Legislature(2011 - 2012)SENATE FINANCE 532

03/20/2012 09:00 AM Senate FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 91 SPORT FISHING GUIDING SERVICES TELECONFERENCED
Heard & Held
*+ SB 201 OIL AND GAS CORPORATE TAXES TELECONFERENCED
Heard & Held
+ SB 146 SNOW CLASSIC TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      March 20, 2012                                                                                            
                         9:03 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
9:03:02 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:03 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Lesil McGuire, Vice-Chair                                                                                               
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Senator  Bill   Wielechowski,  Sponsor;   Michelle  Sydeman,                                                                    
Staff,  Senator  Bill  Wielechowski; Johanna  Bales,  Deputy                                                                    
Director,  Tax  Division,  Department  of  Revenue;  Michael                                                                    
Hurley,   Director,   Government   Affairs,   ConocoPhillips                                                                    
Alaska; Senator Cathy Giessel, Sponsor.                                                                                         
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Lisa Evans, Assistant Director,  Sport Fish Division, Alaska                                                                    
Department  of Fish  and Game;  Deborah Vogt,  Self, Haines;                                                                    
Kara  Moriarty,  Executive  Director,  Alaska  Oil  and  Gas                                                                    
Association;   Chancy   Croft,  Self,   Anchorage;   Rebecca                                                                    
Reichlin,  Board  Chair,  Four  Valleys  Community  Schools,                                                                    
Girdwood; Dianna Hiibner, Ski  Area General Manager, Alyeska                                                                    
Resort, Girdwood.                                                                                                               
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
SB 91     SPORT FISHING GUIDING SERVICES                                                                                        
                                                                                                                                
          SB 91 was HEARD and HELD in committee for further                                                                     
          consideration.                                                                                                        
                                                                                                                                
SB 146    SNOW CLASSIC                                                                                                          
                                                                                                                                
          SB 146 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SB 201    OIL AND GAS CORPORATE TAXES                                                                                           
                                                                                                                                
          SB 201 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
SENATE BILL NO. 91                                                                                                            
                                                                                                                                
     "An Act amending the termination date of the licensing                                                                     
     of sport fishing operators and sport fishing guides;                                                                       
     and providing for an effective date."                                                                                      
                                                                                                                                
9:04:02 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  MOVED  to ADOPT  the  proposed  committee                                                                    
substitute (CS) for SB 91,  Work Draft 27-LS0550\M (Bullard,                                                                    
3/16/12).                                                                                                                       
                                                                                                                                
Co-Chair Stedman OBJECTED for  discussion. He explained that                                                                    
the CS  extended the  sunset date  from FY 13  to FY  17. He                                                                    
WITHDREW his  OBJECTION. There  being NO  further OBJECTION,                                                                    
the CS was ADOPTED.                                                                                                             
                                                                                                                                
SENATOR LESIL MCGUIRE, SPONSOR,  introduced SB 91 and stated                                                                    
that the  legislature had  put the  licensing of  sport fish                                                                    
operators  in   place  in  2004.  The   licensing  had  been                                                                    
beneficial to the  state; the program had  tracked more than                                                                    
1.8 million clients, of which  88 percent were non-residents                                                                    
who had taken  more than 460,000 guided trips  in Alaska. An                                                                    
important feature of the program  was aimed at ensuring that                                                                    
sport fish  guides operated under  basic standards  and that                                                                    
data was provided to the  Department of Fish and Game (DFG).                                                                    
She discussed  struggles related  to the tracking  of salmon                                                                    
returns; the program  was part of an  overall state strategy                                                                    
to  better manage  its resources.  She referred  to a  prior                                                                    
version  of  the  bill  that   would  have  created  a  more                                                                    
comprehensive  program,  which  she  hoped  the  legislature                                                                    
could look at  down the road. The CS extended  the sunset to                                                                    
prevent the program from expiring in the near future.                                                                           
                                                                                                                                
Co-Chair Stedman  pointed to  the one  fiscal note  from DFG                                                                    
that reflected  a $400,000 cost  to administer  the program;                                                                    
the  increment had  been included  in the  governor's FY  13                                                                    
budget.                                                                                                                         
                                                                                                                                
9:06:27 AM                                                                                                                    
                                                                                                                                
LISA EVANS, ASSISTANT DIRECTOR,  SPORT FISH DIVISION, ALASKA                                                                    
DEPARTMENT   OF   FISH   AND  GAME   (via   teleconference),                                                                    
highlighted  that  the sport  fish  guide  program was  very                                                                    
important  to the  department  and  fisheries managers.  She                                                                    
relayed that  the program provided  critical data  on guided                                                                    
sport  fishing  activities and  was  an  effective tool  for                                                                    
successful   fisheries  management   in   the  state.   Data                                                                    
collected from  the program was used  extensively to analyze                                                                    
regulatory options  and inform decisions on  pacific halibut                                                                    
within the International Pacific  Halibut Commission and the                                                                    
North  Pacific Fisheries  Management Council.  She furthered                                                                    
that the  data was  also used  in a variety  of ways  by DFG                                                                    
fisheries managers at a local  level and to inform decisions                                                                    
made by the Board of  Fisheries. She elaborated that in 2010                                                                    
logbooks  had been  modified to  specifically query  charter                                                                    
vessel operators  for the harvest  of sable fish  by clients                                                                    
in Southeast  Alaska because in  2009 the board  had adopted                                                                    
an annual limit  for non-residents. The data  had been taken                                                                    
to the board  in 2010 and 2011 to repeal  the annual region-                                                                    
wide eight fish limit in  order to open up opportunities for                                                                    
non-resident anglers and the sport fish guiding industry.                                                                       
                                                                                                                                
Ms. Evans explained that  the program provided documentation                                                                    
of  harvest patterns  within specific  timeframes (e.g.  bag                                                                    
limits),  which helped  fisheries managers  to evaluate  and                                                                    
update  the regulatory  structure for  certain species.  She                                                                    
detailed   that  freshwater   logbook   catch  and   harvest                                                                    
statistics  were   used  in  Kodiak  to   routinely  observe                                                                    
preseason  establishment of  management  objectives and  for                                                                    
in-season  assessment  of  harvest and  effort.  Local  area                                                                    
managers  relied on  the  data  when considering  management                                                                    
options  for   local  fisheries.  She  had   many  statewide                                                                    
examples showing how managers  used the information gathered                                                                    
under the  program. She communicated that  DFG had responded                                                                    
to concerns of  the sport fish guide industry  by working to                                                                    
modernize its logbook reporting  process. The prior year the                                                                    
department  had reported  all guided  sport fish  harvest of                                                                    
halibut caught  in May through  June by  July 15, 2011  in a                                                                    
pilot program  that used a scanable  logbook. The department                                                                    
planned  to  implement  a  scanning  technology  for  guided                                                                    
freshwater sport  fish activities that would  result in more                                                                    
timely  data  reporting.  She informed  the  committee  that                                                                    
sport fishing was  a $1.4 billion industry in  the state and                                                                    
without   the  information   collected  under   the  program                                                                    
fisheries  managers   would  lose  a  necessary   tool.  She                                                                    
expounded that in  the absence of the  data, fisheries would                                                                    
likely be  managed more conservatively  in order  to fulfill                                                                    
the  department's mission  to protect  and improve  Alaska's                                                                    
recreational fisheries resources.                                                                                               
                                                                                                                                
9:10:17 AM                                                                                                                    
                                                                                                                                
Senator Olson queried  the attitude of the  sport fish guide                                                                    
industry  towards  DFG, given  that  licenses  had not  been                                                                    
required prior  to 2004.  Ms. Evans  noted that  some guides                                                                    
were not  fond of the  requirement but she believed  that in                                                                    
general the  industry recognized the importance  of the data                                                                    
that was collected by the department.                                                                                           
                                                                                                                                
Senator Olson  asked whether sport fish  guides would likely                                                                    
recommend the  program or not.  Ms. Evans replied  that some                                                                    
guides may express that the  program was slightly cumbersome                                                                    
and  that   they  would   prefer  to   be  able   to  report                                                                    
electronically;  however,  she   believed  that  in  general                                                                    
guides  would say  that they  liked the  program because  it                                                                    
protected  their  opportunity  to  have  a  viable  economic                                                                    
industry.                                                                                                                       
                                                                                                                                
Senator  Olson wondered  what the  penalties  were for  non-                                                                    
compliance.  Ms. Evans  responded  that  the penalties  were                                                                    
outlined  in   statute;  she  would   follow  up   with  the                                                                    
information.                                                                                                                    
                                                                                                                                
9:12:25 AM                                                                                                                    
                                                                                                                                
Senator McGuire opined that approximately  80 percent of the                                                                    
guides supported  the program;  many of the  supporters were                                                                    
local  Alaskans  who  were interested  in  protecting  their                                                                    
resource. Pushback  had been received  when a bill  had been                                                                    
introduced that  would have established  a board  to oversee                                                                    
the  program,   which  would   have  resulted   in  enhanced                                                                    
penalties; the  bill had  been introduced  at the  same time                                                                    
federal government  had cracked  down on salt  water guides.                                                                    
She shared that members of  the industry had expressed their                                                                    
support for a simple extension  of the license program as an                                                                    
alternative to the less popular  legislation. She added that                                                                    
concerns  had been  expressed related  to efficiencies;  the                                                                    
department was taking  steps to address the  issue, but many                                                                    
of  the guides  would like  to see  an electronic  reporting                                                                    
system.                                                                                                                         
                                                                                                                                
Co-Chair Stedman CLOSED public testimony.                                                                                       
                                                                                                                                
SB  91  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
9:14:18 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:16:16 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
SENATE BILL NO. 201                                                                                                           
                                                                                                                                
     "An Act  relating to the  oil and gas  corporate income                                                                    
     tax; relating  to the credits  against the oil  and gas                                                                    
     corporate  income  tax; making  conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
9:16:33 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  discussed that the subject  included in SB
201 had been brought up by  consultants in the past and that                                                                    
he thought the bill presentation would be useful.                                                                               
                                                                                                                                
SENATOR BILL  WIELECHOWSKI, SPONSOR,  explained that  SB 201                                                                    
addressed how  corporate income  taxes were  calculated when                                                                    
dealing with  oil and gas  taxes. He relayed  that corporate                                                                    
income taxes in the state  were generally 9.4 percent of the                                                                    
profits  made  by  a  company  (e.g.  if  a  company  earned                                                                    
$100,000 it would typically pay  $9,400); however, the taxes                                                                    
were calculated  differently for multinational  companies in                                                                    
relation to oil and gas.  Oil and gas companies were allowed                                                                    
to calculate  their worldwide profits  and to  apportion the                                                                    
profits based  on production sales and  facilities property;                                                                    
therefore, a  company could make  $2 billion in  Alaska, but                                                                    
only  pay a  corporate  income  tax based  on  a much  lower                                                                    
worldwide  number. He  elaborated  that separate  accounting                                                                    
allowed  companies  to  write-off bad  investments  made  in                                                                    
other parts of the world (i.e.  Libya or the Gulf of Mexico)                                                                    
on  their Alaska  taxes. Conversely,  if Alaska  was a  less                                                                    
profitable place  to do business, under  separate accounting                                                                    
the  bill would  result  in a  lower tax  rate  for the  oil                                                                    
industry.  He shared  that the  concept in  SB 201  had been                                                                    
recommended by oil consultant Pedro van Meurs.                                                                                  
                                                                                                                                
9:19:06 AM                                                                                                                    
                                                                                                                                
MICHELLE   SYDEMAN,   STAFF,  SENATOR   BILL   WIELECHOWSKI,                                                                    
provided a PowerPoint presentation  titled "SB 201: Separate                                                                    
Accounting of Oil  and Gas Corporate Income  Taxes" (copy on                                                                    
file). She read from the presentation (pages 2 through 4):                                                                      
                                                                                                                                
     Senate   Bill   201   would  reinstate   the   separate                                                                    
     accounting method  of calculating corporate  income tax                                                                    
     paid by the oil and gas industry.                                                                                          
                                                                                                                                
     Under separate  accounting, oil  and gas  companies pay                                                                    
     tax  on  the  income  they  earn  within  a  particular                                                                    
     jurisdiction as  opposed to a share  of their worldwide                                                                    
     earnings.                                                                                                                  
                                                                                                                                
     This  method is  used by  EVERY oil  and gas  producing                                                                    
     nation  in  the  world, including  the  United  States,                                                                    
     according to a March 9,  2012, analysis by Roger Marks,                                                                    
     requested by LB&A [Legislative Budget and Audit].                                                                          
                                                                                                                                
Ms. Sydeman noted that she  had received a phone call (prior                                                                    
to the meeting) from Johanna  Bales within the Department of                                                                    
Revenue Tax Division who believed  the U.S. used a variation                                                                    
on  separate accounting.  She returned  to the  presentation                                                                    
(pages 5 and 6):                                                                                                                
                                                                                                                                
     Separate Accounting  is also used by  some U.S. states,                                                                    
     including Oklahoma  and Mississippi, and is  offered as                                                                    
     an option to O&G taxpayers in Louisiana.                                                                                   
                                                                                                                                
     Since oil production in Alaska  began, the O&G industry                                                                    
     has  strongly  urged  the  State  to  use  a  worldwide                                                                    
     apportionment method for calculating their income tax.                                                                     
                                                                                                                                
Ms. Sydeman moved to slide 7:                                                                                                   
                                                                                                                                
     The O&G  industry is the  only industry in  Alaska that                                                                    
     uses this method.                                                                                                          
     The   income   of  other   multinational   corporations                                                                    
     operating in Alaska is apportioned  on a "water's edge"                                                                    
     or U.S.-only basis.                                                                                                        
                                                                                                                                
9:20:44 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman turned to slides 8 through 11:                                                                                      
                                                                                                                                
     In  the mid-70s,  Alaska realized  that  it would  lose                                                                    
    significant revenue under the apportionment method.                                                                         
                                                                                                                                
     After 63 hearings  and 4 years of  analysis and debate,                                                                    
     the legislature adopted separate accounting in 1978.                                                                       
                                                                                                                                
     Under  AS 43.21,  revenues  generated  in Alaska,  less                                                                    
     expenses, became  the basis for  the 9.4  percent state                                                                    
     corporate income tax.                                                                                                      
                                                                                                                                
     The oil  companies sued. They  lost in the  lower court                                                                    
     and appealed to the State Supreme Court.                                                                                   
                                                                                                                                
     Four years  later, in 1982,  the State reverted  to the                                                                    
     apportionment system  because the legislature  feared a                                                                    
     potential cost of $1.8 billion if Alaska lost.                                                                             
                                                                                                                                
Ms. Sydeman moved  to slide 12, which  included a screenshot                                                                    
of a document  that had been provided to  the Alaska Supreme                                                                    
Court by the state,  showing the state's potential liability                                                                    
of $1.8 billion. She continued on slides 13 through 14:                                                                         
                                                                                                                                
     At the  time, the legislature  saw that as too  great a                                                                    
     liability, given the treasury balance in 1981.                                                                             
                                                                                                                                
     However, two years  later, the state won  on all points                                                                    
     at the  Alaska Supreme Court,  and in 1986,  the United                                                                    
     States  Supreme  Court   declined  the  oil  companies'                                                                    
     appeal request, stating there were no federal issues.                                                                      
                                                                                                                                
Ms.  Sydeman noted  that the  industry  had raised  numerous                                                                    
constitutional  issues ranging  from violations  of commerce                                                                    
clause due  process and equal  protection; the  U.S. Supreme                                                                    
Court had determined that none of the issues were relevant.                                                                     
                                                                                                                                
9:22:25 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman turned to slides 15 and 16:                                                                                         
                                                                                                                                
     Separate accounting has never been reinstated.                                                                             
                                                                                                                                
     In  2000,  the  Department of  Revenue  estimated  that                                                                    
     Alaska lost $4.7 billion between  1982 and 1997 because                                                                    
     of   the    switch   from   separate    accounting   to                                                                    
     apportionment.                                                                                                             
                                                                                                                                
Ms. Sydeman  pointed to  an analysis that  had been  done by                                                                    
Dan Dickenson  who had worked  in the Department  of Revenue                                                                    
Tax Division  at the  time (slide 17).  [The slide  showed a                                                                    
comparison  of  actual  oil and  gas  corporate  income  tax                                                                    
collected   with  estimated   revenues   using  a   separate                                                                    
accounting income tax approach.]                                                                                                
                                                                                                                                
Ms. Sydeman presented slide 18  with the disclaimer that she                                                                    
had not  seen a fiscal  note for  the bill; however  a House                                                                    
companion  bill had  a  DOR fiscal  note  estimating a  $250                                                                    
million annual loss. Slide 18:                                                                                                  
                                                                                                                                
     The DOR fiscal  note for this bill  also estimates that                                                                    
     Alaska is losing  about $250 million a year  due to its                                                                    
     use of  worldwide apportionment as opposed  to separate                                                                    
     accounting.                                                                                                                
                                                                                                                                
Ms. Sydeman discussed slide 19:                                                                                                 
                                                                                                                                
     Statements made  over the past  decade by  oil industry                                                                    
     executives  support the  conclusion  that Alaska  loses                                                                    
     income using formulary apportionment.                                                                                      
                                                                                                                                
Ms. Sydeman shared that statements included (slide 20):                                                                         
                                                                                                                                
     "...Norway,  the  U.K.,  Alaska,  Indonesia,  all  have                                                                    
     relatively high, higher than average margins."                                                                             
                                                                                                                                
          Jeffrey Wayne Sheets, CFO and Senior VP of                                                                            
          Finance for ConocoPhillips, in a 2011 Q3                                                                              
          conference call.                                                                                                      
                                                                                                                                
     "Talk about  Alaska, we  like Alaska. .  . .  Last year                                                                    
     240,000 BOE a day, strong  cash margins in this area...                                                                    
     We'll invest  $350 million  in exploitation  this year,                                                                    
     all at very good returns."                                                                                                 
                                                                                                                                
          Greg   Garland,    Senior   Vice    President   of                                                                    
          Exploration and Production for the Americas with                                                                      
          ConocoPhillips. Said on March 23, 2011.                                                                               
                                                                                                                                
9:24:06 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman read from slides 22 through 25:                                                                                     
                                                                                                                                
     " …  Alaska's role  in BP's portfolio  is to  provide a                                                                    
     stable  production base  and cash  flow to  fuel growth                                                                    
     elsewhere in  the business while improving  margins and                                                                    
     returns."                                                                                                                  
                                                                                                                                
          Alaska Business Unit, Mid-Stream Alaska, Trans-                                                                       
          Alaska Pipeline Pump Station Electrification                                                                          
          Decision Support Package - Sanction, February 9,                                                                      
          2004, page 13                                                                                                         
                                                                                                                                
     These   statements   are   confirmed   by   information                                                                    
     contained   in  Securities   and  Exchange   Commission                                                                    
     filings, which  show that per BOE  (Barrel of Earnings)                                                                    
     earnings  in  Alaska   for  ConocoPhillips  are  nearly                                                                    
     double what  they are in  the Lower  48 or the  rest of                                                                    
     the world.                                                                                                                 
                                                                                                                                
     A   Legislative   Research  report   issued   yesterday                                                                    
     compares net income  per BOE from Alaska,  the Lower 48                                                                    
     and the rest of the world from 2000-2010.                                                                                  
                                                                                                                                
        · Alaska average: $15.10                                                                                                
        · Lower 48 average: $8.79                                                                                               
        · Rest of world average: $8.57                                                                                          
                                                                                                                                
     One cause of  this difference in net income  per BOE is                                                                    
     lower  value  gas  production  in  other  jurisdictions                                                                    
     intermingled  with  higher  value oil  production.  But                                                                    
     this   intermingling  is   exactly  what   occurs  with                                                                    
     formulary apportionment.                                                                                                   
                                                                                                                                
Ms.  Sydeman pointed  to a  line  graph on  slide 26  titled                                                                    
"Figure  3: ConocoPhillips:  Net  Income per  Barrel of  Oil                                                                    
Equivalent"  (developed by  Legislative Research  Services).                                                                    
She explained that the blue  line showed Alaska's net income                                                                    
per barrel of  oil equivalent; the red  line represented the                                                                    
Lower 48,  the gray line represented  international, and the                                                                    
purple line represented  global. She moved to  slide 27 that                                                                    
included  a table  depicting the  information used  on slide                                                                    
26. The average  net income per barrel of oil  over 11 years                                                                    
was shown  on the  far right; Alaska  was nearly  double the                                                                    
Lower 48, international, and global numbers.                                                                                    
                                                                                                                                
Ms. Sydeman turned to slide 28:                                                                                                 
                                                                                                                                
     Recently  international oil  industry consultant  Pedro                                                                    
     Van Meurs testified to this  committee that he believes                                                                    
     worldwide apportionment  is cumbersome, an  obstacle to                                                                    
     new investment, and not in the state's best interest.                                                                      
                                                                                                                                
Ms. Sydeman  provided several quotes  from Mr. van  Meurs on                                                                    
slides 29 and 30:                                                                                                               
                                                                                                                                
     "I have always been in  favor of calculating the Alaska                                                                    
     portion  of the  corporate income  tax entirely  on the                                                                    
     revenues and  costs attributable  to Alaska and  not to                                                                    
     any other part of the world."                                                                                              
                                                                                                                                
     Pedro Van Meurs on  worldwide apportionment: "It messes                                                                    
     up  significantly  the  Alaska possibility  for  giving                                                                    
     these kind  of incentives, making these  kind of rules,                                                                    
     allowing international companies to benefit."                                                                              
                                                                                                                                
Ms. Sydeman elaborated  that Mr. van Meurs  was referring to                                                                    
some  of  the recommendations  he  had  made to  the  Senate                                                                    
Finance Committee  for incentivizing  higher cost  and heavy                                                                    
and shale  oil; he felt that  it would be much  easier to do                                                                    
using   a  separate   account  methodology.   She  read   an                                                                    
additional quote from  Mr. van Meurs on slide  31 (she noted                                                                    
that the  quote related to  Roger Marks' findings  that most                                                                    
jurisdictions used a separate accounting methodology):                                                                          
                                                                                                                                
     "It makes  the tax  system very  cumbersome to  run. In                                                                    
     fact,  it  is actually  an  obstacle  to investment  in                                                                    
     Alaska because it  is very difficult to  explain to any                                                                    
     newcomer  how you  even have  to  calculate your  state                                                                    
     corporate income tax."                                                                                                     
                                                                                                                                
Ms.  Sydeman  provided  a   concluding  remark  on  separate                                                                    
accounting by Mr. van Meurs (slide 32):                                                                                         
                                                                                                                                
     "It gives you far more  political freedom to pursue the                                                                    
     interests of the state the way the state wants to do."                                                                     
                                                                                                                                
Ms. Sydeman addressed slides 33 and 34:                                                                                         
                                                                                                                                
     A review  of the history  of this issue  is instructive                                                                    
     as the legislature  reconsiders separate accounting and                                                                    
     other changes to our oil tax regime.                                                                                       
                                                                                                                                
        · In 1949, the territorial income tax enacted. This                                                                     
          tax remained essentially unchanged until 1978.                                                                        
                                                                                                                                
        · Income of multi-state corporations in Alaska was                                                                      
          apportioned on the basis of three factors:                                                                            
          property, payroll and sales.                                                                                          
                                                                                                                                
Ms. Sydeman relayed that income of multistate corporations                                                                      
in Alaska was currently apportioned on the basis of                                                                             
property, production, and sales.                                                                                                
                                                                                                                                
9:28:49 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman discussed slides 35 through 38:                                                                                     
                                                                                                                                
        · This method of apportionment was developed                                                                            
          principally for mercantile businesses.                                                                                
                                                                                                                                
        · Over many years, it became apparent that it                                                                           
          systematically       under-calculates       income                                                                    
          attributable to oil production.                                                                                       
                                                                                                                                
     The  oil industry  in testimony  will  likely tell  you                                                                    
     that Alaska should  maintain formulary apportionment to                                                                    
     be  consistent  with  many   other  states,  avoid  the                                                                    
     potential  for duplicative  taxation, and  sidestep the                                                                    
     administrative   burdens   associated   with   separate                                                                    
     accounting.                                                                                                                
                                                                                                                                
     However,  all of  the  constitutional issues  regarding                                                                    
     duplicative  and  discriminatory   taxation  have  been                                                                    
     resolved,   and  the   fiscal   benefits  of   separate                                                                    
     accounting    clearly    outweigh   the    costs    and                                                                    
     administrative challenges.                                                                                                 
                                                                                                                                
        · According to the fiscal note submitted by DOR (on                                                                     
          the House bill version), separate accounting                                                                          
          would have generated about $250 million more in                                                                       
          each of the 5 preceding fiscal years.                                                                                 
                                                                                                                                
        · The cost[s] of administering the system are                                                                           
          estimated to be about $525,000/year, primarily to                                                                     
          hire 4 new tax auditors.                                                                                              
                                                                                                                                
        · Thus the benefits are roughly 475 times greater                                                                       
          than the costs.                                                                                                       
                                                                                                                                
Ms.  Sydeman did  not  believe that  the  argument that  the                                                                    
system was  costly and cumbersome to  administer held water,                                                                    
given the  very different  ratio between cost  and benefits.                                                                    
She  pointed  to  slide  39  that  showed  DOR  calculations                                                                    
comparing  separate accounting  and worldwide  apportionment                                                                    
for the top  5 oil companies' corporate  income taxes during                                                                    
the  past  five  years.  She   believed  DOR  had  used  the                                                                    
calculations  to determine  its  fiscal note  for the  House                                                                    
companion  version of  the legislation.  She noted  that for                                                                    
the  five  corporations  there  was  a  difference  of  $190                                                                    
million per year [on average].                                                                                                  
                                                                                                                                
9:30:52 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman turned to slide 40:                                                                                                 
                                                                                                                                
        · It's true that until the 1970s, Alaska lacked the                                                                     
          resources and staff to administer a corporate                                                                         
          income tax effectively.                                                                                               
                                                                                                                                
        · Returns were generally accepted as filed and                                                                          
          field audits were never conducted. However, that                                                                      
          is not the case today.                                                                                                
                                                                                                                                
Ms. Sydeman discussed  slides 41 and 42 related  to the late                                                                    
1970s:                                                                                                                          
                                                                                                                                
     As the development of Prudhoe Bay approached, interest                                                                     
     within the legislature on appropriate methods of                                                                           
     taxation increased.                                                                                                        
                                                                                                                                
     Legislative  consultants   warned  that   Alaska  would                                                                    
     receive little  income tax from  the O&G  industry, not                                                                    
     only  because of  the apportionment  formula, but  also                                                                    
     because the  state tax was  based on  federally taxable                                                                    
     income, which usually amounted to very little.                                                                             
                                                                                                                                
Ms. Sydeman noted that Darwin  Peterson, Staff, Senator Bert                                                                    
Stedman  would   distribute  several  articles   related  to                                                                    
federal income  tax paid primarily by  the Exxon Corporation                                                                    
following  the   meeting.  She   detailed  that   one  group                                                                    
estimated  that the  effective  tax  rate was  approximately                                                                    
half  of   the  statutory  35  percent   standard  for  U.S.                                                                    
corporations. She elaborated that  Alaska may be getting far                                                                    
less than imagined if its  corporate income tax was based on                                                                    
federal corporate income tax.                                                                                                   
                                                                                                                                
Ms. Sydeman moved  to slide 43 and  provided the perspective                                                                    
of legislative consultants [mentioned on slide 42]:                                                                             
                                                                                                                                
     They  argued   that  income  tax  should   be  tied  to                                                                    
     profitability,   rather   than  production,   property,                                                                    
     payroll,  sales,  or  other   variables  which  do  not                                                                    
    represent the health or viability of the industry.                                                                          
                                                                                                                                
     These arguments are true today.                                                                                            
                                                                                                                                
Ms. Sydeman directed attention to slides 44 and 45:                                                                             
                                                                                                                                
     Since  little  of Alaska's  oil  is  sold instate,  the                                                                    
     sales  factor,  which is  still  part  of the  formula,                                                                    
     minimizes income generated from Alaska.                                                                                    
                                                                                                                                
     The property factor is also  not as reflective of value                                                                    
     as one might  expect. It does not include  the value of                                                                    
     oil or gas in the  ground, and facilities are valued at                                                                    
     their original cost, not their value today.                                                                                
                                                                                                                                
Ms. Sydeman  pointed to a  recent decision by  Judge Gleason                                                                    
that looked at the value  of the Trans-Alaska Pipeline based                                                                    
on its  current economic value of  approximately $9 billion;                                                                    
the  value was  higher than  the original  construction cost                                                                    
and would  not be  reflected in the  property factor  in the                                                                    
state corporate income tax calculation.                                                                                         
                                                                                                                                
9:33:30 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman moved to slides 46 and 47:                                                                                          
                                                                                                                                
     Formulary  apportionment also  fails  to recognize  the                                                                    
     greater  profitability  of  production,  compared  with                                                                    
     refining or retail sales.                                                                                                  
                                                                                                                                
     It doesn't  reflect that not  all facets or areas  of a                                                                    
     company are equally profitable.                                                                                            
                                                                                                                                
     In addition,  formulary apportionment  treats companies                                                                    
     with the  same earnings  (those doing business  only in                                                                    
    Alaska and multinational corporations) differently.                                                                         
                                                                                                                                
Ms. Sydeman read a quote from the state's brief to the                                                                          
Alaska Supreme Court on April 27, 1984 (slide 48):                                                                              
                                                                                                                                
     "The   three-factor  formula   bestows  a   benefit  on                                                                    
     multistate oil  companies that is  not shared  by other                                                                    
     Alaskan  businesses. It  allows  those corporations  to                                                                    
     pay  tax on  only a  fraction of  their Alaska  income,                                                                    
     which   substantially   lowers  their   effective   tax                                                                    
     rate..."                                                                                                                   
                                                                                                                                
Ms. Sydeman turned to a quote from the late 1970s on slide                                                                      
49:                                                                                                                             
                                                                                                                                
     During  the hearings  on  AS  43.21, legislators  asked                                                                    
     about this:                                                                                                                
                                                                                                                                
        · Senator John Huber: "Does SOHIO object to paying                                                                      
          9.4% on its true net income the same as they                                                                          
          would have to if they were strictly an Alaskan                                                                        
          corporation?"                                                                                                         
                                                                                                                                
        · SOHIO Vice President Richard Donaldson: "Yes"                                                                         
                                                                                                                                
9:35:09 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman addressed slides 50 through 54:                                                                                     
                                                                                                                                
     In 1977,  the Department  of Revenue  acknowledged some                                                                    
     of   the   drawbacks    of   formulary   apportionment,                                                                    
     including:                                                                                                                 
                                                                                                                                
        1. the federal tax base on which it is based (for                                                                       
          U.S. corporations) allows for significant and                                                                         
          undesirable erosions in the tax base;                                                                                 
                                                                                                                                
        2. the  polices   underlying    many   federal   tax                                                                    
          exemptions, credits and deductions are irrelevant                                                                     
          to or inconsistent with state objectives; and                                                                         
                                                                                                                                
        3. none of the property, payroll or sales factors                                                                       
          truly represent O&G producing activity in Alaska.                                                                     
                                                                                                                                
     During the same  period, the O&G industry  made many of                                                                    
     the same arguments heard today about ACES.                                                                                 
     They said separate accounting:                                                                                             
                                                                                                                                
        1. would have an adverse  impact on  exploration and                                                                    
          development investment in Alaska;                                                                                     
                                                                                                                                
        2. was unnecessary  because Alaska  already  imposed                                                                    
          one of  the highest  tax burdens  of any  state on                                                                    
          the O&G industry; and                                                                                                 
                                                                                                                                
        3. illustrated  the   instability  of   the   Alaska                                                                    
          business climate.                                                                                                     
                                                                                                                                
     · Exxon released a "Business Climate Analysis" showing                                                                     
        Alaska ranked 47th and 48th out of  the 50 states on                                                                    
      2 important measures of business friendliness.                                                                            
                                                                                                                                
     · The company argued that separate accounting would                                                                        
        make it worse.                                                                                                          
                                                                                                                                
     Despite O&G industry opposition to separate accounting                                                                     
     in Alaska, it's interesting to note that elsewhere                                                                         
    they have sued to be able to use this methodology.                                                                          
                                                                                                                                
     Even in Alaska, industry has sued in support of the                                                                        
     right to use separate accounting.                                                                                          
                                                                                                                                
          (See State of Alaska  v. Amoco Production Company,                                                                    
         676 P. 2d 595, Supreme Court of Alaska.)                                                                               
                                                                                                                                
9:37:15 AM                                                                                                                    
                                                                                                                                
Ms. Sydeman moved to slides 55 through 57:                                                                                      
                                                                                                                                
     Separate accounting has several additional benefits                                                                        
     the sponsor would like to highlight:                                                                                       
                                                                                                                                
        1. It doesn't tax a company until that company makes                                                                    
          a profit. Under  apportionment, companies begin to                                                                    
          pay taxes as  soon as they set up  shop in Alaska.                                                                    
          In  this  manner, separate  accounting  encourages                                                                    
          new business development.                                                                                             
                                                                                                                                
        2. If a company  invests in  Alaska, it  drives down                                                                    
          that  company's corporate  income  tax.  It is  an                                                                    
          incentive to additional investment.                                                                                   
                                                                                                                                
        3. If  oil  development   in  Alaska   becomes  less                                                                    
          profitable   than   elsewhere,  that   change   in                                                                    
          profitability  is   reflected  in   the  corporate                                                                    
          income tax. Under that circumstance, it would                                                                         
          result in a well-deserved tax cut for the oil                                                                         
          industry.                                                                                                             
                                                                                                                                
        4. The separate accounting methods proposed in SB
          201 are nearly identical to methods used by other                                                                     
          states, the IRS, and other nations. They are also                                                                     
          consistent with OECD model treaties.                                                                                  
                                                                                                                                
Ms. Sydeman  elaborated that a business  would have property                                                                    
that  was  taxable  under worldwide  apportionment  once  it                                                                    
leased property in downtown Anchorage.  In relation to point                                                                    
number 2 she  noted that the concept was one  of the primary                                                                    
principles  behind the  ACES tax  system (the  more money  a                                                                    
business spent in the state, the less it paid).                                                                                 
                                                                                                                                
Ms. Sydeman closed with slides 58 and 59:                                                                                       
                                                                                                                                
     In closing, as  the State argued in 1984  to the Alaska                                                                    
     Supreme  Court,   separate  accounting   "foregoes  the                                                                    
     surrogates  and  assumptions of  mathematical  formulas                                                                    
     and  looks  instead at  actual  revenues  and costs  of                                                                    
     instate operations."                                                                                                       
                                                                                                                                
          State of Alaska brief, April 27, 1984, page 41.                                                                       
                                                                                                                                
     It is a fair and equitable method of assessing                                                                             
     corporate income taxes that is used successfully                                                                           
     around the world and in other U.S. states.                                                                                 
                                                                                                                                
9:39:19 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  about  the origin  of  the data  on                                                                    
slide  39  and how  it  had  been  developed. He  asked  for                                                                    
specific detail  related to 2007 transportation  income. Ms.                                                                    
Sydeman replied that the data  had been assembled by DOR and                                                                    
deferred the question to Johanna Bales, Tax Division, DOR.                                                                      
                                                                                                                                
JOHANNA BALES, DEPUTY DIRECTOR,  TAX DIVISION, DEPARTMENT OF                                                                    
REVENUE, asked for detail related to the question.                                                                              
                                                                                                                                
Co-Chair Stedman  noted that there was  no information about                                                                    
where  the  data had  come  from  and which  companies  were                                                                    
included.  He wondered  why the  2007 transportation  income                                                                    
was not negative.                                                                                                               
                                                                                                                                
Ms. Bales responded that the  data used to develop the table                                                                    
came  from  oil and  gas  tax  production tax  returns;  the                                                                    
sponsor of the  House version of the bill  had requested the                                                                    
calculation  using the  net profits  tax. She  detailed that                                                                    
the  production  tax value  of  the  top  five oil  and  gas                                                                    
companies had  been used to  calculate the  corporate income                                                                    
tax  based on  language  in  the bill.  She  noted that  the                                                                    
transportation   information  came   directly  from   public                                                                    
Federal Regulatory  and Exchange Commission  (FERC) reports;                                                                    
the  department   did  not  know   why  2007   had  positive                                                                    
transportation income.                                                                                                          
                                                                                                                                
Co-Chair Stedman observed  that transportation was typically                                                                    
negative due to tariff charges.  He wondered whether DOR had                                                                    
broken  the figure  down to  determine whether  the positive                                                                    
number  was  a  company  specific issue  or  related  to  an                                                                    
accounting  adjustment.  Ms.  Bales  replied  that  DOR  had                                                                    
looked at  it on a  company basis,  but it had  not followed                                                                    
through to determine  the cause of the anomaly  in 2007. She                                                                    
would follow up with the committee with more detail.                                                                            
                                                                                                                                
9:43:05 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked for verification that  the table (on                                                                    
slide 39) included the five  major tax paying companies that                                                                    
were in Alaska's  legacy fields. Ms. Bales  responded in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  whether DOR  had restated  historic                                                                    
revenues and expenses  to put them under the  ACES system in                                                                    
2006. Ms. Bales replied in the affirmative.                                                                                     
                                                                                                                                
Co-Chair   Stedman   surmised   that  the   table   included                                                                    
hypothetical  numbers looking  back  at  the ACES  structure                                                                    
that  did  not  exist.  Ms. Bales  replied  that  there  was                                                                    
production tax  value information for  FY 06 and FY  07; DOR                                                                    
had been  gathering information from  oil companies  and its                                                                    
economic research  group had pulled  the data  together. She                                                                    
did not believe that the data was extrapolated.                                                                                 
                                                                                                                                
Co-Chair Stedman  asked whether  the industry had  paid $630                                                                    
million in 2006 or whether the  figure was used to show what                                                                    
would have  occurred if  ACES had been  in place.  Ms. Bales                                                                    
replied that the actual corporate  income tax paid came from                                                                    
real  corporate income  tax returns.  The comparison  figure                                                                    
had been  derived from oil  and gas production  tax returns,                                                                    
which  was the  only  available data  to determine  activity                                                                    
that took place  in Alaska. She elaborated that  the oil and                                                                    
gas corporate  income tax returns  did not  provide specific                                                                    
Alaska data only.                                                                                                               
                                                                                                                                
Co-Chair Stedman  inquired what  format the $619  million in                                                                    
2006  had  been  calculated  (i.e.  ACES  or  the  Petroleum                                                                    
Production Tax  system (PPT)). Ms. Bales  responded that the                                                                    
$619  million tax  was calculated  using the  production tax                                                                    
value  from information  the department  had received  under                                                                    
ACES or PPT coupled  with recently acquired information from                                                                    
oil  and  gas companies  to  estimate  corporate income  tax                                                                    
under  the  legislation,  which approximated  the  petroleum                                                                    
profits tax calculation.                                                                                                        
                                                                                                                                
9:45:58 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked for verification that  the table was                                                                    
not depicting data  from a different tax  regime. He queried                                                                    
whether the actual tax paid  was $630 million and that using                                                                    
the calculated  rate of 9.4  percent would have  resulted in                                                                    
$619  million  in  tax.  Ms. Bales  replied  that  the  $619                                                                    
million  was  an  estimate  based   on  the  production  tax                                                                    
petroleum  profits;  there  were  some  differences  in  the                                                                    
calculation  of  net income  for  the  corporate income  tax                                                                    
under the  bill (compared  to PPT).  She clarified  that DOR                                                                    
had done a quick estimation  using the production tax either                                                                    
under ACES  or PPT and  had used  the 9.4 percent  tax rate;                                                                    
the figure  was an  estimate, but DOR  believed it  was only                                                                    
off from $10 million to $20 million per year.                                                                                   
                                                                                                                                
Co-Chair  Stedman  looked at  2010  and  noted that  at  9.4                                                                    
percent  the  statutory  rate was  $638  million.  He  asked                                                                    
whether the  tax collected then  would be $385  million. Ms.                                                                    
Bales answered in the  affirmative. Co-Chair Stedman queried                                                                    
which number  he would  under the  DOR revenue  source book.                                                                    
Ms. Bales  responded that  it would not  be possible  to tie                                                                    
the  actual  corporate  income tax  number  to  the  revenue                                                                    
source  book because  the book  included other  oil and  gas                                                                    
companies that had not been included in the table.                                                                              
                                                                                                                                
9:48:01 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  stated that it was  his understanding that                                                                    
most of  the other companies  in the source book  would have                                                                    
expenses and credits but no  revenue. Ms. Bales replied that                                                                    
it  was  possible that  the  companies  may have  had  other                                                                    
activity and did pay corporate  income tax. Co-Chair Stedman                                                                    
surmised that the  amount would be small.  Ms. Bales replied                                                                    
that she would need to look into the matter.                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  Ms.  Bales to  report  back to  the                                                                    
committee with a total. He  clarified that he would like the                                                                    
information  related to  the oil  and  gas sector  corporate                                                                    
income  tax  paid.  He  requested  that  the  five  relevant                                                                    
companies be parsed out with production. Ms. Bales agreed.                                                                      
                                                                                                                                
Co-Chair Stedman  inquired whether  the expectation  in 2011                                                                    
was similar to  those in 2009 and 2010.  Ms. Bales responded                                                                    
that  based  on  the  table  (slide  39),  the  department's                                                                    
estimate going forward would be similar.                                                                                        
                                                                                                                                
Ms.  Bales provided  comments from  the  perspective of  the                                                                    
administration. She  stated that the bill  would run counter                                                                    
to the  governor's goals to  improve Alaska's  tax structure                                                                    
to make  long-term investment  attractive to  companies. She                                                                    
opined that the  bill would set Alaska back in  terms of its                                                                    
ability to compete with other  jurisdictions for oil and gas                                                                    
investment  dollars. She  stressed  that  there was  nothing                                                                    
simple  about separate  accounting and  that the  bill would                                                                    
require companies to calculate  their tax on three different                                                                    
methods:  separate accounting  for  oil  and gas  production                                                                    
activity, FERC  accounting for transportation  activity, and                                                                    
worldwide   apportionment  for   all  other   activity.  She                                                                    
emphasized  that   the  proposed  accounting   system  would                                                                    
increase complexity for DOR. She  pointed out that there was                                                                    
a  significant difference  between  separate accounting  and                                                                    
separate  entity reporting;  the U.S.  used separate  entity                                                                    
reporting and not separate accounting.  She explained that a                                                                    
U.S.  corporation that  conducted activity  in the  U.S. and                                                                    
internationally  would report  and  pay tax  on  all of  its                                                                    
income. She  believed that there was  some general confusion                                                                    
about the  definition of separate accounting.  She expressed                                                                    
that DOR would like to work  with the committee and the bill                                                                    
sponsor  to help  clarify the  impacts the  bill would  have                                                                    
going forward.                                                                                                                  
                                                                                                                                
9:51:56 AM                                                                                                                    
                                                                                                                                
Senator  McGuire  wondered  whether   there  was  any  other                                                                    
industry that paid  a severance profits tax  and a corporate                                                                    
tax on profits.  Ms. Bales responded that  the fisheries and                                                                    
mining industries  paid severance  tax and  corporate income                                                                    
tax on profits.                                                                                                                 
                                                                                                                                
Senator McGuire  believed that in order  to stay competitive                                                                    
that it may  be better to take a look  at the overall impact                                                                    
of  Alaska's taxes.  She opined  that Alaska  should have  a                                                                    
fair  split,   but  should  that  it   should  increase  its                                                                    
competitiveness through  a change  in the  current structure                                                                    
or through another option.                                                                                                      
                                                                                                                                
Co-Chair Stedman pointed to concern  related to the net cash                                                                    
position, which  could come from  several areas,  but needed                                                                    
to  be  counted together;  however,  the  current focus  was                                                                    
zeroing in  on the  corporate income  tax. He  was concerned                                                                    
that in 2010 the table showed  $638 million in tax, but only                                                                    
$385 million  collected. Page 2  of the revenue  source book                                                                    
referenced $662  million in  petroleum corporate  income tax                                                                    
for FY 12  and $728 million in FY 13.  He furthered that the                                                                    
committee  was  using  the revenue  source  book  frequently                                                                    
related  to models  and government  split numbers;  however,                                                                    
based on the  table there appeared to be  a substantial $300                                                                    
million  difference. He  referred to  numerous presentations                                                                    
that  dealt  with  the  government  take  number,  of  which                                                                    
corporate  income tax  was  one portion  of  the total.  The                                                                    
number  was  roughly   9  percent  or  more   of  the  total                                                                    
hydrocarbon income  that dealt with royalties  and other. He                                                                    
stressed that the money was substantial.                                                                                        
                                                                                                                                
9:55:27 AM                                                                                                                    
                                                                                                                                
Ms.  Bales clarified  that  the table  (slide  39) had  been                                                                    
prepared quickly for the House;  she was happy to expand and                                                                    
refine it for the committee.                                                                                                    
                                                                                                                                
Co-Chair Stedman asked  DOR to polish up the  numbers on the                                                                    
table for  2008 through  2010 and  to reference  the revenue                                                                    
source book. He  noted that there were  two separate issues:                                                                    
(1) corporate  taxes expected  and (2)  separate accounting.                                                                    
He explained  that the question  was - were the  numbers and                                                                    
decisions  made  presently  going  to  provide  an  accurate                                                                    
picture  when "we  turn it  into cash  and stack  it on  the                                                                    
table."   He  believed there  were areas  that needed  to be                                                                    
tightened up  to ensure  that neither  the industry  nor the                                                                    
state were  surprised at  the outcome.  He relayed  that the                                                                    
committee's  consultant PFC  Energy could  work with  DOR on                                                                    
the issue.                                                                                                                      
                                                                                                                                
Senator  Thomas  queried the  reason  for  the $252  million                                                                    
corporate income  tax difference shown for  2010 (slide 39).                                                                    
Ms.  Bales  replied that  the  difference  was a  result  of                                                                    
calculating  corporate  income  tax on  separate  accounting                                                                    
using   only   the   net   profit   tax   versus   worldwide                                                                    
apportionment.                                                                                                                  
                                                                                                                                
9:58:53 AM                                                                                                                    
                                                                                                                                
Senator Thomas  pointed to the  Alaskan comparison  with the                                                                    
Lower  48  international  and  global  slide  27  and  asked                                                                    
whether the higher average net  income per barrel would be a                                                                    
likely place for a company to take worldwide deductions.                                                                        
                                                                                                                                
Ms.  Bales  replied  that  one   of  the  reasons  worldwide                                                                    
apportionment  was attractive  to  taxing jurisdictions  was                                                                    
that  it  was  very  difficult for  companies  to  game  the                                                                    
system.  Once the  focus  was  narrowed to  the  U.S. or  to                                                                    
separate accounting there was  more ability for taxpayers to                                                                    
game  the  system  and  to  either  move  income  out  of  a                                                                    
jurisdiction or pull expenses into  a jurisdiction to offset                                                                    
earned  income. Worldwide  accounting  removed the  transfer                                                                    
pricing   and  inner   company  activities;   as  a   result                                                                    
corporations were  not looking  at what expenses  they could                                                                    
incur  to eliminate  paying more  taxes in  one jurisdiction                                                                    
versus another  because they were  looking at what  was best                                                                    
for  the company.  She was  not certain  what the  table was                                                                    
trying to show.  She understood that Alaska's  barrel of oil                                                                    
equivalent  was  currently  priced higher  than  most  other                                                                    
jurisdictions  (not  always the  case  in  the past),  which                                                                    
probably  made  Alaska  more   profitable  at  present.  She                                                                    
surmised  that  separate  accounting  was  most  likely  the                                                                    
better  way to  go  during  a period  of  higher prices  and                                                                    
production in Alaska, but over  time as production and value                                                                    
decreased separate  accounting would result in  lower income                                                                    
for  the state.  She stressed  that worldwide  apportionment                                                                    
helped to remove volatility in  world markets in relation to                                                                    
corporate income tax.                                                                                                           
                                                                                                                                
10:02:18 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman wondered how  an accident outside the state                                                                    
(e.g. an oil tanker spill,  a platform issue, or other) that                                                                    
was  in the  billions  of dollars  would  impact Alaska.  He                                                                    
pointed  to a  current concern  in  the Gulf  of Mexico  and                                                                    
wondered  whether it  could fold  back  in against  Alaska's                                                                    
revenue  stream.  Ms.  Bales   replied  that  the  types  of                                                                    
incidents did  cut into worldwide net  income; therefore the                                                                    
income base did  shrink. She relayed that  the state adopted                                                                    
federal law, which  meant that penalties and  fines were not                                                                    
deductible; however,  the state shared in  other expenses or                                                                    
revenue increases  such as  maintenance, cleanup,  and other                                                                    
that were incurred in other jurisdictions worldwide.                                                                            
                                                                                                                                
Co-Chair  Stedman  queried  whether there  was  an  estimate                                                                    
related  to the  [2010] Gulf  of  Mexico oil  spill and  its                                                                    
impact on Alaska's revenue stream.  Ms. Bales replied in the                                                                    
negative.                                                                                                                       
                                                                                                                                
Co-Chair Stedman wondered whether  DOR expected the spill to                                                                    
have any impact  to the State of Alaska.  Ms. Bales answered                                                                    
that DOR  expected that the  state would see a  reduction in                                                                    
corporate income  tax. She noted  that it was  very possible                                                                    
that the expenses for cleanup  were included in 2010 numbers                                                                    
in the presentation.                                                                                                            
                                                                                                                                
Co-Chair Stedman requested  additional information regarding                                                                    
the  department's expectations  of  the  types of  incidents                                                                    
that  the state  may  be  exposed to.  Ms.  Bales agreed  to                                                                    
provide that information.                                                                                                       
                                                                                                                                
Co-Chair  Stedman remarked  that  the state  should have  an                                                                    
understanding  of  its  risk  exposure  related  to  outside                                                                    
incidents.                                                                                                                      
                                                                                                                                
Senator Olson  asked for a  comment related to  Roger Marks'                                                                    
statement that  every oil  and gas  producing nation  in the                                                                    
world  used the  separate accounting  method (slide  4). Ms.                                                                    
Bales believed  Mr. Marks  had "fallen  into the  trap" that                                                                    
others did. She stressed that  corporate income tax was very                                                                    
complex  and that  separate  accounting  was different  than                                                                    
separate entity reporting.                                                                                                      
                                                                                                                                
Senator Olson asked whether Mr.  Marks' statement on slide 4                                                                    
was  a  fact.  Ms.  Bales replied  that  the  statement  was                                                                    
incorrect.                                                                                                                      
                                                                                                                                
10:06:03 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  requested   further  information  related                                                                    
methods used by other states.                                                                                                   
                                                                                                                                
MICHAEL HURLEY, DIRECTOR,  GOVERNMENT AFFAIRS, CONOCOPHILIPS                                                                    
ALASKA, looked  at slide  39 and  noted that  the production                                                                    
tax value and tax paid  did not include the corporate income                                                                    
interest  expense  or  corporate   overhead  that  would  be                                                                    
attributable  to Alaska;  all of  the data  was excluded  in                                                                    
ACES calculations, but  it would be included as  part of the                                                                    
calculation under  the legislation. He pointed  out that the                                                                    
result would be significantly  different if the numbers were                                                                    
considered in the calculation.                                                                                                  
                                                                                                                                
Co-Chair  Stedman  surmised  that   the  numbers  were  non-                                                                    
deductible lease hold expenditures.  Mr. Hurley replied that                                                                    
the statement was correct related  to ACES, but would not be                                                                    
under SB 201. He relayed that  the numbers on slide 39 would                                                                    
need  some  work  to  be   able  to  determine  whether  the                                                                    
statement was true related to the past five fiscal years.                                                                       
                                                                                                                                
10:09:38 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  stated that the committee  would work with                                                                    
DOR,  consultants,  and  the  industry  to  obtain  a  close                                                                    
approximation of the  data on slide 39. He  wanted to ensure                                                                    
that the  numbers used when  looking at the  broader picture                                                                    
were as accurate as possible.                                                                                                   
                                                                                                                                
Mr.  Hurley  understood.   He  relayed  that  ConocoPhillips                                                                    
opposed SB 201. The company  did not understand how the bill                                                                    
would  improve  the  fiscal environment  needed  to  attract                                                                    
additional investment  and increased production if  the goal                                                                    
was to increase revenue from  the industry. He stressed that                                                                    
the  company evaluated  its projects  based  on the  overall                                                                    
fiscal take  package. He  stated that the  bill would  go in                                                                    
the opposite  direction as  SB 192  [oil and  gas production                                                                    
tax  legislation].  He  addressed the  philosophy  of  state                                                                    
corporate income tax. He detailed  that policy makers had to                                                                    
decide  how to  attribute income  from multistate  companies                                                                    
(e.g. Walmart,  Alaska Airlines, ConocoPhillips,  or other),                                                                    
to a  particular jurisdiction. He stressed  that most states                                                                    
used  an apportionment  formula;  each state  looked at  the                                                                    
local   business  attributes   (e.g.   amount  of   payroll,                                                                    
property, sales,  etc.) relative to the  business amounts in                                                                    
all  other taxing  jurisdictions. A  fraction was  then used                                                                    
based on  a combination of  the attributes to  determine how                                                                    
much  of the  total income  of the  business related  to the                                                                    
particular state; the process  avoided the potential problem                                                                    
of double taxation on the same income.                                                                                          
                                                                                                                                
Mr.  Hurley  explained  that  over  time  the  apportionment                                                                    
system had been somewhat  standardized by the multistate tax                                                                    
compact,   which  was   overseen  by   the  Multistate   Tax                                                                    
Commission; Alaska  was currently  a member. The  system was                                                                    
currently  used  and was  slightly  modified  for Alaska  to                                                                    
represent  its particular  circumstances. He  discussed that                                                                    
the other method  was to use separate  accounting, which was                                                                    
a policy  call. He believed  that one of the  reasons Alaska                                                                    
had not switched back to  separate accounting was because it                                                                    
resulted in  a doubling  down on  oil prices.  Currently the                                                                    
tax system had  royalties and the ACES  production tax, both                                                                    
of which were  heavily dependent on volatile  oil prices. He                                                                    
relayed that there was a  counter-cyclical nature to the oil                                                                    
and  gas  industry because  when  looking  at the  worldwide                                                                    
income apportioned to Alaska multiple  items were taken into                                                                    
account including,  income in Alaska, and  downstream income                                                                    
(refining,  marketing,  and  distribution occurring  in  the                                                                    
Lower  48);  the  profits and  income  associated  with  the                                                                    
businesses tended  to be counter-cyclical with  upstream oil                                                                    
and gas. He  explained that a switch  to separate accounting                                                                    
would mean total dependence on  the upstream business, which                                                                    
was tightly  tied to  oil prices. He  stated that  there was                                                                    
currently  a counter-cyclical  effect  taking place  because                                                                    
when  oil prices  were high,  refining margins  were "really                                                                    
bad," but when  oil prices went down,  refining margins went                                                                    
up, which  resulted in  a balancing  in the  total worldwide                                                                    
income  that dampened  the volatility  of  the state  income                                                                    
tax.                                                                                                                            
                                                                                                                                
10:15:06 AM                                                                                                                   
                                                                                                                                
Mr. Hurley  directed the committee's attention  to slide 27.                                                                    
He relayed that the numbers only included upstream data.                                                                        
                                                                                                                                
Co-Chair Stedman  asked for an  explanation of  upstream and                                                                    
downstream. Mr.  Hurley clarified  that upstream  applied to                                                                    
the exploration and production business;  it did not include                                                                    
transportation   businesses  (e.g.   TAPS),  the   refining,                                                                    
marketing, or distribution in the  downstream portion of the                                                                    
business. He  reiterated that the  data on slide 27  did not                                                                    
include downstream numbers.                                                                                                     
                                                                                                                                
Mr. Hurley  opined that it  was beneficial to the  state for                                                                    
DOR  to use  the federal  income  tax return  as a  starting                                                                    
point  for the  apportionment calculation.  He relayed  that                                                                    
the federal  rules on what constituted  a deductible expense                                                                    
had "long been  debated and resolved between  tax payers and                                                                    
the IRS"; the  state saved money and  controversy because it                                                                    
was able  to rely on  federal audits of  taxpayers' revenues                                                                    
and expenses.  Under a different  system, DOR would  need to                                                                    
write its own regulations,  which would become voluminous if                                                                    
it  tried  to  mirror  federal  rules.  He  reiterated  that                                                                    
ConocoPhillips did not support SB  201; it believed that the                                                                    
bill would make the state's  fiscal system more dependent on                                                                    
volatile oil prices and  that an administratively burdensome                                                                    
process  would  be  necessary  to  administer  the  separate                                                                    
accounting system.                                                                                                              
                                                                                                                                
Senator Thomas queried the  perspective of ConocoPhillips as                                                                    
a  corporation versus  the perspective  of  DOR. Mr.  Hurley                                                                    
replied  that they  did  not  want to  see  the  state in  a                                                                    
position of having no revenue  when low oil prices occurred;                                                                    
oil  prices are  cyclical.  He stressed  that the  situation                                                                    
would not be positive for the company either.                                                                                   
                                                                                                                                
10:19:54 AM                                                                                                                   
                                                                                                                                
DEBORAH  VOGT,  SELF,  HAINES (via  teleconference),  was  a                                                                    
retired  attorney who  had handled  the separate  accounting                                                                    
litigation  at  the  State  and  U.S.  Supreme  Courts.  She                                                                    
believed that  the committee had heard  a significant amount                                                                    
of testimony  that accurately  presented the  issues related                                                                    
to   separate   accounting.   She   discussed   factors   in                                                                    
apportionment  formulas  that were  used  in  Alaska and  in                                                                    
other states and  the reasons they did not work  for oil and                                                                    
gas  production.  She  relayed  that prior  to  the  state's                                                                    
adoption  of separate  accounting it  had used  the standard                                                                    
three-factor  formula (payroll,  property,  and sales)  that                                                                    
was  reflected in  the Uniform  Division of  Income for  Tax                                                                    
Purposes  Act. She  explained that  the state  had moved  to                                                                    
separate   accounting.  She   stated   that  when   separate                                                                    
accounting was  repealed the state  moved to  two different,                                                                    
two-factor  formulas;   one  for  production  and   one  for                                                                    
pipeline  transportation.  The   formulas  had  always  been                                                                    
combined to a three-factor formula,  but she did not believe                                                                    
it accurately represented income earned in the state.                                                                           
                                                                                                                                
Ms.  Vogt  furthered that  the  methods  did not  accurately                                                                    
attribute  income  because  the  factors were  not  able  to                                                                    
accurately include the revenue  from oil and gas production.                                                                    
She  provided  several  reasons that  the  old  three-factor                                                                    
formula  did  not work:  (1)  the  property factor  did  not                                                                    
include oil in  the ground (discovery was  not an accounting                                                                    
event).  She  explained that  for  a  time a  method  called                                                                    
reserve recognition  accounting had  been used,  which would                                                                    
have put  oil reserve values  on the books, but  the attempt                                                                    
was  unsuccessful;  (2)  the  payroll  factor  was  somewhat                                                                    
distorted  because  compared  to  other  parts  of  the  oil                                                                    
industry production was not a  labor intensive activity. The                                                                    
payroll used in  producing when compared to  payroll used in                                                                    
refining and marketing tended to  understate the income from                                                                    
production.  She  noted that  the  industry  used a  lot  of                                                                    
subcontractors  for production;  (3)  the  sales factor  was                                                                    
currently used and  because most of the state's  oil was not                                                                    
sold in Alaska; therefore, all  of the sales were attributed                                                                    
to jurisdictions outside of the state.                                                                                          
                                                                                                                                
Ms. Vogt  discussed that separate accounting  was an attempt                                                                    
to isolate  and use  only the income  earned in  Alaska. She                                                                    
noted that  apportionment had to  be used "a little  bit" in                                                                    
separate  accounting.  She  expounded  that  the  difference                                                                    
between  separate  accounting  and  apportionment  was  like                                                                    
restaurant accounting; the bill  could be divided up between                                                                    
people based  on what they  ate (separate accounting)  or it                                                                    
could  be   divided  equally   between  the   people  dining                                                                    
(apportionment).  She detailed  that if  separate accounting                                                                    
was used that  apportionment may be used as  well for shared                                                                    
items such  as wine  or bread. She  explained that  the same                                                                    
thing  was true  with  separate accounting  under AS  43.21;                                                                    
apportionment  was needed  to account  for  non-oil and  gas                                                                    
production or  transportation income earned instate  and for                                                                    
administration and overhead costs shared amongst companies.                                                                     
                                                                                                                                
Ms. Vogt  continued to address  why factors had  not worked.                                                                    
The current modified apportionment  method was an attempt to                                                                    
design  a formula  that more  accurately represented  income                                                                    
activities  in Alaska.  There was  a two-factor  formula for                                                                    
production   that   included    property   and   extraction;                                                                    
extraction  was the  portion of  the  oil extracted  instate                                                                    
versus  extraction everywhere.  Transportation  used a  two-                                                                    
factor formula using property and  sales or tariffs (tariffs                                                                    
instate versus tariffs everywhere).  She had understood that                                                                    
when the formulas  were designed they were  to be separately                                                                    
applied to production and to  transportation. She noted that                                                                    
there had  been an argument that  separate corporations were                                                                    
separate  tax  payers  and should  have  used  the  formulas                                                                    
separately  (FERC required  a transportation  company to  be                                                                    
separately  incorporated); however,  the factors  had always                                                                    
been combined  as a three-factor formula,  which presented a                                                                    
problem of having a sales  factor applied against production                                                                    
income  and   an  extraction  factor  applied   to  pipeline                                                                    
transportation income.                                                                                                          
                                                                                                                                
Ms.  Vogt   believed  that  separate  accounting   was  more                                                                    
accurate than any other  designed formulas. She acknowledged                                                                    
that there was more volatility if  more of the tax was based                                                                    
on the price  of oil; however, she opined  that accuracy was                                                                    
sacrificed under  other accounting  methods. She  added that                                                                    
oil  and gas  companies  paid on  a worldwide  apportionment                                                                    
that used to apply to  all taxpayers; however, at the urging                                                                    
of taxpayers the  state had gone from  worldwide to water's-                                                                    
edge (i.e.  modified apportionment) for all  non-oil and gas                                                                    
taxpayers.                                                                                                                      
                                                                                                                                
Ms.   Vogt  briefly   discussed   the  separate   accounting                                                                    
litigation  that she  had been  involved with.  The industry                                                                    
had argued  in many  jurisdictions that  separate accounting                                                                    
more  accurately represented  their income  (e.g. ExxonMobil                                                                    
v.  Wisconsin). She  addressed that  the U.S.  Supreme Court                                                                    
had  vigorously upheld  the refining  and marketing  states'                                                                    
right to use a three-factor formula  and it had looked as if                                                                    
the  court may  hold  that the  method was  constitutionally                                                                    
required  and that  separate accounting  was not  permitted;                                                                    
however, the court  had upheld state's rights to  do as they                                                                    
pleased.  She detailed  that  when  the separate  accounting                                                                    
litigation had gone  to the U.S. Supreme Court  it had found                                                                    
that  there  was  no   significant  federal  issue  involved                                                                    
because  it was  clear  from prior  cases  that states  were                                                                    
permitted to use their preferred method.                                                                                        
                                                                                                                                
10:29:24 AM                                                                                                                   
                                                                                                                                
Senator Olson asked who would  prevail if the state moved to                                                                    
separate accounting and it was  challenged legally. Ms. Vogt                                                                    
replied that  the legality of  separate accounting  had been                                                                    
settled and she did not  believe that industry could prevail                                                                    
in a legal challenge.                                                                                                           
                                                                                                                                
10:30:21 AM                                                                                                                   
                                                                                                                                
KARA  MORIARTY,  EXECUTIVE  DIRECTOR,  ALASKA  OIL  AND  GAS                                                                    
ASSOCIATION   (AOGA)(via   teleconference),   testified   in                                                                    
opposition to the legislation on  behalf of the association.                                                                    
She stated that  AOGA was a business  trade association with                                                                    
a mission to  foster the long-term viability of  the oil and                                                                    
gas industry  in Alaska; member companies  accounted for the                                                                    
majority   of   oil   and   gas   exploration,   production,                                                                    
transportation,  refining, and  marketing activities  in the                                                                    
state.  She  stated  that  the   bill  would  re-impose  the                                                                    
separate accounting income tax that  the state had used from                                                                    
1078 to 1981.  Beginning in 1982 the state had  moved to the                                                                    
current  corporate  income tax  system  under  AS 43.20  and                                                                    
apportionment  under   AS  43.20.072.  She  referred   to  a                                                                    
PowerPoint  presentation   titled  "Oil  and   Gas:  Fueling                                                                    
Alaska's  Economy" (copy  on file).  She  relayed that  both                                                                    
methods  sought  to  answer the  same  question:  "How  much                                                                    
income  of   a  multistate  or  international   business  is                                                                    
properly attributable  to its instate assets  and activities                                                                    
so it can be taxed by that state?" (slide 3).                                                                                   
                                                                                                                                
10:33:30 AM                                                                                                                   
                                                                                                                                
Ms.  Moriarty   spoke  to  slide   4  related   to  separate                                                                    
accounting:                                                                                                                     
                                                                                                                                
     Separate Accounting                                                                                                        
                                                                                                                                
     Looks at  what the  business actually  has and  does in                                                                    
     the  state and  then  seeks to  determine directly  the                                                                    
     net-income as  if that instate portion  of the business                                                                    
     stood alone - separate from the rest of the business.                                                                      
                                                                                                                                
Ms.   Moriarty   continued    that   conceptually   separate                                                                    
accounting seemed to tackle the  question of how much income                                                                    
was made  by the  instate portion of  a multi-jurisdictional                                                                    
business;  however, she  stated  that  appearances could  be                                                                    
misleading.  She testified  that the  method's vulnerability                                                                    
arose from the  fact that the instate portion  of a business                                                                    
did  not stand  alone from  the remainder  of the  business;                                                                    
whether  the   business  was   conducted  within   a  single                                                                    
corporate  entity or  through a  unitary web  of coordinated                                                                    
affiliates,  the opportunities  were often  present for  the                                                                    
instate portion to engage in  business transactions with the                                                                    
out  of state  portions  that shifted  income and  expenses,                                                                    
gains and losses into and out  of the instate portion of the                                                                    
overall business.                                                                                                               
                                                                                                                                
10:34:57 AM                                                                                                                   
                                                                                                                                
Ms.  Moriarty illustrated  how complicated  it  could be  to                                                                    
unravel  transactions among  parts of  an overall  business.                                                                    
She referred to regulations that  had been adopted under the                                                                    
Internal  Revenue  Code  to control  "artfully  created  tax                                                                    
opportunities  within  such  a  business."  She  pointed  to                                                                    
treasury regulation  1.1502-13 that established  the general                                                                    
principles  for unraveling  various  tax  effect created  by                                                                    
transactions between  or among affiliated  corporations. She                                                                    
referenced  regulations 14  through  16,  which applied  and                                                                    
adapted  the   general  principles  to  specific   kinds  of                                                                    
businesses  or transactions;  the  related that  regulations                                                                    
continued through Section 100.                                                                                                  
                                                                                                                                
10:36:15 AM                                                                                                                   
                                                                                                                                
Ms.  Moriarty   spoke  to   slides  6   and  7   related  to                                                                    
apportionment:                                                                                                                  
                                                                                                                                
     Apportionment                                                                                                              
                                                                                                                                
     Starts  with  a   "pie"  containing  the  apportionable                                                                    
     income for  the instate  and outside  business together                                                                    
     and then determines how wide  a "slice" is attributable                                                                    
     to  the  income-generating  potential  of  the  instate                                                                    
     portion  of the  business. It  is the  "slice" that  is                                                                    
     then taxes by the state.                                                                                                   
                                                                                                                                
     · Avoids the need to unravel transactions.                                                                                 
                                                                                                                                
     ·  Avoids the analytical difficulties that arise when a                                                                    
        unitary business as a whole is greater than the sum                                                                     
        of its individual parts.                                                                                                
                                                                                                                                
Ms. Moriarty  discussed that  the key  assumption underlying                                                                    
apportionment  was  that  overall,  money  invested,  sales,                                                                    
workers,  and  oil  and  gas   produced  all  had  the  same                                                                    
potential instate as they did  elsewhere. In relation to oil                                                                    
and gas  producers, pipeline companies and  their affiliates                                                                    
doing business in Alaska (slide 7):                                                                                             
                                                                                                                                
     ·  The width of a company's "slice" of their respective                                                                    
        business's "pie" is  the average of  the percentages                                                                    
        of that  business's real  or  tangible property  (at                                                                    
        cost), its  sales, and  its oil  and gas  production                                                                    
        that is present within the state.                                                                                       
                                                                                                                                
10:38:10 AM                                                                                                                   
                                                                                                                                
Ms.  Moriarty  quoted  from an  Alaska  Supreme  Court  1984                                                                    
ruling:                                                                                                                         
                                                                                                                                
     These factors  are merely  indicative of  the business'                                                                    
     income  producing capabilities.  They are  not intended                                                                    
     to reflect the business'  precise sources of income for                                                                    
     any particular  year. The  factors in  an apportionment                                                                    
     formula  represent  and  attempt   to  relate  the  tax                                                                    
     payer's presence within the state to its presence                                                                          
     everywhere.                                                                                                                
                                                                                                                                
Ms.  Moriarty  stated  that  for   any  given  taxpayer  the                                                                    
question of whether  its Alaska income tax  would be greater                                                                    
under separate  accounting versus apportionment  depended on                                                                    
whether  the  profitability  of  the  Alaskan  business  was                                                                    
greater  overall  than  the profitability  of  the  combined                                                                    
instate and  out of  state business as  measured by  the per                                                                    
dollar invested,  per dollar sold, and  per barrel produced.                                                                    
She expounded that apportionment  would be preferable if the                                                                    
instate portion of the business  was materially superior; if                                                                    
it  was  materially  inferior  to  out  of  state  business,                                                                    
separate accounting was preferred.  Meaning that certain oil                                                                    
and  gas  taxpayers  could  start  out  preferring  separate                                                                    
accounting  and  others   would  prefer  apportionment.  She                                                                    
stated  that the  preferred method  depended on  a company's                                                                    
own facts and circumstances.                                                                                                    
                                                                                                                                
Ms. Moriarty reminded the committee  that AOGA represented a                                                                    
diverse  group of  companies and  explained  that there  was                                                                    
nothing  inherent about  separate accounting  that caused  a                                                                    
taxpayer's tax  to be greater than  tax under apportionment;                                                                    
however,  she stressed  that  there  was something  inherent                                                                    
about  a  non-renewable  resource  like  oil  and  gas.  She                                                                    
emphasized  that  no matter  how  long  an oil  company  may                                                                    
initially  prefer  apportionment over  separate  accounting,                                                                    
there  eventually  would  come  a  day  when  the  company's                                                                    
resources  would  become  depleted and  separate  accounting                                                                    
would become  the smaller tax  for the business;  the timing                                                                    
would  vary   widely  between  companies.   The  association                                                                    
believed  that it  was premature  for Alaska  to restructure                                                                    
its income tax  that would be more suitable  for an advanced                                                                    
stage in the oil and gas industry.                                                                                              
                                                                                                                                
Ms.  Moriarty  expressed that  AOGA  also  thought that  the                                                                    
proposed  enactment  of  separate accounting  could  be  ill                                                                    
advised because depending on how  the rest of the tax system                                                                    
was restructured,  the enactment of separate  accounting may                                                                    
turn into  a self-fulfilling prophecy;  particularly because                                                                    
separate  accounting would  take  more  money from  industry                                                                    
instead  of   optimizing  opportunities.  She   stated  that                                                                    
"having 100 percent  of nothing is just as poor  as having 0                                                                    
percent of everything." She  understood that the legislature                                                                    
was working  to determine the  "sweet spot" between  the two                                                                    
extremes where  the tradeoff was optimized  between the size                                                                    
of one's share and the size  of what there was to be shared.                                                                    
She stressed  that the overall  government take  was already                                                                    
too  high in  Alaska;  therefore  increasing the  government                                                                    
take through  the enactment of separate  accounting would be                                                                    
a  mistake.   She  reiterated   AOGA's  opposition   to  the                                                                    
legislation.                                                                                                                    
                                                                                                                                
10:42:55 AM                                                                                                                   
                                                                                                                                
CHANCY   CROFT,   SELF,  ANCHORAGE   (via   teleconference),                                                                    
testified  in  support  of separate  accounting  because  he                                                                    
thought that  it realistically reflected the  income derived                                                                    
by  a company's  operations in  Alaska. He  believed it  was                                                                    
preferable  to an  "artificial" system  based on  inaccurate                                                                    
assumptions.  He stated  that separate  accounting reflected                                                                    
Alaska  as a  resource producing  state and  the desires  of                                                                    
states down the  line that wanted to  extract something from                                                                    
Alaska's  resource.  He  provided   a  fishing  analogy  and                                                                    
explained  that  allocation  was  appropriate  if  fishermen                                                                    
wanted others  using their catch  to benefit more  than they                                                                    
did;  however,  he  believed  separate  accounting  was  the                                                                    
preferred method if  a person believed that  the real profit                                                                    
from operation came from producing oil in Alaska.                                                                               
                                                                                                                                
Mr. Croft referred  to the 1985 Arco Pipeline  v Alaska case                                                                    
that  quoted him  as  saying  that the  income  tax was  not                                                                    
designed  to  pick  up  additional   money  but  to  try  to                                                                    
establish  equal   treatment  between   companies  operating                                                                    
within the  state. He  stated that Pedro  van Meurs  was not                                                                    
the first advisor to urge  separate accounting to the state;                                                                    
the first was  Milton Lipton of Walter,  Levy and Associates                                                                    
whose firm advised  the legislature for more  than 10 years.                                                                    
The same  case quoted Mr.  Lipton as saying "the  purpose of                                                                    
separate accounting  is not  to get  higher taxation  but it                                                                    
gives  you a  direct fix  on what  the profitability  of the                                                                    
industry's operations are."                                                                                                     
                                                                                                                                
Mr.  Croft elaborated  on the  reason he  believed that  the                                                                    
allocation formula  was artificial. The supreme  court noted                                                                    
that  in 1978  to 1980  10  percent of  Sohio's payroll,  12                                                                    
percent  of sale,  and 50  percent of  its property  were in                                                                    
Alaska;  at the  same time  the company  had indicated  that                                                                    
over 90  percent of its  oil production derived  from Alaska                                                                    
resources. He  offered that the  question was "are  we going                                                                    
to be real or are we  going to be artificial"; he thought in                                                                    
fairness  to Alaska  businesses  and to  have  a stable  tax                                                                    
structure, a  consistent approach towards the  corporate tax                                                                    
rate  was  important.  He stated  that  separate  accounting                                                                    
provided the consistency; however,  the formula approach did                                                                    
not.                                                                                                                            
                                                                                                                                
Mr.  Croft  spoke  to  why   separate  accounting  had  been                                                                    
repealed  if  it  was  so  good.  He  detailed  that  former                                                                    
governor Jay  Hammond had said  that one of his  two biggest                                                                    
mistakes   as  governor   had   been   to  repeal   separate                                                                    
accounting;  he had  repealed it  for two  reasons: (1)  the                                                                    
commissioner of  DOR had assured  him that the  change would                                                                    
be revenue neutral and (2)  he was worried about the state's                                                                    
ability to repay  the tax that had been paid  if the supreme                                                                    
court determined  that the method was  unconstitutional (the                                                                    
supreme court  did not hold  it unconstitutional).  He urged                                                                    
the  committee   to  consider   the  adoption   of  separate                                                                    
accounting  as the  corporate  tax method  for  oil and  gas                                                                    
operations and companies operating in the state.                                                                                
                                                                                                                                
10:48:22 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman relayed  that  there was  one fiscal  note                                                                    
from  DOR that  included  the estimated  cost  to hire  four                                                                    
auditors  to  administer  the  program;  FY  14  costs  were                                                                    
$253,900  because  the  auditors   would  be  hired  halfway                                                                    
through  the fiscal  year;  FY 15  costs  would increase  to                                                                    
$522,900 and would remain the same moving forward.                                                                              
                                                                                                                                
Senator  Wielechowski  reiterated  that  the  bill  was  not                                                                    
intended to  be a  tax increase.  The legislature  had heard                                                                    
repeatedly  from industry  that Alaska  was not  competitive                                                                    
and was  not as profitable as  other areas; if that  was the                                                                    
case or it  did become the case, the bill  would result in a                                                                    
tax decrease to the industry.  He had filed the bill because                                                                    
the state's tax calculation method  was bad policy; the rate                                                                    
was  currently   based  on   events  that   were  completely                                                                    
unrelated  to events  occurring  in the  state. He  believed                                                                    
that  from a  cash flow  perspective  it was  a bad  method;                                                                    
world  events such  as a  natural disaster,  war, or  an oil                                                                    
spill, directly impacted corporate  tax collected in Alaska.                                                                    
He thought  that separate accounting would  enable the state                                                                    
to have a direct ability to fix the system.                                                                                     
                                                                                                                                
Senator McGuire asked whether the  sponsor had reviewed data                                                                    
on slide  28 of the  presentation that showed a  $10 million                                                                    
loss in  2005; the net  calculation from that  point forward                                                                    
was almost  $1 billion. She  wondered whether he  had looked                                                                    
at data  prior to  2005 to determine  whether the  state was                                                                    
losing money at the time.                                                                                                       
                                                                                                                                
Senator  Wielechowski  pointed to  slide  17  that had  been                                                                    
prepared by former tax director  Dan Dickenson regarding the                                                                    
1982  to 1997  timeframe. The  data showed  that Alaska  had                                                                    
lost $4.656 billion during the period.                                                                                          
                                                                                                                                
10:51:30 AM                                                                                                                   
                                                                                                                                
Senator McGuire  pointed to a  statement by Mr.  Hurley that                                                                    
the current  tax method allowed  the state to  diversify its                                                                    
portfolio  risk and  that during  times  of revenue  decline                                                                    
perhaps  the  state would  make  up  the difference  through                                                                    
global investment.                                                                                                              
                                                                                                                                
Senator Wielechowski  responded that for the  15-year period                                                                    
from 1982  to 1997 the state  had lost money every  year. He                                                                    
referred to another chart  showing the ConocoPhillips barrel                                                                    
of  oil equivalent  indicating that  the state  had probably                                                                    
lost money every  year. The DOR chart showed  that the state                                                                    
lost  money  every  year  with the  exception  of  2006.  He                                                                    
reiterated  that the  bill  was not  about  tax increase  or                                                                    
decrease;  it   was  about  setting  policy   on  collecting                                                                    
taxation.  He did  not  believe the  state  should have  its                                                                    
policy tied  to allowing companies to  essentially write-off                                                                    
bad investments or disasters in other parts of the world.                                                                       
                                                                                                                                
Senator McGuire  agreed. She surmised  that the  current tax                                                                    
system was  not a  good method  of diversifying  the state's                                                                    
risk  and that  the state  had  lost money  in almost  every                                                                    
case.  Senator  Wielechowski  replied  that  from  a  policy                                                                    
perspective it  was bad policy  to tie Alaska's  taxation to                                                                    
events in other countries or states.                                                                                            
                                                                                                                                
SB  201  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
10:53:18 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:53:51 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
SENATE BILL NO. 146                                                                                                             
                                                                                                                                
     "An Act establishing a snow classic as an authorized                                                                       
     form of charitable gaming."                                                                                                
                                                                                                                                
10:54:25 AM                                                                                                                   
                                                                                                                                
SENATOR  CATHY  GIESSEL,  SPONSOR,  introduced  SB  146  and                                                                    
relayed that  it had no  fiscal impact. She stated  that the                                                                    
bill established  a Snow Classic, which  was essentially the                                                                    
Nenana Ice  Classic in  reverse. The bill  would add  to the                                                                    
charitable gaming  list of opportunities for  501(c)(3) non-                                                                    
profit Four Valleys Community School  to run a guessing game                                                                    
that  would raise  money for  the  schools 250-plus  classes                                                                    
offered  in  the Turnagain  Arm  area.  The school  provided                                                                    
scholarships for  athletes and  local high  school graduates                                                                    
and  participated in  community services  with the  Girdwood                                                                    
Lion's  Club, Rotary,  and  volunteer  fire department.  She                                                                    
expounded that  the Snow Classic  was similar to  the Nenana                                                                    
Ice   Classic;  people   would   make   guesses  about   the                                                                    
accumulated  snow  depth  at  a  specific  location  on  Mt.                                                                    
Alyeska on  a specific day.  She noted that Mt.  Alyeska was                                                                    
the state's major ski resort.                                                                                                   
                                                                                                                                
Senator Giessel  furthered that the  profits for  the gaming                                                                    
would  replace  community  school   funding  that  had  been                                                                    
eliminated from the Anchorage  school district; she referred                                                                    
to the  community school  program that had  been run  by the                                                                    
Anchorage  School District,  which  had  been eliminated  10                                                                    
years earlier.  She relayed that the  Girdwood community had                                                                    
elected to continue the program  because it was an important                                                                    
service  to the  community; it  provided classes  for youths                                                                    
and  adults at  a low  cost  with local  teachers. The  Snow                                                                    
Classic  would help  Four  Valleys achieve  self-sufficiency                                                                    
and  to keep  the  classes affordable  and available.  There                                                                    
were many  other charitable  gaming opportunities  listed in                                                                    
statute (e.g. the Cabbage Classic  run by the Palmer Rotary,                                                                    
the Canned Salmon  Classic run by the  Petersburg Chamber of                                                                    
Commerce,  the  Deep  Freeze Classic  in  Delta,  the  Goose                                                                    
Classic in  Fairbanks, the King Salmon  Classic, the Mercury                                                                    
Classic, and other). The bill had 79 letters of support.                                                                        
                                                                                                                                
10:57:34 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  referenced that  the  bill  had one  zero                                                                    
fiscal note.                                                                                                                    
                                                                                                                                
REBECCA  REICHLIN,  BOARD   CHAIR,  FOUR  VALLEYS  COMMUNITY                                                                    
SCHOOLS, GIRDWOOD (via teleconference),  spoke in support of                                                                    
SB 146  on behalf  of the Four  Valleys Board.  She detailed                                                                    
that  since 1981  the school's  community programs  were the                                                                    
main   source  of   education,   recreation,  and   cultural                                                                    
opportunities  for   community  members   of  all   ages  in                                                                    
Girdwood,  Bird  Creek,  Indian, and  Portage  Valleys.  The                                                                    
school served  approximately 6,800 participants and  had 700                                                                    
volunteers. The  organization had a long  and stable history                                                                    
of  providing  quality  programs   for  the  community.  She                                                                    
relayed  that the  Girdwood year-round  recreational program                                                                    
through the school  was a model that  provided extensive and                                                                    
varied opportunities for youths  to be physically active; it                                                                    
included  activities  such  as cross  country  skiing,  fall                                                                    
trail running,  indoor soccer,  downhill and  nordic skiing,                                                                    
gymnastics   and  other.   Since  1984   Four  Valleys   had                                                                    
administered public  funds for programs; all  awarded monies                                                                    
provided  direct community  services. To  help with  funding                                                                    
the   school  had   established   partnerships  with   local                                                                    
businesses,  non-profits,  and  private  donors;  volunteers                                                                    
contributed  their   time  to   support  a  wide   range  of                                                                    
activities.                                                                                                                     
                                                                                                                                
Ms.  Reichlin  expounded  that  Four  Valleys  had  a  prior                                                                    
history utilizing  gaming activities to raise  funds; it had                                                                    
offered  a Monte  Carlo night,  but when  gaming regulations                                                                    
changed  it  could not  continue  to  offer the  event.  The                                                                    
legislation  would   allow  Four  Valleys  to   control  its                                                                    
financial  destiny.   She  accentuated   that  in   a  small                                                                    
community  all  of  the  organizations  solicited  community                                                                    
support. She  relayed that the  bill would allow  the school                                                                    
to  support its  mission, eliminate  dependence on  property                                                                    
tax dollars, and  to meet its goal  of self-sufficiency. The                                                                    
bill expanded on current gaming regulations.                                                                                    
                                                                                                                                
11:01:32 AM                                                                                                                   
                                                                                                                                
DIANNA HIIBNER,  SKI AREA  GENERAL MANAGER,  ALYESKA RESORT,                                                                    
GIRDWOOD  (via  teleconference),  spoke   in  favor  of  the                                                                    
legislation on  behalf of  the resort.  The resort  had been                                                                    
involved in  the Alyeska Snow  Classic since  its inception.                                                                    
The  resort felt  that the  Snow  Classic would  be a  great                                                                    
fundraising opportunity  for Four Valleys  Community Schools                                                                    
and the  community of Girdwood.  She urged the  committee to                                                                    
vote  in   favor  of   the  Snow   Classic  that   would  be                                                                    
administered by Four Valleys.                                                                                                   
                                                                                                                                
Senator Giessel reiterated  that the bill had  a zero fiscal                                                                    
note and that it would benefit Girdwood.                                                                                        
                                                                                                                                
SB 146 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Stedman discussed the agenda for the following                                                                         
meeting.                                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
11:02:50 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:02 AM.                                                                                          

Document Name Date/Time Subjects
HB 452 Enrolled.pdf SFIN 3/20/2012 9:00:00 AM
HB 452
SB 91 ADFG LICENSING REAUTH BRIEF.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
SB 91 Sponsor Statement.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
SB 91 2012 Freshwater Charter Logbook.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
SB 91 SWLogsheet_2012.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
SB 91 2010 Participation Effort and Harvest in the Sport Fish Business-Guide Licensing and Logbook Programs.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
SB 201 Alaska Margins slide.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Separate Accounting Revenue Comparison.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Fact Sheet.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Atlantic Richfield.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Sponsor Statement.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 146-FVCS Background Information.pdf SFIN 3/20/2012 9:00:00 AM
SB 146
SB 146-Letters of Support Part 2.pdf SFIN 3/20/2012 9:00:00 AM
SB 146
SB 146-Letters of Support Part 1.pdf SFIN 3/20/2012 9:00:00 AM
SB 146
SB 146-Sectional Analysis.pdf SFIN 3/20/2012 9:00:00 AM
SB 146
SB 146-Sponsor Statement.pdf SFIN 3/20/2012 9:00:00 AM
SB 146
CSSB 91 Verson M.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
SB 91 Support Fishermen.pdf SFIN 3/20/2012 9:00:00 AM
SB 91
AOGA Moriary - SFIN Mar 20 2012.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Legislative Reseach Report March 19 2012.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Roger Marks memo on where separate accounting is used.docx SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Senate Finance Committee PowerPoint final.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 CNN Money article on Exxon CIT.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Washington Post article on Exxon corp income tax.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Forbes - Exxon Says It Does Pay US Income Taxes.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 201 Forbes corporate income tax article.pdf SFIN 3/20/2012 9:00:00 AM
SB 201
SB 91 ADFG Response Letter 032112.pdf SFIN 3/20/2012 9:00:00 AM
SB 91