Legislature(2017 - 2018)SENATE FINANCE 532

04/26/2017 09:00 AM FINANCE

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09:06:38 AM Start
09:07:13 AM HB111
10:12:09 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                      April 26, 2017                                                                                            
                         9:06 a.m.                                                                                              
9:06:38 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair MacKinnon called the Senate Finance Committee                                                                          
meeting to order at 9:06 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Shelley Hughes                                                                                                          
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Representative Tammie Wilson; Representative Chris Birch;                                                                       
Representative Geran Tarr, Sponsor; Representative Cathy                                                                        
Tilton; Senator Cathy Giessel.                                                                                                  
HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                             
          HB 111 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)                                                                                       
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     relating  to carried-forward  lease expenditures  based                                                                    
     on losses  and limiting those lease  expenditures to an                                                                    
     amount  equal  to  the  gross value  at  the  point  of                                                                    
     production of  oil and gas  produced from the  lease or                                                                    
     property  where  the  lease expenditure  was  incurred;                                                                    
     relating to  information concerning tax  credits, lease                                                                    
     expenditures, and  oil and gas  taxes; relating  to the                                                                    
     disclosure of that information  to the public; relating                                                                    
     to an  adjustment in  the gross value  at the  point of                                                                    
     production;  and  relating  to  a  legislative  working                                                                    
9:07:13 AM                                                                                                                    
REPRESENTATIVE GERAN TARR,  SPONSOR, addressed CSHB 111(FIN)                                                                    
version  L.A.   She  commented  that  the   House  Resources                                                                    
Committee  had observed  that the  state's oil  and gas  tax                                                                    
system  was not  working well  in the  low-price environment                                                                    
over  the  preceding  two  years.   She  recalled  that  the                                                                    
committee had looked  to minimize the downside  risk for the                                                                    
state. Popular opinion suggested oil  would hover at $50 per                                                                    
barrel (bbl).  She discussed the  importance of the  oil and                                                                    
gas  industry  in  the  state,  and the  need  to  remain  a                                                                    
competitive place  for investment.  She emphasized  the fact                                                                    
that all  potential developments and opportunities  were not                                                                    
alike.  She   pondered  how  the  state   could  pursue  the                                                                    
opportunities  that would  help it  meet the  constitutional                                                                    
mandate  of maximizing  the benefit  for the  people of  the                                                                    
Representative  Tarr   relayed  that  the   House  Resources                                                                    
Committee wanted  to address cash credits,  which had become                                                                    
an untenable situation after the  state had accumulated $1.1                                                                    
billion in obligations. The committee  had considered it was                                                                    
a priority  to establish  a plan  and stabilize  the system.                                                                    
She discussed companies that borrowed  from banks and relied                                                                    
on credits issued by the  state. The committee wanted a plan                                                                    
that was  durable along  all oil  prices and  time horizons.                                                                    
She referred  to previous oil  and gas tax policies  such as                                                                    
Alaska's Clear and Equitable Share (ACES).                                                                                      
Representative  Tarr   described  that   one  goal   of  the                                                                    
legislation was  to have a  plan that worked well  and could                                                                    
be set  aside for some  number of years, rather  than taking                                                                    
more  time from  the  legislature  and garnering  additional                                                                    
criticism  from the  industry. She  thought the  cash credit                                                                    
was  incentive  that  was important  for  new  entrants  and                                                                    
companies  in  exploration. The  ability  to  take the  cash                                                                    
credits to  banks for financing was  a valuable opportunity.                                                                    
She  referred  to the  state's  tax  credit obligation,  and                                                                    
recognized  the challenge  in meeting  the obligation  after                                                                    
greatly reduced production tax.                                                                                                 
Representative  Tarr  detailed   that  the  House  Resources                                                                    
Committee  had  followed  the  advice of  oil  and  gas  tax                                                                    
consultant Rich  Ruggiero in order  to offer  something that                                                                    
would  be  an  incentive  for  a  company,  keep  the  state                                                                    
competitive,  and  encourage  investment. Mr.  Ruggiero  had                                                                    
recommended  using  operating  loss carry-forwards  [or  net                                                                    
operating losses  (NOLs)]. The bill  as it passed  the House                                                                    
allowed for  100 percent  of NOLs for  7 years,  after which                                                                    
time there  was a 10 percent  reduction in the value  of the                                                                    
losses. The 10 percent would be specific to the year.                                                                           
9:12:12 AM                                                                                                                    
Co-Chair  MacKinnon  referred  to  the  100  percent  carry-                                                                    
forward for  seven years, and  asked if the provision  was a                                                                    
result of the advice of the consultant.                                                                                         
Representative   Tarr  stated   that   the  consultant   had                                                                    
recommended  a   number  of  things,  including   an  uplift                                                                    
provision, which  was an interest incentive  (or an interest                                                                    
earning loss). She relayed that  the version L.A of the bill                                                                    
contained 50 percent of NOLs  with an uplift. The consultant                                                                    
had  recommended against  the committee's  idea to  have the                                                                    
value to  be 100 percent at  year 7. He had  considered that                                                                    
not allowing 100 percent carry-forward  would be atypical of                                                                    
what other  regimes offered. Subsequently the  House Finance                                                                    
version  of  the  bill  was changed,  and  allowed  for  100                                                                    
percent carry-forward. The consultant  did not recommend for                                                                    
the reduction of 10 percent after 7 years.                                                                                      
Co-Chair MacKinnon  relayed that Mr. Ruggiero  had presented                                                                    
to the Senate Finance Committee  in a joint meeting with the                                                                    
Senate  Resources Committee  the  previous  weekend. He  had                                                                    
suggested that  all around the  world, costs  for production                                                                    
were  allowable  expenses  and   100  percent  recovery  was                                                                    
Representative  Tarr  clarified  that  the  House  Resources                                                                    
Committee version of the bill  had contained 50 percent loss                                                                    
carry-forward  with  uplift;  while  in  the  House  Finance                                                                    
Committee it  was changed to 100  percent loss carry-forward                                                                    
for 7  years, with  a 10  percent reduction.  She considered                                                                    
that  the matter  was  a policy  call  for the  legislature,                                                                    
which  wanted  to  encourage   getting  into  production  as                                                                    
quickly  as  possible.  She  thought  the  average  time  to                                                                    
production  was 7  years. She  relayed that  there had  been                                                                    
conversation  about incidental  occurrences  such as  delays                                                                    
from  federal regulation  or permitting.  She thought  there                                                                    
was  a  question  of  what   the  state  could  afford  when                                                                    
considering  the  accumulation  of losses.  When  a  company                                                                    
transitioned into  production, the  losses would  be applied                                                                    
to  tax  revenue and  be  lost  revenue  to the  state.  She                                                                    
emphasized that the committee had  wanted to be careful that                                                                    
the state wasn't  so generous that once a  company went into                                                                    
production,   the  carry-forward   losses  could   last  for                                                                    
extended years.                                                                                                                 
9:16:08 AM                                                                                                                    
Co-Chair  MacKinnon   commented  that  Senate   Finance  was                                                                    
familiar with the credit mechanism.                                                                                             
Representative  Tarr  stated  that  the bill  also  had  the                                                                    
feature of  ring-fencing, through  which a loss  would apply                                                                    
to the lease where the  loss was incurred. The committee had                                                                    
considered  the per-barrel  credit  and the  base tax  rate,                                                                    
which were features  that worked together in SB  21 [oil and                                                                    
gas tax  legislation passed  in 2013].  The 35  percent base                                                                    
rate would  be unusually high if  it were not offset  by the                                                                    
per-barrel reduction. She thought  there were different ways                                                                    
to approach the matter. The  House version repealed the per-                                                                    
barrel credit altogether, and reduced  the base rate from 35                                                                    
percent  to 25  percent.  She  stated that  the  rate of  25                                                                    
percent  was chosen  because it  was  the base  rate in  the                                                                    
original version of  SB 21 as introduced  by former Governor                                                                    
Sean Parnell.                                                                                                                   
Representative Tarr  discussed the per-barrel  credit, which                                                                    
also worked  to have  reversed progressivity.  She specified                                                                    
that  version  L.A  of  the  bill  contained  a  15  percent                                                                    
bracketed supplemental  tax. The consultant  had recommended                                                                    
working from the  production tax value (PTV),  which was the                                                                    
gross value less the  transportation and lease expenditures;                                                                    
and was how  to truly work with  a net-profits-based system.                                                                    
After  the PTV  value  was  $60, it  would  transition to  a                                                                    
higher bracket with  an additional 15 percent added  on as a                                                                    
supplemental tax.                                                                                                               
Representative  Tarr  stated  that  the  bill  hardened  the                                                                    
minimum floor  at 4 percent,  and did  not allow any  of the                                                                    
credits to go  through the floor. The bill  addressed one of                                                                    
the  gross  value  reduction  (GVR)  provisions,  and  would                                                                    
repeal the extra  10 percent GVR for  higher royalty fields.                                                                    
The  bill  would  repeal  the ability  to  use  credits  for                                                                    
Representative Tarr  stated that  the bill  had a  couple of                                                                    
transparency  provisions,  one  of  which  was  built  on  a                                                                    
provision  in  HB  247,   regarding  public  disclosure  for                                                                    
credits earned  and lease expenditures. The  bill previously                                                                    
had several provisions relating  to access to information to                                                                    
legislators,  which had  been scaled  back significantly  in                                                                    
the final version of the bill  that left the other body. The                                                                    
bill also addressed  the interest rate, and  scaled the rate                                                                    
to match  the number of  years needed to complete  the state                                                                    
9:20:07 AM                                                                                                                    
Co-Chair  MacKinnon  thanked  Representative  Tarr  for  her                                                                    
testimony.  She thought  Representative  Tarr had  suggested                                                                    
that the  state needed to find  a way to pay  off tax credit                                                                    
obligations to  the smaller companies. She  inquired how the                                                                    
other body  proposed to do  so, and asked  if Representative                                                                    
Tarr could cite specific provisions in the bill.                                                                                
Representative  Tarr  explicated  that the  House  Resources                                                                    
Committee  version of  the bill  had  intent language  that,                                                                    
contingent  upon  the  passage  of a  fiscal  plan,  paid  a                                                                    
significant portion  of the  state's credit  obligation. She                                                                    
recounted conversations  with the  Co-Chair, including  a 3-                                                                    
year  or 5-year  plan. She  mentioned seeking  feedback from                                                                    
industry  representatives. She  had a  strong concern  about                                                                    
the  state  not  meeting  its obligations,  and  the  ripple                                                                    
effect to any Alaska businesses  that might be impacted. She                                                                    
stated  that  the fiscal  note  attached  to the  bill  only                                                                    
addressed the  revenue and the  elimination of  credit size,                                                                    
and  did not  have  additional funding  for  paying the  tax                                                                    
credit obligations.                                                                                                             
Co-Chair MacKinnon  asked if it  was fair to say  that there                                                                    
was not consensus  in the House about the method  to pay off                                                                    
the  businesses, but  there  was consensus  to  pay off  the                                                                    
obligations over a period of time.                                                                                              
Representative  Tarr  did  not   want  to  characterize  the                                                                    
intentions  of  others.  She restated  the  idea  of  paying                                                                    
credits contingent  upon the passage  of a fiscal  plan. She                                                                    
stated  that  based  on  the House  Majority  and  the  four                                                                    
pillars it  had put  forward, meeting the  obligations would                                                                    
be considered.  She knew that  members were  concerned about                                                                    
impacts  on  Alaska  companies,  and did  not  want  to  see                                                                    
companies default  on any lease  payment and then  leave the                                                                    
bank as a lease holder.                                                                                                         
Co-Chair Hoffman stated  that part of the  House fiscal plan                                                                    
included  an income  tax. He  asked if  it could  be assumed                                                                    
that income  tax revenues would be  used to pay off  the tax                                                                    
Representative Tarr  stated that all  the funds would  go to                                                                    
the  General  Fund   (GF),  and  to  the   extent  that  the                                                                    
obligations would  be paid  from the  GF, the  statement was                                                                    
true.  She  thought  that  there were  those  who  were  not                                                                    
willing to  pay an income  tax or  part of a  Permanent Fund                                                                    
Dividend (PFD)  if it was  going toward a subsidy  or credit                                                                    
to  an oil  company.  She discussed  the  idea of  balancing                                                                    
competing  ideas, and  shared that  the House  was taking  a                                                                    
multi-faceted approach  to a fiscal plan.  She thought there                                                                    
were others that thought changes  to the oil tax system must                                                                    
come first. She stated that  the House was trying to address                                                                    
the  situation and  make some  modest  changes, which  might                                                                    
make people  more comfortable about  other proposals  in the                                                                    
fiscal plan.                                                                                                                    
Co-Chair MacKinnon  asked about the  cuts that were  part of                                                                    
the House's  plan, and asked  if there had been  a reduction                                                                    
in payment of the tax credits.                                                                                                  
Representative  Tarr   answered  in  the   affirmative,  and                                                                    
qualified  that  the  cut  was  to  reduce  the  tax  credit                                                                    
payments to the statutory minimum.                                                                                              
Co-Chair MacKinnon asked about the amount of the cut.                                                                           
Representative  Tarr  recalled  that   the  amount  was  $37                                                                    
million. She wanted to double check the figures.                                                                                
9:24:35 AM                                                                                                                    
Senator von Imhof referred  to Representative Tarr's comment                                                                    
about  a precarious  economy  and  business environment  for                                                                    
producers.   She   noted   that  Representative   Tarr   had                                                                    
acknowledged  that  paying  some  of  the  tax  credits  was                                                                    
important,  and referenced  her  complete  fiscal plan  that                                                                    
included  an income  tax. She  asked if  Representative Tarr                                                                    
felt that taking money from  a precarious economy was in the                                                                    
best interest  of paying for  tax credits. She  wondered how                                                                    
an income  tax, in the  context of the House's  treatment of                                                                    
tax  credits,  would not  put  the  state's economy  into  a                                                                    
Representative Tarr stated that the  House had tried to work                                                                    
closely with the Legislative Finance  Division (LFD) and the                                                                    
Department   of   Revenue   (DOR)  to   consider   different                                                                    
proposals. She  stated that relative  to the  bill proposal,                                                                    
nothing  would  change the  obligations  that  would be  due                                                                    
because  of  the  taxes  being   on  a  calendar  year.  The                                                                    
effective  date  of  the  bill  was  January  1,  2018;  and                                                                    
everything that  continued through  the 2017 would  be under                                                                    
the current  tax credit system.  She thought if some  of the                                                                    
tax credits were not paid,  it might be more challenging for                                                                    
smaller companies.                                                                                                              
Representative Tarr continued  discussing a potential income                                                                    
tax; and stated  that she had been told that  for every $100                                                                    
million in budget cuts that  were made, there would be about                                                                    
$1000  to   $1,200  jobs  lost   from  the   public  sector.                                                                    
Additionally,  there  would  thousands   more  lost  in  the                                                                    
private  sector.  She  discussed the  numbers  of  residents                                                                    
leaving the state,  and recalled that 9,000  people had left                                                                    
Alaska the  previous year. She  pondered that an  income tax                                                                    
would be the  least impactful to the  public, whereas deeper                                                                    
cuts could drive the state into a deeper recession.                                                                             
Representative Tarr  observed that many  people's retirement                                                                    
accounts  were still  recovering from  the recession  in the                                                                    
Lower 48,  while home values had  not dropped significantly.                                                                    
She thought there  was real concern that if  people left the                                                                    
state  in large  numbers,  it would  cause  house prices  to                                                                    
drop. She  argued that a  30 percent  to 40 percent  drop in                                                                    
real  estate value  would far  exceed the  $1,500 to  $2,000                                                                    
that might be  paid in income tax. She noted  that an income                                                                    
tax would  also get out-of-state workers  to help contribute                                                                    
to the  state, so the burden  would not be felt  entirely by                                                                    
Alaskans. She  discussed the concept  of a sales  tax, which                                                                    
she considered overly burdensome  for small communities when                                                                    
stacked upon other local sales taxes.                                                                                           
9:28:47 AM                                                                                                                    
Senator  Micciche thought  the conversation  was moving  off                                                                    
topic. He asked  if a reduction of the  cashable credits was                                                                    
one of the  four pillars of the House fiscal  plan. He asked                                                                    
if the bill was related to one of the four pillars.                                                                             
Representative Tarr answered in the affirmative.                                                                                
Senator  Micciche asked  if one  of the  four pillars  was a                                                                    
change to the oil  tax structure, or specifically reductions                                                                    
in the exposure to cashable credits.                                                                                            
Representative Tarr  thought the  answer depended  upon whom                                                                    
one was speaking  to. She stated that  reduction to exposure                                                                    
from cashable  credits was  a priority,  and she  hoped that                                                                    
all parties  were in agreement.  She wanted to  move forward                                                                    
with changes to give companies time to make plans.                                                                              
Co-Chair  MacKinnon   relayed  that  statute   required  the                                                                    
legislature contribute  $77 million towards paying  down the                                                                    
tax credits. The  House version of the bill  had reduced the                                                                    
amount to $37  million, so there had been a  $40 million cut                                                                    
to the small explorers that received cashable credits.                                                                          
Co-Chair MacKinnon  asked if there were  questions regarding                                                                    
the structure  of the bill.  She knew that the  interest had                                                                    
changed, and  mentioned ring-fencing and repeal  of the per-                                                                    
barrel credit.                                                                                                                  
9:31:30 AM                                                                                                                    
Senator Micciche  thought the effective  tax rate  and state                                                                    
take  under the  House  Resources Committee  version of  the                                                                    
bill  was   somewhat  more  balanced  in   relation  to  the                                                                    
consultant's advice. He thought  the House Finance Committee                                                                    
version  seemed  as  if  there had  not  been  a  consultant                                                                    
involved;  and  that  instead of  going  with  industry  and                                                                    
sovereign/global balance  evaluation, the bill  version went                                                                    
for more money.  He asked Representative Tarr  to comment on                                                                    
the changes that happened in the House Finance Committee.                                                                       
Representative Tarr stated  that working on the  bill in the                                                                    
House Resources  Committee, she had felt  like more progress                                                                    
would be  made by  working within  the infrastructure  of SB
21.  She relayed  that Mr.  Ruggiero  had recommended  using                                                                    
brackets off the PTV, which  the committee would have worked                                                                    
on  had time  allowed. She  thought that  there was  room to                                                                    
raise the overall effective tax  rate. She specified that at                                                                    
at an oil  price of $55/bbl, the tax  rate was approximately                                                                    
10  percent, while  the  bill would  bump it  up  to the  13                                                                    
percent  range.   When  the  House  Finance   Committee  had                                                                    
considered  the   bill,  it  had   built  on   the  original                                                                    
conversation and put in a  15 percent tax bracket, which had                                                                    
changed the overall proposal.                                                                                                   
Representative   Tarr   continued,   explaining   that   the                                                                    
consultant had asserted  there were ways to  remove the per-                                                                    
barrel credit and GVR provisions,  in aid of simplifying the                                                                    
system. She mentioned a provision  for a dry-hole credit (as                                                                    
an  incentive for  explorers), which  was eliminated  in the                                                                    
House Finance Committee version  of the bill after questions                                                                    
as  to how  it  would be  implemented.  She summarized  that                                                                    
there had  been different approaches  in what had  been done                                                                    
in the  House Resources  Committee versus the  House Finance                                                                    
Committee. She  discussed the differences in  revenue to the                                                                    
state based on  the two approaches of the oil  tax system at                                                                    
different oil price points.                                                                                                     
Vice-Chair Bishop commented that  Mr. Ruggiero had suggested                                                                    
that the state  should have a tax regime that  did not chase                                                                    
the price of oil.                                                                                                               
Co-Chair  MacKinnon asked  if  Representative  Tarr had  any                                                                    
closing thoughts for consideration of the committee.                                                                            
Representative   Tarr    appreciated   Vice-Chair   Bishop's                                                                    
comments; and  qualified that the  version of the  bill that                                                                    
passed the House used the PTV  and tax brackets for the same                                                                    
reason. She considered that basing  things off the PTV would                                                                    
function more independent  of the price of  oil. She thought                                                                    
the  feature was  worth considering.  She acknowledged  that                                                                    
the Senate  Finance Committee was knowledgeable  in the area                                                                    
of  oil tax  credits,  and looked  forward to  collaborating                                                                    
with the members to complete the work of the session.                                                                           
Co-Chair MacKinnon  clarified that  PTV was in  reference to                                                                    
production tax value.                                                                                                           
9:36:39 AM                                                                                                                    
AT EASE                                                                                                                         
9:39:04 AM                                                                                                                    
SENATOR  CATHY  GIESSEL,   addressed  the  Senate  Committee                                                                    
Substitute (SCS) for  HB 111(RES). She stated  that the bill                                                                    
focused on the important issues  around which the Senate had                                                                    
consensus. She recalled that the  Senate had started work on                                                                    
the issue three  years previously when it  had observed that                                                                    
cash  credits were  a  significant risk  to  the state.  She                                                                    
detailed  that   in  January  of  2015,   the  legislature's                                                                    
consultant  enalytica had  put out  a white  paper entitled,                                                                    
"The Impact of  Alaska's Oil and Gas  Production Tax Credits                                                                    
at Low Oil Prices" (copy  on file under committee meeting on                                                                    
January 27, 2015).  She stated that at the  time, the Senate                                                                    
had recognized  the risk.  In the  conclusion of  the report                                                                    
the  Cook Inlet  capital well  lease expenditure  and carry-                                                                    
forward annual loss credits were  distinguished as "the most                                                                    
significant"  of  the  tax  credit  issue,  and  were  worth                                                                    
examining in further detail.                                                                                                    
Senator Giessel  recounted that the Senate  had convened the                                                                    
Senate Oil and  Gas Tax Credit Working Group,  on which four                                                                    
members  of the  committee had  served. The  group had  also                                                                    
included  industry, labor  unions, and  Native corporations.                                                                    
The group  had addressed the significant  liability faced by                                                                    
the state, focusing  primarily on the Cook  Inlet. The group                                                                    
had made six recommendations.                                                                                                   
Senator  Giessel relayed  that the  previous session,  in HB
247  [oil  and gas  tax  legislation  passed in  2016],  the                                                                    
Senate  had  accomplished  several of  the  working  group's                                                                    
recommendations to reform the  state's cash tax credits. She                                                                    
believed that HB 111 completed the list of recommendations.                                                                     
9:41:19 AM                                                                                                                    
Senator  Giessel  asserted  that   there  was  a  continuing                                                                    
countdown  on tax  credits in  Cook Inlet.  She spoke  to an                                                                    
overview of SCS CSHB 111(RES) (copy on file):                                                                                   
     Summary of Senate CS for CS for HB 111 \C                                                                                  
     Eliminates  the state's  cash  exposure  by ending  the                                                                    
     program of refundable oil and  gas tax credits to small                                                                    
     or new  companies. Transitions to a  system of carrying                                                                    
     forward  operating losses  for use  against future  tax                                                                    
     liability,  while protecting  the basic  tax components                                                                    
     in statute today.                                                                                                          
     Eliminating refundable tax credits                                                                                         
          •  Ends refundable  credits statewide  and repeals                                                                    
          the tax credit fund;  credits issued for work done                                                                    
          through  2017  are   refundable  by  appropriation                                                                    
          instead. (Sec. 15-17, 25, 32)                                                                                         
          •  Concludes the  multi-year  effort to  eliminate                                                                    
          tax  credits used  against  liability, except  for                                                                    
          the local energy source  work developing in Middle                                                                    
          Earth. (Sec. 25)                                                                                                      
          •   Preserves  Middle   Earth   credits  as   non-                                                                    
          refundable,  and allows  the  company earning  the                                                                    
          credits  to  apply   them  against  the  corporate                                                                    
          income  tax as  well  as  against production  tax;                                                                    
          also,  applies   timelines  to   encourage  prompt                                                                    
          issuance  of Middle  Earth credits.  (Sec. 2,  11,                                                                    
          12, 14, 26, 27)                                                                                                       
          • Ensures  the expiring in-state refinery  and LNG                                                                    
          storage   facility   credits   remain   refundable                                                                    
          through appropriation. (Sec. 3-6)                                                                                     
          •  Expands  opportunities  for  companies  holding                                                                    
          credits  to  realize  value of  those  credits  by                                                                    
          enabling credits  - a  company's own  or purchased                                                                    
          from   another  -   to  be   used  against   prior                                                                    
          liabilities  once  those   liabilities  come  due.                                                                    
          (Sec. 7, 9, 13, 28)                                                                                                   
Senator  Giessel  detailed that  the  SCS  hardened the  tax                                                                    
floor  at 4  percent  against net  operating losses  (NOLs).                                                                    
Additionally,  the   sliding  scale  credit   was  retained,                                                                    
because  it   helped  to  offset   the  high   royalty.  She                                                                    
emphasized  the importance  of  local  energy production  in                                                                    
areas such  as the  Interior. She emphasized  that expanding                                                                    
the  opportunity  for  credits  to  be  used  against  prior                                                                    
liabilities would help to reduce the state's liability.                                                                         
9:45:58 AM                                                                                                                    
Senator  Giessel addressed  the topic  of transparency.  She                                                                    
thought  that  transparency  was  created  when  making  the                                                                    
credits refundable  only by appropriation. She  discussed an                                                                    
example of tax  credit for seismic work, and  noted that the                                                                    
bill placed  a time limit of  120 days for the  Tax Division                                                                    
to respond and issue a certificate for the company.                                                                             
Senator Giessel continued discussing the bill summary:                                                                          
     Transition   to   carry-forward   loss   system   while                                                                    
     protecting SB 21 tax                                                                                                       
          •   Repeals   the   net  operating   loss   credit                                                                    
          statewide. On the North Slope,  shifts to a system                                                                    
          of carrying  forward lease expenditures  unable to                                                                    
          be deducted in the current  year as a mechanism to                                                                    
          recover costs,  and provides non-cash  support for                                                                    
          new developments through  an uplift. (Sections 10,                                                                    
          21, 23, 25, 29)                                                                                                       
          • Protects  the tax structure in  place, including                                                                    
          a flexible floor for new  oil and small producers,                                                                    
          and  affirming   a  hard  floor   against  losses.                                                                    
          (Sections 10, 23)                                                                                                     
          • Reduces  the interest  rate on  delinquent taxes                                                                    
          and  extends   the  time  during   which  interest                                                                    
          accrues. (Section 1)                                                                                                  
Senator Giessel  relayed that consultants had  been emphatic                                                                    
about the loss carry-forward.  She emphasized that all other                                                                    
jurisdictions  around the  world  allowed  companies to  get                                                                    
back  their losses.  She discussed  uplift, which  supported                                                                    
new  developments. She  detailed that  DOR had  communicated                                                                    
that it  was difficult to  have a  separate oil and  gas tax                                                                    
interest rate  on delinquent taxes.  The bill would  set the                                                                    
interest   rate   for   delinquent  taxes   at   3   percent                                                                    
(compounding  quarterly), with  no time  limit for  accruing                                                                    
interest.  The language  was put  into the  area of  tax law                                                                    
that was  for all  other delinquent  taxes. She  thought the                                                                    
key elements  of the  bill addressed  the three  issues that                                                                    
the Senate had focused on.                                                                                                      
9:49:38 AM                                                                                                                    
Senator  Giessel reiterated  that the  bill opened  the door                                                                    
for various uses  of the tax credits in order  to reduce the                                                                    
backlog, which  occurred at no  cost to the GF.  She thought                                                                    
the  biggest piece  of  the work  protected  the state  from                                                                    
future  cash  calls  by  repealing   the  cash  credit  fund                                                                    
entirely.  The NOLs  moved  from a  credit  to a  deduction,                                                                    
which put an  expiration date on the  state's cash exposure.                                                                    
She emphasized that both consultants  utilized by the Senate                                                                    
had recommended  the change;  and had  suggested that  to do                                                                    
otherwise   would  put   Alaska   at  the   bottom  of   the                                                                    
competitiveness ladder.                                                                                                         
Senator   Giessel   continued,   stating   that   the   bill                                                                    
incorporated  a non-cash  uplift for  operating losses  that                                                                    
were  carried  forward.  She   thought  the  provision  gave                                                                    
respect to the time-value of  money, and pointed out that it                                                                    
was only  for new  companies. The  bill allowed  for natural                                                                    
expiration  in 5  years  for the  refinery  and gas  storage                                                                    
credits,  which would  be made  only  by appropriation.  She                                                                    
emphasized that  the changes in  the SCS were  profound, and                                                                    
that  industry  would be  impacted.  She  believed that  the                                                                    
legislature  had  heard  from   the  industry,  and  it  had                                                                    
recognized the cash risk that the state was in.                                                                                 
Senator Giessel addressed the third  issue of concern to the                                                                    
Senate, and thought that a  complete re-write of the state's                                                                    
tax policy  would require significantly more  time than what                                                                    
was  available  in  the  current  legislative  session.  She                                                                    
recalled that in the past,  when the legislature had written                                                                    
tax  policy, the  administration had  come forward  with its                                                                    
own consultant; and the  legislature had robust, experienced                                                                    
consultants  rather than  just the  two that  were presently                                                                    
retained. She  stated that policies  in SB 21  were retained                                                                    
in the SCS with minor changes; such as hardening the floor.                                                                     
Senator  Giessel stated  that  the consensus  in the  Senate                                                                    
stood on  four pillars of tax  policy: the tax must  be fair                                                                    
to  Alaskans and  to business,  the tax  must encourage  new                                                                    
production, the  tax must be  balanced, and the tax  must be                                                                    
durable  for  the  long-term.  She   thought  the  bill  was                                                                    
balanced in  protecting the  state while  allowing companies                                                                    
to carry forward their losses.                                                                                                  
9:53:15 AM                                                                                                                    
Senator Giessel asserted that the  bill was neutral, in that                                                                    
it levelled  the playing ground  for all the  companies. She                                                                    
thought the bill  was a way to end cashable  credits, with a                                                                    
clear  policy  rather  than vetoes.  She  relayed  that  the                                                                    
Senate had  been very  concerned that  the policies  were in                                                                    
the best  interested of  Alaska's families,  businesses, and                                                                    
Senator Giessel relayed an anecdotal  story about an elderly                                                                    
woman  concerned about  a proposed  income tax.  She thought                                                                    
rewriting  tax  policy  in  the last  days  of  an  extended                                                                    
session was  not appropriate, and  informed that  the Senate                                                                    
had focused only on the  cashable credits. She asserted that                                                                    
if the  administration had moved  the goalpost, and  was now                                                                    
asking for a complete tax  policy rewrite and an increase in                                                                    
taxes,  she  thought  it would  require  significantly  more                                                                    
Co-Chair  MacKinnon  referred  to her  earlier  question  to                                                                    
Representative  Tarr  relating  to paying  of  cashable  tax                                                                    
credit   liability.  She   thought   the  Senate   Resources                                                                    
Committee version of the bill  proposed to start paying down                                                                    
the liability.                                                                                                                  
Senator Giessel  answered in the affirmative.  She explained                                                                    
that the bill began the  process of reducing the outstanding                                                                    
cashable credit  liability by  allowing companies  to either                                                                    
use the  credits on assessed  tax liability or (in  the case                                                                    
Middle  Earth) to  allow for  deduction of  outstanding cash                                                                    
credits from corporate income tax.                                                                                              
Co-Chair  MacKinnon  discussed  NOLs  and  shared  that  the                                                                    
consultant  hired  by  the   Legislative  Budget  and  Audit                                                                    
committee had  suggested that around the  world, 100 percent                                                                    
of loss  carry-forwards were allowable in  keeping the state                                                                    
competitive  in  the global  market.  She  thought the  bill                                                                    
coming from the  other body had a condition  of seven years,                                                                    
and a ten  percent reduction; she believed it was  in aid of                                                                    
encouraging  earlier production.  She asked  Senator Giessel                                                                    
to address carry-forward losses.                                                                                                
Senator  Giessel  recalled  slides shown  by  Mr.  Ruggiero,                                                                    
which had  addressed lost NOLs,  and had emphasized  that it                                                                    
was  critical that  100 percent  of the  loss carry-forwards                                                                    
should  be recoverable  by  companies.  He had  demonstrated                                                                    
multiple ways  that the value  was lost, and the  Senate had                                                                    
taken  the advice  and incorporated  it into  the bill.  She                                                                    
stated that 100  percent of the losses  would be recoverable                                                                    
in the bill version she was presenting.                                                                                         
9:58:01 AM                                                                                                                    
Senator Micciche  did not know that  all Alaskans understood                                                                    
how  federal tax  code worked.  He discussed  a hypothetical                                                                    
situation under which he started  a business (with expenses)                                                                    
and  federal  tax  code  allowed  for  carrying  the  losses                                                                    
forward.  He emphasized  that loss  carry-forwards were  not                                                                    
Senator  Giessel concurred,  and thought  that the  practice                                                                    
merely sounded  unusual because it  had not been done  in SB
21, and the  state had been offering cash for  the NOLs. She                                                                    
stated that  the consultant  had been clear  in that  he did                                                                    
not know  of any other  jurisdiction in the world  that gave                                                                    
cash for the credits.                                                                                                           
Senator  Micciche clarified  that the  NOLs being  discussed                                                                    
were for  the smaller producers,  but were also part  of the                                                                    
large taxpayers.  Mr. Ruggiero had discussed  the importance                                                                    
of  the  losses  being  100  percent  used  and  useful.  He                                                                    
emphasized that  carry-forward losses were commonly  used in                                                                    
a net tax system.                                                                                                               
Co-Chair  MacKinnon  asked if  SB  21  had created  cashable                                                                    
Senator Giessel  believed that  cashable credits  were first                                                                    
established  in  Alaska's  Clear  and  Equitable  Share  Act                                                                    
(ACES). She  recounted that  SB 21 had  begun to  reduce the                                                                    
credits, but  left some in  place; while HB 247  had removed                                                                    
the majority of the credits  for Cook Inlet. The removal had                                                                    
not  been fully  implemented,  and the  proposed bill  would                                                                    
complete the process.                                                                                                           
10:01:17 AM                                                                                                                   
AT EASE                                                                                                                         
10:05:56 AM                                                                                                                   
Senator von  Imhof thanked Senator  Giessel for her  work on                                                                    
the bill. She  thought the bill accomplished  a balance. She                                                                    
appreciated a  summary of the  work done by the  task force.                                                                    
She agreed that  it was important to find a  way to pay down                                                                    
the  tax credit  liability over  time, and  she thought  the                                                                    
bill  would   accomplish  the  goal  in   a  thoughtful  and                                                                    
systematic  manner.  She  thought  the  bill  protected  and                                                                    
promoted oil production on the  North Slope. She agreed with                                                                    
the Senator's  comment that  addressed changing  the overall                                                                    
tax structure.                                                                                                                  
Senator von  Imhof referred to Mr.  Ruggiero's comment about                                                                    
the complexity  of the oil and  gas tax system, and  that it                                                                    
was  worth examining.  She  thought the  topic  was worth  a                                                                    
discussion in a larger context. She  was happy to be part of                                                                    
the legislation, and  thought it addressed the  issue of tax                                                                    
Senator Giessel pointed out that  the Legislative Budget and                                                                    
Audit Committee  was in  the process  of offering  a request                                                                    
for  proposal for  legislative consultants  on the  topic of                                                                    
oil and  gas taxes. She  clarified that the  legislature was                                                                    
preparing to address the entire  oil and gas tax system, but                                                                    
was not prepared at present.                                                                                                    
Senator  Giessel  pointed out  that  the  previous year  the                                                                    
legislature  had  requested  a  report  from  DOR  on  which                                                                    
credits were  being paid  off under HB  247 (copy  on file).                                                                    
She  informed  that  the  report   had  been  delivered  the                                                                    
previous day. She drew members  attention to the report, and                                                                    
noted that  it would  specify which  payments had  been made                                                                    
under the AS 463.55.028 Tax Credit Fund the previous year.                                                                      
Co-Chair MacKinnon asked if Senator  Giessel could provide a                                                                    
copy of the report.                                                                                                             
Co-Chair MacKinnon  thanked Senator Giessel  for introducing                                                                    
the SCS.                                                                                                                        
Co-Chair MacKinnon  thanked the  House and  Senate Resources                                                                    
Committees  for their  perspective on  addressing challenges                                                                    
and looking at cashable  credits. She asked Senator Micciche                                                                    
to speak to a timeline of different taxes.                                                                                      
10:09:56 AM                                                                                                                   
Senator Micciche  spoke to  the frequency  of change  in tax                                                                    
policy as  the legislature  and the administration  tried to                                                                    
pursue  various  goals.  He   recalled  that  in  2006,  the                                                                    
Petroleum  Production  Tax  (PPT)  had a  $25  million  per-                                                                    
company  cap. In  2007, ACES  created the  Tax Credit  Fund,                                                                    
which  had the  same goal  as  the Cook  Inlet Recovery  Act                                                                    
passed in  2010; and  was to  entice smaller  companies into                                                                    
the marketplace.  He was not  sure of the degree  of success                                                                    
of  the act.  He stated  that all  the credits  were heavily                                                                    
supported by both  sides of the aisle. He  recalled that the                                                                    
previous year HB 247 had  limited credits to $70 million per                                                                    
company, and  there was  a discount  for early  payment that                                                                    
dropped the liability somewhat.                                                                                                 
Senator  Micciche  thought  that as  the  legislature  moved                                                                    
forward in  tax policy,  it was  important to  consider that                                                                    
some  efforts had  unintended consequences.  He thought  the                                                                    
state had  learned a  lesson and was  trying to  correct the                                                                    
10:12:09 AM                                                                                                                   
The meeting was adjourned at 10:12 a.m.                                                                                         

Document Name Date/Time Subjects
HB 111 DOR Annual Report Requirement for Tax Credit Certificates.pdf SFIN 4/26/2017 9:00:00 AM
HB 111