Legislature(2023 - 2024)SENATE FINANCE 532
03/31/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB114 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 98 | TELECONFERENCED | |
| *+ | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
March 31, 2023
9:08 a.m.
9:08:20 AM
CALL TO ORDER
Co-Chair Olson called the Senate Finance Committee meeting
to order at 9:08 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Donny Olson, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Jesse Kiehl
Senator Kelly Merrick
Senator David Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Senator Bill Wielechowski; Dan
Stickel, Chief Economist, Economic Research Group, Tax
Division, Department of Revenue; Sonja Kawasaki, Staff,
Senator Bill Wielechowski.
PRESENT VIA TELECONFERENCE
SUMMARY
SB 114 OIL & GAS PRODUCTION TAX; INCOME TAX
SB 114 was HEARD and HELD in committee for
further consideration.
Co-Chair Olson discussed housekeeping.
SENATE BILL NO. 114
"An Act establishing an income tax on certain entities
producing or transporting oil or gas in the state;
relating to the oil and gas production tax; and
providing for an effective date."
9:09:27 AM
SENATOR BILL WIELECHOWSKI, discussed the presentation "SB
114 - Oil Revenue Reform Bill," (copy on file).
Senator Wielechowski looked at slide 2:
"The legislature shall provide for the utilization,
development, and conservation of all natural resources
belonging to the State, including land and waters, for
the maximum benefit of its people."
-Article 8, Section 2, Constitution of Alaska
Senator Wielechowski pondered that Alaska was unique to
other oil states because it had been granted subsurface
rights upon statehood. He discussed the process for
determining royalties paid by producers to oil states.
9:10:59 AM
Senator Wielechowski spoke to slide 3, "SB 114: Three
Common Sense Reforms":
Closes Income Tax Loophole for Highly Profitable
Petroleum Business S-Corps
Reduces the Sliding Scale Per-Barrel Credits &
Requires Investment Match
Ringfences Losses on Alaska's Most Profitable North
Slope Fields
Senator Wielechowski remarked that experts testified that
Alaska had the most complex oil tax structure in the world.
He said that the first provision would close the S
Corporation tax status, which was a status that allowed
small business corporations to pass corporate income
credits and deductions to shareholders. To qualify
corporations would have to have less than 100 shareholders
and not have any foreign shareholders. He said that over
the years there had been no major producers on the North
Slope that were S Corporations.
9:11:53 AM
Senator Wielechowski referenced slide 4, "Closing the S-
Corporation Tax Loophole":
"S Corporation" stands for "Subchapter S corporation",
or sometimes "Small Business Corporation." It is a
special tax status granted by the Internal Revenue
Service that lets corporations pass their corporate
income, credits and deductions through to their
shareholders.
9:12:36 AM
Senator Wielechowski turned to slide 5, "The S-Corp
Loophole":
• Alaska incorporates the federal Internal Revenue
Code as its tax code.
• The IRS taxes "pass-through" entities like privately
owned S-Corps at the owner level to ensure taxes are
collected on profits.
• But in 1980 Alaska repealed the personal income tax
with HB 1040.
• This created a loophole for S-Corps to avoid paying
taxes in Alaska, unlike regular public
Corporations.
9:13:06 AM
Senator Wielechowski considered slide 6:
The Nonpartisan Legislative Finance Division
Recommends Closing this Loophole
"Should it be Continued, Modified, or Terminated?"
"Recommend termination. "S" corporations are exempt
from the federal corporate income tax because income
from these corporations is taxed under the personal
income tax. Without a state personal income tax, these
corporations receive the legal benefits of
incorporation without any state tax liability."
-Indirect Expenditure Report, January 2021, Page 144
9:13:28 AM
Senator Wielechowski displayed slide 7, "
The Department of Revenue Presented this Concern to
the Legislative Fiscal Policy Working Group in 2021
Existing Revenue: Expand Corporate Income Tax to Oil
and Gas Pass-through Entities
Description: The option proposes to tax oil and gas
through entities at the same rate as the current
Corporate Income Tax on C-Corporations. This option
defines entities to mean sole proprietorships,
partnerships, and S-Corporations. This option would
apply to any business who files a return, claim for
credit or report under AS 43.55 (oil and gas
production tax).
First Full Year Impact: $67.1 million in FY 2022
Using our July 2021 ANS price update as the basis, the
estimate is that this could increase corporate income
revenue by $47 to $61 million per year from FY 2022 to
FY 2030. The FY 2022 estimate includes retroactive
application to 1.1.2021. The range is due to
forecasted changes in production, oil prices, and
anticipated company profitability this period.
Costs: There are no incremental costs to implement
this change.
Source: Comprehensive Fiscal Policy Plan for Alaska
Presented by Commissioner Lucinda Mahoney August 10,
2021.
9:14:29 AM
Senator Wielechowski highlighted slide 8, "Now is the Time
to Close this Loophole":
The Department of Revenue estimated that over just
FY22 and FY23, Alaska will have lost $194 million in
revenue due to this defect.
Source: Fiscal Note SB 106-DOR-TAX-4-29-22, 32nd
Alaska State Legislature
9:14:44 AM
Senator Wielechowski looked at slide 9, "
The SB 114 Solution
Closing this Loophole Levels the Playing Field Between
Privately Owned S-Corps and Public C-Corporations
Applies only to oil & gas production or pipeline
transportation passthrough entities
9.4% Tax rate that matches percent
tax on Alaska's highest tax bracket
for C-Corps
Applies only to profits over $4
million
Senator Wielechowski said that the rationale for the $4
million cap was to protect smaller producers.
9:15:42 AM
Co-Chair Olson asked how many corporations in Alaska fell
into the category of making less than $4 million in
profits.
Senator Wielechowski thought perhaps the Department of
Revenue could answer the questions. He cited that a problem
under the state's tax code was a policy of confidentiality
surrounding profit information. He suggested that the
committee might want to take up some kind of transparency
provision. He said that he had just received the fiscal
note attached to the bill.
9:17:00 AM
Senator Wielechowski addressed slide 10:
Alaska's S-Corp Shareholders will Receive Federal Tax
Benefits
The owners of an S-Corp pay federal income taxes as
individuals. If they are high income earners, they
likely pay at the top marginal tax rate of 37%.
Since the amount of taxes they pay to Alaska is
deductible from their federal taxable income, their
taxes due to the IRS will be reduced by 37% under this
provision.
9:18:05 AM
Senator Wielechowski advanced to slide 11:
Reducing the Sliding Scale Per-Barrel Credits & Requiring
Investment "Match"
9:18:21 AM
Senator Wielechowski looked at slide 12:
Current Law: For new fields in their first seven years
of production, the per-barrel credit is a flat
$5/barrel, unless oil prices exceed $70 for any three
years.
9:18:42 AM
Senator Wielechowski showed slide 13:
Current Law: For the state's major producing North
Slope fields, the credit is based on a sliding-scale
of average gross wellhead value:
$8/barrel at less than $80;
$7/barrel at $80 to less than $90;
$6/barrel at $90 to less than $100;
$5/barrel at $100 to less than $110;
$4/barrel at $110 to less than $120;
$3/barrel at $120 to less than $130;
$2/barrel at $130 to less than $140;
$1/barrel at $140 to less than $150;
$0/barrel at $150
9:19:16 AM
Senator Wielechowski referenced slide 14:
How the Per-Barrel Credits Evolved During the
Legislative Process
• SB 21, the "More Alaska Production Act" (MAPA), was
introduced in 2013 with no per-barrel credits.
• The Senate added a flat $5 per-barrel credit for all
producers. When SB 21 passed the Senate on March 21,
2013, the Governor, industry, and others supported
just a $5 credit.
• The House made the $5 credit apply to the new fields
and added the $8 to $1 sliding-scale per barrel
credits for existing fields.
?As oil prices drop, and production tax revenue
decreases, the tax credits increase amounting to
even lower production tax revenue.
Co-Chair Olson asked Senator Wielechowski to cite the
reason for putting in the $5 per barrel tax credit.
Senator Wielechowski thought there was some discussion
about increasing investment, and that investment should be
tied to the amount of barrels of oil produced. He said that
when SB 21 was transmitted back to the senate with the
sliding scale per barrel credit, no additional analysis had
been done and the senate voted to concur with the changes.
He thought that the bill had not been vetted rigorously
before final passage. He stated that the fiscal note at the
time had modeled oil prices that had not come to fruition.
9:21:56 AM
Senator Wielechowski turned to slide 15, "
The Senate had little time to analyze the sliding-
scale per-barrel credits added by the House
SB 21 was transmitted back to the Senate with the
sliding-scale per barrel credit on April 13, 2013the
day before the Legislature adjourned sine die.
Relying on the House committee vetting process, on
April 14, 2013 the Senate voted to concur with the
changes to SB 21 just hours before adjournment.
9:22:04 AM
Senator Wielechowski considered slide 16:
The fiscal modeling for the final House Finance
version of SB 21 assumed the $5 tax credit would apply
The fiscal note only modeled revenue differences at
$90, $100, and $120 oil prices. But since the per-
barrel credits went into effect on January 1, 2014
nearly a decade agoonly nineteen months have seen
high enough oil prices to provide the producers with
anything less than the full $8 credit.
Source: Fiscal Note Analysis #14, HCS CCSSB 21(FIN)
(4/11/2013); Alaska Department of Revenue Tax
Division, Prevailing Values ANS West Coast Average
Spot Price,
http://www.tax.alaska.gov/programs/oil/prevailing/ans.
aspx.
9:23:23 AM
Co-Chair Bishop asked whether Senator Wielechowski had
considered work done by the TAPS Throughput Committee.
Senator Wielechowski said that he could go back and look at
the information.
9:24:19 AM
Senator Wielechowski displayed slide 17:
Since 2014 Alaska has lost $7.2 billion to the per-
barrel credits
Source: Revenue Sources Book Spring 2023
Senator Wielechowski looked at a table showing historical
production tax credits.
9:24:55 AM
Senator Wielechowski highlighted slide 18:
Alaska is projected to lose another $8.7 billion in
the next nine years
In just FY23 and FY24, the credits will cost the state
$2.2 billion.
Source: Revenue Sources Book Spring 2023
Senator Wielechowski looked at a table, which was a
continuation of the historical production tax credits
detail, FY13 through FY32.
9:25:19 AM
Senator Wielechowski looked at slide 19, "History of
Production Tax Revenue vs. Per-Barrel Credits Deducted,"
which showed a line graph showing the production tax
revenue versus the per-barrel credits from FY14 through
FY23. The blue line represented the production tax, and the
orange line showed the per-barrel credits.
9:25:30 AM
Senator Wielechowski addressed slide 20, "The Per-Barrel
Credits Have Not Incentivized Investment on the North
Slope: Expenditures," which showed a table of reported ANS
lease expenditures and capital lease expenditures. He
observed that there was a fairly significant loss every
year with a slight increase in 2019 and then a drop back
down. He pointed out roughly $3 billion in CAPX had
declined by half since 2014.
9:26:44 AM
Senator Wielechowski advanced to slide 21, " The Per-Barrel
Credits Have Not Incentivized Investment on the North
Slope: Credits," which showed a table of estimated Prudhoe
Bay per-barrel credits. He noted that the data was an
estimate and was sourced from the Department of Revenue. He
pointed out that the highlighted numbers on the top line
reflected the total value of per-taxable-barrel credits
used against tax liability. The second line showed the
Prudhoe Bay percentage of ANS production, which averaged 55
percent, per year. The last line showed the estimated value
of per-taxable barrel credits applicable to Prudhoe Bay -
$399 million in FY21 and $563 million in FY22.
9:28:03 AM
Senator Wielechowski went back to slide 20 and compared the
numbers on each slide to illustrate his point.
9:28:44 AM
Senator Wielechowski looked at slide 22:
"Development that actually costs the state remains
Alaska's least understood and most pressing economic
problem. Few politicians seem concerned that we do not
extract enough wealth from new resource development to
offset its costs." -Governor Jay Hammond
9:29:02 AM
Senator Wielechowski spoke to slide 23, "The SB 114
Solution":
SB 114 reduces these credits to a $5 to $1 sliding
scale and ties the credits to capital investment in
Alaska:
• Per-barrel credit ranges from $5 to $1 for wellhead
value ranges from $80 to $110.
• Producers earn the credits only up to the amount
matching their qualified capital expenditures from the
same tax year.
The new investment caveat encourages investment
spending on projects in Alaska that will maintain
production, create jobs for Alaskans, and promote
industry growth.
9:29:48 AM
Senator Wielechowski referenced slide 24, "The SB 114
Solution":
SB 114 returns the amount of the per-barrel credit to,
at most, the $5 value that was acceptable to the
Senate, the Governor, and industry supporters when SB
21 passed on the Senate Floor on March 21, 2013.
9:30:05 AM
Senator Wielechowski turned to slide 25, "Ringfencing North
Slope Fields":
Ringfencing: Limiting the deduction of lease
expenditures to those fields where the expenditure is
incurred.
9:30:20 AM
Co-Chair Olson asked why the per-barrel credit had not
incentivized exploration.
Senator Wielechowski turned back to slide 20 and remarked
that Prudhoe Bay legacy fields were extremely profitable. H
Co-Chair Olson clarified that he was asking the per-barrel
credits had not incentivized investment of the North Slope.
Senator Wielechowski could not answer the question.
9:31:53 AM
Senator Bishop commented that another component that was
difficult to measure was the regulatory process.
Senator Wielechowski thought that what Senator Bishop
brough up was more of a federal issue. He admitted that
doing business in Alaska was challenging. He said that
investment in Alaska was gained back in a magnitude greater
than in other oil producing states.
9:33:39 AM
Senator Kiehl recalled that the sliding-scale credits were
less to do exploration or in-field development but were
tied to other credits. He asked Senator Wielechowski to
remind the committee of what else had passed in SB 21.
Senator Wielechowski recalled that there was a provision
for refundable tax credits. He cited the challenge of
having only a few producers on the North Slope. He
mentioned that Alaska's Clear and Equitable Share (ACES)
Act had allowed for refundable oil tax credits. He
explained that incumbent producers could write off the cost
of development new producers did not receive the same
credits. He said that the refundable tax credits were an
attempt to balance the scale. He said that ACES gave large
tax credits for more investment which led to industry
investing in record levels on the North Slope. He said that
SB 114 would tie the tax credits to additional investment.
He believed this would lead to an increase in production
and development.
9:36:08 AM
Senator Wielechowski went back to slide 18, and wondered
whether the state was getting a good return on investment
for the tax credits. He discussed the cost of the Willow
Project. He stressed that the promise of SB 21 had been
that investment and production would increase with the
cutting of taxes, which had not happened. He thought that
rolling back the credits or tying them to increased
investment would be more beneficial to the state.
9:37:43 AM
Senator Wielechowski went back to slide 25 and defined ring
fencing as "limiting the deduction of lease expenditures to
those fields where the expenditures occurred.
9:37:58 AM
Senator Wielechowski considered slide 26, "Current law
Advantages Incumbent Producers":
• The producer with profits from existing fields can
save on taxes as expenses are incurred.
• The newcomer must carry forward their "losses" until
the field comes into production.
• Both would earn tax offsets for their spending, but
the incumbent gets them much sooner.
9:38:38 AM
Senator Wielechowski displayed slide 27, "Ringfencing: Why
is it Needed?":
• Under our tax code, incumbent producers are able to
immediately write off their new field expenditures
against their existing field production taxes. For
every $1 billion in expenditures, the State generally
loses $350 million in production taxes. This has the
potential to cause severe shock to the State's cash
flow.
• New producers do not have this same advantage and
must wait until oil production flows before writing
off their field expenditures.
• Of particular concern is oil development on federal
land, because Alaska subsidizes 35% of the development
yet receives no royalties and very little production
tax value.
Senator Wielechowski noted that all these figures depended
on the price of oil.
9:40:11 AM
Senator Wielechowski highlighted slide 28, "The SB 114
Solution":
• Ringfence fields on the North Slope. Limits the
deduction of lease expenditures to those fields where
the expenditure is incurred.
• When new fields start producing oil, the accrued
lease expenditures are then taken.
• Incumbent producers will be incentivized to faster
development and completion of a project.
• Levels the playing field - Provides equal treatment
to incumbent producers and new producers.
9:40:43 AM
Senator Wielechowski looked at slide 29, "History of
Ringfencing":
• 1977-2005 - Ringfencing was standard in Alaska
• 2006-2023 (North Slope) Comingled net profits
• 2006-2016 (Cook Inlet Oil): Each field capped at
ELF rates (Zero)
• 2007-2023 (Cook Inlet Oil): Capped at $1/bbl.
Senator Wielechowski
9:41:47 AM
Co-Chair Olson referenced the 28-year period of ring
fencing. He asked if the practice had achieved the intended
goals.
Senator Wielechowski cited tax rates for different fields
declining at different rates, which indicated to him that
things had not been working. He said that there was no net
profits tax at that point. He noted that ringfencing was
common in tax structures around the world.
9:42:50 AM
Senator Wielechowski addressed slide 30, "Ringfencing is a
common aspect of oil revenue systems across the world":
"Ring-fencing rules matter for two main reasons:
• Absence of ring-fencing can postpone government tax
revenue because a company that undertakes a series of
projects will be able to deduct exploration or
development expenditures from each new project against
the income of projects that are already generating
taxable income.
• As an oil and gas area matures, absence of ring-
fencing may discriminate against new entrants that
have no income against which to deduct exploration or
development expenditures." -Emil M. Sunley, Thomas
Baunsgaard, and Dominique Simard
Source: International Monetary Fund Publication
"Fiscal Policy Formulation and Implementation in Oil-
Producing Countries: Chapter 6 Revenue from the Oil
and Gas Sector: Issues and Country Experience," August
21, 2023
Senator Wielechowski referenced a publication shown on the
slide, "Fiscal Policy Formulation and Implementation in
Oil-Producing Countries" from the International Monetary
Fund.
Senator Wielechowski stressed the complexity of the states
tax structure and thought that a simple piece of
legislation would not solve all problems.
9:44:51 AM
Senator Wielechowski advanced to slide 31, "Economists have
criticized other oil producing jurisdictions for not using
ringfencing":
"Governments typically utilize ring-fencing provisions
to prevent oil companies from using losses incurred on
one site from sheltering the profits from other, more
lucrative investments
"Unfortunately, Guyana has granted the contractor a
blank check with regard to future development. The
result is that the contractor has a powerful incentive
to continue to add costs to the project. The net
effect is to push back the point at which Guyana
maximizes its cash benefit."
-Tom Sanzillo, Director of Financial Analysis
Institute for Energy Economics and Financial Analysis
Source: "Lack of Ring-Fencing Provision Means Guyana
Won't Realize Oil Gains Before 2 s, if at All,"
Institute for Energy Economics and Financial Analysis.
July 2021
Senator Wielechowski commented that one concern of ring
fencing was that Alaska was a large participant in the
expenses an incumbent incurred. He worried that the
position could negatively impact the states cash flow.
9:46:01 AM
Senator Kiehl thought there was much attention on the
timing of cash flow. He agreed that time was money. He
mentioned the complexity of the state's tax structure, and
asked if there were situations where implementing
ringfencing could change the overall value to the state or
producers.
Senator Wielechowski answered "yes," and referenced the
time value of money. He thought if 35 percent of a billion
dollars could be written off, that was $350 million that
industry could invest elsewhere.
9:47:41 AM
Senator Kiehl referenced the recent presentation with
revised estimates for the Willow Project. He asked about
the gross based tax floor. He asked whether ringfencing
could limit a companys ability to recoup their investment.
Senator Wielechowski agreed that there could be a situation
where that would be true. He noted that DOR had spoken to
the topic and reiterated the complexity of the tax
structure.
9:48:41 AM
Senator Wielechowski spoke to slide 32:
"I clearly recognize the need for new revenue for
Alaska. In my opinion that new revenue does need to
include some additional amount from the oil and gas
industry."
-Aaron Schutt, CEO, Doyon, Limited Speaking as a
surrogate for OneAlaska Vote No on 1 Commonwealth
North event "Discussion of Ballot Measure 1: The Oil
Tax Initiative"
Senator Wielechowski said that opponents of the initiative
thought that the legislature should be dealing with oil tax
structure changes, which was what the bill was trying to
accomplish.
9:50:02 AM
Senator Wilson pondered that if the resources in the state
were so valuable why were oil companies leaving the state.
Senator Wielechowski was not sure which companies Senator
Wilson was referring to but thought perhaps BP had left the
state due to the cost of a large oil spill off the Gulf of
Mexico. He thought that when one corporation left another
always took its place.
9:52:09 AM
Senator Wilson said that when BP had been operating the
fields that Hilcorp too over there had been a decline in
oil revenue, which had increased. He asked whether the
increase in taxable oil revenue would surpass the tax BP
would have paid.
Senator Wielechowski was not sure he understood the
question. He suggested looking at the production at Prudhoe
Bay, which would show that there had not been an increase
in production.
Senator Wilson thought that the new producer had increased
production over what BP had been producing.
Senator Wielechowski relayed that he had not done the
analysis to answer the question. He did not know how much
Hilcorp paid in corporate income taxes. He asserted that
the state did not have the data necessary to do many such
calculations.
9:54:53 AM
Co-Chair Olson understood that the bill only affected oil
companies. He asked whether there were concerns that there
were some sort of constitutional protection issues that may
arise in the future.
Senator Wielechowski relayed that the courts had a
"rational basis test." He said that there was a
constitutional mandate to get the maximum amount for
resources for the people of Alaska. He thought the bill
closed a loophole by treating all companies the same when
it came to paying taxes to the state.
9:56:31 AM
Senator Merrick referenced page 6 of the presentation, and
relayed that she had been surprised to find that LFD had
made what she considered a policy decision to terminate the
S Corporation loophole solely for oil companies.
Senator Wielechowski deferred the question to the committee
if it wished to expand on the matter. He reminded that the
state had major producers on the North Slope doing similar
types of work and paying different types of taxes.
Senator Merrick asked whether Senator Wielechowski had an
estimate of potential revenues if all S Corporations were
taxed.
Senator Wielechowski understood that oil and gas made up 70
percent of the states corporate income tax. He did not
have an exact number and deferred to DOR.
9:58:28 AM
Senator Wielechowski referenced slide 33:
"I have no doubt that oil taxes will be part of the
conversation in the Legislature? Any proposal needs to
be examined and reviewed and the Legislature tends to
be a better format for that."
-Kara Moriarty, Campaign Manager, OneAlaska, Vote No
on 1 Anchorage Daily News "Oil tax initiative fails,
pushing question of where to look for new revenue
sources back to Alaska Legislature," November 1, 2 2
Senator Wielechowski asserted that the industry expected
that there would be discussions on the tax structure.
Senator Wielechowski showed slide 34, "Questions?"
9:59:40 AM
Co-Chair Olson expressed appreciation for the quality of
the presentation.
9:59:59 AM
Co-Chair Stedman thought it had been a decade since the
state had extensive modelling done on the oil and gas
structure and thought that significant changes had been
made since that time. He asked whether more modeling had
been done.
Senator Wielechowski recalled that the previous year when
he had been on the committee, there had been a DOR
presentation where he had asked the same question. The
testimony at the time was from the deputy commissioner, who
had indicated that the state had done the modeling. He had
requested the information multiple times yet had not
received it. He added that another question was whether the
cutting the credit could be done with minimal impact to the
state.
Senator Wielechowski addressed corporate tax modelling and
did not recall if the questions had been addressed.
Co-Chair Olson invited a representative from DOR to discuss
the fiscal note.
10:03:37 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, reviewed a new fiscal note
from the Department of Revenue. He described that the note
was four pages in length and the final page included a
table depicting the provisions of the bill and the
estimated revenue impact for each of the 10 years. He
explained that the note contained a more detailed analysis
than most fiscal notes, which DOR endeavored to do for oil
and gas related fiscal notes.
Mr. Stickel spoke to page 4 of the fiscal note and
qualified that the note did not speak to policy decisions
but rather to DORs estimate of revenue impacts of those
decisions. He related that everything in the note was based
on the spring 2023 revenue forecast and assumed no changed
in company behavior or investment.
Co-Chair Olson understood that the slide assumed $73/bbl.
Mr. Stickel responded that the information presumed an oil
price of $73/bbl. for FY24, and then followed the DOR
spring forecasts for the remaining 10 years. He mentioned
that the analysis was based on the preliminary
interpretation of possible policy changes, and the
interpretations that were made for modeling purposes.
Mr. Stickel looked at the table at the top of the page,
which included descriptions of the 4 provisions outlined in
the bill. Line 5 showed the collective impact of
implementing the provisions together. He noted that each
provision had been modeled independently and then added
together to determine total fiscal impact.
Mr. Stickel addressed provision one, which pertained to
ring fencing:
Retroactive to 1/1/23, for all until, taxes and per-
taxable-barrel credits are calculated and applied
separately for each unit.
Mr. Stickel explained that the provision was estimated to
generate $396 million in FY24, including the retroactive
payment, $303 million in FY25, and then remaining at over
$200 million over the next 10 years.
Mr. Stickel spoke to the second provision:
Retroactive to 1/1/23, for all units, the sliding-
scale per-taxable-barrel credit is reduced with a
maximum value of $5 per taxable barrel at wellhead
values below $80 per barrel, reducing down to $1 at
wellhead values equal to or greater than $110 per
barrel.
Mr. Stickel noted that some of the analysis had looked at
keeping the existing scale, and limiting the credit to
$5/bbl, which meant that the credit would phase out at
gross value point of production greater than $150/bbl. The
bill reduced the value of all the credits by $3/bbl. which
meant that it would phase out at $120/bbl.
10:08:11 AM
AT EASE
10:09:12 AM
RECONVENED
Mr. Stickel continued to address line 2 of the table on
page 4 of the fiscal note. He cited that the gross minimum
tax floor in the production tax code was hard and
companies could not go beneath the minimum tax floor.
Having the minimum tax floor in place reduced the potential
impact. Mr. Stickel explained that the provision was
estimated to generate $322 million in FY25 and would
decrease in the out years.
Mr. Stickel addressed the third provision:
Retroactive to 1/1/23, per-taxable barrel credits
applied within a unit during a year may not exceed
capital expenditures within that unit during the year.
Mr. Stickel assumed that the provision applied to sliding
scale and non-sliding scale per barrel taxable credits. The
impacts started out at $174 million in FY 25, decreasing to
under $100 million at the end of the 10-year time horizon.
Mr. Stickel addressed the fourth provision:
Retroactive to 1/1/23, apply a 9.4 percent tax on
income over $4 million for oil and gas companies not
subject to corporate income tax, including S-
corporations.
Mr. Stickel shared that the modeling assumed that
corporations that were not C-corporations would pay a
similar amount of tax as was estimated for C-corporations.
Mr. Stickel addressed line 5 on the table which addressed
the total impact of the bill provisions, some of which
overlapped and added to each other. The total impact was
shown on the yellow line at the bottom of the table.
10:13:03 AM
Senator Kiehl asked about the out-year numbers on line 2.
He asked about the uptick in FY32.
Mr. Stickel explained that there were two factors at work.
He explained that the oil price forecast increased in
FY2030 and beyond, which allowed for more headroom above
the minimum tax floor to use the per barrel tax credits.
The other factor was that over time the estimates showed
some companies being non-gross value eligible.
10:14:48 AM
Co-Chair Stedman asked Mr. Stickel to review the breakover
point for net tax and gross tax.
Co-Chair Olson agreed that the topic could be confusing.
Mr. Stickel relayed that in the spring revenue forecast for
2024, the crossover point for major companies was in the
mid-50s and mid 70s in terms of the price at which
companies would go from paying at the gross minimum tax
floor to paying some amount above the minimum tax floor. He
noted that there were a lot of companies that were very
close to the minimum tax floor, which was material to the
calculated numbers. By reducing the per-taxable-barrel
credits, it would increase the net tax and shift the
crossover point. He could not provide exact numbers.
Co-Chair Olson asked whether the number would increase or
decrease.
Mr. Stickel thought there would be a little lower crossover
point.
10:16:42 AM
Co-Chair Stedman asked for the department to provide more
detailed numbers than what was available in the revenue
source book.
Co-Chair Olson asked whether Mr. Stickel could fine-tune
the information.
Mr. Stickel agreed to provide the information.
10:17:34 AM
Senator Bishop pondered that there were many moving parts
to the bill, and a change to one part would affect another.
He referenced the GVR and expressed that he would need the
order of operations at various price ranges in order to
comprehend the potential effects of the legislation.
Mr. Stickel was happy to work with the committee to provide
a more detailed analysis of the legislation.
10:18:58 AM
Co-Chair Olson referenced a comment by Senator Kiehl
regarding a "donut hole." He asked how the issue measured
into the fiscal note.
Mr. Stickel relayed that the donut hole had to do with the
ringfencing provisions. He explained that in most cases,
the ringfencing represented an overall tax increase for
companies because the lease expenditures for new
developments were required to be carried forward separately
and not applied against the tax liability until the field
came into production. There were some cases in which ring
fencing provided a tax cut for a company and under current
law if a company was under the minimum tax floor level, or
very close, they would not benefit from the lease
expenditure; Under ringfencing they would earn a carry
forward credit that they would not have earned otherwise.
10:20:17 AM
Senator Wilson requested modelling without the ringfencing
provision.
Co-Chair Olson thought that the matter of ringfencing would
be addressed.
Mr. Stickel appreciated the time of the committee and the
bill sponsor and offered to be available for further
analysis.
Co-Chair Olson relayed that the committee had not noticed
public testimony for the bill during the meeting and would
address it at a later time.
10:21:25 AM
Senator Wielechowski relayed that he did not have
additional comments.
SONJA KAWASAKI, STAFF, SENATOR BILL WIELECHOWSKI, thanked
the committee for the opportunity to present the bill.
Co-Chair Olson revealed that a committee substitute that
removed the ringfencing provision would be before the
committee at the next hearing of the bill.
SB 114 was HEARD and HELD in committee for further
consideration.
Co-Chair Olson discussed the agenda for the next meeting.
ADJOURNMENT
10:23:36 AM
The meeting was adjourned at 10:23 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 114 - Presentation_Oil Revenue Reform SFIN 3.31.23.pdf |
SFIN 3/31/2023 9:00:00 AM |
SB 114 |
| SB 114 - Sectional Analysis 3.30.23.pdf |
SFIN 3/31/2023 9:00:00 AM |
SB 114 |
| SB 114 - Sponsor Statement 3.30.23.pdf |
SFIN 3/31/2023 9:00:00 AM |
SB 114 |
| SB 114 DOR - TAX - 032823.pdf |
SFIN 3/31/2023 9:00:00 AM |
SB 114 |