Legislature(2007 - 2008)SENATE FINANCE 532
11/13/2007 02:00 PM Senate FINANCE
| Audio | Topic |
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| Start | |
| HB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB2001 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
November 13, 2007
2:22 p.m.
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 2:22:09 PM.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Gary Stevens; Senator Johnny Ellis; Representative
Eric Crawford; Steve Porter, Legislative Consultant,
Legislative Budget and Audit Committee, Legislative Affairs
Agency
PRESENT VIA TELECONFERENCE
Barry Pulliam, Senior Economist, EconOne, Research,
Contractor, Legislative Budget and Audit Committee
SUMMARY
CSHB 2001(FIN) am
An Act relating to the production tax on oil and
gas and to conservation surcharges on oil;
providing a limit on the amount of tax that may be
levied on the production of certain gas that is
produced outside of the Cook Inlet sedimentary
basin; relating to the sharing between agencies of
certain information relating to the production tax
and to oil and gas or gas only leases; expanding
the period in which the Department of Revenue may
assess the amount of oil and gas production tax
and conservation surcharges; prohibiting a
producer or explorer from receiving tax credits if
certain judgments are not satisfied and requiring,
as a condition of receiving the tax credits, the
deposit of the amount of certain unpaid judgments
and certain interest on those judgments in the
court during an appeal and relating to that
interest; relating to state oil and gas audit
masters; making conforming amendments; and
providing for an effective date.
CSHB 2001 (FIN) am was HEARD & HELD in Committee
for further consideration.
CSHB 2001(FIN) am
An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; providing a
limit on the amount of tax that may be levied on the
production of certain gas that is produced outside of
the Cook Inlet sedimentary basin; relating to the
sharing between agencies of certain information
relating to the production tax and to oil and gas or
gas only leases; expanding the period in which the
Department of Revenue may assess the amount of oil and
gas production tax and conservation surcharges;
prohibiting a producer or explorer from receiving tax
credits if certain judgments are not satisfied and
requiring, as a condition of receiving the tax credits,
the deposit of the amount of certain unpaid judgments
and certain interest on those judgments in the court
during an appeal and relating to that interest;
relating to state oil and gas audit masters; making
conforming amendments; and providing for an effective
date.
Co-Chair Stedman commented on the Legislative Finance
charts presented on November 12. He thought that too much
reliance on one model provides an opportunity for potential
error, which is why he asked Legislative Finance to create
its own model. He said he intends to keep Legislative
Finance involved in the process.
Co-Chair Stedman noted that EconOne's analysis is the main
piece of information the legislature uses to make
decisions.
2:27:54 PM
BARRY PULLIAM, SENIOR ECONOMIST, ECONONE, RESEARCH,
CONTRACTOR, LEGISLATIVE BUDGET AND AUDIT COMMITTEE,
testified via teleconference on EconOne's plan.
STEVE PORTER, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, LEGISLATIVE AFFAIRS AGENCY, was present to
answer questions.
2:28:47 PM
Mr. Pulliam began with "Tax Rates vs. Net Taxable Value
Under Alternative Tax plans" (copy on file.) He compared
all versions of the tax plans before the Committee. He
explained that the far left column was Net Taxable Value
listed in ten dollar increments between $20 and $200. That
is the net value after transportation costs and operating
and capital costs are subtracted. The columns to the right
show, for each of the different proposals, the tax rate
applied. All of the proposals apply taxes to the net
taxable value, including PPT that is in place now, the
Governor's proposal - SB 2001, the Senate Judiciary CS, the
Senate Finance CS, and the House Bill. The chart depicts
the tax rates that would apply at different taxable values
inclusive of progressivity.
Mr. Pulliam used an example from the PPT column: at $20, the
rate is 22.5 percent and stays at that rate until the net
taxable value is at $40. The cap of 47.5 percent happens at
$140 net taxable value. He gave examples under various
plans. He noted that the Senate Judiciary numbers are the
same as the House Bill and have a steeper progressivity.
Mr. Pulliam explained the tax rates under the Senate Finance
CS. He pointed out the numbers under the Net Trigger and
Per-Dollar Rate.
2:34:38 PM
Mr. Pulliam turned to the second slide to explain the
crossover rates. The Senate Finance overall rate would
cross the SB 2001 rate at about $37 of taxable value. That
would be equivalent to $64 West Coast ANS price. The Senate
Finance CS would cross the House Bill at a taxable value of
about $43 or $71 West Coast ANS price.
Mr. Pulliam explained that the House Bill and the Senate
Judiciary CS would both cap out at 50 percent, however, the
Senate Finance CS would continue to move up beyond 50
percent. Overall, the progressivity is higher on the Senate
Finance proposal, which has a lower base tax than the other
proposals. At higher prices, more tax would be collected,
but at lower prices, less would be collected.
2:37:26 PM
Mr. Pulliam explained the slide "Estimated Average Effective
Tax Rate on Gross Taxable Value at Various West Coast ANS
Price Levels". This slide differs from the November 12
version in that the Senate Finance CS was added.
2:38:06 PM
Mr. Pulliam turned to the slide entitled "Estimated Total
Government Share at Various West Coast ANS Price Levels".
Again, the Senate Finance CS has been added.
2:38:20 PM
Mr. Pulliam discussed the "Estimated Marginal Government
Share at Various West Coast ANS Price Levels" slide. He
reviewed the idea that the marginal government share would
cap out at a little over 85 percent for all plans. The
Senate Finance CS would have a marginal rate a little lower
than the House Bill or the Senate CS at the point at which
it caps. Instead of the cap feature, the rate of increase
is slowed down.
2:40:06 PM
Mr. Pulliam highlighted the final slide, "Estimated Average
Effective Tax Rate, Government Shares and Revenue Impacts at
Various West Coast ANS Price Levels". He reported that he
has added the 2007 state forecast to this chart. That
number is roughly $62 in real terms. Consistent with other
charts, the Senate Finance CS was added. At $80 and above,
the Senate Finance CS shows revenues that are higher than
the other proposals. At lower prices, it shows revenues
that are considerably less than other proposals. At the
state forecast prices, the proposals are closer together.
2:43:52 PM
Mr. Pulliam also brought up price expectations reflective of
the current NYMEX futures market. Pricing on NYMEX
currently is showing forward pricing of about $80/barrel.
He projected the prices over the next five years. Revenue
generation for the Senate Finance CS would be about $100
million over the House Bill and $600 million over SB 2001.
He emphasized that the break point should be taken into
consideration.
Co-Chair Stedman requested clarification of the last point.
2:47:33 PM
Mr. Pulliam explained that if you look forward to 1 year out
of 5 at $80/barrel and 4 years out of 5 at $40/barrel, the
numbers would suggest that the Senate Finance CS would
generate the same overall revenues as SB 2001 over a 5-year
period. That is the result of bigger differences at higher
prices.
2:49:20 PM
In response to a question from Senator Huggins, Mr. Pulliam
explained that when looking at prices over the next five
years, the average price level on NYMEX is about $80 per
barrel. That in 2008 real numbers is about $75 per barrel.
He explained how that would fit into the charts. Senator
Huggins thought that the Senate Finance version's
progressivity would generate more money than the other
versions. Mr. Pulliam agreed. He added that it would be
about $100 million higher per year than the House Bill.
2:51:11 PM
Senator Thomas expressed concern about PPT and PPT-expected
being based on costs. He inquired if progressivity is the
only thing that ensures making more money.
Mr. Pulliam replied that progressivity is certainly a key
piece of it. The price itself is also a big piece. If
prices are lower, then rates will be lower and the state
will collect less. The variables include costs. He opined
that there was little one could do as far as setting rates
to get back to where the PPT expected line is.
2:54:40 PM
Senator Thomas asked what the costs entailed. Mr. Pulliam
responded that the charts assume costs that are going to be
at $60 per barrel; $27 per barrel total transportation and
production costs. They will rise by $1.50 per barrel for
every $20 increase in cost above that point and fall by that
same amount for every $20 decrease.
2:55:21 PM
Co-Chair Hoffman referred to a previous comment by Mr.
Pulliam and noted at $40 per barrel Alaska would be
bringing in only $230 million and experiencing a financial
crisis. He said that at $100 per barrel, the state would
get an additional $400 million. He suggested that the
state needs to protect itself at the lower end. He thought
the better option would be to take the Senate proposal,
which contains more assurances of being able to continue to
provide expected state services. He recalled testimony by
Dr. Pedro Van Meurs regarding government take. At $40 per
barrel, expected revenue would not address the financial
disaster the state would be facing.
2:59:36 PM
Senator Elton said he was drawn to the state forecast
column on the chart and how NYMEX fits into the picture.
He questioned the assumption that Alaskan production costs
might rise higher than production costs around the world.
Mr. Pulliam explained the NYMEX numbers are suggesting a
price level a little above the state's forecast, but a
little below the $80 level.
3:02:16 PM
Co-Chair Stedman asked for clarification of the 1:5
relationship of $40 per barrel vs. $80 per barrel. He
asked for comments on various scenarios.
Mr. Pulliam explained he was trying to look at what a break
even point would be. He questioned if the rate should be at
22 or 25 percent and at what point it should start to
increase. He examined whether the two different types of
tax systems would produce similar revenues if a 1:4
relationship was assumed. Two years of high price for every
one year of low price would ultimately bring in more revenue
for the system with the steeper progressivity.
Co-Chair Stedman acknowledged that Senator Stevens, Senator
Ellis, and Representative Crawford were present.
3:04:39 PM
Senator Huggins brought up the issue of OPEC's ability to
influence the price of oil. He pointed out that their
ability to moderate prices around the world is limited;
however, OPEC could drive price up by reducing production.
Mr. Pulliam commented that there is some capacity within
OPEC to increase production. Turmoil in the Middle East is
limiting. Calm in the region would probably result in
increased production. High prices tend to influence an
increase in production.
3:07:49 PM
Senator Huggins questioned what revenues would look like at
$40 per barrel.
Mr. Pulliam responded that if oil prices fell to the $40
range, though he didn't see it as a likely scenario, it
would put prices for gasoline at $1 to $1.50 a gallon.
Current station prices haven't caught up to current barrel
prices of $90 to $95.
3:09:37 PM
Senator Elton stated that he feels the state is pretty
protected for now. He questioned if the Senate Finance CS
makes the tax retroactive to July 1, and recent prices of
oil have been high, how many months the state would be
protected from low barrel prices. Mr. Pulliam restated the
question. Senator Elton thought there would be protection
in place with the retroactivity piece and high
progressivity. Mr. Pulliam agreed and expected that for
that half year, additional state revenue would be in the
$250 million to $300 million range.
3:12:34 PM
Senator Elton asked what the expected income would be
without the additional monies. Mr. Pulliam said it would be
in addition to the revenue from the new tax that started in
January, as opposed to July. Senator Elton asked if the
$250 to $300 million was the amount above what would be
generated in the House Bill. Mr. Pulliam said that was
correct.
Co-Chair Stedman asked how the same scenario would look
under PPT. Mr. Pulliam replied that his answer would be
the same because PPT would be in place from January to July.
3:13:59 PM
Senator Thomas questioned, under PPT and PPT Expected, the
factoring in of $2 for every $20 over the $60 amount. Mr.
Pulliam clarified that for every $20 increase it is about
$1.50 per barrel increase in costs. That is factored into
all scenarios except for PPT Expected.
Senator Thomas pointed out that the tax rate lines on the
charts differ greatly from the dollar figure on the PPT
Expected. Mr. Pulliam agreed that the costs do not change
with price under PPT Expected.
3:15:17 PM
Senator Thomas compared the differences at 22.5 percent
compared to 25 percent. Mr. Pulliam pointed out that it
comes down to risk preferences. Tolerance for risk will
affect those choices. Having higher taxes on the higher
end, and lower taxes on the lower end, shares more of the
risk. If the state has the ability to bank the reward at
higher prices, it can insulate itself against lower prices.
3:19:30 PM
Mr. Pulliam commented on the House Bill. Operating costs
would be level with 2006 costs for Prudhoe Bay and Kuparuk.
Those operating costs would be allowed to inflate 3 percent
per year. This is not per barrel cost, but overall cost
level. He questioned if that was the right thing to do. He
thought that the net system was the correct choice. To deem
costs potentially introduces an artificial element that
could hurt the state. During 2006 a lot of changes occurred
on the North Slope and world wide.
Mr. Pulliam related that a second concern is that Prudhoe
has the potential for additional production in heavy oil.
Costs are higher for heavy oil. Deeming costs may not
accommodate the kind of development for those fields. It
would be better to get the numbers right through the audit
process.
3:26:21 PM
Mr. Pulliam brought up the Trans-Alaska Pipeline System
(TAPS) issue - whether the tax rate was appropriate. The
House Bill contains a provision for a "just and reasonable
rate" where the state determines a reasonable cost for
operating the TAPS system. That provision is worth
considering for all scenarios. He discussed FERC's
regulations and position. He related that the department
has predicted the impact of a just and reasonable rate to be
$50 million per year over 7 years.
Mr. Pulliam explained that the just and reasonable rate
provision was not included in the charts.
3:31:04 PM
Senator Elton reviewed concerns expressed by Mr. Pulliam.
He asked if Mr. Pulliam's concerns would be mitigated by a
three-year sunset, which would allow auditors to review OPEX
costs for legacy fields. Mr. Pulliam responded that his
concerns would be mitigated if there were a sunset because
it would be stronger than a review. He emphasized that the
Prudhoe Bay and Kuparak fields need to be done correctly and
quickly.
AT EASE: 3:33:26 PM
RECONVENE: 3:34:20 PM
CS HB 2001 (FIN) am was HELD in Committee for further
consideration.
ADJOURNMENT
There being no further business before the committee, the
Senate Finance Committee meeting was adjourned at 3:57 PM.
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