Legislature(2015 - 2016)ANCH LIO AUDITORIUM
07/13/2016 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB5005 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB5005 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
FIFTH SPECIAL SESSION
July 13, 2016
1:35 p.m.
1:35:22 PM
[NOTE: Meeting was held in Anchorage, Alaska at the
Legislative Information Office]
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 1:35 p.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Ken Alper, Director, Tax Division, Department of Revenue;
Jenny Rogers, Audit Master, Tax Division, Department of
Revenue;
PRESENT VIA TELECONFERENCE
Senator Click Bishop; Senator Peter Micciche, Vice-Chair;
Randall Hoffbeck, Commissioner, Department of Revenue.
SUMMARY
SB5005 TAX;CREDITS;PMTS;INTEREST;LEASE;O & G
1:36:06 PM
SENATE BILL NO. 5005
"An Act relating to the oil and gas production tax,
tax payments, and credits; relating to oil and gas
lease expenditures and production tax credits for
municipal entities; relating to the interest
applicable to delinquent tax; and providing for an
effective date."
Co-Chair MacKinnon welcomed the presenters.
1:37:13 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
introduced Jenny Rodgers, the Audit Master. She has been
with the division for 28 years. She was a part of the
production tax group.
JENNY ROGERS, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE, introduced herself.
Mr. Alper introduced the PowerPoint presentation: "Oil and
Gas Tax Credit Reform SB 5005." He began with slide 3:
"Purpose of the Bill":
SB5005 is a smaller, more targeted credit reform and
minimum tax package than HB247
· Addresses "North Slope NOL" issue
· Re-introduces several smaller parts of HB247 that
did not pass
· Increases the minimum tax at certain prices
· Technical fixes to HB247 sections that may have
implementation issues
Mr. Alper indicated that the current tax bill addressed the
North Slope net operating losses (NOLs). He informed the
committee that the bill was a smaller and more cognitive
tax reform and minimum tax package. It was a far simpler
bill than what was passed through the legislature in the
previous session. It did a few things including addressing
the North Slope net operating issue. It brought up some of
the smaller parts of HB 247 [Legislation passed in June,
2016 - Short Title: Tax; Credits; Interest; Refunds; Oil
and Gas].
Senator Dunleavy asked if the bill went beyond tax credits
into tax policy.
Mr. Alper responded in the affirmative. He explained that
there were issues in the bill that affected the minimum tax
and how it was calculated.
Senator Dunleavy asked if the bill addressed SB 21
[Legislation passed in 2013 - Short Title: Oil and Gas
Production Tax] beyond tax credits.
Mr. Alper responded that the bill addressed the tax system.
The administration had stayed away from the core provisions
of SB 21 including the tax rate, the per-barrel credit,
etc. He furthered that by adjusting the minimum tax, a
portion of statute that had been around since the Petroleum
Production Tax (PPT) regime came into being, it addressed
some of the residual older oil and gas tax laws rather than
the parts placed into SB 21. He reaffirmed that the
legislation was beyond the world of credits.
Co-Chair MacKinnon asked if there was a reason why the
administration introduced several of the smaller measures
that had already been denied.
Mr. Alper responded that the governor thought it was
important to revisit the issues. He expounded that they fit
into the rest of the reform package. He commented that
sometimes the third time was a charm.
Co-Chair MacKinnon responded that the committee would see.
Mr. Alper continued that the bill addressed the minimum tax
(the so called "floor") and how it was calculated. There
were also a couple of technical fixes that if another bill
was going to move, they would address. Otherwise, the
department would address the issues through the regulation
process. He moved to slide 4: "History of Oil and Gas
Production Tax Credits":
Update: FY 2007 thru '16, $8.0 Billion in Credits
North Slope
· $4.4 billion credits against tax liability
· Major producers; mostly 20% capital credit in
ACES and per-taxable-barrel credit in SB21
· $2.3 billion refunded credits
· New producers and explorers developing new fields
· Non-North Slope (Cook Inlet & Middle Earth)
· $0.1 billion credits against tax liability
· Another $500 to $800 million Cook Inlet tax
reductions (through 2013) due to the tax cap
still tied to ELF
· $1.2 billion refunded credits (most since 2013)
He explained that in the previous year the governor limited
the credits to $500 million. Although the books were not
100 percent closed, he anticipated the number would be
similar, about $498 [million]. He relayed that if a person
were to add the FY 16 number of $498 million to the prior
history, about $8.0 billion had been put into tax credits
in the so-called tax credit era going back 10 years. He
detailed that of the $8.0 billion in tax credits $4.4
billion went to credits against tax liability on the North
Slope. The majority of credits were used by the major
producers. He reported $2.3 billion going towards refunded
credits to new producers, explorers, and developers on the
North Slope. He relayed that of the $500 million spent in
the prior year a little over $200 million was invested in
the North Slope and less than $300 million was invested
outside of the North Slope.
1:42:22 PM
Co-Chair MacKinnon had several questions. She mentioned
that from FY 16 to FY 17 the state had issued $8 billion
worth of credits. She was aware that when the state issued
a credit it did not always receive revenue in the same time
period. Under the same time period how much revenue came
from production in the oil and gas industry.
Mr. Alper mentioned he had documented the information Co-
Chair MacKinnon was asking about. However, he did not have
it with him. He noted that the number was roughly $60
billion in overall oil and gas revenues comprised of
royalties, production taxes, and corporate income taxes. He
thought the number was about $62 billion, the bulk of which
came from the legacy fields like Prudhoe Bay.
Co-Chair MacKinnon had asked Mr. Alper to bring the
information with him. She mentioned the importance of being
able to convey to the general public not only what the
state was paying out but also what the state was receiving
from the industry, an amount large in magnitude. She
referred back to slide 3. Director Alper had indicated that
if the administration was not able to accomplish some of
the policies proposed in SB 5005 then it would move to the
regulatory process to begin implementation of those things.
She asked him to point out where the administration would
make regulatory changes should the legislature deny a
change in state statute.
Mr. Alper responded affirmatively and assured Co-Chair
MacKinnon it was none of the larger pieces. He clarified
that he was talking about technical language relating to
the piece that dealt with the pro-rationing of a utility
that owned its own gas field and how its costs might get
apportioned. There was a technical issue with how the final
language was written that the department was hoping to
clean up. The administration believed it could be resolved
through the regulatory process without doing anyone any
harm. He assured the committee large changes to the tax law
would not be made without going through the legislature.
1:44:58 PM
Co-Chair MacKinnon thought it depended on perspective. She
suggested that if an entity's tax credits were not coming
in, the entity might think it was more important than if it
was receiving tax credits based on regulations. She
requested that Mr. Alper point out items that the division
could change through regulation if the legislation did not
move forward.
Mr. Alper was happy to point out the two places the public
could expect to see changes.
Senator Dunleavy asked Mr. Alper to explain why the
governor was introducing a new bill. He asked him to
clarify the purpose of changing the tax credits. He
wondered if was to generate new revenue or something else.
He wondered if the goal was generating more revenue or
spending less. He asked him to highlight the goals.
Mr. Alper responded that it was important to view the bill
in the context of the rest of the package. The governor
introduced the passage of bills for regular session and had
been trying to move the administration's comprehensive
fiscal package, the New Sustainable Alaska Plan. It was the
governor's goal to pass the overall package. The current
bill before the committee was only one component of the
whole. Regarding oil and gas there was a broader goal to
pass a series of bills that would place Alaska on a
sustainable footing given the state's constrained fiscal
circumstances. In looking at the specifics of the bill, the
fiscal note reflected a savings to the state of about $100
million to $150 million per year and would raise a little
bit of money in some years through the minimum tax changes.
For the most part, it was a savings to the state which
would help in reducing the state's deficit.
1:47:32 PM
Senator Dunleavy, as an educator, had seen certain benefits
for schools when oil had taken off in the 80s. He wondered
how the bill would ensure ongoing oil exploration,
development, and production to keep oil in the pipeline. He
mentioned that there were two camps; pro-oil and pro-other.
However, he believed everyone was pro-Alaska. He wanted to
make sure that whatever policy was put in place by the
legislature helped Alaska in the short, mid, and long-term.
He wondered how the approach would ensure investment.
Mr. Alper could not ensure anything. As a state government,
the executive in the legislative branch could not ensure,
guarantee, or force private companies to act. The
government could encourage and incentivize. Things such as
resources and the price of oil (currently very low) would
influence investment. He concluded it was reasonable to say
that there might be fewer investors in the short-term
because of oil prices. He added that the state's taxes and
tax credits were considerations but were not the only
consideration. The bill reduced the state's participation
in and incentives for new players which could result in
fewer investors. However, tax credits were only one
consideration. The overarching question was could the state
afford the level of support it was currently providing.
Senator Dunleavy asked about the administration's response
to a negative effect on the oil industry with the
legislation.
Mr. Alper was sure the administration would be engaging
with the oil industry. He acknowledged that the oil
industry was the state's "bread and butter." The
administration would be looking to maximize the state's
position to develop its resources for the maximum benefit
of the people of Alaska and to make sure the maximum were
developed. He suggested that if the state moved too far in
one direction there would be a movement to bring it back.
He stated that it was an inherently dynamic process as seen
from year-to-year.
1:50:52 PM
Co-Chair Kelly thought it was important to describe the
approach the legislature was taking versus the approach
some members around the table would take regarding oil
revenue. He relayed that the legislature was looking at
revenue stream. He believed the administration was looking
at an expense stream. He mentioned that Mr. Alper's opening
comments had to do with the amount of revenue the state had
received. The state spent $8 billion on tax credits which
resulted in $61 billion in revenue. Most people would say
that that was a pretty good deal. The legislature realized
that the tax regime in 2009, 2010 and 2011 was going in the
wrong direction. The state was attempting to extract as
much revenue as possible from oil companies, but the
legislature realized that it was discouraging production
and exploration. Therefore, the state adopted SB 21 with
the approval of the people of Alaska. He pointed out that
the sometimes more investment was needed to achieve
additional revenue. He reiterated his question about what
the bill did to increase production. He wondered if the
legislation would increase production, leave production the
same, or decrease production. He supposed the legislation
would decrease production. The state might extract a little
more money, but would ultimately tilt the production curve
downward again. He wanted to see a tax or credit regime
from the governor that increased production or, if changes
had to be made, at least kept it from declining. The state
should be in the business of getting more oil through the
line resulting in more money for the state.
Mr. Alper could not argue that the legislation would
increase production. The bill reduced incentives for the
oil industry and, there was nothing inherently in it that
would make producers want to do more. He wondered how much
less production the state would see and whether the cost
benefit analysis would show the state giving up more than
what it was gaining. The credits were put into place to
invest in Alaska's future during a time when the state
understood it had a large amount of money coming in from
the industry. The state wanted to reinvest some of its
surplus revenue in future production. At the time, the
state was receiving $3 billion to $6 billion just from
production tax and putting about $300 million back into tax
credits, which made intuitive sense and was a rational
behavior towards the future. With the drop in the price of
oil, the state's revenue shrunk to a level of less than $1
billion. Currently, it appeared that oil prices would not
be returning to previous levels anytime soon. He wondered
if the state could afford the same level of investment in
the industry at a time when there was no longer a
reinvestment of surplus profits. He suggested there was an
entire diversion of the bulk of Alaska's revenue. The
paradigm had shifted to the point that Alaska needed to
look more aggressively at ramping back its support of the
industry based on fiscal reality. He argued that Alaska
could not afford the level of participation it had
previously.
1:56:18 PM
Co-Chair MacKinnon asked if the committee would be seeing
some statistical analysis on where the administration's
proposal set Alaska's tax regime in comparison to other
sovereigns around the world and in comparison to other US
states. She recalled a previous conversation about the past
oil regime. Some felt Alaska's government take was
excessive overall. The state tried to balance its tax
regime nationally between Texas, North Dakota, Wyoming, and
other sovereigns that had production. Alaska was not
looking so much at the goal of what it took to pay for
state government. Alaska was looking at how to compete with
other state structures. Alaska then went to a broader
perspective looking at how Alaska compared to other
nations. There was a debate about who Alaska should compare
itself to. She restated her question. She asked if the
committee would see statistical analysis on the
administration's proposal during the special session.
Mr. Alper responded that the Department of Revenue (DOR)
did not currently have outside analysis on contract to
provide such work. If the conversation continued into the
next regular session the administration would expect to
provide the information. The administration had been in
touch with the new consultant, Mr. Meyer, hired by the
Legislative Budget and Audit Committee. He was putting
together his modeling, presentation, and package. He
believed Mr. Meyer would be bringing the type of analysis
the legislature was looking for to the committee. He
mentioned that the current bill was not touching on the
core government take issues that were being discussed. The
comparable total government take percentage of different
price points was the significant analysis of SB 21. The
credits were not a part of the calculation or analysis for
SB 21. The change in the legislation before the committee
was a tax increase between prices of around $55 to $80 per
barrel. Taxes remained neutral above $80 per barrel. He did
not believe there would be significant movement than what
was brought before the legislature with SB 21.
1:59:11 PM
Co-Chair MacKinnon asked if Mr. Alper saw a difference
between tax credits and a net operating loss (NOL).
Mr. Alper was unclear about the senator's question.
Co-Chair MacKinnon relayed that in the previous special
session the legislature passed a billed that removed about
$400 million from available funds for the oil and gas
industry, more specifically in the Cook Inlet Region. The
gross value was touched and the floor was hardened a bit
with allowable deductions. She explained that NOL's were
similar to a federal income tax. She relayed an example. If
she submitted her federal income tax and had an expense
that qualified, it was a deduction rather than a credit.
Net operating losses were allowable expenses. She specified
that a tax credit was a tool used to incentivize. She
speculated if the committee was talking about how to
incentivize or not incentivize exploration in Alaska. She
also wondered if the committee was discussing a structural
change concerning allowable deductions. She was not sure
there was a difference between the two.
Mr. Alper replied that much of the language in the bill was
similar to what the House passed late in the regular
session. He explained that it prevented operating losses
from being carried forward, moved, and turned into credits
by the major producers. He understood that it was a large
and controversial step. Alaska had a large and broad fiscal
system related to oil and gas. Many of the comparable
countries had one tax with a fixed percentage. Norway had a
78 percent tax. Alaska had a property tax, a corporate
income tax, a royalty, and there was a federal income tax.
Alaska's royalty was strictly a gross tax, regressive at
low prices. The state had a corporate income tax in which
losses carried forward and were recaptured in a future year
receiving full value. Alaska's production tax was a hybrid;
it was not a pure income tax or a pure royalty or a
severance tax. Commissioner Hoffbeck had done a good job of
explaining that Alaska had a net profit tax at high prices.
As the prices decreased and a minimum tax kicked in it
became a gross tax. Once the break-even point was crossed
at about $45 per barrel it became a net profits tax again
in the negative. The producers received the full value of
their loss at the 35 percent rate. The administration
thought it was unbalanced. He reported that if the state
was at the gross at a relatively small tax, between $45 and
$80 per barrel, he questioned why the state should return
to a net below $45 per barrel. He suggested the more
appropriate approach would be that if a producer was losing
money only a small minimum tax would apply or no tax would
apply. However, a producer should not be allowed to go
negative carrying the losses forward, specifically for the
production tax. No one was questioning the ability to carry
forward loses within the corporate income tax structure.
Co-Chair MacKinnon asked Mr. Alper to remind her whether
the 35 percent NOL dropped to 25 percent at a particular
point.
Mr. Alper confirmed that it remained at 35 percent. The
bill that passed by the other body ramped it down towards
25 percent. It did not stay in the version passed by the
Senate Finance Committee.
Co-Chair MacKinnon was trying to recall the credits that
were supposed to sunset in 2017 but were extended under the
bill that was just passed.
Mr. Alper responded that for the North Slope specifically
there were no material changes to the credits. The capital
credit had been previously eliminated as part of SB 21. The
exploration credit was sunsetting and continued to sunset.
The operating loss credit of 35 percent remained. There was
a temporary bump to 45 percent for 2014 and 2015 that
ramped down. The Frontier Basin, with a large 80 percent
credit, was specifically extended to 2017. Ahtna, Inc.
addressed the committee with their concern about missing
their window because of a lost rig. That credit was
extended for a single year and was the only short extension
in HB 247.
2:04:25 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE (via
teleconference), wanted to explain that the net operating
loss credit came in two flavors. First, credits were used
by developers and explorers and, they were truly credits.
They were cash flow credits paid by the state. Secondly,
credits were used by the producers as deductions or write
offs against revenues. A net operating loss credit was a
credit in one circumstance and a deduction in another.
Co-Chair MacKinnon thanked the commissioner for the
clarification.
Mr. Alper indicated he was halfway through slide 4. He
reported there were very little credits against tax
liability outside of the North Slope because of the tax
caps, the very low maximum taxes in place going back to the
PPT bill from 2006. He relayed there was a robust amount of
refunded credits in the amount of $1.2 billion, primarily
in Cook Inlet and within the previous 3 or 4 years.
Mr. Alper turned to slide 5: "Work Done Since January":
· Spring 2016 Revenue Forecast includes large expected
operating losses from major producers, which would
offset minimum tax payments for several years
· Forecast also updates FY17 demand for refunded credits
to $775 million (includes $200 million that had been
vetoed from the FY16 budget, carried forward)
· HB247 passes after over 60 hearings with substantial
reforms in Cook Inlet credits and how North Slope
"Gross Value Reduction" is treated
· FY17 budget passes with $30 million GF funding for
credits via statutory formula, plus $430 million
from other funding sources in the HB247 fiscal note
· Governor Walker vetoes the additional $430 million,
leaving only the $30 million from the formula
Mr. Alper reported that the bill was introduced with a set
of expectations at the beginning of the last regular
session. Those expectations changed with the spring
forecast released in late March or early April [2016].
Suddenly, with the extended period of low oil prices, large
anticipated operating losses could be seen for the major
producers. It changed how the administration calculated
things. He furthered that because of the ability to use
operating loss credits carried forward against the minimum
tax it started seeing zero minimum taxes for production for
2,3, and 4 years into the future rather than receiving
roughly $150 million to $200 million the state had been
counting on as the minimum tax payment in a low price
environment. In a low price environment the department
still saw $775 million in expected demand for refunded tax
credits in FY 17. He explained that of the $775 million
there was $575 million of new applicants and $200 million
carried forward from the previous year's veto. The demand
equaled $775 million. He explained that with the passage of
HB 247 there were tremendous reforms to the Cook Inlet
credits which would be completely phased out by 2018. On
the North Slope the calculation and the application of the
new oil provisions of the gross value reduction were
aggressively reformed. The underlying credits, the
operating losses, and how they were treated on the North
Slope, were not reformed. Meanwhile, the legislature passed
an operating budget with $30 million in general fund (GF)
funding determined by a statutory formula and $430 from
other funding sources making up $460 million in tax credits
for FY 17. He reported that the governor vetoed the
additional $430 million which left only $30 million from
the formula. It meant that the state only had $30 million
to be spent on $775 million worth of demand. He thought
there would be a large amount of tax credits carried
forward into FY 18 if additional action was not taken.
2:08:47 PM
Mr. Alper moved to the spreadsheet on slide 6: "Potential
NOL Carry-Forward Liability." He explained that the top
half of the slide reflected the beginning of the credit era
through the last fiscal year. The third column showed how
many credits were claimed and how much the state spent on
tax credits. He relayed that the columns further to the
right showed the calculation had the legislature funded at
the statutory formula which was tied to 10 percent to 15
percent of production tax revenue. He pointed to the column
titled "Credit Cap per AS 43.55.028 (c) showing what the
appropriation would have been. He noted that the numbers
between FY 09 and FY 13 were larger than the amount spent
on credits. In other words, had the formula appropriation
taken place, rather than funding what had been requested,
the state would have been out of funds. The state would
have built up an amount of set-aside money to fund tax
credits. The end year fund balance was the balance of the
fund which would have peaked at $655 million at the end of
FY 13. He continued that beginning in FY 14 the revenue
would have been dropping off but there would have been the
money in the fund and with the demand the state would have
spent the fund down. The fund would have been close to
wiped out by the end of FY 15. Going into the last budget
cycle a year previously the state would have been roughly
in the same place - the state would need to find money to
pay for tax credits only there would not be the cultural
expectation that the legislature would fully fund the
demanded tax credits over a year. The expectation would be
that the state would fund at the statutory formula. There
would not have been the same level of anxiety from short
funding.
Mr. Alper pointed to the bottom of the page. He queried
what would happen if the state continued the process into
the future. He highlighted the blue numbers. The blue
numbers were updated based on the passage of HB 247. He
noted there had been different and larger numbers when he
had presented the same slide a month prior. Due to the
changes, the Cook Inlet tax cuts, and additional revenue
from a couple of other calculations the state would be
spending less money on tax credits. It would also have
slightly smaller carry forward NOLs for the major
producers. The demand in the following year [FY 17] would
decrease to about $760 million down from $775 million. In
FY 18 the demand would be $445 million down from $500
million. He suggested that in looking at the $760 million,
when the legislature was only paying the statutory amount
of $30 million, left a carry-over of $730 million. If $730
million of carry forward was added to $445 million (the
claimed credits for FY 18) it would result in a credit
demand worth almost $1.2 billion in FY 18. Meanwhile, only
$33 million would be appropriated in FY 18 by the statutory
formula leaving a $1.1 billion carry-forward. By FY 25 the
state would be behind in tax credits by about $2.0 billion
if it continued to fund at the statutory cap.
2:12:30 PM
Co-Chair MacKinnon stated that what the slide showed her
was that by FY 18 the governor would have created a $600
million hole in the state's budget by not paying a bill
that was owed via his veto power.
Mr. Alper stated that it was moving an obligation from FY
17 to FY 18. The producers would have certificates of
credits, an obligation of the state. With the certificates
in-hand the companies would request payment and would be
waiting until the state had money available to make the
payments.
Co-Chair MacKinnon stated that the administration was
creating the problem while advocating for a solution. She
conveyed that with the current veto, over half of the
problem stemmed from the administration not paying a bill
when it was supposed to. It was something the legislature
could override, but more importantly she wanted to
understand the administration's reason for not advocating a
fix and for creating more of a problem by not paying its
bill.
Mr. Alper stated that through legislation the
administration was attempting to change the underlying
programs so that there were less tax credits owed and
earned in the future. The veto had to do with when past
obligations had to be paid. He argued that the state was
not required to pay the obligations immediately. There was
no requirement that the state buy the credits and there was
not cost of delay. The governor struggled with his decision
to execute his veto power. Mr. Alper reported being part of
the discussions around the governor's veto. He reported the
decision was heart-felt, difficult, and would potentially
put a strain and burden on the industry. The governor's
original proposal in January [2016] included an
appropriation to fund all the credits wiping the slate
clean. However, the original proposal was part of a
comprehensive fiscal package. There were several pieces of
legislation that would solve the state's problem and
balance its budget into the future. In the absence of a
comprehensive plan in place, the governor's larger concern
became how to keep the light on for the coming 2 or 3
years. The state was on a path to deplete the
Constitutional Budget Reserve (CBR) a year from the
present. The state had school obligations, healthcare
obligations, transportation obligations, pension
obligations, and other costs related to the day-to-day
functioning of government. If the state was uncertain that
it would be able to meet the obligations listed, he
wondered if it could afford to fully fund the tax credit
program. He suggested that the state could legally make a
smaller installment payment, save some money for the
future, and hopefully resolve its underlying fiscal
problems in the following year.
Co-Chair Kelly suggested that Mr. Alper's slide essentially
cried out, "Help stop me before I make another irrational
veto!" He agreed with what Senator McKinnon had said about
the governor creating a problem with his veto and the
administration asking the legislature to make a complete
change to Alaska's oil tax regime rather than the governor
acting more sanely. He also pointed out that prior to the
governor's plan of paying off the tax credits with a larger
fiscal plan, he recalled that it assumed the use of the
CBR. He asked Mr. Alper if he was correct.
Mr. Alper responded affirmatively.
Co-Chair Kelly stated that there was an assumed CBR draw
that was never, ever, ever going to happen. He thought it
was impossible. He reported telling the governor that a CBR
draw was impossible early on in the current year's regular
session. He relayed that the governor seemed surprised at
his comments. He continued that the administration saying
it had a plan that was not working and wanting to do
something else was a poor response. He opined that the
larger fiscal plan the administration was hoping would be
enacted was irrational. He thought 2 things were going on
in slide 6. First, the governor created a problem, and now
the legislature had to do something else instead of the
governor changing his behavior. Second, the Tax Division
came up with a $2 billion number, an extremely political
number - the number that had been thrown around for several
years as the $2 billion give away. It was never true and
the people of Alaska voted for SB 21 because of what a sham
it was. Currently, the state was back with another slide.
He reiterated that he thought slide 6 was a very political
slide.
2:17:46 PM
Senator Olson realized that the State of Alaska was in a
bind. He wondered about any considerations being made for
the smaller companies trying to survive. Late payments to
businesses made survival difficult and effected people's
livelihoods. He was not only talking about producers but
also the contractors. He was concerned that some of the
private sector businesses would go bankrupt.
Mr. Alper replied that the state had significant
obligations not just to the oil industry. It had the rest
of the government to run. The anxiety over how to handle
the state's fiscal condition with reserves rapidly
depleting became the overarching factor. He suggested that
if the state paid its obligation in full it might not be
allowed to do something else in the following day. He
believed a comprehensive fix was necessary either in the
current year or the following year. He conveyed the message
of the governor. He mentioned that the governor's office
had released paperwork regarding what would happen if the
state went off of the cliff. He supposed he would have to
generate a couple of bullet points about how his agency
would function with 75 percent less funding. He was certain
it would not be pretty. The state did not want to do damage
to its private sector investors. He thought it was about
priorities and making sure the lights stayed on longer.
Senator Olson asked about assurances that the
administration could give to the private sector. HE
compared the governor's veto to either paying a partial
credit card payment or making a full payment of the
balance.
Mr. Alper stated that it was about making a minimum payment
on a credit card rather than paying off a balance as the
state had been with the tax credits for the past 3 or 4
years. He could not speak for the governor or guarantee any
future action. He believed that once the governor was
satisfied the state had solved its fiscal woes, he would
want to set aside the funds to pay down the state debt.
There was nothing positive about having $1 billion debt
over the state. The state needed to get to the point of
knowing it had the money.
2:22:15 PM
Co-Chair MacKinnon commented that the state did not pay
interest in reference to Mr. Alper's credit card example
and could make the monthly payment, the issue that the
Senate Finance Committee was concerned with was job loss,
bankruptcy, and people having similar loses, and the
state's credit down rating. The governor had been a
proponent of maintaining the state's credit worthiness. She
was not sure, as bankruptcy occurred as a result of the
non-payment of tax credits, she could consider it a minimum
payment. The interest would be very different. It would be
job loss, downgraded credit, and other things. She asked
Mr. Alper to respond.
Mr. Alper wished he had an answer for her. It was obviously
a burden on the industry. It was not a place the state was
comfortable being in or wanted to be in. She was accurate
that the state did not have to pay any interest. However,
the companies did have to pay interest to their finances.
Many of them had cash calls. He continued that the great
bulk of the credits were owed against borrowed money. The
companies did not have their own cash reserves to invest in
their field but rather they borrowed money with the
expectation of paying it back. The administration
understood. It was an uncomfortable and unfortunate reality
of the state's fiscal situation. He noted Co-Chair Kelly's
prior comments about how a CBR draw to pay the credits
would not work. The reality was that the budget that just
passed was funded 2/3 out of the CBR. Whether the funds
were GF or set a side special CBR appropriations, if the
state placed $600 billion into tax credits the money would
be coming out of the CBR.
Senator Bishop returned to the forecast on slide 6
regarding the NOL liabilities. He wanted to see the same
numbers ran with the debt paid as it was encumbered to see
what the bottom looked like. He thought that the
administration was chasing a red herring. Alaska was not
Texas, North Dakota, or Wyoming. It took 10 years, at best,
from an initial discovery to point of production to bring a
field online. It was a long-term commitment. He reiterated
his desire to see the numbers ran with the debt paid in the
year the credits were encumbered ultimately looking for the
bottom line.
Co-Chair MacKinnon asked if the numbers could be run.
Mr. Alper responded in the affirmative. He addressed
Senator Bishop. He emphasized that the state would stay
abreast of its obligations every year in the scenario on
the slide and pay it. It meant that the state would spend
about $2 billion more which would come out of reserves
assuming the money was available. The state would butt up
against the bottom of the CBR and would possibly have to
get into the earnings reserve account (ERA) and address
fundamental questions of restructuring. The Senate passed a
bill that had gone a long way towards fixing the problem.
Part of the administration's struggle was that the rest of
the legislature had not followed suit. The number on the
slide of $2 billion was the real obligation of the state
for the next 6 or 7 years. He added that what was
interesting in updating the slide was that it used to be $3
billion. The reason for the change was due to the passage
of HB 247. There was an authentic savings of $1 billion on
tax credits reducing the burden to the state.
2:27:40 PM
Co-Chair MacKinnon appreciated the information and
suggested that it be referenced in some of the governor's
press releases. She commented that the general public
believed that the legislature did not act on anything in
the governor's package. However, the legislature took
action. She loved the idea of saving $1 billion over the
following 10 years based on what the legislature passed
which was part of the fiscal plan. However, the information
had not been conveyed in a press release.
Mr. Alper turned to slide 7: "Regional Impacts of HB 257":
Cook Inlet
· Complete phase-out of NOL, QCE, and WLE by 2018
· Extends "tax caps" on gas indefinitely and adds a
· $1 / bbl "tax cap" on oil
· Municipal utility pro-ration of costs
Middle Earth
· Reduces the NOL, QCE, and WLE credit rates
· Extends "Frontier Basin" exploration credit for one
year to July 2017
North Slope
· GVR "Graduation" provision after three to seven
years
· GVR can't be used to increase an NOL
Statewide
· $70 million per company per year cap ($61 with
discount)
· Interest rates increased for 3 years, then drops to
zero
· Transparency, local hire, state obligation offsets,
surety bond
Mr. Alper listed the bulk of the changes.
2:32:36 PM
Co-Chair MacKinnon asked how many of the provisions were in
the new bill SB 5005. She noticed interest changes on page
1 of the bill.
Mr. Alper responded that there were interest changes and
the municipal pro-ration had a technical cleanup section.
The administration was looking at extending things on the
North Slope when the state was done in Cook Inlet. However,
the administration was not looking to changing any of the
pieces already addressed in HB 247.
Mr. Alper moved to slide 8: "Fiscal Impact of HB247":
Revenue
· $0 to $25 million increase through FY21 due to loss
of Cook Inlet credits used against tax liability,
plus new $1 / bbl oil tax
· $40 to $115 million tax cut beginning FY22 due to
above combined with up to $20 million from sunset of
GVR tax break, but offset by extension of Cook Inlet
gas tax caps
Spending
· Full impact of credit cuts won't be seen until FY19
· Annual savings $65 to $115 million. Largest portion
is Cook Inlet cuts, less from the per-company cap
and the fix to the GVR / NOL interaction issue
Mr. Alper indicated that the slide was a snapshot of the
fiscal note for HB 247. He explained that all of the bills
had 2 halves to the fiscal note; raising or changing
revenue in some way and changing spending such as buying
tax credits. He reported that the $1 per barrel tax would
generate about $5 million to $10 million. There was also a
tax cut in the bill which might lead to seeing negative
revenue. He had stated there was $1 billion in savings and
spending on the previous slide that was offset by the tax
cut in some of the out years. As a result the public's
perception of the impact of HB 247 might have been diluted
because of the extension of the Cook Inlet tax caps past
2022. They were scheduled to come off the books and the
underlying 35 percent tax would kick in in 2022. By
extending them into the future it showed up as a negative
in the revenue estimates. He thought that it was an
overblown number. No one really expected the 35 percent tax
to kick in in 2022. However, it was the administration's
statutory base line.
2:35:36 PM
Co-Chair MacKinnon asked Mr. Alper to pause and discuss why
the 35 percent would not likely come to fruition in the
Cook Inlet.
Mr. Alper explained that when the Petroleum Profits Tax
(PPT) system legislation came before the legislature in
2006 the Economic Limit Factor (ELF) system had been in
place for 20 years or more. The ELF formulas were thought
to be distorted. It generated tax from fields tied to per-
well productivity including the Prudhoe Bay and Alpine
fields. However, most of the other fields on the North
Slope were paying a low production tax (less than 1 percent
of the gross). In Cook Inlet the tax was zero. The Cook
Inlet gas taxes under ELF were also low. While there was a
desire to raise revenue from the North Slope through the
PPT bill (it was an important reform package and part of
Governor Murkowski's Stranded Gas Development Act process),
no one wanted to raise the tax on gas in Cook Inlet. At the
time there was a larger concern about gas supply and
utility security. He suggested that in the ELF bill there
was a hold harmless provision which outlined that taxes on
oil and gas in Cook Inlet would not exceed what they were
prior to the passage of the bill (from 2005). It was a 15
or 16 year hold harmless provision until 2022. He relayed
that in 2022 the underlying statutes kicked in. However the
underlying statutes had not been built for Cook Inlet
leaving the state with a hodge-podge of multiple other
bills. There was the 35 percent SB 21 tax rate without a
per-barrel credit or comparable benefit on the North Slope.
There were no new oil benefits and the 20 percent capital
credit was going away. There would be a large 35 percent
net tax. He opined that sometime between now and 2022
someone would have to fix the system. He suggested that the
attempt made with HB 247 extending the tax caps, was
probably too low. The 17 cent per MCF tax on gas in Cook
Inlet was probably not the state's highest and best use of
the resource. Another part of the equation was $150 million
more from at 35 percent net tax. He though the right answer
was somewhere in the middle.
2:38:20 PM
Co-Chair MacKinnon asked where the oil from the Cook Inlet
region was sold.
Mr. Alper responded that it went to a refinery in Cook
Inlet and used in Alaska.
Co-Chair MacKinnon stated that the oil was sold to an
instate refinery, and accounted for about 30 percent of the
feed stock at the Tesoro refinery. She asked Mr. Alper to
comment.
Mr. Alper reported hearing similar numbers. He stated that
the refineries in Alaska were ready to absorb all of the
oil production from Cook Inlet and were still importing
crude oil.
Co-Chair MacKinnon asked how the refinery would collect an
increase of 35 percent.
Mr. Alper responded that if there was a higher tax on Cook
Inlet oil it would be taxed similarly to North Slope oil.
It would likely be worked through. He thought that Cook
Inlet gas was what was really being referred to. He
suggested that if there was a higher tax it would affect
the utility rates in South Central.
Co-Chair MacKinnon emphasized that rate payers in Anchorage
and the Central region would have to pay the tax. From a
political perspective folks that would be opposed to a 35
percent increase in taxes within the region were trying to
protect the consumers on the other side.
Mr. Alper clarified that it was not a 35 percent increase
but a 35 percent net profits tax which would be a very high
tax in Cook Inlet, 5 or 6 times the current tax.
Commissioner Hoffbeck concurred that a large portion of the
Cook Inlet gas tax would get passed to consumers. As far as
the oil and its use in refined products, prices depended
largely on the competition of other refiners. It really
depended upon the refining margins and whether refiners
could absorb the tax. There was a good chance the 35
percent tax rate would not be passed to the consumers
because the price was set based on other competitive
products delivered by other West Coast refiners.
Co-Chair MacKinnon concurred that about 30 percent of the
feed stock going into the local refinery came from Cook
Inlet. She continued that 70 percent came from another
source. She was depending on others in the market. Cook
Inlet gas was being sold at some of the highest prices in
the world. Alaska's consumers would be picking up some of
the proposed price changes.
Commissioner Hoffbeck concurred.
2:42:43 PM
Vice-Chair Micciche also concurred. He added that the less
competitive Alaska oil was, produced by Alaskan jobs at an
Alaskan facility, the more likely imports would compete. In
the current market, he thought throwing another tax in the
way could have a negative effect. He believed a 35 percent
tax on Cook Inlet oil and gas was unreasonable. He
suggested that the reason for holding off on another
increase would be to take the time to evaluate what the
proper tax should be rather than simply applying a 35
percent rate in 3 years.
Mr. Alper stated that there was no change proposed for the
Cook Inlet oil and gas tax in the current legislation. He
mentioned that the administration had an issue with the
extension of the caps in the previous legislation. The
administration was not looking to make a change until 2022.
He indicated that if the sunset remained in place the
administration would be passing a tax cut because of
something that would occur in 2022. However, when looking
to put in the right Cook Inlet tax in the future it would
be sold with a tax increase and would be more difficult to
get accomplished.
Co-Chair MacKinnon asked the question because when the
committee looked at the $775 million that was distorted by
the $200 million veto that would be distorted further in
the following year by the $430 million veto he interjected
the comparison. She agreed that it would have never reached
the 35 percent. There was a reason why the legislature
would walk cautiously into the conversation. She wanted the
people in the Central Region to understand that the
committee was trying to look at who in the end would pay
some of the increases. The state would not be the one to
pay the increases, it would be the consumer that would be
covering the costs as the state withdrew tax credits and
increased taxes.
Mr. Alper noted that his point was a distraction from the
current legislation. He raised the issue because it
explained why the legislature had not received enough
credit for the good HB 247 did. He furthered that if a
person was to read the fiscal note for HB 247 the bottom
line did not add up to $1 billion. It added up to a much
smaller number because the number was eroded by the paper
tax cut on the Cook Inlet side. On the spending side it
added up to $1 billion. Negative numbers could be seen on
the revenue side. He pointed to the spending reductions of
about $1 million on the bottom of slide 8. The state would
not see the full impact of the spending reductions until FY
19 as a result of the slow ramping down of the Cook Inlet
tax credits. The annual saving would be between $65 million
to $115 million. There would be an overall reduction in
what the state would be spending on tax credits and cash
credits, or obligated to spend. He estimated the reduction
to be between 30 percent and 40 percent. The largest
portion of the spending reductions were the Cook Inlet
cuts.
2:47:19 PM
Mr. Alper turned to slide 9: "Original HB 247 Components
Not Passed":
· Minimum tax increase to 5%
· Floor "hardening" against various credits
· Per-barrel credit migration ("true up") issue
· GVPP cannot go below zero for a field
· Restrict repurchase to companies with < $10 billion
revenue and sunset NOLs after 10 years
· Interest rate increase limited to three years, and
then reduced to below current rate after that
Mr. Alper continued to slide 10: "House-Passed HB 247
Components Not Passed":
(In addition to components of Governor's original bill)
· Cash payments limited to companies with less than
15,000 bbl / day
· NOL credit rate ramps down to 25%
· No NOLs earned by companies with production over
15,000 bbl / day
· Cook Inlet tax cap sunset moved up to 2019
· ARM Board alternative purchase option
Mr. Alper moved on to slide 11: "Major Features of SB
5005":
1. North Slope Operating Loss (NOL) credit phased out:
35% today to 15% in 2017 and zero in 2018
· Effectively sets a tax rate that can't go below zero
for
· non-profitable companies
· Impacts major producers by preventing credits from
carrying forward, indirectly "hardening" the minimum
tax floor
· Impacts independents by eliminating credits earned
during the development stage prior to a company's
profitability
New language not in any version of HB247
Mr. Alper added that the new language was a more aggressive
stance towards operating loses than seen in any of the
prior versions of legislation during the current session.
2:51:35 PM
Senator Dunleavy asked if price impacted the NOLs. He
wondered if there was a certain price at which the NOLs
disappeared.
Mr. Alper responded, "Half yes, half no." He explained that
for independents developing a field that did not have any
revenue price it did not matter. Their NOL would be 35
percent of whatever their costs might be. He continued that
for the major producers it was only relevant if they had a
loss. It varied dramatically from company-to-company. The
weighted average breakeven price on the North Slope at
present was about $45 per barrel. If the price of oil was
demonstratively higher than $45 the state would not expect
to see a significant amount of NOLs from the major
producers. The provision would be mute.
Senator Dunleavy thought the price of oil was currently
close to $45 per barrel.
Mr. Alper reported that the previous day's price was about
$44 per barrel. Two weeks prior the price reached $50.
Senator Dunleavy asked Mr. Alper about his comment
regarding investing or dealing with the oil patch as Alaska
had done 35 years prior.
Mr. Alper responded that when Prudhoe Bay and Kuparuk and
other large fields were built there were no tax credits or
carry forward operating losses. Instead there was a gross
tax and no incentives for development. There were just oil
fields.
Senator Dunleavy asked if new technologies, such as those
used in North Dakota, had altered the concept of
traditional oil exploration, development, and production.
Mr. Alper responded that the increase in technology,
precise directional drilling, hydraulic fracturing, and the
like had made pools available that might not have otherwise
been developed. He thought there was a significant amount
of oil available that might not have been available without
new technology. He believed the biggest difference between
the current day and the past was scale. There were larger
economies of scales and the North Slope was smaller.
Smaller fields had a higher per barrel cost. He surmised
that the higher per barrel cost was behind the push to
provide incentives for operators.
Senator Dunleavy remarked that the world was vastly
different than it was 35 years previously in terms of
science advances and technology.
Co-Chair Kelly asked if the regulatory environment had
resulted in companies spending more money to develop a
field. He mentioned Senator Dunleavy's reference to a
number of technological changes in developing fields. He
wondered if regulatory practices from 35 years ago had been
taken into consideration.
2:56:01 PM
Mr. Alper answered "probably." He commented that Senator
Bishop had discussed that it took 7 years to 10 years to
get an oil filed in place. He clarified that not all of the
time had to do with logistics, much of it was devoted to
permitting. He believed the state was tighter in handling
the unique environmental issues on the North Slope. He
added that the frozen season being shorter made it more
difficult to operate. The ability to build ice roads and
other factors made it more challenging. He admitted that it
was not easy to develop an oil field on the North Slope of
Alaska.
Co-Chair Kelly asked how long it used to take to bring an
oilfield online. He noted that 10 years was frequently
mentioned. There had been an earlier reference made to the
Lower 48 fields being brought online within 30 to 60 days.
He acknowledged that both the physical and regulatory
environments in the Lower 48 were completely different from
those in Alaska. He reiterated his question about how long
it used to take in 1979 or 1980.
Mr. Alper answered that in 1930 it was nothing. Once the
Clean Air Act and Clean Water Act passed there was a fairly
robust process in place. He recalled companies shipping a
lot of pipe to Alaska which ended up sitting in piles along
the haul road for 4 or 5 years waiting on federal permits
to build the Trans-Alaska Pipeline System (TAPS).
Commissioner Hoffbeck relayed that the last field developed
on the North Slope was Alpine which took close to 10 years
to develop.
Co-Chair MacKinnon asked about ConocoPhillips' CD-5 field.
Commissioner Hoffbeck answered that CD-5 did not take as
long. He explained that the Alpine field was brand new in
the Colville Delta with no infrastructure around it. He
indicated that CD-5 had a bridge issue that held it up for
a long time. He was unclear of the total number of years it
took to develop it.
2:59:11 PM
Mr. Alper addressed slide 12: "Major Features of SB5005":
2. Reduces eligibility for cash credits from 50,000 bbl /
day to 15,000
Was in House-passed HB247
3. Minimum tax increased to 5% when the price of oil is
greater than $55 / bbl
· Current 4% rate is at all prices above $25; would
remain in effect between $25 and $55
· Current "crossover" between minimum tax and SB21
profits tax is about $75-$80 / bbl
Gov orig. bill had a 5% minimum tax at all prices.
House-passed HB247 had a 5% minimum above $65
Mr. Alper explained that the change in number 1 was of
relatively limited impact. It would make a difference in
2017 where there was the 15 percent NOL. He furthered that
by eliminating the operating loss credit on the North Slope
it became a Middle Earth credit. Feature number 2
restricted the eligibility to producers of less than 15,000
bbl/day. Currently there was no production from the
Interior.
Mr. Alper discussed item 3 which was the minimum tax
increase. It was a milder version of what the
administration had proposed 6 months prior. It did not kick
in to the 5 percent level until the price of oil reached
$55 /bbl (per barrel). He explained that the 4 percent rate
in statute was actually a stair step. He claimed that the
steps were written years ago and were unrealistic. The
price had to be below $25 /bbl for a full year for the
percentage rate to go to 3 percent, $20 /bbl to drop to 2
percent, etc. As long as the price was about $25 /bbl the
rate would be 4 percent.
Co-Chair Kelly asked about a mandatory 4 percent rate
between $25 and $55 regardless of losses. He also asked
about the percentage between $75 /bbl and $80 /bbl and
whether it essentially returned to the current regime.
Mr. Alper answered that currently the rate was 4 percent
between $25 /bbl and $75 /bbl or $80 /bbl. In SB 5005 it
would be 4 percent from $25 /bbl to $55 /bbl and then 5
percent from $55 /bbl to the crossover point.
Co-Chair Kelly asked if it returned to the current regime
at $75 /bbl to $80 /bbl.
Mr. Alper replied that there was a breakeven point in the
calculation where 35 percent of the net minus $8 /bbl (the
per barrel credit) was exactly equal to 4 percent of the
gross, the crossover point. It was roughly between $75 /bbl
to $80 /bbl. As the minimum tax was raised it pushed the
crossover point to the right a couple of dollars. It would
go from $76 /bbl to $78 /bbl if there was an increase to
the 5 percent.
Ms. Rogers believed that the annual tax was one
calculation, but the monthly installment payments went back
and forth.
Co-Chair MacKinnon asked for clarification of the specific
language in the bill. She suggested that the people
required to pay the tax would want specificity concerning
how the tax calculations worked. She understood that once
the price of oil went over $55 /bbl for a year the minimum
tax would be triggered. She wondered whether it stayed at 5
percent or whether it went back and forth. She requested
additional information.
Mr. Alper replied that the division would supply something
in writing. He confirmed that it was one minimum tax rate
based on the average price for a calendar year. The number
could be a different number from one year to the next. The
state received estimated tax payments and there was a true-
up at the end of the year. Every year was a separate
calculation.
3:04:55 PM
Mr. Alper spoke to slide 13: "Major Features of SB5005":
4. "Migrating Credits" fix preventing per-barrel credits
from being used in another month than the month they
were earned
· Important volatility protection for the state
In both the Gov. Orig. and House versions of HB247
5. Gross Value at the Points of Production can't go below
zero for a lease or property
· Protects the state from effective negative taxation
at high-transportation cost fields
In both the Gov. Orig. and House versions of HB247
Mr. Alper continued that item 4 created some confusion
about the issue of the interaction of the per barrel
credit, a monthly credit that changed value from month-to-
month. In a year with significant volatility such as in
2014 when there were certain months the tax calculation
fell below the minimum tax only a portion of the $8 /bbl
figure could be subtracted because of the 4 percent of
gross calculation. A per barrel credit was non-
transferrable and could not be carried forward. It was a
use-it or lose-it credit. Credits would be lost in the low
priced months. In other months the full credit would be
used and the companies would pay a net profit tax. At the
time of annual true-up companies were able to recapture the
unused per-barrel credits from the low price months
effectively offsetting tax obligations from the higher
priced months. The state paid about $110 million in refund
checks after the 2014 tax true-ups. A fixed number floor
would prevent it from happening. It would turn the per
barrel credit into a true monthly tax calculation. It was
not an overall monthly tax such as in the Alaska's Clear
and Equitable Share (ACES) system. It was a limited
application of a monthly tax for one specific issue. It
would only kick in in a year with a lot of volatility. The
item was in the governor's original bill and also in one of
the versions of HB 247. He highlighted item 5 which stated
that the gross value at the point of production could not
go below zero. The provision had to do with avoiding
negative taxation. He provided an example where if there
was a high transportation cost and a very low price it
might result in a negative wellhead value. Point Thomson
was used as an example in testimony. Point Thomson filed
tariff to return to the preexisting infrastructure at about
$19 /bbl. By the time oil went from Point Thomson all the
way to market the tariff was at about $31 /bbl. If the
price of oil was $30 /bbl there would be a negative
wellhead value of $1 /bbl which could be offset against the
wellhead value from other fields and impacted some of the
other taxes. If corrected, for a given field the gross
value could not go below zero. It was rare for the
provision to apply. He brought up the example of the Smith
Bay prospect.
3:08:28 PM
Mr. Alper discussed item 6 on slide 14: "Major Features of
SB SB5005":
6. Interest Rate on delinquent taxes changed from HB247
amendments
· Change from 7% + Fed compounding, for three years and
then zero after that; to 5% + Fed compounding, for
four years and 5% + Fed, with simple interest after
that
· Substantial concern that zero interest rate will make
it difficult to settle tax cases. Also it may kick in
immediately even if a delinquency has paid only the
3%-4% "SB21" rate for three years
· Changes applied to all taxes rather than carving out
the O&G Production Tax
Language was in House-passed HB247
Mr. Alper addressed item 6 dealing with the interest rate
on delinquent taxes. He relayed that the law that passed as
part of SB 21, included a simple interest rate of 3 percent
above the federal discount rate. The simple interest was an
amendment error in the late stages of SB 21 when the bill
was in the House Finance Committee. Prior versions had
compound interest. The administration wanted to raise the
interest rate from 3 percent to 7 percent. The rate under
ACES was 11 percent. He mentioned reverting to simple
interest after 4 years of entities paying compound
interest. He added that the administration had real
concerns about the impact of a zero interest rate. It was
not about years 4, 5, and 6, but about years 7, 8, and 9.
If a company were to get assessed and decided to fight the
audit findings there would be no reason to hurry the
process along because no interest would be accrued. He
remarked that zero interest was unsustainable for the
state. The administration also wanted some clarification on
transitional language from the previous version of the
bill. Another change was to the interest rate language.
House Bill 247 carved out a new regime for just the oil and
gas production tax and left the old interest rates in place
for all other taxes. It created some programming complexity
and the administration would like to have a consistent
interest regime across all of its taxes.
Co-Chair MacKinnon encouraged Mr. Alper to continue to try
to make his case. However, there were 3 members in the
House that stepped forward to send the ball down the field
to the Senate, but she was uncertain that everything in the
House version would be acceptable to the group. The Senate
had a difficult time removing over 10 years of tax credits
worth billions of dollars. The Senate would listen
carefully, as they did not want auditors to have more
complex procedures. The Senate had done battle regarding
some of the issues in the bill already. She remarked that
although the House passed a certain version of a bill, the
Senate would pass a bill that reflected what it thought was
the right thing to do in a compromise position. She
encouraged Mr. Alper to provide a more detailed proposal.
She thought the issue had already been vetted.
Mr. Alper appreciated her words. He emphasized that the
administration wanted a more enforceable and rational
structure for the interests. There were some technical
concerns with the Senate language which gave the
administration some anxiety, but it would adapt to the law
if it remained in its current form.
Co-Chair MacKinnon highlighted that Mr. Alper had stated
that he would try to solve the problem through a regulatory
process if the legislature did not take it up statutorily.
3:13:53 PM
Senator Dunleavy asked if Mr. Alper had stated that if the
bill did not pass he would accept the law as it was and
implement it.
Mr. Alper responded affirmatively. He added that the
regulations would provide some clarity as to how the
administration enforced different pieces. The part that
could be addressed from a regulatory standpoint was how
exactly the effective date applied to existing debts of a
certain age and how things kicked in. He thought the
language needed to be cleaned up for a transition period.
He commented, "The law is the law and, we will, of course,
enforce it".
Senator Dunleavy wondered if there would be any further
attempts to change SB 21 if the bill was not passed.
Mr. Alper was not in a position to promise one way or
another.
Senator Dunleavy was trying to clarify.
Mr. Alper advanced to slide 15: "Major Features of SB5005":
7. Technical correction to Sec. 30 of HB247. Fixes
error in the municipal entity / only a portion of
production is sold / proration of costs issue.
New language
8. Allows for seismic and geophysical data to be
released in less than 10 years if the lease for which
the data was acquired is terminated.
New language
Mr. Alper explained that in a circumstance where a
municipally owned utility owned a gas field and consumed
all of their own gas in their own turbines they would not
be taxable and they would not get credits for their
expenses. If they sold some of their gas and gained a small
amount of revenue and became a tax payer, they would be
able to get credits on all of their spending. The technical
correction would allow the utility to get credits only on
the share of the costs related to the amount of gas sold.
Ms. Rogers detailed that all of what the municipally owned
utility produced was taxable. However, because they were a
municipal entity they could not be taxed. In other words,
the portion that they sold was subject to tax and the other
portion that they produced and did not sell was still
taxable. However, because they were a municipal entity they
were not taxed. The technical correction aligned the
expenditures with the portion that was produced and sold.
Mr. Alper clarified that the issue was technical in nature.
It was not that the gas was taxed low, it was that the tax
payer was exempt. The language needed to be changed to
restrict the ability of a municipal owned utility to
receive certain refundable credits.
Co-Chair MacKinnon stated that it was her understanding.
She wondered if the legislature had changed the language.
She thought the original administrative language was
inserted in an attempt to help the administration with the
issue.
Mr. Alper responded that every committee had kept the
administration's language. The Tax Division realized late
in the game that the language was written incorrectly. He
reported that item 8 addressed the issue of seismic and
geophysical data becoming public. Currently, if a company
owned a credit and obtained certain data it became public
in 10 years. The proposed change was that if a company gave
up a lease in less than 10 years the data would become
public immediately upon giving up a lease. The state could
then use the data publically to release the land to get a
new developer in place.
3:18:45 PM
Co-Chair MacKinnon asked if item 8 applied to a lease that
was willingly forfeited or a lease forfeited through
litigation.
Mr. Alper would have to get back to her.
Co-Chair MacKinnon made reference to the Prudhoe Bay unit.
She wanted clarification on data associated with a lease in
litigation.
Mr. Alper responded that litigation would likely take about
10 years.
Co-Chair MacKinnon suspected Mr. Alper was probably
correct. She wanted to better understand what the language
did.
Mr. Alper replied that he would get clarification. The
issue impacted DNR more than the tax division. He would
consult with them and provide a coherent response to the
committee.
Mr. Alper scrolled to slide 16: "Implementation Cost":
· The changes anticipated in this bill will require
additional reprogramming of the Tax Revenue Management
System (TRMS) and Revenue Online (ROL) which allows a
taxpayer to file a return online and update the
current tax return forms
· The fiscal note from HB247 included $1.2 million in
capital funds for this purpose
· We are not requesting any additional funds with this
bill
· We do not anticipate any additional costs to
administer the tax program
· We are beginning the scoping process for the major
regulatory changes to implement HB247
Co-Chair MacKinnon was waiting for the regulatory review
process.
Mr. Alper offered to review the sectional analysis
beginning on slide 17 "Sectional Analysis". He began
reading the sectional analysis.
Co-Chair MacKinnon called an "at ease."
3:21:51 PM
AT EASE
3:22:34 PM
RECONVENED
Co-Chair MacKinnon asked Mr. Alper to send the sectional
analysis in a word document for members.
Mr. Alper would provide a copy for the committee.
Co-Chair MacKinnon stated that a separate document was
easier for the general public to access online.
Mr. Alper responded that the documents that were presented
to the committee included the fiscal note, the PowerPoint
Presentation, and a one page analysis of the expected
future spend for credits as modified to HB 247.
Co-Chair MacKinnon notified the public that the document
titled, "Estimated Tax Credit Payments with Impacts of FY
17 Budget and HB 247", was prepared by Dan Stickle and was
available online. The document was dated, July 12, 2016 and
was 2 pages. The second page contained a graph.
Mr. Alper explained that the graph on the second page
reflected what he had mentioned earlier: 30 percent to 40
percent of the credits were reduced in HB 247.
Senator Hoffman had a question on the fiscal note. He
wondered if the numbers would continue to decline beyond
2022. He asked Mr. Alper what he envisioned for 5 years,
through 2027.
Co-Chair MacKinnon noted that there was a fiscal note
number attached to SB 5005, Fiscal Note 1, dated 7-11-2016.
It had fiscals from FY 17 through FY 22.
Mr. Alper relayed that the fiscal note was a 4 page
document. Most of the narrative had been covered throughout
the meeting. He noted on the back page there was a
horizontal formatted table showing the years and the line
item description of the different provisions of the bill.
Going past 2025 there were two halves to it: The half that
reduced the state's spending on credits and the increase of
a minimum tax in the years of 2022, 2023, 2024, 2025. Once
the price of oil increased the additional revenue would not
be seen.
3:26:43 PM
Co-Chair MacKinnon thought it was important for the people
of Alaska to know that for the first time in the prior
decade the state had an increase in oil production of about
3.3 percent. She wondered if she recalled the number
correctly.
Mr. Alper confirmed that she was correct. There had been 15
thousand barrels per day of production more than last year
or the year before.
Co-Chair MacKinnon asked if the state was above or below
the price point provided in the spring revenue forecast.
The spring forecast lowered when the legislature modified
the price per barrel amount. She wondered if the price was
lower or higher than the state was currently experiencing.
Mr. Alper responded that the spring forecast had an FY 17
price of $39. Currently, the price was in the $43-$44
range. If the price held, the state would be about $4 above
the estimate - round numbers at these prices was $1 and the
price of oil made the state about $30 million per year.
Co-Chair MacKinnon supposed the state was over estimating
expenses and under estimating revenue on what was before
the committee.
Mr. Alper stated that the administration was estimating
revenue based on the price of oil. The volume of oil would
not make a material bit of difference. Much of the new and
incremental production that lead to the increase was in
NPRA and areas that did not pay a high royalty to the
state. At low prices the so called new oil, the gross value
reduction eligible oil, did not really pay a production
tax.
Senator Dunleavy commented that the transportation of oil
would help by lowering the pipeline costs overall.
Mr. Alper agreed. The administration was more or less
diluting the annual operating costs of TAPS with every
extra barrel of oil.
Senator Dunleavy asked if the bill contained all of the
changes to SB 21 that the administration would be
proposing.
Mr. Alper responded that he could only speak to the bill
before the committee. He did not know what might be
proposed at a future time.
Senator Dunleavy asked, "So there could be more proposals
to 21?"
Mr. Alper replied that it was not for him to say. He
suggested that perhaps the commissioner could respond.
Commissioner Hoffbeck was uncertain whether there would be
additional changes. The governor stated when he came into
office that rewriting SB 21 was not on his agenda. The
administration had found areas that needed fine tuning. He
believed that until the entire fiscal package was put
together it would be difficult to make a commitment that
there would be no other changes. He was not aware of any
changes in the works.
Co-Chair MacKinnon asked if there were other tax credits
that would be suspended.
Commissioner Hoffbeck responded that the film tax credit
had been eliminated in the prior year. In terms of smaller
credit programs he deferred to Mr. Alper.
Mr. Alper stated that the programs, themselves, were not
being suspended. However through the veto the
administration was suspending the purchase of tax credits.
Many different credits fall under the same umbrella. Only
the refundable tax credits were suspended. The state only
refunded credits in the world of oil and gas.
Co-Chair MacKinnon asked about an indirect expense report
showing millions of additional dollars going to other
industries. /she wondered if there would be a bill in the
session to suspend the tax credits or delay the
implementation of paying those tax credits.
Mr. Alper stated that they were all credits used to reduce
tax payments.
Co-Chair MacKinnon was aware.
Mr. Alper explained that no one was preventing or trying to
prevent anyone from using them to reduce their taxes. If
someone earned them and had a tax obligation they could
reduce it. There had been legislation regarding indirect
expenditures eliminating some of the credits. He personally
wanted to see a more aggressive look into some of the
items.
3:32:29 PM
Senator Dunleavy noted that Mr. Alper had just provided an
opinion on where he would like things to go.
Mr. Alper had opinions.
Co-Chair MacKinnon responded that there were industries
that contributed across the state. All of those industries
were being hit at the same time the oil and gas industry
was being affected based on either the jobs created or
money that was coming into the state of Alaska from
revenues. The money was paying for, not receiving, taxes
from the other industries. It was not a tongue and check
matter. She was asking if there was any reason the
administration was holding off paying all of the other
industries that were contributing to Alaska's economy but
were paying less taxes to the government in doing so. She
would appreciate an evaluation. She opined that one
industry was being held as a reason to argue about their
business practices, while other industries were benefiting
from the revenue of a particular industry that had
contributed to Alaska for more than 35 years. Everyone was
trying to ride the fiscal situation the state was in. She
wondered if the state could suspend the other credits or
delay paying the other credits against their tax
liabilities so that the state saw more revenue rather than
a deferral of the revenue by allowing other deductions.
Mr. Alper agreed that it was worth investigating and would
talk to the assistant attorney general. He was aware of a
credit reduction built into the mining tax component.
Co-Chair MacKinnon responded that it was the only bill the
committee had at present.
Mr. Alper expressed his gratitude to the committee for
hearing the administration's bill. He mentioned other bills
that were looking for other industries to contribute more.
There was a mining bill, a fisheries bill, a motor fuel
bill, and an alcohol and tobacco tax bill. The intent was
to pass all of them along with a Permanent fund
restructuring bill. He encourage moving towards building
Alaska instead of fighting over how to fix Alaska. He was
paraphrasing the governor.
Co-Chair MacKinnon apologized to the committee. Her office
did not receive the governor's tax bill until late
afternoon on Monday. She reported reaching out to
contractors to look at the bill before the beginning of the
special session. The legislature's contractor was not
available. The legislature had to change contractors in May
and actively pursued another contractor to do the fiscals.
That person was not available at least until the following
Monday. The committee also reached out to the industry to
give them a chance to review the legislation. They were not
available until after Monday. At present she had nothing
else to go before the committee between now and Monday. She
wondered if any committee members wanted more from the
administration. The analysts also wanted to be well
prepared to provide the legislature with correct
information.
3:37:45 PM
Vice-Chair Micciche was processing the points brought
before the committee.
Co-Chair MacKinnon added that the committee would continue
to pursue the analysis as well as prepare for the industry
that was affected by the bill and then move to public
testimony. She encouraged committee members to email her
office with any requests for additional information on the
bill.
3:38:35 PM
AT EASE
3:38:52 PM
RECONVENED
Co-Chair MacKinnon added that the committee had reached out
to the industry and would hear from the legislature's
analysts prior to hearing from the industry.
ADJOURNMENT
3:39:23 PM
The meeting was adjourned at 3:39 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB5005 Sponsor Statement - Governor's Transmittal Letter.pdf |
SFIN 7/13/2016 1:30:00 PM |
SB5005 |
| SB 5005 DOR 1st Presentation- SB5005 OG Credits 7-12-16 final.pdf |
SFIN 7/13/2016 1:30:00 PM |
SB5005 |
| SB 5005 Tax Credit Payments w HB247_v2_ds_20160712.pdf |
SFIN 7/13/2016 1:30:00 PM |
HB 247 SB5005 |