25 line 15, respectfully, were
included in the bill as placeholders until Co-Chair Wilken
concluded his discussion with the Department of Environmental
Conservation and provided his recommendation in this regard.
Co-Chair Green noted that no other changes were made to language
on page 25. Furthermore, no changes were made on page 26 of the
bill.
Co-Chair Green noted that the definition of "explorer" had been
expanded for clarity purposes in Sec. 34 subsection (17), page
27 lines 11 and 12. References to oil and gas in this Section
were also expanded to provide further clarity.
9:41:53 AM
Co-Chair Green noted that the repealer language in Sec. 35 page
28 lines 1 through 3 had been amended for conformity purposes.
Co-Chair Green anticipated that an amendment would be
forthcoming regarding the reports to the Legislature specified
in Sec. 36 of the bill. In order to prevent these reports from
being "overlooked" the intent would be to place them in codified
rather than uncodified law.
Co-Chair Green noted that the remainder of the bill contained
conforming language and date changes. She concluded her
overview.
9:42:56 AM
Senator Bunde asked that an estimate of the difference in
revenue the State would receive as the result of changing the
effective date from April 1 to July 1, 2006 be provided.
9:43:26 AM
Senator Bunde also asked that an estimate of the effect of other
changes in the bill such as the change to a 25 percent credit be
provided.
Co-Chair Green understood that increasing the tax rate from 20
to 25 percent had more impact on revenue than increasing the
credit rate from 20 to 25 percent.
9:44:09 AM
Senator Stedman asked that the government take charts be updated
to reflect the provisions of Version "P"; specifically the
affect of the Progressivity element in the bill. For comparison
purposes, he asked that the revised charts also reflect the
provisions of CSSB 305(RES).
Mr. Dickinson acknowledged.
Mr. Dickinson stated that while the comparison charts could be
provided in short order, generating the revenue estimates
requested by Senator Bunde would take longer to compile.
9:45:16 AM
In response to a question from Co-Chair Wilken, Co-Chair Green
revisited the Progressivity element specified in Sec. 4
subsection (g) page 4 lines 7 through 15. The Progressivity rate
of one-tenth of one percent would be triggered at a $45 barrel
price of oil after cost.
Co-Chair Wilken understood therefore that the Progressivity rate
language specified in Version "P" had been changed to one-tenth
of one percent.
Mr. Dickinson referred Co-Chair Wilken to Sec. 5 subsection (h)
page 4 lines 16 through 21 for further details about the
Progressivity element calculation.
Co-Chair Wilken asked whether the one-tenth of one percent
language on lines 12, 13, and 14 of Sec. 5 subsection (g) would
equate to the two percent Progressivity language provision
included in CSSB 305(RES).
Mr. Dickinson affirmed they were "comparable".
9:47:03 AM
Co-Chair Wilken hoped there would be an opportunity for the
Legislature's consultants to develop charts pertinent to Version
"P"; specifically those pertaining to the government share
percentages. Decisions were dependent on such information.
9:47:34 AM
Senator Stedman surmised that the affect of the Progressivity
element in Version "P" would be substantially different to that
of CSSB 305(RES). The Progressivity calculation had transitioned
from being based on the West Texas Intermediate (WTI) price to
the ANS West Coast, and now to the North Slope wellhead price.
Having this in chart form would assist in understanding the
affect.
9:48:24 AM
Mr. Dickinson stated that charts would be developed.
Senator Bunde understood that basing Progressivity on a net
price differed from the approach taken in CSSB 305(RES).
Co-Chair Green affirmed that "consideration for cost" was
included in the Progressivity component of Version "P" as it was
deemed to be "more fair".
Senator Bunde noted that, while "considerable discussion" had
occurred regarding conditions in Cook Inlet, specific language
addressing that situation was not included in Version "P".
Co-Chair Green affirmed that the PPT provisions in Version "P"
would be applied on a statewide basis. However, the rate had
been adjusted to reflect the situation in Cook Inlet and other
areas including the Nenana Basin and Bristol Bay.
Mr. Dickinson stated that the PPT rate specifications in Version
"P" had taken into account smaller developments.
Co-Chair Green removed her objection to the adoption of Version
"P".
Without further objection, Version "P" was ADOPTED as the
working document.
9:50:28 AM
Senator Stedman asked whether Version "P" included language that
would prevent an entity from getting both the 20-percent credit
afforded by the extension of SB 185 as well as the 25 percent
PPT credit. He also asked for further discussion as to how the
credit associated with Progressivity would be applied.
9:51:21 AM
Mr. Peterson stated that the Statutes referenced in Sec. 12 page
6, lines 23 through 26, would prohibit an entity from "double
dipping" credits.
9:52:00 AM
Senator Stedman asked that further analysis be conducted on this
of this issue.
9:52:32 AM
Senator Stedman next addressed the two for one five-year look
back provision in the bill; specifically whether Version "P"
would allow those credits to be applied over a seven or ten year
forward timeframe.
Mr. Dickinson responded that Version "P" specified a seven year
forward timeframe.
Co-Chair Green mentioned that CSSB 305(RES) had also specified a
seven year timeframe.
9:53:06 AM
Senator Dyson was impressed with the work conducted on the
committee substitute. He was in agreement with some of it but
would desire more time to thoroughly analysis it.
Co-Chair Green advised that the timeframe in which to address
the bill was limited. The intent would be to further address
questions this afternoon, receive amendments on Thursday, April
20, and act on them and report the bill from Committee on
Friday, April 21.
Co-Chair Green stated that additional work to address such
things as an alternate point of production for small companies
on the North Slope would be required. Amendments would be
required to address such things as incorporating the reporting
requirements in codified law.
9:55:00 AM
Co-Chair Green requested the Committee to provide additional
feedback on the bill as soon as possible as the timeframe was
limited. The effort would be to develop a bill that would
benefit Alaska and encourage the industry to keep investing and
producing in the State.
AT EASE: 9:55:38 AM/ 9:56:41 AM
Senator Hoffman requested that a chart be developed that would
reflect the Progressivity factor included in the House of
Representatives PPT bill, CSHB 488(RES) as compared to that
proposed in Version "P" and CSSB 305(RES).
Mr. Dickinson, Senator Hoffman, Senator Stedman, Co-Chair
Wilken, and Co-Chair Green discussed the mechanics of the chart
being requested.
9:59:08 AM
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 9:59:38 AM.
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