Legislature(2015 - 2016)BILL RAY CENTER 230

05/17/2016 09:00 AM FINANCE


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09:08:01 AM Start
09:08:38 AM HB247
05:17:53 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Moved SCS 2D CSHB 247(FIN) Out of Committee
Bills Previously Heard/Scheduled
                 SENATE FINANCE COMMITTEE                                                                                       
                       May 17, 2016                                                                                             
                         9:08 a.m.                                                                                              
                                                                                                                                
9:08:01 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair MacKinnon called the Senate Finance Committee                                                                          
meeting to order at 9:08 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Peter Micciche, Vice-Chair                                                                                              
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Laura  Cramer,   Staff,  Senator  Anna   MacKinnon;  Randall                                                                    
Hoffbeck,  Commissioner, Department  of Revenue;  Ken Alper,                                                                    
Director,  Tax  Division,  Department  of  Revenue;  Senator                                                                    
Cathy Giessel;  Senator Mia Costello;  Representative Tammie                                                                    
Wilson.                                                                                                                         
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
2d CSHB 247(RLS)am                                                                                                              
          TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                                    
                                                                                                                                
          SCS  2d   CSHB  247(FIN)   was  REPORTED   out  of                                                                    
          committee  with "no  recommendation" with  one new                                                                    
          fiscal   impact  note   from  the   Department  of                                                                    
          Revenue; and one  previously published zero fiscal                                                                    
          note: FN 5(DNR).                                                                                                      
                                                                                                                                
2d CS FOR HOUSE BILL NO. 247(RLS) am                                                                                          
                                                                                                                                
     "An Act  amending the powers  of the board  of trustees                                                                    
     of the Alaska Retirement  Management Board to authorize                                                                    
     purchase   and   sale   of  transferable   tax   credit                                                                    
     certificates issued in  conjunction with the production                                                                    
     tax on oil and gas;  relating to interest applicable to                                                                    
     delinquent tax; relating to the  oil and gas production                                                                    
     tax,   tax   payments,   and   credits;   relating   to                                                                    
     exploration incentive credits;  relating to refunds for                                                                    
     the  gas storage  facility  tax  credit, the  liquefied                                                                    
     natural  gas  storage  facility  tax  credit,  and  the                                                                    
     qualified   in-state    oil   refinery   infrastructure                                                                    
     expenditures tax  credit; relating to  the confidential                                                                    
     information   status  and   public  record   status  of                                                                    
     information  in the  possession  of  the Department  of                                                                    
     Revenue;  relating to  oil and  gas lease  expenditures                                                                    
     and  production  tax  credits for  municipal  entities;                                                                    
     requiring  a  bond  or cash  deposit  with  a  business                                                                    
     license  application  for  an   oil  or  gas  business;                                                                    
     establishing a  legislative working group to  study the                                                                    
     fiscal regime and  tax structure and rates  for oil and                                                                    
     gas produced  south of 68  degrees North  latitude; and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
9:08:38 AM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche MOVED to ADOPT proposed committee                                                                           
substitute for 2d CSHB 247(RLS)am, Work Draft 29-GH2609\Z                                                                       
(Nauman/Shutts, 5/17/16).                                                                                                       
                                                                                                                                
Co-Chair MacKinnon OBJECTED for discussion.                                                                                     
                                                                                                                                
9:09:00 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:10:29 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, discussed the                                                                      
sectional analysis for SCS CSHB 247(FIN) (copy on file):                                                                        
                                                                                                                                
     *Section  1:   Relates  to  the  Alaska   Oil  and  Gas                                                                    
     Conservation   Commission's    determination   of   the                                                                    
     commencement of regular production  of oil eligible for                                                                    
     a Gross Value Reduction. Conforms to Section 31                                                                            
     *Section   2:  Removes   reference   to  the   explorer                                                                    
     incentive credit from the  provisions of the Department                                                                    
     of Natural Resources audit statutes                                                                                        
     *Section   3:  Removes   reference   to  the   explorer                                                                    
     incentive credit from the  provisions of the Department                                                                    
     of Revenue royalty and net profits payments                                                                                
     *Section   4:  Removes   reference   to  the   explorer                                                                    
     incentive  credit from  information  the Department  of                                                                    
     Natural  Resources  would  obtain to  carry  out  their                                                                    
     responsibilities and functions                                                                                             
     *Section   5:  Removes   reference   to  the   explorer                                                                    
     incentive   credit  from   information  that   is  kept                                                                    
     confidential as the result of an audit                                                                                     
     *Section   6:  Removes   reference   to  the   explorer                                                                    
    incentive credit from the publishing of statistics                                                                          
     *Section  7: Changes  the interest  rate of  delinquent                                                                    
     taxes  effective  January  1,  2017  to  7%  above  the                                                                    
     Federal  Reserve rate,  compounded quarterly  for three                                                                    
     years.  For  the  following years  of  the  statute  of                                                                    
     limitations, no interest would be accrued                                                                                  
     *Section  8:   Conforms  to   the  new   definition  of                                                                    
     outstanding liability found in Section 26                                                                                  
     *Section  9:   Conforms  to   the  new   definition  of                                                                    
     outstanding  liability found  in Section  26*Section 9:                                                                    
     Conforms   to  the   new   definition  of   outstanding                                                                    
     liability found in Section 26                                                                                              
     *Section  10: Reduces,  then eliminates,  the in  state                                                                    
     refinery  tax credit.  Reduces by  50% January  1, 2017                                                                    
     and eliminates the credit January 1, 2018                                                                                  
     *Section  11:   Conforms  to  the  new   definition  of                                                                    
     outstanding liability found in Section 26                                                                                  
     *Section 12: Removes  the sunset on the  Cook Inlet gas                                                                    
     tax cap                                                                                                                    
     *Section 13: Removes  the sunset on the  Cook Inlet oil                                                                    
     calculation, and  imposes a  tax not  to exceed  $1 per                                                                    
     barrel of oil                                                                                                              
                                                                                                                                
Ms. Cramer noted that the oil tax in Section 13 was                                                                             
equivalent to the amount of tax on gas in the Cook Inlet.                                                                       
                                                                                                                                
9:13:16 AM                                                                                                                    
                                                                                                                                
Ms. Cramer continued reviewing the sectional analysis:                                                                          
                                                                                                                                
     *Section  14: Removes  the sunset  on the  cap for  gas                                                                    
     produced in state for use in state                                                                                         
     *Section  15: Calculation  for Cook  Inlet oil  and gas                                                                    
     taxes                                                                                                                      
     *Section 16: Reduces  the qualified capital expenditure                                                                    
     in Cook Inlet sedimentary basin from 20% to 10%                                                                            
     *Section  17: Reduces  the net  operating  loss in  the                                                                    
     Cook Inlet sedimentary basin from  25% to 15%, prevents                                                                    
     the  Gross  Value Reduction  on  the  North Slope  from                                                                    
     increasing  the size  of the  net  operating loss  when                                                                    
     calculating the net operating loss                                                                                         
     *Section 18: Eliminates the net  operating loss for the                                                                    
     Cook Inlet                                                                                                                 
     *Section  19:  Conforms  to   the  elimination  of  the                                                                    
     qualified expenditure found in Section 16                                                                                  
     *Section  20:  Conforms  to   the  elimination  of  the                                                                    
     qualified expenditure found in Section 16                                                                                  
     *Section 21: Reduces the well  lease expenditure in the                                                                    
     Cook Inlet from 40% to 20%                                                                                                 
     *Section 22: Conforms to  subsequent changes related to                                                                    
     the tax credit fund (43.55.028)                                                                                            
     *Section  23: Establishes  a per  company limit  of $70                                                                    
     million  annually  for   eligible  purchases  from  the                                                                    
     Department  of  Revenue;  prevents  an  applicant  from                                                                    
     dividing into multiple  entities; and reestablished the                                                                    
     50,000  barrel per  day limit  on accessibility  to the                                                                    
     fund                                                                                                                       
     *Section 24: Restricts repurchasing  for tax credits to                                                                    
     a  preference  of  at  least   75%  of  the  applicants                                                                    
     workforce  being Alaska  residents. Divides  the annual                                                                    
     repurchase  limit  per  company  into  two  categories:                                                                    
     first 50%  of the annual eligible  appropriation can be                                                                    
     repurchased at  100% of the certificate  value; and the                                                                    
     second   50%  can   be  repurchased   at  75%   of  the                                                                    
     certificate value                                                                                                          
     *Section 25: Conforms to Section 24                                                                                        
     *Section  26:  Creates   a  definition  of  outstanding                                                                    
     liability  to  the  state.  Allows  the  Department  of                                                                    
     Revenue  to   restrict  repurchase  of   credits  after                                                                    
     notifying  the  applicant  for  any  liability  related                                                                    
     directly  to the  applicant's  oil  or gas  exploration                                                                    
     development or production                                                                                                  
     *Section 27:  Conforms to the  elimination of  the well                                                                    
     expenditure   credit   and    the   qualified   capital                                                                    
     expenditure  credit  found   in  Section  41  effective                                                                    
     January 1, 2018                                                                                                            
     *Section  28:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  29:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  30: Imposes  a lifespan  on  the Gross  Value                                                                    
     Reduction for  a term of  seven years, or  three years,                                                                    
     consecutive  or  nonconsecutive,  in which  the  annual                                                                    
     price on  Alaska North Slope  crude oil  sales averages                                                                    
     more than $70 per barrel                                                                                                   
                                                                                                                                
9:16:13 AM                                                                                                                    
                                                                                                                                
Ms. Cramer continued to discuss the sectional analysis:                                                                         
                                                                                                                                
     *Section  31: Conforms  to  the  Gross Value  Reduction                                                                    
     lifespan found  in Section 30,  and directs  the Alaska                                                                    
     Oil and  Gas Conservation  Commission to  determine the                                                                    
    commencement of regular production of eligible oil                                                                          
     *Section  32:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  33:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  34:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  35:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  36:  Conforms  to   the  elimination  of  the                                                                    
     qualified capital expenditure found in Section 41                                                                          
     *Section  37: Limits  a municipality  from receiving  a                                                                    
     credit to only  an amount that is  proportionate to its                                                                    
     taxable gas                                                                                                                
     *Section 38: Creates a new  definition of the qualified                                                                    
     capital expenditure to conform  with the elimination of                                                                    
     the qualified capital expenditure found in Section 41                                                                      
     *Section 39:  Requires an applicant  engaged in  oil or                                                                    
     gas exploration,  development, or production to  file a                                                                    
     surety bond  in the  amount of  $250,000 to  the state;                                                                    
     creates new Alaska Statute  43.70.028, stating that the                                                                    
     surety  bond  is meant  to  satisfy  claims for  labor,                                                                    
     employee benefits,  taxes and contributions due  to the                                                                    
     state,  city,  and   borough,  material  and  equipment                                                                    
     claims  for negligent  or improper  work  or breach  of                                                                    
     contract, repair of public facilities                                                                                      
     *Section 40: Repeals  listed statutes effective January                                                                    
     1, 2017                                                                                                                    
     *Section 41: Repeals  listed statutes effective January                                                                    
     1, 2018                                                                                                                    
     *Section 42: Applicability language                                                                                        
     *Section  43:  Transition  language  for  oil  refinery                                                                    
     credits                                                                                                                    
     *Section  44:  Transition  for  the  qualified  capital                                                                    
     expenditure and well lease expenditure credits                                                                             
     *Section 45: Transition language  for the net operating                                                                    
     loss credit                                                                                                                
     *Section 46: Transition  language for lease expenditure                                                                    
     language removed                                                                                                           
     *Section  47: Regulations  language  for Department  of                                                                    
     Revenue,  Department of  Natural Resources,  Department                                                                    
     of Commerce,  Community, and Economic  Development, and                                                                    
     the Alaska Oil and Gas Conservation Commission                                                                             
     *Section 48: Retroactivity clause                                                                                          
     *Section  49:  Effective  dates  for  authorization  of                                                                    
     regulations effective immediately                                                                                          
     *Section  50: Effective  date of  January  1, 2018  for                                                                    
     Sections 18  -20, 22, 25,  27 - 29, 32  - 36, 41,  43 -                                                                    
     46,  and for  the new  definition of  qualified capital                                                                    
     expenditure                                                                                                                
     *Section 51: Effective date  of all previously unlisted                                                                    
     sections of January 1, 2017                                                                                                
                                                                                                                                
Ms. Cramer  pointed out that  there were items  removed from                                                                    
the bill version  the committee had received  from the other                                                                    
body.  The items  removed included  language related  to the                                                                    
Alaska  Retirement   Management  (ARM)   Board  repurchasing                                                                    
credits;  language related  to disclosure  of company  info-                                                                    
related credits; language preventing  the gross value at the                                                                    
point  of  reduction  being less  than  zero;  and  language                                                                    
preventing  an annual  true-up of  the per-barrel  credit on                                                                    
the North  Slope for  legacy oil. She  added that  the House                                                                    
Rules Committee substitute had  eliminated the Net Operating                                                                    
Loss  (NOL) credit,  and  replaced it  with  the ability  to                                                                    
carry  forward lease  expenditures. She  continued that  the                                                                    
version that  was amended on  the House floor and  passed to                                                                    
the  Senate did  not  contain the  language, so  effectively                                                                    
there was no language in  the committee substitute (CS) that                                                                    
hardened the floor directly or indirectly.                                                                                      
                                                                                                                                
Co-Chair  MacKinnon REMOVED  her OBJECTION.  There being  NO                                                                    
further  OBJECTION, the  proposed  committee substitute  was                                                                    
adopted.                                                                                                                        
                                                                                                                                
9:20:19 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:20:46 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair MacKinnon thanked  the Legislative Legal Department                                                                    
and the Legislative  Finance Division for their  work on the                                                                    
CS.  She shared  that the  committee was  trying to  move as                                                                    
quickly as possible while  ensuring accuracy. She encouraged                                                                    
the legislature and  the public to notify her  office of any                                                                    
errors.  She continued  that the  committee had  worked with                                                                    
the Department  of Administration,  the director of  the Tax                                                                    
Division, as well as Commissioner  Randall Hoffbeck over the                                                                    
preceding twelve  hours to ensure  the group had  an initial                                                                    
opportunity to provide a fiscal  note. She asserted that the                                                                    
committee would continue to work to make necessary changes.                                                                     
                                                                                                                                
9:22:33 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:23:26 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  MacKinnon  recognized  Senator Cathy  Giessel  and                                                                    
staff   for  their   work  on   vetting  language   for  the                                                                    
committee's  consideration. The  Senate Resources  Committee                                                                    
had been following  the bill and trying  to provide feedback                                                                    
to the committee.                                                                                                               
                                                                                                                                
Vice-Chair Micciche MOVED to ADOPT Amendment 1:                                                                                 
                                                                                                                                
     Page 5, line 26:                                                                                                           
     Delete "and"                                                                                                               
                                                                                                                                
     Page 5, line 28, following "year":                                                                                         
     Insert "; and                                                                                                              
     (3)  the  aggregate  amount of  tax  credits  purchased                                                                    
     under   each  statutory   section  or   subsection,  as                                                                    
     applicable,   for   the    preceding   calendar   year,                                                                    
     classified   to  prevent   the   identification  of   a                                                                    
     particular taxpayer"                                                                                                       
                                                                                                                                
Co-Chair MacKinnon OBJECTED for discussion.                                                                                     
                                                                                                                                
Vice-Chair Micciche  discussed Amendment  1, which  he noted                                                                    
was technically incorrect with reference  to the location of                                                                    
the amendment. He  stated that it would  be incorporated the                                                                    
redrafting  of the  bill. He  continued  that the  amendment                                                                    
would allow  the Department of  Revenue to put out  a report                                                                    
that  categorized  and aggregated  tax  credits  to be  made                                                                    
available for the review of the public and the legislature.                                                                     
                                                                                                                                
Co-Chair MacKinnon  WITHDREW her  OBJECTION. There  being NO                                                                    
further  OBJECTION,  it  was so  ordered.  Amendment  1  was                                                                    
conceptually   amended  to   technically   conform  to   the                                                                    
committee substitute.                                                                                                           
                                                                                                                                
9:25:44 AM                                                                                                                    
RECESSED                                                                                                                        
                                                                                                                                
4:15:49 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Vice-Chair Micciche MOVED to ADOPT the committee substitute                                                                     
for   2d   CSHB    247(RLS)am,   Work   Draft   29-GH2609\AA                                                                    
(Nauman/Shutts, 5/17/16).                                                                                                       
                                                                                                                                
Co-Chair MacKinnon OBJECTED for DISCUSSION.                                                                                     
                                                                                                                                
4:16:52 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:19:07 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Ms. Cramer discussed the document, "Summary of Changes from                                                                     
Z to AA," (copy on file):                                                                                                       
                                                                                                                                
     *Section  7: New  section, conforms  to confidentiality                                                                    
     disclosure   requirements  under   the  newly   created                                                                    
     Section 9                                                                                                                  
     *Section  8: Corrects  drafting  error  to correct  the                                                                    
     interest rate at 7% on delinquent taxes                                                                                    
     *Section 9: Confidentiality provision                                                                                      
     *Section  24: Adds  language  for  oil graduating  from                                                                    
     gross  value   reduction  eligibility  to   legacy  oil                                                                    
     eligibility.  Ensures newly  classified  legacy oil  is                                                                    
    able to receive the sliding scale per barrel credit                                                                         
     *Section  25: Adds  language  for  oil graduating  from                                                                    
     gross  value   reduction  eligibility  to   legacy  oil                                                                    
     eligibility.  Ensures newly  classified  legacy oil  is                                                                    
    able to receive the sliding scale per barrel credit                                                                         
     *Section  28: Clarifies  the  original  intent of  this                                                                    
     section. Of  a company's  annual repurchase  limit ($70                                                                    
     million),  established  in  Section 27,  the  following                                                                    
     restrictions are  imposed: up to the  first $35 million                                                                    
     is   eligible  for   reimbursement  at   100%  of   the                                                                    
     certificate value;  the second $35 million  is eligible                                                                    
     for reimbursement at 75% of the certificate value                                                                          
    *Section 29: Conforms to the changes in Section 28                                                                          
     All  sections and  references to  effective dates  have                                                                    
     been renumbered and reordered accordingly.                                                                                 
                                                                                                                                
Co-Chair MacKinnon  WITHDREW her  OBJECTION. There  being NO                                                                    
further  OBJECTION, the  proposed  committee substitute  was                                                                    
adopted.                                                                                                                        
                                                                                                                                
Senator Dunleavy  asked if the committee  would be reviewing                                                                    
fiscal notes for the bill.                                                                                                      
                                                                                                                                
Co-Chair MacKinnon answered in the affirmative.                                                                                 
                                                                                                                                
4:21:51 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:23:32 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
referred to his opening remarks  pertaining to the bill made                                                                    
in  earlier  meetings. He  reflected  that  there were  many                                                                    
portions of  the bill  that had  retained the  House version                                                                    
language,  as well  as some  changes. He  informed that  his                                                                    
department had  structured its presentation using  the House                                                                    
version of the bill as  a baseline, and then showing changes                                                                    
to the bill and flagging areas  of the bill that were in the                                                                    
original Senate Resources Committee substitute.                                                                                 
                                                                                                                                
Co-Chair MacKinnon asked  to start with a review  of the DOR                                                                    
fiscal note (OMB component 2476).                                                                                               
                                                                                                                                
Senator Dunleavy  referred to  recent communications  he had                                                                    
observed  (on blogs  or newsletters)  asserting that  if the                                                                    
state  took action  on oil  and  gas tax  credits, it  would                                                                    
realize a $775 million reduction  in spending in the current                                                                    
year.  He  did not  consider  the  assertion was  true,  and                                                                    
wondered if testifiers could address the matter.                                                                                
                                                                                                                                
Commissioner  Hoffbeck  agreed  with Senator  Dunleavy,  and                                                                    
stated  that the  $775 million  that was  referenced was  in                                                                    
credits that  had already been  earned, was a  liability the                                                                    
state  had acquired,  and needed  to be  paid. He  continued                                                                    
that the  legislation concerned forward-looking  credits and                                                                    
liabilities.                                                                                                                    
                                                                                                                                
Senator Dunleavy  thought the $775  million was  a liability                                                                    
the state must honor and pay.                                                                                                   
                                                                                                                                
Commissioner Hoffbeck concurred.                                                                                                
                                                                                                                                
Senator  Dunleavy thought  it was  important to  clarify the                                                                    
matter, and thought there was confusion on the issue.                                                                           
                                                                                                                                
4:26:28 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
thought  that  none   of  the  versions  of   the  bill  had                                                                    
tremendous impact on  the FY 17 budget spend.  He noted that                                                                    
the  governor's  original  bill,  which  had  a  retroactive                                                                    
hardening  of the  floor,  would have  had  brought in  more                                                                    
money  yet  would  not  have reduced  spending  on  the  tax                                                                    
credits. He  furthered that the aforementioned  $775 million                                                                    
subject to  appropriation, was the obligation  of the state.                                                                    
He explained that,  presuming the major changes  in the bill                                                                    
took  effect  in  2017,  the credits  that  were  earned  in                                                                    
calendar year  2017 would impact  the spend  on repurchasing                                                                    
them in FY  19. He summarized that there was  a two-year gap                                                                    
between  the  expense  and the  actual  expenditure  by  the                                                                    
company.                                                                                                                        
                                                                                                                                
Mr. Alper continued discussing the  bill, and noted that the                                                                    
fiscal  note used  a structure  that was  used for  previous                                                                    
versions of  the bill.  He commented that  he did  not fully                                                                    
understand all the accounting mechanics of the fiscal note.                                                                     
                                                                                                                                
Co-Chair MacKinnon mentioned the  $700-plus million that Mr.                                                                    
Alper had referred to, and  asked if the amount was affected                                                                    
by the Governor's $200 million veto [in FY 16].                                                                                 
                                                                                                                                
Mr.  Alper answered  in the  affirmative. He  furthered that                                                                    
the expectation  of credits earned  (normally due in  FY 17)                                                                    
was approximately  $575 million.  The number expected  in FY                                                                    
16 was  $700 million, but  only $500 million was  funded due                                                                    
to  the   governor's  veto.   The  remaining   $200  million                                                                    
obligation would roll forward  and increase the $575 million                                                                    
to a total of $775 forecasted for FY 17.                                                                                        
                                                                                                                                
Co-Chair MacKinnon  asked to  clarify that  it had  been the                                                                    
governor's  intent, rather  than  the  legislature, to  fund                                                                    
only $500 million.                                                                                                              
                                                                                                                                
Mr.  Alper answered  in the  affirmative. He  recounted that                                                                    
the  governor had  put  a  $500 million  cap  on tax  credit                                                                    
spending, and  noted that the  $700 million that was  in the                                                                    
budget that passed the legislature  was an estimate. The way                                                                    
the  budget  had  been drafted,  the  amount  presented  for                                                                    
repurchase   (of   tax   credits)  was   appropriated.   The                                                                    
governor's veto had removed the  syntax and replaced it with                                                                    
the amount of $500 million.                                                                                                     
                                                                                                                                
Senator Bishop emphasized that the  estimate of $775 million                                                                    
was a debt owed, and was a debt that would be repaid.                                                                           
                                                                                                                                
Mr.  Alper  concurred,  and furthered  that  the  governor's                                                                    
initial  submission  of  the  bill  had  come  with  a  fund                                                                    
capitalization fiscal note  in excess of the  amount, to pay                                                                    
off the obligation.                                                                                                             
                                                                                                                                
Co-Chair MacKinnon  expressed appreciation for  the clarity,                                                                    
and thought it was  confusing when people started discussing                                                                    
100's  of millions  of dollars  in what  the state  owed and                                                                    
what we  might owe. She  asserted that the state  planned on                                                                    
paying its credits;  and that the governor  was proposing to                                                                    
pay  the  credits,  including  the  $200  million  that  was                                                                    
vetoed.                                                                                                                         
                                                                                                                                
Mr. Alper concurred, and furthered  that the changes made in                                                                    
the  legislation   (should  it  pass)  would   affect  state                                                                    
spending to  a substantial  degree in future  years, however                                                                    
there  was  not much  that  could  be  done about  the  $775                                                                    
million.                                                                                                                        
                                                                                                                                
4:30:05 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Micciche referred  to the  2016 Revenue  Sources                                                                    
Book, which he considered out  of date regarding oil prices,                                                                    
and  possibly containing  some "spin"  on credits  and other                                                                    
issues. He  wondered when  an update  would be  available to                                                                    
reflect the  impact of the  credit spend and  production tax                                                                    
revenue.                                                                                                                        
                                                                                                                                
Mr. Alper was confident in  the estimate of the $775 million                                                                    
debt, which had evolved from  the fall forecast. He conveyed                                                                    
that once  the state  ran out  of money  in the  fund, there                                                                    
would  be approximately  $650  million  worth of  obligation                                                                    
request  applications that  were  currently  before the  tax                                                                    
division.  There were  many more  coming in,  including some                                                                    
large  exploration expenditures.  He thought  the difference                                                                    
from the forecast would be if  the price of oil exceeded the                                                                    
estimated  $39  per  barrel,  and  the  carried-forward  NOL                                                                    
credits  (not   cashable  for  major  producers)   would  be                                                                    
dramatically lower  than previously  estimated and  shown on                                                                    
the fall forecast.                                                                                                              
                                                                                                                                
Vice-Chair  Micciche  asked  for  elaboration  on  the  term                                                                    
"dramatically."                                                                                                                 
                                                                                                                                
Mr.  Alper  relayed that  at  the  end  of  FY 16,  the  tax                                                                    
division   was  estimating   $657   million  in   obligation                                                                    
requests,  and  at  the  end  of FY  17,  the  division  was                                                                    
estimating a little  over $600 million. He  stated for every                                                                    
dollar the  price of  oil moved above  the estimate  of $39,                                                                    
the amount would  reduce by $65 million.  He summarized that                                                                    
if the price was $5  greater than estimated, it would equate                                                                    
to $325 million less.                                                                                                           
                                                                                                                                
Co-Chair  MacKinnon asked  Senator  Bishop  for the  current                                                                    
price of oil.                                                                                                                   
                                                                                                                                
Senator  Bishop  stated the  price  of  oil was  $48.01  per                                                                    
barrel.  He   clarified  that  the  price   was  West  Texas                                                                    
Intermediate (WTI),  and was not  adjusted for  Alaska North                                                                    
Slope crude oil (ANS).                                                                                                          
                                                                                                                                
Mr. Alper confirmed  that if the price of oil  stayed at $48                                                                    
per barrel  through the end  of FY  17, the state  would not                                                                    
have carried forward NOL credits to any substantial degree.                                                                     
                                                                                                                                
Co-Chair  MacKinnon appreciated  having  the information  on                                                                    
the record.                                                                                                                     
                                                                                                                                
Mr. Alper  continued discussing the fiscal  note, explaining                                                                    
that  the structure  of  the note  showed  revenue, but  the                                                                    
reduction and  expenditure were not  reflected on  the cover                                                                    
page, because  the numbers  were for a  budget that  did not                                                                    
yet  exist. The  front page  of the  fiscal note  showed $10                                                                    
million to  $12 million  in new  revenue; which  mostly came                                                                    
from a  new tax on  the Cook Inlet side,  as well as  from a                                                                    
sunset of  certain credits  that would  be used  against tax                                                                    
liability.  He explained  that the  $10 million  represented                                                                    
only a  small part of the  story, and the great  bulk of the                                                                    
fiscal impact  was on the reduced  expenditures reflected on                                                                    
the large table on page 4 of the fiscal note.                                                                                   
                                                                                                                                
Mr.  Alper continued  discussing the  fiscal note,  which he                                                                    
considered to  be complicated. He directed  attention to the                                                                    
sub-heading "Total Revenue  Impact" on page 4  of the fiscal                                                                    
note, which  summed up  the new revenue  that came  from the                                                                    
various  changes in  the  bill. The  line  showed ranges  of                                                                    
numbers for subsequent fiscal  years, which were represented                                                                    
on  the  first  page  under   the  bottom  line  "Change  in                                                                    
Revenues."  He  highlighted  a  second  subtotal  under  the                                                                    
subheading  "Total  Budget   Impact,"  which  represented  a                                                                    
reduction  in  spending,  or  a   decrease  in  the  state's                                                                    
obligation  to buy  credits in  future  years. He  continued                                                                    
that the next grey subtotal,  "Total Fiscal Impact," was the                                                                    
sum  of  the  two  subtotals,  or  the  net  impact  of  the                                                                    
additional  revenue  plus  the  reduction  in  spending.  He                                                                    
asserted  that  the bill  would  reduce  state spending  and                                                                    
increase  its revenue  in the  amount of  approximately $125                                                                    
million on average over the next  3 to 4 years, beginning in                                                                    
FY 18.                                                                                                                          
                                                                                                                                
4:34:32 PM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon stated  that she  had heard  individuals                                                                    
combining four  to five years  together and  suggested there                                                                    
was $500  million worth of  savings during a four  year time                                                                    
period.                                                                                                                         
                                                                                                                                
Mr. Alper thought Co-Chair MacKinnon made a fair statement.                                                                     
                                                                                                                                
Co-Chair MacKinnon wanted to revisit  the topic of debt owed                                                                    
to a  group of taxpayers.  She wondered how  many individual                                                                    
companies  were qualified  to receive  the  amount of  funds                                                                    
being discussed.                                                                                                                
                                                                                                                                
Mr.   Alper   stated    that   different   companies   filed                                                                    
differently, which  made the  question difficult  to answer.                                                                    
Sometimes an operator  filed on behalf of  all partners, and                                                                    
other times  the same project  might have a  dozen different                                                                    
applicants   due  to   the   differing   ways  of   internal                                                                    
accounting.  He thought  the  tax division  wrote  50 to  60                                                                    
different checks for tax credits in a given year.                                                                               
                                                                                                                                
Co-Chair  MacKinnon  was  raising   the  issue  because  she                                                                    
thought there  was a  sentiment in  the general  public that                                                                    
only three  taxpayers were  receiving a  huge number  of tax                                                                    
credits from the liability that  the state had on its books,                                                                    
while in  reality the people  that the state was  paying the                                                                    
$775  million to  many more  entities. She  wondered if  the                                                                    
payees included "the big three"  [BP, Exxon Mobil Corp., and                                                                    
ConocoPhillips].                                                                                                                
                                                                                                                                
Mr.  Alper clarified  that the  big three  were specifically                                                                    
excluded   from  getting   cash   credits.  Alaska   statute                                                                    
stipulated  that  when  a  company  produced  more  than  50                                                                    
thousand  barrels a  day, it  was not  eligible to  get cash                                                                    
repurchases  for  credits.  In  such  cases,  the  companies                                                                    
carried the credits  forward to use against  a future year's                                                                    
tax liability.  When there was  the issue of the  NOL carry-                                                                    
forwards  (when the  price  of  oil was  very  low), it  was                                                                    
because the  major producers explicitly  could not  get cash                                                                    
for their credits.                                                                                                              
                                                                                                                                
Senator Dunleavy  referred to the  $775 million  figure, and                                                                    
wondered how  much of it was  from Cook Inlet as  opposed to                                                                    
the North Slope.                                                                                                                
                                                                                                                                
Mr. Alper referred to the  spring revenue forecast and noted                                                                    
the information was on Table  8.4 of the publication. The FY                                                                    
17 forecast  showed $447  million in  tax credits  for North                                                                    
Slope, and $325  million in tax credits  for non-North Slope                                                                    
(predominately  Cook Inlet).  He  stated  that although  the                                                                    
Cook  Inlet area  had comprised  roughly 60  percent of  the                                                                    
total in  past two years,  the numbers were changing  and in                                                                    
FY 17, 60 percent were for the North Slope.                                                                                     
                                                                                                                                
Senator Dunleavy  thought the numbers were  important if the                                                                    
bill were to go to the floor for debate.                                                                                        
                                                                                                                                
Mr. Alper  stated that in  the FY  17 forecast there  was an                                                                    
unusually  large  number  of  $120  million  in  exploration                                                                    
credits, believed to  be due to the impending  sunset of the                                                                    
exploration  credit.  He  thought companies  had  done  some                                                                    
exploration  work the  previous year  in order  to earn  the                                                                    
credits while it was still possible.                                                                                            
                                                                                                                                
4:38:26 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Micciche  observed   that  without  the  changes                                                                    
proposed  in  the  CS, the  assumed  total  refunded  credit                                                                    
liability for the state trickled  off substantially and then                                                                    
leveled off around  $250 million per year  from 2021 through                                                                    
2025. He asked if Mr. Alper could explain.                                                                                      
                                                                                                                                
Mr. Alper stated  that the state's credit  forecast was tied                                                                    
very  closely  to  the production  forecast  and  the  lease                                                                    
expenditure  forecast. Data  provided  twice a  year by  the                                                                    
companies  would  communicate  information about  wells  and                                                                    
fields, and  how much  the companies  intended to  spend. He                                                                    
continued that  the forecasts  tended to  shrink in  the out                                                                    
years  due   to  uncertainty   about  future   activity.  He                                                                    
referenced  $250 million  as  the "stabilizing  placeholder"                                                                    
that  was  an estimate;  since  after  three or  four  years                                                                    
estimates were very weak in terms of known activities.                                                                          
                                                                                                                                
Vice-Chair Micciche asked if the  changes in the bill (if it                                                                    
passed with the Cook Inlet  credits) would cause a change in                                                                    
the next forecast  for FY 17, then from FY  18 forward there                                                                    
would be a significant reduction.                                                                                               
                                                                                                                                
Mr. Alper  expected that the  non-North Slope numbers  to be                                                                    
very close to  zero around FY 20. He referred  to the "Total                                                                    
Budget  Impact"  line  on  the  fiscal  note,  and  directed                                                                    
attention  to the  range of  numbers starting  in FY  20. He                                                                    
thought for  the sake  of simplicity,  one could  equate the                                                                    
ranges to  equal approximately $125 million,  which would be                                                                    
half of the estimated spend of $250 million per year.                                                                           
                                                                                                                                
Co-Chair  MacKinnon  asked  if  there was  anything  on  the                                                                    
fiscal note that Mr. Alper wanted to highlight.                                                                                 
                                                                                                                                
Mr.  Alper noted  that there  had been  a draft  fiscal note                                                                    
that  did not  include the  narrative, and  the numbers  had                                                                    
since changed and would need  to be moved slightly back. The                                                                    
change had  to do with  the bill  revision in Section  28 as                                                                    
previously discussed  by Ms. Cramer. He  referred to changes                                                                    
to  Version Z  of the  bill, that  stated that  of a  credit                                                                    
under the  $70 million cap, half  would be paid at  the full                                                                    
amount and  half would be paid  at the 75 percent  rate. The                                                                    
department had  worked the interpretation  into line  "C" on                                                                    
the second half  of the fiscal note. The new  CS, or Version                                                                    
AA of  the bill,  stipulated that the  first $35  million of                                                                    
the  credit would  be paid  at  the full  amount, while  any                                                                    
amount in  advance would be  paid at the smaller  amount. He                                                                    
summarized  that  the sum  of  the  smaller credits  made  a                                                                    
material   difference.  The   difference  would   equate  to                                                                    
approximately $15 million or $20  million less than what was                                                                    
shown on the fiscal note.                                                                                                       
                                                                                                                                
Co-Chair MacKinnon expressed appreciation  for work that had                                                                    
been done the previous evening.                                                                                                 
                                                                                                                                
Mr. Alper  recounted working with the  Commissioner Hoffbeck                                                                    
and updating the  fiscal note using the language  of the new                                                                    
committee substitute.                                                                                                           
                                                                                                                                
4:42:20 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  discussed the  presentation,  "Oil  and Gas  Tax                                                                    
Credit  Reform; Senate  CS to  CS HB247(FIN);  Department of                                                                    
Revenue;  Initial Review  of Changes  in Senate  Finance CS;                                                                    
May  16,  2016"  (copy  on  file).  He  addressed  slide  2,                                                                    
"Introduction":                                                                                                                 
                                                                                                                                
     • This bill is substantially changed from what passed                                                                      
     the House                                                                                                                  
                                                                                                                                
     • We have attempted to describe the changes made in                                                                        
     the current CS, but have only had the document for a                                                                       
     few hours. We apologize for any oversights                                                                                 
                                                                                                                                
     • We're using the same format as we did on Friday and                                                                      
     Saturday before this committee, describing the prior                                                                       
     two versions of the bill                                                                                                   
                                                                                                                                
     • To color-code our text:                                                                                                  
                                                                                                                                
          • Purple items are as they are in the "House"                                                                         
          version                                                                                                               
          • Red items are as they are in CSSB130(RES)                                                                           
          • Black items are current law but not in either                                                                       
          version                                                                                                               
          • Blue items are new to this version                                                                                  
                                                                                                                                
Mr.  Alper looked  at  slide 3,  "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     1. Exploration Credits                                                                                                     
     • House bill                                                                                                               
          • Allows existing credits to sunset on 7/1/16                                                                         
          • Keeps "middle earth" extension to 1/1/22                                                                            
          • Repeals older dormant DNR exploration credits                                                                       
          • Extends the "Frontier Basin" credit one year to                                                                     
          protect ongoing AHTNA investment                                                                                      
     • Senate Finance CS                                                                                                        
          • Keeps the first three changes from the House                                                                        
          • Does not include the Frontier Basin extension                                                                       
                                                                                                                                
Mr. Alper noted that there  had been four major changes from                                                                    
the House version  of the bill. He noted  that the component                                                                    
to  extend the  Frontier  Basin  credit was  not  in the  CS                                                                    
before the  committee, and was  scheduled to sunset  on July                                                                    
4, 2016.                                                                                                                        
                                                                                                                                
Mr.  Alper highlighted  slide 4,  "Major Provisions  in SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     2. Cook Inlet (and Middle Earth) Credits                                                                                   
     • House bill                                                                                                               
          • NOL kept at 25% in 2017 but only if producing                                                                       
          by end of 2016. To 0% in 2018                                                                                         
          • QCE repealed 7/1/16                                                                                                 
          • WLE reduced to 20% for 2017 and zero in 2018                                                                        
          • Middle Earth maintained at 25% NOL if under a                                                                       
          POD, along with a 10% QCE                                                                                             
     • Senate Finance CS                                                                                                        
          • NOL reduced to 15% in 2017 and zero in 2018                                                                         
          • QCE reduced to 10% in 2017 and zero in 2018                                                                         
          • WLE reduced to 20% in 2017 and zero in 2018                                                                         
          • Middle Earth same as Cook Inlet with full                                                                           
         elimination of all three credits by 2018                                                                               
                                                                                                                                
Mr.  Alper  thought  that  slide   4  was  substantive,  and                                                                    
commented that  all versions  of the  bill had  been working                                                                    
with the  same set  of components.  The Middle  Earth credit                                                                    
regime and  its relationship to  other credit regimes  was a                                                                    
variable that  could be seen to  change throughout differing                                                                    
versions of the  bill. He pointed out that  the reduction in                                                                    
the NOL  rate was  language from an  earlier version  of the                                                                    
bill,  and the  qualified capital  expenditure (QCE)  credit                                                                    
language  was   new.  He   continued  that   the  well-lease                                                                    
expenditure (WLE) change listed on  the slide was taken from                                                                    
the  House  version of  the  bill,  and the  arrangement  of                                                                    
Middle Earth credits  referenced at the bottom  of the slide                                                                    
was new to the version of the bill being considered.                                                                            
                                                                                                                                
Mr.  Alper  continued  to  discuss the  NOL,  QCE,  and  WLE                                                                    
reductions included  in the CS  and listed on the  bottom of                                                                    
the  slide.  He  summarized  that   the  elements  would  be                                                                    
approximately be  cut in  half for a  year of  transition in                                                                    
2017, and then  the tax credit system would go  to zero. The                                                                    
state  would  no  longer be  offering  credits  for  capital                                                                    
expenditures  or  operating  losses  in Cook  Inlet  and  in                                                                    
Middle Earth  beginning January 1,  2018. He  specified that                                                                    
the credits  earned in  2017 would still  show on  the books                                                                    
through FY 19,  because of the natural delays  of tax filing                                                                    
and  receipt and  cashing of  credits. The  first year  with                                                                    
zero Cook Inlet credits being spent would be FY 20.                                                                             
                                                                                                                                
4:46:03 PM                                                                                                                    
                                                                                                                                
Mr.  Alper looked  at  slide 5,  "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     3. Cook Inlet (and Middle Earth) Taxes                                                                                     
     • House bill                                                                                                               
          • Moves up  2022 tax cap sunset to  2019, for Cook                                                                    
          Inlet gas, Cook  Inlet oil, and Gas  Used in State                                                                    
          (GUIS)                                                                                                                
          •  Imposes   a  high   underlying  tax   in  2019;                                                                    
          expectation of new system  as proposed by "working                                                                    
          group"                                                                                                                
     • Senate Finance CS                                                                                                        
          •  Eliminates sunset  of Cook  Inlet Gas  and GUIS                                                                    
          tax caps                                                                                                              
          •  This extends  indefinitely the  Cook Inlet  Gas                                                                    
          and GUIS tax at an average of 17.5 cents/mcf                                                                          
          • Adds a new Cook Inlet oil tax cap of $1.00/bbl                                                                      
          •  No   sunsets,  no  working  group.   These  are                                                                    
          intended to be long term changes                                                                                      
                                                                                                                                
Mr.  Alper  discussed  the  different   types  of  what  was                                                                    
considered "in-state"  gas. He  specified that gas  used on-                                                                    
well for  production purposes was  not taxed; as  opposed to                                                                    
gas  sold to  the Trans-Alaska  Pipeline System  (TAPS), and                                                                    
gas sold to the municipal  utility in Barrow. He pointed out                                                                    
that the Cook Inlet oil tax  cap referenced on the slide was                                                                    
new  to the  CS.  He  quantified that  there  was roughly  5                                                                    
million taxable  barrels of oil  produced in Cook  Inlet per                                                                    
year, all sold  through local refineries and able  to make a                                                                    
$5 million revenue impact after the change.                                                                                     
                                                                                                                                
Vice-Chair Micciche  thought the committee had  been focused                                                                    
on  credit exposure,  and  had evaluated  the  value of  the                                                                    
credits in both basins. He  suggested that the state did not                                                                    
have the money  for some of the credits. He  referred to the                                                                    
statement on  slide 5, "These  are intended to be  long term                                                                    
changes,"  and recognized  that the  committee did  not have                                                                    
foresight into  what would  happen with  future legislatures                                                                    
or future Cook Inlet production.                                                                                                
                                                                                                                                
Mr. Alper stated  that recent state history  had proven that                                                                    
the  government  tended  to re-address  the  matter  of  tax                                                                    
credits every few years.                                                                                                        
                                                                                                                                
Vice-Chair  Micciche thought  that  stability was  important                                                                    
and  did  not want  to  endlessly  revisit the  subject.  He                                                                    
emphasized  that the  legislature's focus  was managing  the                                                                    
environment of a low oil price with a high fiscal gap.                                                                          
                                                                                                                                
4:49:46 PM                                                                                                                    
                                                                                                                                
Mr.  Alper  discussed slide  6,  "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     4. North Slope Credits, Limits, Carry-Forwards                                                                             
     • House bill                                                                                                               
          • No NOL credit or carry-forwards after 2016 for                                                                      
          companies producing over 15,000 barrels / day                                                                         
          •  Smaller producers  still eligible  for refunded                                                                    
          NOLs with cap of $70 million / company / year                                                                         
          •  Must  be from  a  lease  from which  the  state                                                                    
          receives a  royalty, under a plan  of development,                                                                    
          and in which the producer has a working interest                                                                      
          • NOL rate ramps down: 32% in 2017; 29% in 2019;                                                                      
          26% in 2021; 25% in 2023                                                                                              
                                                                                                                                
Mr.  Alper noted  that slide  6  and 7  worked together.  He                                                                    
pointed out that the ramp-down  of the NOL rate would reduce                                                                    
future  liabilities   as  well   as  the  level   of  future                                                                    
incentive.                                                                                                                      
                                                                                                                                
Mr.  Alper highlighted  slide 7,  "Major Provisions  in SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     4. North Slope Credits, Limits, Carry-Forwards                                                                             
     • Senate Finance CS                                                                                                        
          • Limit for cashing  credits remains 50,000 barrel                                                                    
          / day                                                                                                                 
          • Cap for refunds $70 million / company / year                                                                        
          •  First half  of each  credit certificate,  up to                                                                    
          the cap,  is paid  at face  value. Second  half is                                                                    
          paid at  75% of  face value  or, at  the company's                                                                    
          option, can be carried forward into a future year                                                                     
     • NOL rate remains 35%                                                                                                     
          • In the case of a company with $70 million in                                                                        
          certificates, they will  receive $61.25 million in                                                                    
          payment  ($35  +  75%  x  $35),  which  equals  an                                                                    
          effective NOL rate of 30.6%                                                                                           
                                                                                                                                
Mr. Alper  stated that the  changes to  the bill on  slide 7                                                                    
were  quite broad.  He noted  that the  third bullet  on the                                                                    
slide was the point at  which his presentation diverged from                                                                    
the most recent changes of  the bill as presented earlier by                                                                    
Ms. Cramer.                                                                                                                     
                                                                                                                                
Vice-Chair Micciche  remarked that the governor's  bill, the                                                                    
bill that  passed the  House, and the  bill that  was before                                                                    
the committee had morphed between a  net tax and a gross tax                                                                    
system. He  thought that  by eliminating  the carry-forwards                                                                    
and some of the NOLs, which  he thought were present in most                                                                    
business-type  taxes, the  bill became  somewhat of  a gross                                                                    
tax.                                                                                                                            
                                                                                                                                
Mr.  Alper  stated that  the  current  tax  was a  net  tax,                                                                    
although  the gross  minimum  floor imposed  the  idea of  a                                                                    
gross tax at  certain lower prices below  a crossover point.                                                                    
He continued  that because of  the operating losses,  once a                                                                    
company went below  zero it more or less reverted  back to a                                                                    
net tax  for carry-forwards. The  House version of  the bill                                                                    
had kept the  structure of the net tax becoming  a gross tax                                                                    
as  it  got  lower,  and  then  staying  gross  as  it  went                                                                    
negative.                                                                                                                       
                                                                                                                                
Vice-Chair Micciche  recalled that  the governor's  bill had                                                                    
not  dealt with  carry-forwards,  and  the estimated  carry-                                                                    
forward exposure had been $1.2 billion  at the end of FY 20.                                                                    
He reflected that the CS was  closer to the House version of                                                                    
the bill, with  less than half of the  remaining exposure in                                                                    
FY 20 in the governor's bill.                                                                                                   
                                                                                                                                
Mr. Alper  stated that the governor's  bill had dramatically                                                                    
increased the carry-forward  exposure, primarily because the                                                                    
bill  was a  firm hardening  of the  floor. Companies  would                                                                    
have had to  pay the full 4 percent, which  would have added                                                                    
another  $150  million  to  $200 million  per  year  to  the                                                                    
exposure. The  status quo number (the  official forecast for                                                                    
the end  of FY 20)  was $585  million. He considered  the CS                                                                    
was a small and not dramatic decrease from the status quo.                                                                      
                                                                                                                                
4:54:52 PM                                                                                                                    
                                                                                                                                
Mr. Alper addressed slide 8, "Major Provisions in SCS-                                                                          
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     5. Minimum Tax Changes                                                                                                     
     • House bill                                                                                                               
          • Adds a 5% "floor" but only if yearly price is                                                                       
          over $70 / bbl. Doesn't harden against additional                                                                     
          credits                                                                                                               
          • Because  NOLs are  no longer carried  forward by                                                                    
          large producers, floor indirectly hardened                                                                            
          •  Revenue impact  delayed  to  2020 because  pre-                                                                    
          effective date NOLs can still  be used to go below                                                                    
          floor                                                                                                                 
     • Senate Finance CS                                                                                                        
          • No increase to minimum tax                                                                                          
          •  No hardening  of  floor against  NOLs, new  oil                                                                    
          per-barrel credits, or other credits                                                                                  
                                                                                                                                
Mr.  Alper   discussed  the  hardening  of   the  floor  and                                                                    
historical changes. He pointed out  that the CS went back to                                                                    
default language that was in  existing statute. There was no                                                                    
increase to  the minimum  tax, and  hardening of  the floor.                                                                    
The original governor's bill had  looked to harden the floor                                                                    
against the  per-barrel credits  of new  oil or  gross value                                                                    
reduction (GVR)  eligible oil. He  stated that  although the                                                                    
per-barrel credit was  limited by the floor  for legacy oil,                                                                    
the per-barrel  credit could still  go to zero for  new oil.                                                                    
Additionally, there was  a change to the  definition of "new                                                                    
oil," which he would address further.                                                                                           
                                                                                                                                
Mr.  Alper looked  at  slide 9,  "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     6. New Oil "GVR" Provisions                                                                                                
     • House bill                                                                                                               
          • 7-year "graduation" of GVR  oil to become legacy                                                                    
          oil 5-year  graduation for 10% additional  GVR for                                                                    
          high-royalty fields                                                                                                   
          • If the average price  of oil exceeds $70 for any                                                                    
          three  years,  the  GVR sunsets  early,  with  the                                                                    
          production reverting to legacy oil                                                                                    
     • Senate Finance CS                                                                                                        
          • 7-year "graduation" of GVR  oil to become legacy                                                                    
          oil, for all royalty levels                                                                                           
          • If the average price  of oil exceeds $70 for any                                                                    
          three  years,  the  GVR sunsets  early,  with  the                                                                    
          production reverting to legacy oil                                                                                    
                                                                                                                                
Mr. Alper  thought the  Senate version  (with regard  to the                                                                    
GVR provisions)  was very  similar to  the House  version of                                                                    
the bill,  with the exception  of the removal of  the 5-year                                                                    
category for the  30 percent GVR. He specified  that all oil                                                                    
that was  new, and met  one of  the 3 provisions  to qualify                                                                    
for the  GVR, would qualify for  7 years and then  revert to                                                                    
become legacy oil.                                                                                                              
                                                                                                                                
Mr.  Alper  continued  to discuss  slide  9,  referencing  a                                                                    
technical change Ms. Cramer had  mentioned: once the new oil                                                                    
went from the  new to the old category, it  also went to the                                                                    
sliding scale per barrel credit  category. He noted that the                                                                    
three-year early graduation provision remained in the CS.                                                                       
                                                                                                                                
4:58:08 PM                                                                                                                    
                                                                                                                                
Mr. Alper highlighted slide 10, "Major Provisions in SCS-                                                                       
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     7. New Provisions from House Bill                                                                                          
          •  "Migrating  Credits  / True-up":  Prevent  per-                                                                    
          barrel  credits not  usable in  one month,  due to                                                                    
          minimum tax, from being applied in another month.                                                                     
          •   "ARM  Board   Alternative  Purchase   Option":                                                                    
          Authorizes Alaska  Retirement Management  Board to                                                                    
          repurchase  credits  at  60% of  face  value.  DOR                                                                    
          mandated  to repurchase  at  full  value within  5                                                                    
          years                                                                                                                 
     • Senate Finance CS                                                                                                        
          • Neither provision retained                                                                                          
                                                                                                                                
Mr.  Alper  explained  that  the  Migrating  Credits/True-up                                                                    
provisions were not in the  current version of the bill, nor                                                                    
was the ARM Board Alternative Purchase Option.                                                                                  
                                                                                                                                
Mr.  Alper looked  at slide  11, "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     8. New Provision in Senate Finance CS                                                                                      
     • Refinery Credit                                                                                                          
          • Refinery credit repealed early.                                                                                     
          • Rate reduced from 40% to 20% in 2017, and                                                                           
          eliminated in 2018                                                                                                    
          • Credit was  scheduled to sunset at  end of 2019,                                                                    
          so  effectively this  removes  2 ½  out  of the  5                                                                    
          years of initial eligibility and value                                                                                
                                                                                                                                
Mr. Alper pointed out that  the early repeal of the refinery                                                                    
credit (on  the first bullet of  the slide) was a  major new                                                                    
provision of the bill that had  not been seen in any earlier                                                                    
versions. The  language took  effect in 2015,  and was  a 5-                                                                    
year credit  of up to  $10 million  per company for  each of                                                                    
the   refineries   in  the   state,   for   40  percent   of                                                                    
infrastructure   expenditures   for   major   projects.   He                                                                    
mentioned  the highly  publicized asphalt  plant project  by                                                                    
Petrostar, which had discussed using  the credit. He noted a                                                                    
$10 million  impact on the fiscal  note in 2017, and  then a                                                                    
$20 million  impact on  what would be  affected in  2018 and                                                                    
2019.                                                                                                                           
                                                                                                                                
Mr.  Alper discussed  slide 12,  "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     9. Misc. and Technical Provisions                                                                                          
     a) House: GVR can't be used to increase the size of an                                                                     
     NOL                                                                                                                        
     Sen Fin: Same as House                                                                                                     
     b) House: Municipal Utility Lease Expenditure pro-                                                                         
     ration                                                                                                                     
     Sen Fin: Same as House                                                                                                     
     c) House: Transparency, can release name of company                                                                        
     and amount of refundable credits received                                                                                  
     Sen Fin: Amendment provides amounts but not names                                                                          
     d) House: Increase to 5% over Fed, compounding, with                                                                       
     simple interest after four years                                                                                           
     Sen. Fin: Increase to 7% over Fed, compounding, with                                                                       
    zero interest after three years (5% in draft text)                                                                          
                                                                                                                                
Mr. Alper  referenced earlier lengthy discussions  about the                                                                    
GVR  provision  listed  on  the slide.  He  noted  that  the                                                                    
department  had some  concern with  the section  relating to                                                                    
compounding interest,  specifically what might  happen after                                                                    
the  sixth year.  He described  a hypothetical  situation in                                                                    
which a company contested a  state assessment and took it to                                                                    
court,  which  he contemplated  could  result  in a  lengthy                                                                    
court case  with zero percent interest  carrying forward for                                                                    
the entirety of the legal process.                                                                                              
                                                                                                                                
5:02:02 PM                                                                                                                    
                                                                                                                                
Mr.  Alper displayed  slide 13,  "Major  Provisions in  SCS-                                                                    
CSHB247(FIN)":                                                                                                                  
                                                                                                                                
     9. Misc. and Technical Provisions (cont'd)                                                                                 
     e) House: Level of Alaska Hire as prioritization for                                                                       
     repurchase given limited funds, including contractors                                                                      
    Sen Fin: Priority for repurchase for companies with                                                                         
     Alaska   Hire   greater   than   75%,   not   including                                                                    
     contractors                                                                                                                
     f) House: Credits can be used to offset other                                                                              
     delinquent obligations to the state related to oil and                                                                     
     gas business                                                                                                               
     Sen Fin: Same as House, requires notice if credit                                                                          
    funds are used to pay liability on company's behalf                                                                         
     g) House: $250k surety bond with local vendor priority                                                                     
     Sen Fin: Same as House                                                                                                     
                                                                                                                                
Mr. Alper  discussed the Alaska  Hire provision and  used an                                                                    
analogy of  a company that  had a small number  of employees                                                                    
and  had  the bulk  of  its  work  done by  contractors.  He                                                                    
mentioned corporate income tax filers,  who may have a great                                                                    
number  of   out-of-state  workers.  He  wondered   how  the                                                                    
language  in  the bill  would  be  interpreted, and  thought                                                                    
there might need  to be a regulatory fix.  He continued that                                                                    
the language  on the slide  pertaining to a surety  bond had                                                                    
stayed  relatively  consistent  since   it  had  been  first                                                                    
introduced in the House Resources Committee.                                                                                    
                                                                                                                                
Vice-Chair   Micciche  referred   to  Mr.   Alper's  earlier                                                                    
comments regarding compounding  interest and potential court                                                                    
cases, and  asked about how  the interest and  the liability                                                                    
might work together. He wondered  if it would be possible to                                                                    
use credit  funds to help  with the expense. He  wondered if                                                                    
Mr. Alper's  concern pertained  to an  ongoing case  with no                                                                    
interest burden on the remaining time.                                                                                          
                                                                                                                                
Mr. Alper mused that if a  court case dragged on there would                                                                    
be  no   interest  and  obligation,  and   therefore  little                                                                    
incentive to  settle. If the company  had forthcoming future                                                                    
tax  credits, provision  (f)  (on slide  13)  could pay  the                                                                    
obligation. In the  case that the company won  its case, the                                                                    
state would  reimburse it as  needed. He continued  that the                                                                    
state  routinely paid  back companies  with interest  when a                                                                    
settlement went  in the company's  favor. He noted  that the                                                                    
provision  would  only be  relevant  if  the company  had  a                                                                    
cashable  credit. Major  producers  were  excluded from  the                                                                    
provision as they did not have cashable credits.                                                                                
                                                                                                                                
5:05:21 PM                                                                                                                    
                                                                                                                                
Senator Olson  addressed the issue  of zero  interest earned                                                                    
in the  event of an  ongoing court case, and  wondered about                                                                    
the timeline of state audits and the effect on businesses.                                                                      
                                                                                                                                
Mr.  Alper  discussed the  progress  of  audits in  the  tax                                                                    
division. He  stated that the  department had  gotten behind                                                                    
in  audits two  years previously,  after Alaska's  Clear and                                                                    
Equitable  Share  (ACES)  tax  came in  to  effect  and  the                                                                    
division was  busy writing regulations. He  noted that there                                                                    
was an active  plan for the division to catch  up on audits,                                                                    
and  thought it  would be  a gradual  process. He  qualified                                                                    
that there was no fiduciary  interest in the tax division to                                                                    
accrue more interest.                                                                                                           
                                                                                                                                
Senator  Olson  made the  point  that  businesses were  also                                                                    
subject to the pressures of the fiscal environment.                                                                             
                                                                                                                                
Commissioner  Hoffbeck did  not have  a strong  disagreement                                                                    
with years 4  through 6 of the audit  timeline. He qualified                                                                    
that  the department  had issue  with litigation  that could                                                                    
extend to years 7 through  10. He echoed Mr. Alper's comment                                                                    
that with no interest accruing,  there was less incentive to                                                                    
settle the  case. He relayed  that typically  litigation was                                                                    
driven from the taxpayer side rather than from the state.                                                                       
                                                                                                                                
Senator  Olson referred  to Former  Governor Walter  (Wally)                                                                    
Hickel, and  understood there  was a  historical perspective                                                                    
on the matter.                                                                                                                  
                                                                                                                                
Vice-Chair Micciche  stated that there was  a consequence he                                                                    
had  not considered,  and  mused on  finding  other ways  to                                                                    
motivate payment  when there was  liability was owed  to the                                                                    
state.                                                                                                                          
                                                                                                                                
Commissioner Hoffbeck did not  want to overstate the matter,                                                                    
and did  not think  there was  that many  economic decisions                                                                    
made on  the amount  of accrued  interest on  litigation. He                                                                    
considered  that people  wanted litigation  to be  complete,                                                                    
and did  not think the  potential zero interest years  was a                                                                    
huge issue, but rather a  concern that the department wanted                                                                    
to point out.                                                                                                                   
                                                                                                                                
5:09:16 PM                                                                                                                    
                                                                                                                                
Mr. Alper  addressed slide 14,  "Summary of  Fiscal Impact,"                                                                    
which he  stated was a  stripped down version of  the fiscal                                                                    
note to illustrate  the different versions of  the bill. The                                                                    
slide  showed a  table  entitled "Summary  Analysis of  Bill                                                                    
Versions ($millions)."  He noted that the  slide tracked not                                                                    
only the total bill impact;  but the savings on spending and                                                                    
the increase in revenue, as  well as tracking the NOL carry-                                                                    
forwards. He  commented that should  the price of oil  be as                                                                    
low  as predicted,  there  would be  $500  million worth  of                                                                    
carry-forwards at the end of  FY 20. If the price prediction                                                                    
was off by $8 or $9 over  the course of the next four years,                                                                    
the number could be wiped out completely.                                                                                       
                                                                                                                                
Mr. Alper  continued discussing slide 14;  noting that under                                                                    
the CS  the expected  total bill  impact was  $115 in  FY 18                                                                    
million, $140 million  in FY 19, and $130 million  in FY 20.                                                                    
He  expected the  numbers to  reduce by  $15 million  to $20                                                                    
million,  because of  the  adjustment  he described  earlier                                                                    
relating to the  $35 million (and how it  was calculated) in                                                                    
Section 28 of the bill.                                                                                                         
                                                                                                                                
Vice-Chair  Micciche  discussed  the spring  revenue  source                                                                    
book,  which he  assumed was  off  by about  25 percent.  He                                                                    
wondered  if the  actuals continued  in the  same direction,                                                                    
the number would be wiped out quite a bit sooner.                                                                               
                                                                                                                                
Mr. Alper stated  that the forecast had a  price point below                                                                    
break-even through  the end of FY  18. He thought the  FY 18                                                                    
prediction  was  about  $43  per   barrel,  and  the  FY  19                                                                    
prediction was up to $48.  The three years of losses equated                                                                    
to  a fairly  large buildup  of NOLs.  If the  price of  oil                                                                    
ended up closer to $46 per  barrel for three years, it would                                                                    
make a significant difference.                                                                                                  
                                                                                                                                
Co-Chair  MacKinnon  thanked Mr.  Alper  for  his hard  work                                                                    
through the preceding hours.                                                                                                    
                                                                                                                                
Senator Bishop  referred to  a new  computer program  to aid                                                                    
the tax audit  division, and thought it  would alleviate the                                                                    
backlog of audits.                                                                                                              
                                                                                                                                
Commissioner Hoffbeck confirmed that  the program was up and                                                                    
running.  He  relayed  that  the  program  would  have  more                                                                    
granular data  as well  as increased  accuracy in  the audit                                                                    
filings.                                                                                                                        
                                                                                                                                
Co-Chair MacKinnon  noted that  the fiscal note  showed $1.2                                                                    
million  already included  in  the capital  budget that  was                                                                    
contingent on passage of the  legislation to support some of                                                                    
the reporting requirements.                                                                                                     
                                                                                                                                
Commissioner Hoffbeck concurred.                                                                                                
                                                                                                                                
5:12:47 PM                                                                                                                    
                                                                                                                                
Senator Olson  referred to  slide 11,  and the  reference to                                                                    
refinery  credits. He  mentioned projects  in his  district,                                                                    
and   asked  Commissioner   Hoffbeck  to   comment  on   the                                                                    
administration's view of the recent changes to the bill.                                                                        
                                                                                                                                
Commissioner  Hoffbeck   shared  that  based   on  available                                                                    
information,  it  appeared that  most  work  to be  done  on                                                                    
refineries  would  be  able  to   be  completed  within  the                                                                    
timeframe of  the modification listed  on the slide.  He did                                                                    
not think the new provision would impact most refineries.                                                                       
                                                                                                                                
Co-Chair  MacKinnon   recognized  the   hard  work   of  the                                                                    
legislative legal department.                                                                                                   
                                                                                                                                
Vice-Chair  Micciche MOVED  to report  SCS 2d  CSHB 247(FIN)                                                                    
out  of Committee  with individual  recommendations and  the                                                                    
accompanying fiscal notes. There  being NO OBJECTION, it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
SCS 2d CSHB 247(FIN) was  REPORTED out of committee with "no                                                                    
recommendation"  with one  new fiscal  impact note  from the                                                                    
Department  of Revenue;  and one  previously published  zero                                                                    
fiscal note: FN 5(DNR).                                                                                                         
                                                                                                                                
5:15:00 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
5:17:37 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
ADJOURNMENT                                                                                                                   
5:17:53 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 5:17 p.m.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
HB 247 SCS work draft version Z.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 Sectional Analysis Version Z Updated.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 SCSHB247 FIN prelim_ds_20160517.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 Amendment 1 Micciche.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 Summary of Changes Z to AA.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 SCS2dCS work draft version AA (002).pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 051716 Review of SCSHB247(FIN) 5-16-16 final.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 Sectional Analysis Version AA Updated.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 Public Testimony Harrington.pdf SFIN 5/17/2016 9:00:00 AM
HB 247
HB 247 Testimony Alliance 051616.pdf SFIN 5/17/2016 9:00:00 AM
HB 247