Legislature(2007 - 2008)SENATE FINANCE 532
11/05/2007 02:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
November 5, 2007
2:38 P.M.
CALL TO ORDER
Co-Chair Bert Stedman called the Senate Finance Committee
meeting to order at 2:38:32 PM.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Lyda Green; Senator Gary Stevens; Patrick Galvin,
Commissioner, Department of Revenue; Bob George, Consultant,
Gaffney, Cline and Associates, Inc.
PRESENT VIA TELECONFERENCE
None
SUMMARY
SB 2001 "An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; relating to the
issuance of advisory bulletins and the disclosure of
certain information relating to the production tax and
the sharing between agencies of certain information
relating to the production tax and to oil and gas or gas
only leases; amending the State Personnel Act to place
in the exempt service certain state oil and gas auditors
and their immediate supervisors; establishing an oil and
gas tax credit fund and authorizing payment from that
fund; providing for retroactive application of certain
statutory and regulatory provisions relating to the
production tax on oil and gas and conservation
surcharges on oil; making conforming amendments; and
providing for an effective date."
SB 2001 was HEARD & HELD in Committee for further
consideration.
SENATE BILL NO. 2001
"An Act relating to the production tax on oil and gas and
to conservation surcharges on oil; relating to the issuance
of advisory bulletins and the disclosure of certain
information relating to the production tax and the sharing
between agencies of certain information relating to the
production tax and to oil and gas or gas only leases;
amending the State Personnel Act to place in the exempt
service certain state oil and gas auditors and their
immediate supervisors; establishing an oil and gas tax
credit fund and authorizing payment from that fund;
providing for retroactive application of certain statutory
and regulatory provisions relating to the production tax on
oil and gas and conservation surcharges on oil; making
conforming amendments; and providing for an effective
date."
2:39:30 PM
Co-Chair Stedman emphasized the complexity of the issue and
observed the discussion revolves around "government take" or how
the value of state resources would be divided between the State,
federal government, explorers and developers, and major oil
companies which harvest those assets. He observed that the
State receives revenue from the oil industry primarily through:
royalty, property tax, corporate income tax, and production tax
(PPT). He stressed the need to consider cash flow, lease
expenditures, base tax, progressivity or surcharge added to the
base tax, trigger or speed that the surcharge escalates, credit
that stimulate PPT, transitional credits, net operating loss
carry forwards, credits and incentives, tax administration
(filing penalties, tax auditing and windows), and other issues.
He explained that the focus would be the tax value citizens of
the State receive for their resource, but emphasized the need to
keep an eye on the treasury.
2:48:10 PM
PATRICK GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, gave a
presentation titled, "Senate Finance, November 5, 2007" [copy on
file].
2:48:49 PM
Commission Galvin addressed Page 2:
Topics
· Oil's importance to overall Alaska State revenue
· Producer Economics
o PPT
o CS SB 2001 (JUD)
· Government Take
o Alaska and Federal
o Under PPT and CSSB 2001(JUD)
Commissioner Galvin reiterated the four revenue sources received
by the State through taxes. He highlighted the difference
between royalty and production tax and explained that royalty
tax is only applied to oil and gas produced on state owned land.
Production tax is applied to all oil and gas produced in the
state.
2:49:38 PM
Commissioner Galvin continued his presentation with Page 3:
Sources of Alaska Government
Revenue From Petroleum
o Royalty
o Based on the gross value at the "point of
production"
o Rate established in lease contract
o Property Tax
o Based on adjusted (for inflation) depreciated
investment costs and remaining useful life
o Production Tax
o Based on company's net cash flow per barrel of
production after costs and reinvestment
o State Income Tax
o After deduction of allowed costs, including
Royalties, Property Tax and Production Tax based
on apportioned worldwide income
2:53:37 PM
Senator Dyson asked if there is any real difference between
severance tax and a production tax. Commissioner Galvin
responded that for the ease of dialog the terms can be
considered equivalent.
2:54:18 PM
Senator Dyson asked what the Commissioner meant by "we figure
out what portion would be applicable to Alaska", when
calculating income tax.
2:54:40 PM
Commissioner Galvin explained that the percentage of the
corporation's employees, volume and value of production in
Alaska and a number of other factors are used to determine how
much of a corporation's worldwide profit is attributable to
their Alaskan properties. The corporate tax rate is applied
against the result of those calculations.
2:55:28 PM
Senator Dyson asked the Commissioner if the process is outlined
in statute. Commissioner Galvin affirmed. Senator Dyson
summarized that the State does the analysis and determines what
portion of a corporation's worldwide income can be attributed as
their share. Commissioner Galvin agreed.
2:55:57 PM
Senator Dyson asked if companies had appeal rights. Commissioner
Galvin observed that companies have the same appeal rights as
they would under any tax system.
2:56:06 PM
Senator Dyson asked if companies ever counter the findings of
the State. Commissioner Galvin explained that the share is
calculated with easily determinable factors, so there is not the
same level of auditing that would be found in the more complex
production tax.
2:56:57 PM
Senator Dyson questioned if the apportionment method would be
sophisticated enough to pick up a scenario where all of a
company's purchasing and administrative offices were outside
Alaska with a small portion serving their Alaskan operation.
Commissioner Galvin was not able to answer the question, but
promised to provide information on the actual apportionment
methods.
2:57:58 PM
Commissioner Galvin continued his presentation with Page 4;
Total State Revenues
FY 2007 - $11.9 Billion
[Pie chart depicting the breakdown of revenues as follows:
Federal (restricted) 26%
Investment (restricted) 24%
Oil (unrestricted) 36 % ($4.3 Billion)
Oil (restricted) 5% ($1.3 Billion)
Other (unrestricted) 4%
Other (restricted) 4%
Investment (restricted) 1%
He explained that state funds are comprised of restricted and
unrestricted revenue. Restricted revenue is designated for
specific purposes and is not available for legislative
appropriation. Restricted investment is made up of both
permanent and non permanent fund money.
2:59:19 PM
Commissioner Galvin addressed the next slide (page 5) that
itemized the percentages of Unrestricted Petroleum Revenues:
Royalty 35% ($1.6 billion)
Production Tax 47% (2.3 billion)
State Corporate Income Tax 12% ($0.6 billion)
Property 5% (municipality)
Property 1% (state)
3:00:14 PM
In response to a question by Senator Elton, Commissioner Galvin
noted the $4.6 billion did not include the property tax portion,
which goes to municipalities.
Senator Huggins asked for clarification regarding the $300
million in property tax. Commissioner Galvin explained that
corporate income tax brings in about $60 million, $300 million
represents the municipal portion and the state portion is
approximately $50 million.
3:01:40 PM
Commissioner Galvin addressed the pie chart on Page 6:
General Fund Unrestricted Revenues
FY 2007 - $4.9 Billion
The breakdown is as follows:
Oil 88% ($4.3 billion)
Other 10%
Investment 2%
3:02:08 PM
Co-Chair Steadman pointed out that the 88% or $4.3 billion
varies from year to year depending on volume and price, but 80 -
90 percent of state comes from the oil industry.
3:02:38 PM
Senator Elton clarified that the percentage does not represent
the amount of unrestricted income that comes in from the
Permanent Fund. Commissioner Galvin agreed and clarified that
the discussions only pertain to the portion that is available on
an annual basis.
3:03:13 PM
BOB GEORGE, CONSULTANT, GAFFNEY, CLINE AND ASSOCIATES INC.,
provided information. He addressed Page 7:
FY 2009 Producer Share of Revenues Under PPT
Mr. George explained that the charts reflect calculations for
fiscal year 2009 because it is the first full year, without
transitional impacts that forecasts would be available. He
reviewed the chart.
He pointed out that the percentage column represents individual
numbers as a percentage of the sales revenue. He clarified that
this is different from the percentage on profits. He further
highlighted the amount under the Trans-Alaska Pipeline System
(TAPS). He explained that the number represents actual costs,
but emphasized that there is a higher cost allowance amount of
approximately $5 per barrel under PPT. The presented scenario
the Producer income is $20.02 per barrel.
3:09:47 PM
Mr. George moved on to Page 10 in order to show a comparison of
PPT and CSSB 2001(JUD).
3:09:58 PM
Senator Elton asked for clarification of the state income tax
percentages. He observed that the producer revenues under PTT
shows state income tax at $763 million or 4% income tax, but the
chart on page 5 seems to suggest that state income tax is 12%.
Commissioner Galvin explained that the 12% is all state revenue;
the four percent of the sales revenue. The pie chart represents
total state corporate income tax revenue. The pie chart
compares state income tax as a percentage of state revenues. The
4% represents the sales tax amount as a percentage of oil sales
for the company.
3:11:34 PM
Co-Chair Hoffman asked what the production tax would bring in
under ACES (HB 2001) if the oil prices were at $66.30 Alaska
North Slope (ANS). Mr. George said he did not have the numbers
available, but promised to provide them.
Senator Steadman noted that the Governor's bill (ACES) was not
before them and asked if the Commissioner could get the numbers
for comparison purposes at a later date. The Commissioner said
he would accommodate the request.
3:13:15 PM
Mr. George noted that the primary difference under CSSB
2001(JUD) is that the base rate of the production tax is moved
from 22.5% to 25% and progressivity starts at a cash flow per
barrel of $30 rather than $40 under PPT. He further outlined the
changes as follows: progressivity is 4% on the dollar per barrel
when the net cash flow exceeds $30 as opposed to .2% under PPT.
The final change was the elimination of TIE credits in CSSB
2001(JUD).
3:14:11 PM
Co-Chair Steadman asked Mr. George to discuss page 13. Mr.
George explained that the numbers are the same from previous
tables (of ANS at $66.30 per barrel), but specifically focuses
on the government take and the Alaska share. He explained that
the Net cash flow number equals the ultimate sales price, less
costs. He further pointed out that under a PPT scenario the
total government take (both federal (20%) and state (38%)) would
be 58%, whereas the producers would receive 42%. He noted an
error in the chart: Production Tax should say Property Tax and
Petroleum Tax should say Production Tax. He itemized the 38% to
state government noting the percentages for each of the four
taxes.
Royalty 16%
Propery Tax 2%
Production Tax 13%
State Income Tax 6%
3:16:40 PM
Co-Chair Steadman directed Mr. George to skip the chart because
the bill (CSSB 2001 JUD) was not before the committee.
3:17:00 PM
Mr. George referred to page 15 noting the comparison of
government take under PPT and the Senate Judiciary CS (CSSB
2001(JUD)). Co-Chair Stedman asked how this compared to other
basins around the world when considering the share between
state, federal government and producer.
3:17:46 PM
Mr. George named several places in the world with percentages.
In the UK sector of the North Sea the tax rate on older fields
pay 75% of profits with newer fields paying 50% of profit. In
Norway the state take is 78%. Co-Chair Stedman asked
specifically about Alberta. Mr. George did not know the latest
figures since the implementation of changes in Alberta. Prior to
current changes in Alberta, the government take was in the mid
40 percent range.
3:18:41 PM
Senator Huggins asked the Commissioner what the goal of the
Administration was regarding government take. Commissioner
Galvin clarified that the Administration looked primarily at the
balance of Alaska investment opportunities to ensure the rates
set would not impinge new investment, rather than a specific
government take number. With regards to the share to the state
the commissioner explained that though it was secondary to the
investment concern, the Administration wanted to make sure the
percentage of share was not outside the norm. He specifically
noted that based on research of other countries with similar
variables the rate could be between the UK rate and Norway of
50% - 75%. Mr. George explained that in the UK older fields
have two taxes that apply resulting in an aggregate of 75%
government share. This differs from newer fields that pay only
one tax at 50%. He reiterated that with Norway's tax structure
the government tax is 78%.
3:20:54 PM
Senator Huggins questioned the Commissioner about the gross
floor and opined that is was a dysfunctional element of the ACES
bill.
3:21:32 PM
Commissioner Galvin countered that the Administration believed
the gross floor had merit. He went on to say that rather than
relying on taking more at the high end and saving for the
future, the gross floor ensured a revenue stream at low prices.
He acknowledged that the industry put forth an opinion that the
gross floor would impinge on their investment decision making,
but maintained that the Administration believed the gross floor
struck the appropriate balance.
3:23:00 PM
Senator Huggins maintained his point that no one, thus far had
been advocating for the gross floor.
3:23:14 PM
Senator Thomas put forth that it may be helpful to look at
historical years pricing index and compare the ELF system, PPT
and ACES systems, when establishing estimates. He expressed
skepticism regarding prices remaining high.
3:24:45 PM
Commissioner Galvin agreed with Senator Thomas and further
pointed out that the hope is that the tax structure would be in
place long term.
3:25:41 PM
Senator Thomas noted a concern regarding the frequent use of the
current high oil prices as a standard for future projections. He
felt a historical perspective created a more realistic picture.
3:26:13 PM
Mr. George said page 17 describes the difference between the
existing PPT system and the CSSB 2001(JUD). He discussed
specifically the base and the credits and deductions allowed
under PPT that no longer exist in the CSSB 2001(JUD).
3:27:32 PM
Co-Chair Stedman noted the importance of viewing each component;
TAPS tariff, marine transportation, credits, and the total
effect on the tax. Commissioner Galvin concurred.
3:28:24 PM
Mr. George discussed details of the chart: FY 2009 Share of
Sales Revenue. He observed that costs remain relatively
constant and become a smaller portion of the overall sales
revenue. He further pointed out that as the price of oil
increases so does government take and the percentage for the
producer.
3:30:00 PM
Mr. George addressed the next slide, Share of profit, and noted
that the chart strips out costs and illustrates profit under the
different price ranges.
3:30:47 PM
Co-Chair Stedman asked the Commissioner to reflect the same data
under PPT and ACES structure, noting that it would provide a
better reference point. The Commissioner agreed to provide the
information.
Co-Chair Stedman discussed the progressivity impact, shipping
and tariffs, as well as other variables outside the general
arena. He emphasized the importance of deliberation on these
components when the issue of progressivity is discussed.
3:32:30 PM
Senator Elton asked the Commissioner if the Governor is
comfortable with the Senate Judiciary version (CSSB 2001(JUD)).
Commissioner Galvin observed that the Administration is
comfortable with either version.
3:33:52 PM
Senator Huggins said he was interested in what elements of the
Transitional Investment Credits (TIE) the Administration is
supportive of and what questions remain. Commissioner Galvin
said the Administration's position is that TIE credits should
not be allowed forward from the effective date of the bill.
3:35:00 PM
Co-Chair Stedman noted that the Committee would review each
individual credit and the financial impact they would have on
the treasury. The Committee would also address impact with an
income statement approach to PPT.
3:36:05 PM
Co-Chair Hoffman emphasized that there is a significant
difference in Progressivity between the Governor's bill and the
Senate Judiciary version. He asked what the Administration's
position was on progressivity.
3:37:20 PM
Commissioner Galvin observed that the original bill had a
combination of gross tax floor to protect the State at the low
end and a more modest two percent progressivity slope starting
at $30 per barrel. He said the Administration recognized the
Legislature was taking a different direction, with without the
gross floor and a higher four percent progressivity, to save the
amount when prices are low. The Administration was comfortable
with a four percent progressivity in lieu of a floor.
3:38:35 PM
Co-Chair Hoffman cited a revenue comparison having a gross floor
with low progressivity and a higher progressivity without the
floor. He emphasized the significant dollar difference between
the two. The price difference without the floor may range
between $100 and $200 million. The difference between
progressivity at $100, PPT and what was passed by the House
would be $3 billion dollars.
3:39:31 PM
Commissioner Galvin pointed out that the original intent of the
floor was to protect the State when oil prices are low. He
acknowledged that the progressivity feature in the Senate
Judiciary version does bring in more than ACES, but said that it
becomes a matter of a commitment to saving. He further commented
that the Legislature has chosen to go with a steeper
progressivity and no floor, but is committed to saving for the
future. The Commissioner stated that the Administration was
comfortable with the different version on the progressivity
piece.
3:40:55 PM
Co-Chair Hoffman reiterated and emphasized the significant
dollar difference at high oil prices. At a $100 per barrel, the
difference is $3 billion dollars, which is staggering.
3:41:29 PM
Commissioner Galvin clarified that when evaluating metrics of
ACES in July, August and September, the price of oil was in a
$70 range and considered at historic levels. He stated that
calculations were based on that number and attempting to base
figures on a $100 price range would have been unrealistic. He
voiced the concerns of Senator Thomas, that focusing only on the
returns during $100 price range creates an unrealistic picture
for the future.
3:43:20 PM
Co-Chair Stedman explained that the previous Administration when
creating PPT looked at prices of oil in the $20-$60 range. The
current Administration created ACES looking at a $70-$90 price
range. He said that he intends to look at a structure based on
prices between $50 and $150 so that there will be no need to
revisit the tax issue.
3:44:41 PM
CS HB 2001 (FIN) am was HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 3:44:59 PM.
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