Legislature(2007 - 2008)SENATE FINANCE 532
11/08/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB2001 | |
| 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 8, 2007
9:31 A.M.
CALL TO ORDER
Co-Chair Bert Stedman convened the Senate Finance Committee
meeting at 9:31:11 AM.
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
Barry Pulliam, Senior Economist, Econ One, Research, Contractor,
Legislative Budget and Audit Committee
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."
9:32:33 AM
BARRY PULLIAM, SENIOR ECONOMIST, ECON ONE, RESEARCH, CONTRACTOR,
LEGISLATIVE BUDGET AND AUDIT COMMITTEE, referred to a handout
entitled, "Tax Rates and Progressivity" [copy on file]. He
related that the presentation would be about the relationship
between the base tax rate and the progressivity rate as it
applies to the various bills under consideration.
9:33:46 AM
Mr. Pulliam turned to page 2 to discuss the structure of the tax
system as it appears today. All systems, both current and
proposed, are based on a net tax system. They have a tax rate,
or base rate, plus a progressivity rate, which equals the total
tax rate. The total tax rate is applied against taxable value.
9:34:44 AM
Mr. Pulliam outlined taxable value on page 3. Gross sales price
(West Coast), minus transportation costs, equals the gross
wellhead value, minus operating and capital costs, which then
equals the net taxable value.
9:35:35 AM
Mr.Pulliam explained other key items related to the production
tax, as seen on page 4: floor, capital credits, TIE credits,
small producer credits, and exploration credits (EIC). He noted
most of his presentation would focus on the tax rate and
progressivity.
9:36:22 AM
Mr. Pulliam turned to page 5 to explain how the base tax rate is
applied to taxable value at all price levels. The line graph
depicts tax rates of 25 percent (SB 2001) and 22.5 percent
(PPT). He noted that the base tax rate does not vary with
prices.
Mr. Pulliam explained that a progressive tax is added to the
base tax, as seen on page 6. He related the elements that
affect progressivity: trigger level, slope, and gross or net
value, as they are applied under PPT and SB 2001.
9:39:32 AM
Mr. Pulliam detailed page 7, an example of the progressive tax
under current and proposed systems. As the net taxable value
rises, progressivity kicks in. The red line shows the
effectiveness of progressivity with an overall rise in the tax
rate.
Mr. Pulliam noted that page 8 shows the tax rate with
progressivity under SB 2001.
9:41:12 AM
Mr. Pulliam explained the graph depicting various trigger points
under the two different tax rates - page 9. Changing the slope
also affects the tax rate.
9:49:14 AM
Mr. Pulliam compared PPT, SB 2001, and the Senate Judiciary CS
at different price levels, as shown on page 10. At higher
prices, the tax rates rise. Under PPT, the tax rate would be
22.5 percent up until a $40 net taxable value, and then it would
rise at 2.5 percent for every $10 until it reaches a cap of 50
percent at $150 net taxable value.
9:50:47 AM
Under SB 2001 there is a higher tax rate at lower prices - 25
percent. Then the tax rate rises with progressivity until it
caps out at 50 percent. At $130 net taxable value, PPT and SB
2001 cross.
The Senate Judiciary CS maintains the 25 percent tax rate until
the trigger at $30, but it has a much steeper slope until it
caps out at 50 percent, which it reaches at $100 and flattens
out.
All plans presented so far all have a linear progressivity until
they reach a cap.
9:53:04 AM
Mr. Pulliam turned to page 11 to show other ways to design
progressivity. The green line shows the linear increase,
whereas the blue line shows a progressive piece that rises
quickly at the outset and then flattens out at higher prices.
It does not require a cap. He detailed the percentages at which
the tax would rise.
9:55:45 AM
Mr. Pulliam explained that the red line is another example of
how one could design a progressivity piece. It provides for a
smaller increase at the beginning, followed by a steeper
incline, and then a lesser incline again.
These variations do not need a cap at high prices; they
naturally flatten out.
9:57:04 AM
Mr. Pulliam explained the estimated average effective tax rate
on gross taxable value at various West Coast ANS price levels
under the various scenarios - page 12. Under PPT the effective
tax rate on gross value would range from a low of 5 percent at
about $40, to a high of just over 35 percent in the $160 range.
Under SB 2001 the effective tax on the gross level rises at the
lower price levels and continues up at a lower slope than PPT.
PPT Expected is the effective tax rate that would have been
expected under the modeling done on PPT. Higher costs account
for the difference between PPT and PPT Expected.
10:00:41 AM
Mr. Pulliam noted that these pictures go out to a higher price
range, which was not done when considering PPT. Earlier charts
reflected lower price levels. The modeling reflects an
intention to increase costs as prices increase, and decrease
costs as prices decline.
10:02:06 AM
Co-Chair Stedman inquired how the modeling was done last year on
PPT.
Mr. Pulliam recalled that costs were modeled as if they would be
constant - about a billion dollars for capital costs and a
little over a billion dollars for operating costs. Those costs
would have resulted in about $9 per barrel gross taxable value.
There was not an adjustment for higher costs at higher levels or
lower costs at lower levels. That is different than what is
being used now. The costs used to analyze the current proposals
are about double those of the earlier analysis. Above $60,
costs escalate; below $60, costs de-escalate.
Under the Senate Judiciary CS, the 25 percent rate is kept, but
there is an increase in progressivity. It has a 50 percent cap
and flattens out at higher prices. The cap would be on a net
value. These projections also take into account the TIE
credits.
10:05:23 AM
Senator Thomas said he was surprised at the difference between
PPT and PPT expected, considering the impact of the gross tax
value. Mr. Pulliam replied that the impact of increased costs
will serve to reduce taxes.
10:07:08 AM
Mr. Pulliam also noted that the old ELF system would be a
straight line across the graph.
Co-Chair Hoffman asked what the revenue to Alaska would be at
$60 under PPT and PPT Expected.
Mr. Pulliam turned to page 13 to answer. The bottom box shows
the annual average tax difference for each of the scenarios, as
compared to PPT. The state would get about $1 billion more
under PPT Expected at $60, over the next six fiscal years.
10:09:16 AM
Mr.Pulliam explained that the figures were done using volume
projections by DOR. Those projects will be revised for lower
volume over the next several years. New fiscal notes are
forthcoming which would reflect a change of 30,000 barrels a day
less than what has been projected.
Co-Chair Stedman asked about the 2008 - 2014 time frame. Mr.
Pulliam clarified that there were two different analyses; a 10-
year projection and a 30-year projection. A shorter period
projection is preferred due to a relatively more accurate
picture.
Co-Chair Stedman requested more information about the numeric
totals, whether they are annual or total. Mr. Pulliam reported
that the figures are all annual.
10:11:55 AM
Co-Chair Hoffman asked if PPT's tax rate is 22.5 percent and the
other two are at 25 percent. Mr. Pulliam said that is correct.
He added that the different tax rates, progressive features, and
TIE credits are also included.
Mr. Pulliam explained that the dashed line between $80 and $100
emphasizes the point that figures over $100, particularly for
PPT Expected, are not scenarios that were run before.
10:13:42 AM
Mr. Pulliam discussed the different metrics shown on page 13.
Each of the boxes is structured in same way. The top box is the
effective tax rate on gross taxable value. Those figures mirror
the chart shown previously with lines that increase and flatten
out at higher prices.
The second box shows government share of net cash. The
percentage of net income is being measured. Net income is the
value of the oil after cost is deducted. Government take at
different price levels is shown. There is also state government
take and federal government take. The state takes value in
several ways; property taxes, royalties, income taxes, and
production taxes. The federal government only takes income
taxes against which all state takes are deductible.
10:16:48 AM
Co-Chair Stedman highlighted what happens when the state share
is increased or decreased. Mr. Pulliam explained that if the
state takes more, which comes, in part, from the industry, and
is deductible against federal taxes, the federal government gets
less. For every dollar the state takes, the federal government
will get .35 cents less.
Mr. Pulliam explained the box relating to marginal government
share of net cash. The Department of Revenue has presented and
analyzed these statistics at a $60 price level. This represents
what happens with increased revenues when prices go up by $1 per
barrel. He gave an example at $60. If the price of oil jumps
from $60 to $61, with no other factors, the state increase is
63.7 percent. The Department of Revenue has focused on this
statistic in their analysis. In the PPT line, the marginal
share rises as prices rise, due to progressivity.
10:20:24 AM
Co-Chair Stedman wondered what the dollar affect of that was as
the marginal rate increases. Mr. Pulliam said it still
increases. As dollars are rising, everybody is getting more.
For each dollar increase, the state is getting a bigger percent
of that increase.
Mr. Pulliam noted what is implied on marginal takes for the
other plans. For example, under SB 2001, the marginal takes are
a little bit higher at lower levels and start to flatten out at
higher levels due to the smaller slope on progressivity. The
Senate Judiciary CS has a higher marginal take at higher prices
because of the higher slope. It flattens out and declines when
it hits the cap.
10:23:12 AM
Mr. Pulliam turned to the bottom box, annual average tax
difference above/below PPT. The revenue impacts shown are
differences from PPT. He explained the increase and decline
under SB 2001, Senate Judiciary CS, and PPT Expected.
Co-Chair Hoffman asked about the tax rate of 22.5 to 25 percent
at current projections in the spring forecast of $71.60. He
noted the production tax value would be $10.6 billion. An
additional 2.5 percent would provide an additional $260 million.
He summarized that the additional revenue to the state really
isn't in the tax rate, but in the progressivity and the slope of
the progressivity.
Mr. Pulliam agreed. Co-Chair Hoffman concluded that the fight
shouldn't be whether the tax rate is 22.5 or 25 percent, but
rather what the slop should be.
10:26:06 AM
Mr. Pulliam stated that, ultimately, the base tax rate and
progressivity are related issues and cannot be separated.
Senator Dyson asked for a definition of PPT Expected. Mr.
Pulliam related that it is the cost expectations that were built
into PPT legislation last year. It shows the difference between
what was expected last year and what is expected now.
Senator Dyson agreed with Co-Chair Stedman's idea to not use
automatic escalators. He expressed concern about devalued
trigger points due to an expectation that inflation will be
higher.
10:28:29 AM
Mr. Pulliam agreed, to the extent that the inflation was on the
cost side and not reflected in the price. Higher costs at any
given price would result in a lower net. Senator Dyson thought
inflation on the price of oil would drive the real value of the
trigger point down and distort it significantly to the
industry's disadvantage.
Mr. Pulliam asked if Senator Dyson meant that the net
realization, in real terms, would drop. Senator Dyson's concern
involved a higher effective tax rate. Mr. Pulliam agreed that
that is a potential in all systems, both net and gross.
Co-Chair Stedman requested more information about the evolution
of the modeling and how the operating and capital expenditures
are addressed relative to prices above and below $60. He
requested information on the magnitude of the price movement
relative to the cost movement.
Mr. Pulliam replied that the projections use higher costs at
higher prices and the costs escalate beginning at $60. The
escalation is heavier on the capital side than on the operating
side. A lot of the cost differences between PPT and PPT
Expected are based on higher expectations of oil prices and the
increased activity that accompanies that. Price increases have
risen more than cost increases.
10:32:53 AM
Co-Chair Stedman wondered if it was fair to say that current PPT
would be more distorted as far as off of its targets at higher
prices than if prices decline to the $50 to $30 range due to
shrinking operating and capital expenditures. Mr. Pulliam
responded that distorted was not the right term, but agreed that
higher costs are taken into account in getting at the net value.
One of the desirable features in any proposed system is that it
operates off the net.
Senator Thomas referred to the comment regarding not being able
to separate the base rate from the progressivity. Mr. Pulliam
explained the difference in the slope of the progressive piece
in SB 2001 and the Senate Judiciary CS.
Senator Huggins assumed that the PPT line represents "as it is
performing". Mr. Pulliam agreed.
10:35:21 AM
Senator Huggins commented, under present conditions of prices,
in the marginal government share box, PPT outperforms SB 2001.
Mr. Pulliam agreed and added that PPT has a higher progressivity
rate.
Senator Huggins emphasized that progressivity is a very strong
tool. He returned to page 11 and voiced appreciation for the
chart and how it targeted PPT. Mr. Pulliam agreed with Senator
Huggins' analysis. He elaborated on the linear relationship of
progressivity. Senator Huggins endorsed the concept.
10:39:43 AM
Mr. Pulliam turned to page 14, the tax floor issues. Current
law has a floor ranging between 1 and 4 percent of gross
wellhead value at low ANS prices. He described the floor
characteristics of PPT, SB 2001, and Senate Judiciary CS. He
noted that the presence of a higher floor would introduce
regressivity at lower prices. A floor is like an insurance
policy and is a matter of economics. The cost of that insurance
policy is tied to expectation of ANS prices. Mr. Pulliam state
that his preference was having a higher floor rate.
10:45:48 AM
Senator Huggins commented that he appreciated and agreed with
Mr. Pulliam's tax floor issue conclusions. But he also agreed
that if the administration wants a floor, it should include it.
Senator Dyson shared Senator Huggins intrigue with the graph on
page 11. He wondered if the blue line was similar to the House
Resources version.
10:48:28 AM
Senator Dyson asked if Mr. Pulliam was requested to produce the
charts. Mr. Pulliam reported that he was asked to look at
different types of progressivity mechanisms. Senator Dyson
asked who requested the information. Mr. Pulliam replied that
Co-Chair Stedman and Co-Chair Hoffman prepared the presentation
and the specific lines were of his doing.
Senator Dyson appreciated the information.
10:49:42 AM
Co-Chair Stedman related that several different concepts and
methodologies could be used with progressivity. He recalled
last year's difference of opinion with the previous
administration regarding progressivity within PPT. The intent
is to review progressivity and show its possibilities. He
opined that it would be beneficial to remember that
progressivity is a powerful tool and has the potential to be
very beneficial to the treasury, and the marginal effects versus
the effects to the base rate could be substantial, depending on
the structure. The intent is to hit on a multitude of topics
regarding the oil tax structure.
10:51:51 AM
Senator Huggins underlined Senator Dyson's comments. He thanked
the co-chairs for their efforts.
CS HB 2001 (FIN)am was HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 10:54:09 AM.
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