Legislature(2005 - 2006)BUTROVICH 205
03/23/2006 10:00 AM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 305 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 23, 2006
10:11 a.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Bert Stedman
Senator Kim Elton
MEMBERS ABSENT
Senator Albert Kookesh
OTHER MEMBERS PRESENT
Senator Lyda Green
Senator Lyman Hoffman
COMMITTEE CALENDAR
SENATE BILL NO. 305
"An Act repealing the oil production tax and gas production tax
and providing for a production tax on the net value of oil and
gas; relating to the relationship of the production tax to other
taxes; relating to the dates tax payments and surcharges are due
under AS 43.55; relating to interest on overpayments under AS
43.55; relating to the treatment of oil and gas production tax
in a producer's settlement with the royalty owner; relating to
flared gas, and to oil and gas used in the operation of a lease
or property, under AS 43.55; relating to the prevailing value of
oil or gas under AS 43.55; providing for tax credits against the
tax due under AS 43.55 for certain expenditures, losses, and
surcharges; relating to statements or other information required
to be filed with or furnished to the Department of Revenue, and
relating to the penalty for failure to file certain reports,
under AS 43.55; relating to the powers of the Department of
Revenue, and to the disclosure of certain information required
to be furnished to the Department of Revenue, under AS 43.55;
relating to criminal penalties for violating conditions
governing access to and use of confidential information relating
to the oil and gas production tax; relating to the deposit of
money collected by the Department of Revenue under AS 43.55;
relating to the calculation of the gross value at the point of
production of oil or gas; relating to the determination of the
net value of taxable oil and gas for purposes of a production
tax on the net value of oil and gas; relating to the definitions
of 'gas,' 'oil,' and certain other terms for purposes of AS
43.55; making conforming amendments; and providing for an
effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 305
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/21/06 (S) READ THE FIRST TIME - REFERRALS
02/21/06 (S) RES, FIN
02/22/06 (S) RES AT 3:30 PM BUTROVICH 205
02/22/06 (S) Heard & Held
02/22/06 (S) MINUTE(RES)
02/23/06 (S) RES AT 3:30 PM BUTROVICH 205
02/23/06 (S) Heard & Held
02/23/06 (S) MINUTE(RES)
02/24/06 (S) RES AT 3:30 PM BUTROVICH 205
02/24/06 (S) Heard & Held
02/24/06 (S) MINUTE(RES)
02/25/06 (S) RES AT 9:00 AM BUTROVICH 205
02/25/06 (S) -- Reconvene from 02/24/06 --
02/25/06 (H) RES AT 10:00 AM SENATE FINANCE 532
02/25/06 (S) Heard & Held
02/25/06 (S) MINUTE(RES)
02/27/06 (S) RES AT 3:30 PM BUTROVICH 205
02/27/06 (S) Heard & Held
02/27/06 (S) MINUTE(RES)
02/28/06 (S) RES AT 3:30 PM BUTROVICH 205
02/28/06 (S) Heard & Held
02/28/06 (S) MINUTE(RES)
03/01/06 (S) RES AT 3:30 PM BUTROVICH 205
03/01/06 (S) Heard & Held
03/01/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 1:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/02/06 (S) RES AT 3:30 PM BUTROVICH 205
03/02/06 (S) Heard & Held
03/02/06 (S) MINUTE(RES)
03/03/06 (S) RES AT 3:30 PM BUTROVICH 205
03/03/06 (S) -- Meeting Canceled --
03/04/06 (S) RES AT 10:00 AM SENATE FINANCE 532
03/04/06 (S) Presentation by Legislative Consultants
03/06/06 (S) RES AT 3:30 PM SENATE FINANCE 532
03/06/06 (S) Heard & Held
03/06/06 (S) MINUTE(RES)
03/07/06 (S) RES AT 3:30 PM BUTROVICH 205
03/07/06 (S) Heard & Held
03/07/06 (S) MINUTE(RES)
03/08/06 (S) RES AT 3:30 PM BUTROVICH 205
03/08/06 (S) -- Meeting Canceled --
03/09/06 (S) RES AT 3:30 PM BUTROVICH 205
03/09/06 (S) -- Meeting Canceled --
03/10/06 (S) RES AT 3:30 PM BUTROVICH 205
03/10/06 (S) -- Meeting Canceled --
03/11/06 (H) RES AT 10:00 AM CAPITOL 106
03/11/06 (H) -- Meeting Canceled --
03/13/06 (S) RES AT 3:30 PM BUTROVICH 205
03/13/06 (S) Heard & Held
03/13/06 (S) MINUTE(RES)
03/14/06 (S) RES AT 3:30 PM BUTROVICH 205
03/14/06 (S) Heard & Held
03/14/06 (S) MINUTE(RES)
03/15/06 (S) RES AT 3:30 PM BUTROVICH 205
03/15/06 (S) -- Testimony <Invitation Only> --
03/16/06 (S) RES AT 3:30 PM BUTROVICH 205
03/16/06 (S) -- Meeting Canceled --
03/17/06 (S) RES AT 3:30 PM BUTROVICH 205
03/17/06 (S) Heard & Held
03/17/06 (S) MINUTE(RES)
03/18/06 (H) RES AT 10:00 AM CAPITOL 124
03/18/06 (H) -- Meeting Canceled --
03/19/06 (S) RES AT 1:00 PM BUTROVICH 205
03/19/06 (S) Heard & Held
03/19/06 (S) MINUTE(RES)
03/20/06 (S) RES AT 3:30 PM BUTROVICH 205
03/20/06 (S) Heard & Held
03/20/06 (S) MINUTE(RES)
03/21/06 (S) RES AT 3:30 PM BUTROVICH 205
03/21/06 (S) -- Meeting Canceled --
03/22/06 (S) RES AT 10:00 AM BUTROVICH 205
03/22/06 (S) -- Testimony <Invitation Only> --
03/23/06 (S) RES AT 10:00 AM BUTROVICH 205
WITNESS REGISTER
JOE BALASH
Staff to Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Commented on CSSB 305(RES).
MARVIN KIRSNER
Greenberg & Traurig LLC
Tax Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau AK 99811-0001
POSITION STATEMENT: Commented on amendments to CSSB 305(RES).
CAROLYN FANAROFF
Greenberg Traurig LLC
Tax Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau AK 99811-0001
POSITION STATEMENT: Commented on amendments to CSSB 305(RES).
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau AK 998811-0001
POSITION STATEMENT: Commented on amendments to CSSB 305(RES).
ROGER MARKS, Economist
Department of Revenue
PO Box 110400
Juneau AK 99811-0400
POSITION STATEMENT: Commented on amendments to CSSB 305(RES).
MARY JACKSON
Staff to Senate Resources Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Commented on amendments to CSSB 305(RES).
ROBERT MINTZ, Assistant Attorney General
Department of Law
PO Box 110300
Juneau AK 99811-0300
POSITION STATEMENT: Commented on amendments to CSSB 305(RES).
ACTION NARRATIVE
CHAIR THOMAS WAGONER reconvened the Senate Resources Standing
Committee meeting from March 22 at 10:11:37 AM. Present were
Senators Ben Stevens, Stedman, Seekins, Dyson, Elton and Chair
Wagoner.
SB 305-OIL AND GAS PRODUCTION TAX
CHAIR WAGONER announced CSSB 305(RES), Version Y, to be up for
consideration. The committee began by taking up Administrative
Amendment 1 again as follows:
ADMINISTRATIVE AMENDMENT 1
OFFERED IN THE SENATE BY SENATOR WAGONER
TO: CSSB 305(RES), draft version 24-GS2052\Y
Page 18, line 4: insert after "than zero":
If a producer does not produce taxable oil or gas
during a month, the producer is considered to have
generated a positive production tax value if the
calculation described in this subsection yields
appositive number because the producer's adjusted
lease expenditures for a month are less than zero as a
result of the producer's receiving a payment or credit
under (e) of this section or otherwise.
Page 18, line 23: insert new paragraph (3):
(3) an explorer that has taken a tax credit under AS
43.55.024(b) or that has obtained a transferable tax
credit certificate under AS 43.55.024(d) for the
amount of a tax credit under AS 43.55.024(b) is
considered a producer, subject to the tax levied under
AS 43.55.011(e), to the extent that the explorer
generates a positive production tax value as the
result of the explorer's receiving a payment or credit
described in (e) of this section.
Page 19, line 29: replace (A) "outlays for capital assets" with:
(A) an expenditure, when incurred, to acquire an item
if the acquisition cost is otherwise a direct cost,
notwithstanding that the expenditure may be required
to be capitalized rather than treated as an expense
for financial accounting or federal income tax
purposes;
Page 21, line 9: replace "amounts that have not been paid" with:
amounts incurred
Page 21, lines 14 - 15: after "business entity" delete all
material and insert:
, whether or not the transaction is treated as an
asset sale for federal income tax purposes.
Page 21, lines 16 - 17: replace "any payment of credit the
producer receives for" with:
Certain payments or credits received by the producer,
as provided in this subsection. If one or more payment
or credits subject to this subsection are received by
a producer during a month or, under (f) of this
section, during a calendar year, and if either the
total amount of the payments or credits exceeds the
amount of the producer's lease expenditures or the
producer has no lease expenditures, the producer shall
nevertheless subtract those payments or credits from
the lease expenditures or from zero, respectively, and
the producer's adjusted lease expenditures for that
moth or calendar year are a negative number and shall
be applied to the calculation under (a) of this
section as a negative number. They payments or credits
that a producer must subtract from the producer's
lease expenditures, or from zero, under this
subsection are payments or credits received by the
producer for
Page 21, lines 18 - 22: delete all material, insert:
(1) the use by another person of a production facility
in which the producer has an ownership interest or the
management by the producer of a production facility
under a management agreement providing for the
producer to receive a management fee;
Page 22, line 1: replace (n) with (m) and after "2006;" insert:
For purposes of this subsection, if a producer removes
from the state, for use outside the state, an asset
described in this subparagraph, the value of the asset
at the time it is removed is considered a payment
received by the producer for the transfer of the
asset;
Page 23, line 28: insert "(b)," at the beginning of the line
Page 23, lines 29 - 30: replace (d)(2)(L) with (d)(2)(N) and
delete "or (d)(2)(M)"
Page 23, line 31: delete "(d)(2)(L) or (d)(2)(M)" and insert
(e)(3)(A)
Page 24, line 10: delete "(d)(2)(L) and replace with (d)(2)(N)
Page 24, line 4: insert after "Revenue Code":
as amended
Page 24, lines 12 - 13: delete all material after "due" and
insert:
If a producer fails to comply with a request under
this paragraph, there shall be added to any
underpayment determined by the department under this
section a penalty in the amount of 20 percent of the
underpayment.
Page 24, lines 14 - 27: delete all material and reorder
Page 24, lines 28 - 30: delete all material and insert:
(n) For purposes of determining the amount of the
adjustment by subtraction that must be made to a
producer's lease expenditures as a result of the
producer's receiving a payment or credit under
(e)(3)(A) of this section,
Page 25, lines 7 - 11: delete all material and reorder
10:14:06 AM
JOE BALASH, staff to Legislative Budget and Audit Committee,
said that language on page 4 of Administrative Amendment 1
[that applied to page 24, lines 12 - 13, of CSSB 305(RES),
Version Y] related to items surrounding the penalty for failure
to provide information requested by the department in connection
with a Section 482-like audit - that determines whether or not a
fair value was assigned to the asset in a transaction that was
not at arm's length.
10:15:19 AM
CHAIR WAGONER recapped that Senator Stedman had asked for a
legal opinion and Jack Chenoweth was working on that. He invited
Mr. Kirsner to testify.
MARVIN KIRSNER, Greenberg & Traurig LLC, Tax Counsel to the
Governor, said his colleague, Carol Fanaroff, was with him.
SENATOR BEN STEVENS said the committee left off yesterday with
Senator Stedman wanting to make all language after "Page 21,
lines 18 - 22: delete all material, insert:" of Administrative
Amendment 1 a substantive amendment. So, he now moved to do that
and then objected for discussion purposes.
10:16:42 AM
He said the question was:
If we're going to do that, I guess the question is do
we continue to adopt the administrative amendment and
then continue this discussion when we get all the
information on the substantive amendment.
CHAIR WAGONER responded that attorneys are available now to
discuss the language and they may not be available later.
SENATOR BEN STEVENS restated his motion with the understanding
that the committee would act on the deleted language at a future
date.
SENATOR ELTON wanted Mr. Kirsner to be available to discuss the
substantive amendment when it was taken up.
10:18:24 AM
SENATOR BEN STEVENS removed his objection.
CHAIR WAGONER announced without further objection, the committee
had Administrative Amendment 1 before it without the language on
page 4.
10:18:49 AM
SENATOR BEN STEVENS said Mr. Kirsner's discussion would concern
the material on page 4 of Administrative Amendment 1 through the
end of the amendment - "(e)(3)(A)".
MR. BALASH explained that the penalty item on the last page of
Amendment 1 [regarding page 24, lines 12 - 13 of the CS], was an
issue by itself.
10:21:18 AM
SENATOR BEN STEVENS went to page 3 of Administrative Amendment 1
and said a lot of the pieces that refer to (d)(2)(L) and
(d)(2)(M) related to the information at the bottom of page 4. He
didn't disagree with Mr. Balash that the penalty was an item,
but he was more concerned about including (L), (M), (N), and
(e)(3)(A) - on page 3 of Administrative Amendment 1 that
referred to page 22, line 1 of the CS.
MR. BALASH explained that replacing (n) with (m) was due to the
deletion of material on page 24, lines 14 - 27. He explained
that Mr. Kirsner wrote a memo dated February 27, 2006, that
addressed a couple of potential constitutional issues, which
were put aside, but he also identified a number of other
concerns about capital expenditures such as how to treat the
stock of companies, outlays for Capex, related party
transactions, ownership interests, and how credits and
reimbursement adjustments are made. All his concerns were
embodied in Section 26, which he offered to explain to the
committee.
10:24:56 AM
SENATOR BEN STEVENS clarified that the affected language in the
CS started on page 23, line 29, and went through the top of page
24, line 13; he wanted to hear the reasoning behind the
insertion of (l) on page 23, line 29.
MR. BALASH replied that the administration was not trying to
affect a substantive issue in Subsection (l), which was beyond
the scope of his charge; it was the legislature's policy call.
However, he supported striking the penalty provision as the
department requested.
CHAIR WAGONER identified that the section started on page 23,
line 29, and went through page 24, line 13.
SENATOR BEN STEVENS suggested that it extended through page 25,
line 6.
10:29:57 AM
SENATOR SEEKINS recalled that he moved the amendment and
objected. So, he removed his objection.
MR. BALASH clarified that all that has been stricken from
Administrative Amendment 1 was the penalty language, which would
be dealt with as a separate amendment; the rest of the changes
corrected references.
SENATOR BEN STEVENS further corrected that the conceptual
substantive amendment referred to page 23, line 29, through page
25, line 11.
10:33:45 AM
SENATOR ELTON suggested deleting all language after page 3 of
Administrative Amendment 1 starting with "Page 22, line 1:".
MR. BALASH said they must go one paragraph higher to capture the
references the administration requested - on page 3 [of
Administrative Amendment 1] starting at "Page 21, line 18-22:".
10:36:02 AM
CHAIR WAGONER added that deleted language could be changed into
one substantive and one technical amendment. He clarified that
that Administrative Amendment 1 dealt with items on pages 1, 2,
and the first two lines on page 3 as follows:
ADMINISTRATIVE AMENDMENT 1
OFFERED IN THE SENATE BY SENATOR WAGONER
TO: CSSB 305(RES), draft version 24-GS2052\Y
Page 18, line 4: insert after "than zero":
If a producer does not produce taxable oil or gas
during a month, the producer is considered to have
generated a positive production tax value if the
calculation described in this subsection yields
appositive number because the producer's adjusted
lease expenditures for a month are less than zero as a
result of the producer's receiving a payment or credit
under (e) of this section or otherwise.
Page 18, line 23: insert new paragraph (3):
(3) an explorer that has taken a tax credit under AS
43.55.024(b) or that has obtained a transferable tax
credit certificate under AS 43.55.024(d) for the
amount of a tax credit under AS 43.55.024(b) is
considered a producer, subject to the tax levied under
AS 43.55.011(e), to the extent that the explorer
generates a positive production tax value as the
result of the explorer's receiving a payment or credit
described in (e) of this section.
Page 19, line 29: replace (A) "outlays for capital assets" with:
(A) an expenditure, when incurred, to acquire an item
if the acquisition cost is otherwise a direct cost,
notwithstanding that the expenditure may be required
to be capitalized rather than treated as an expense
for financial accounting or federal income tax
purposes;
Page 21, line 9: replace "amounts that have not been paid" with:
amounts incurred
Page 21, lines 14 - 15: after "business entity" delete all
material and insert:
, whether or not the transaction is treated as an
asset sale for federal income tax purposes.
Page 21, lines 16 - 17: replace "any payment of credit the
producer receives for" with:
Certain payments or credits received by the producer,
as provided in this subsection. If one or more payment
or credits subject to this subsection are received by
a producer during a month or, under (f) of this
section, during a calendar year, and if either the
total amount of the payments or credits exceeds the
amount of the producer's lease expenditures or the
producer has no lease expenditures, the producer shall
nevertheless subtract those payments or credits from
the lease expenditures or from zero, respectively, and
the producer's adjusted lease expenditures for that
moth or calendar year are a negative number and shall
be applied to the calculation under (a) of this
section as a negative number. They payments or credits
that a producer must subtract from the producer's
lease expenditures, or from zero, under this
subsection are payments or credits received by the
producer for
There were no objections and Administrative Amendment 1 was
adopted.
He said Mr. Kirsner would start his discussion on the deleted
language of the amendment as follows:
Page 21, lines 18 - 22: delete all material, insert:
(1) the use by another person of a production facility
in which the producer has an ownership interest or the
management by the producer of a production facility
under a management agreement providing for the
producer to receive a management fee;
Page 22, line 1: replace (n) with (m) and after "2006;" insert:
For purposes of this subsection, if a producer removes
from the state, for use outside the state, an asset
described in this subparagraph, the value of the asset
at the time it is removed is considered a payment
received by the producer for the transfer of the
asset;
Page 23, line 28: insert "(b)," at the beginning of the line
Page 23, lines 29 - 30: replace (d)(2)(L) with (d)(2)(N) and
delete "or (d)(2)(M)"
Page 23, line 31: delete "(d)(2)(L) or (d)(2)(M)" and insert
(e)(3)(A)
Page 24, line 10: delete "(d)(2)(L) and replace with (d)(2)(N)
Page 24, line 4: insert after "Revenue Code":
as amended
Page 24, lines 12 - 13: delete all material after "due" and
insert:
If a producer fails to comply with a request under
this paragraph, there shall be added to any
underpayment determined by the department under this
section a penalty in the amount of 20 percent of the
underpayment.
Page 24, lines 14 - 27: delete all material and reorder
Page 24, lines 28 - 30: delete all material and insert:
(n) For purposes of determining the amount of the
adjustment by subtraction that must be made to a
producer's lease expenditures as a result of the
producer's receiving a payment or credit under
(e)(3)(A) of this section,
Page 25, lines 7 - 11: delete all material and reorder
MR. KIRSNER explained this provision dealt with a facility that
was owned by the producer that leased it to a third party and
received payments for it. The amounts received would be
subtracted from his costs. However he thought there was still
potential for abuse saying the producer might enter into a
management agreement - like most franchised hotels do. In that
case, an operator wouldn't need an ownership interest in order
to receive fees for it and that then puts him in the same
position as if it were leasing a facility.
10:40:49 AM
CHAIR WAGONER asked him to comment on changes to page 22, line
1.
MR. KIRSNER explained that the original bill had provisions
dealing with deductions that were taken before a property was
sold. He said that would avoid the potential abuse by a producer
who purchased equipment just in order to generate a direct cost
he would be able to deduct in order to determine the profit for
each barrel of oil. For example, a company might buy a piece of
equipment, ostensibly for use in Alaska, which would entitle it
to a deduction from direct costs, but then instead of selling
it, it would ship it out of Alaska for its own use or use by an
affiliate in some other state or some other country - like
Nigeria.
10:42:31 AM
SENATOR SEEKINS asked if the intent was to block a company from
bringing an asset into Alaska to get the credit and then
shipping it someplace else to use it within a short period of
time.
MR. KIRSNER replied yes - that was a very big loophole.
He moved on saying the next technical change renumbered
(d)(2)(L) with (d)(2)(N). The next changes were corrected
references to the Internal Revenue Code as amended.
MR. KIRSNER said the next change dealt with what he thought was
the "greatest area for abuse," which he would also let Ms.
Fanaroff comment on. It covered transactions between related
entities. For example, a producer could purchase items at an
inflated cost. It could buy 10 drill bits that are worth
$100,000 each, but it might pay $2 million for them from the
related entity. This would generate an inflated direct cost
deduction of $1 million.
He said Section 482 of the IRS Code allowed the IRS to
reallocate income between related entities. The idea was to
incorporate the IRS provisions or allow the Department of
Revenue to promulgate regulations incorporating the provisions
of Section 482. This is where the 20-percent penalty came from.
He then let his colleague, Carolyn Fanaroff, address the
transfer pricing issues since her background was with the IRS.
CAROLYN FANAROFF, Tax Counsel, Greenberg Traurig LLC, focused
specifically on the penalties. She explained that Section 482
was started by the IRS to deal with companies that were using
offshore entities to maximize their expenses and income in low-
tax or no-tax areas. To enforce the transfer pricing rules, the
IRS developed a penalty documentation rule, which she explained:
So, it's always a two-step process, which is that
first you have to set your prices at the right level;
but then, step two is that you have to provide the IRS
with a roadmap of how you did it. This is because the
IRS agents would come in and try to figure out how the
companies structured their transfer prices.... There
is no way to know because it's just one company and
they were out to get a lot of answers that had to do
with smoke-filled rooms and private negotiations. So
in order to avoid that, Congress enacted Section
6662(e), which we refer to here - which has two parts
to it - the part that's the penalty and the part that
is the documentation. When Congress enacted the rules,
the clear intent was not to apply the penalty, but
rather to encourage compliance with the law. So, the
goal would be that when the IRS came to audit the
company, they would be able to go to their stuff and
pull out from their stuff prepared documentation that
was contemporaneous at the time the tax return was
filed, hand it to the IRS, and then the IRS would have
a roadmap of the transaction. That's basically the
model that we've tried to incorporate here, because it
is very difficult to enforce these principles without
a roadmap.
CHAIR WAGONER asked for questions and indicated there were none
at this point.
MS. FANAROFF continued saying the only difference is the IRS
established the penalty for the valuation statement where a
company would value its goods and services incorrectly. That is
slightly different than language in the amendment that
establishes a penalty for underpayment. She reiterated that the
intent was not to have penalties, but rather to have compliance
at the federal level.
MR. KIRSNER added that it would be to the state's benefit to
piggyback on that body of federal law.
10:52:16 AM
CHAIR WAGONER indicated there were no further questions and
thanked them for their testimony. He set that amendment aside.
10:53:40 AM
SENATOR SEEKINS moved to adopt Substantive Amendment 1.
SUBSTANTIVE AMENDMENT 1
OFFERED IN THE SENATE RESOURCES COMMITTEE BY SENATOR WAGONER
TO: CSSB 305(RES)(24-GS2052\Y)(3/26/06) Work Draft: Chenoweth)
Page 3, line 16, through page 4, line 23:
Deleted all material.
Renumber the following bill sections accordingly.
Page 6, lines 18 - 27:
Delete all material.
Renumber the following bill sections accordingly.
Page 13, line 11, through page 14, line 7:
Delete all material.
Renumber the following bill sections accordingly.
Make changes throughout the bill to conform to the deletions
above.
Page 17, line 26, following "(f)":
Insert "and (i)"
Page 21, line 10:
Delete "(l)"
Insert "(n)"
Page 21, line 14:
Delete "(l) and (m)"
Insert "(n) and (o)"
Page 22, line 1:
Delete "(l) and (n)"
Insert "(n) and (p)"
Page 23, following line 14 - insert the following material:
"(i) For a month for which (12) the production tax
value of the taxable oil and gas produced during the month
calculated under (a) of this section exceeds zero, and (2)
the total quantity of oil and gas, including oil and gas
the ownership or right to which is exempt from taxation,
produced per day by the producer from all leases or
properties in the state averages less than 55,000 barrels
of oil equivalent, a producer that is qualified under (j)
of this section may reduce the production tax value by
deducting an allowance in an amount calculated under this
subsection. For purposes of this subsection, a barrel of
oil equivalent is a barrel of oil, in the case of oil, or
6, 000 cubic feet of gas, in the case of gas. The allowance
is equal to the production tax value calculated under (a)
of this section multiplied by the fraction that is yielded
by the following formula, except that the value of the
fraction may not be greater than one:
(5,000 - 0.1*[ADP-5,000])/ADP
where ADP is the average for the month of the number of
barrels of oil equivalent of the total quantity of oil and
gas, including oil and gas the ownership or right to which
is exempt from taxation, produced per day by the producer
from all leases or properties in the state.
(j) Upon written application by a producer, including
any information the department may require, the department
shall determine whether the producer qualifies under this
subsection for a calendar year. To qualify under this
subsection, a producer must demonstrate that its operation
in the state or its ownership of an interest in a lease or
property in the state as a distinct producer entity would
not result in the division among multiple producer entities
or any production tax value of taxable oil and gas, as
defined under (a) of this section, that would be reasonably
expected to be attributed to a single producer entity if
the allowance provision of (i) of this section did not
exist."
Page 23, line 15:
Delete "(i)"
Insert "(k)"
Page 23, line 23:
Delete "(j)"
Insert "(l)"
Page 23, line 25:
Delete "(k)"
Insert "(m)"
Page 23, line 29:
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Insert "(n)"
Page 24, line 14:
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Insert "(o)"
Page 24, line 25:
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Insert "(n)"
Page 24, line 27:
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Insert "(n)(1)"
Page 24, line 28:
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Insert "(n)"
Page 25, line 3:
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Insert "(n)(1)"
Page 25, line 18:
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Inert "(q)"
Page 8, line 26:
Delete "AS 43.55.013(c),"
Insert "AS 43.55.011(a), 43.55.011(b), 43.55.013(c),"
Following: 43.55.013(i),"
Insert "43.55.013(j),"
Make changes throughout the bill to conform to the statute
repeals added on page 28, line 26, above.
CHAIR WAGONER objected for discussion purposes. He said that
Robert Mintz, Department of Law, wrote this amendment that dealt
with the 5,000-barrel amendment and replaces the Cook Inlet tax
structure and the $73 million standard deduction that was in the
governor's bill.
10:55:28 AM
MARY JACKSON, Staff to Senator Wagoner, added that the chair had
worked with Dr. Pedro van Meurs on this issue and that Mr. Mintz
was online to answer questions.
CHAIR WAGONER asked Mr. Mintz to review the concept.
ROBERT MINTZ, Assistant Attorney General, Department of Law,
explained that material on page 1 of the amendment eliminated
the component of the production tax for Cook Inlet and that the
heart of the amendment implemented a concept of Dr. Van Meurs
that was on page 2 through the top of page 3.
The concept basically has a tax-free allowance similar in
magnitude to the $73 million allowance, but scaled to the amount
of production a company has in Alaska. If the average daily
production of a producer during a month were no more than 5,000
barrels per day, then there would be no production tax on its
oil and gas. At the other end of the spectrum, it gave no
allowance to producers with 55,000 barrels a day or more of oil
and gas production. The intent was to target the allowance to
smaller producers where it was really needed and it was designed
to be calculated on a monthly basis.
10:59:39 AM
MR. MINTZ pointed out that line 17 referred to 55,000 barrels of
oil being equivalent to 6,000 cf of gas. Subsection (j)
[referenced on line 18] was language from the governor's bill
that tried to prevent abuse of the allowance. In looking over
the amendment, he realized a couple of refinements in
terminology were needed. He said lines 15 and 26 of page 2, have
a reference to "total quantity of oil and gas" and the
production tax statute actually uses the term "amount" when it
refers to how much oil and gas is produced. He suggested
changing "quantity" to "amount" for consistency. Secondly,
language on page 3, line 3 - the anti-splitting provision -
talks about production tax value among multiple producer
entities. In this case, because the allowance is based on the
formula that in turn depends on the producer's total amount of
oil against production, he suggested inserting "any amount of
oil or gas production or" after "entities of" on page 3, line 3.
So, it would read, "multiple producer entities of any amount of
oil or gas production or any production tax value of taxable oil
and gas,". He said the rest of the amendment had conforming
changes.
CHAIR WAGONER said that converting 6,000 cf of gas to 55,000
barrels of oil was a pretty simplistic statement in looking at
the volatility of pricing for both commodities. He thought they
might want to look at a formula the DOR could use to change it
as prices changed.
11:04:45 AM
DAN DICKINSON, CPA, supported his observation and said he was
comfortable with using a rough approximation that could be
modified.
11:06:00 AM
SENATOR STEDMAN said another issue of concern was the financial
impact of the tier structure and he suggested they might want to
cap it at $40 a barrel. However, since it was a different
methodology from the original $73 million exemption, he thought
the idea needed to be analyzed more thoroughly.
MR. DICKINSON said he had a graph that would help illustrate it.
He explained that Roger Marks, a petroleum economist at the
Department of Revenue, calculated that the break-even point
between the $73 million exemption and the $40 cap, given the
current distribution of barrels, was at about $30. "At more than
$30, this would yield a higher allowance; at less than $30, this
would yield a lower allowance."
CHAIR WAGONER observed that the 5,000-barrel equation could go
quite high.
11:08:13 AM
SENATOR STEDMAN agreed and he also thought they should have a
discussion on the scope of the exclusion since they were going
to have one. Econ One had come back with the $40 cap suggestion.
"It's controlling the size of it," he said.
MR. DICKINSON pointed out that Econ One suggested a cap, not a
break-even point.
11:09:21 AM
SENATOR BEN STEVENS said he didn't see an issue with running the
production up to a certain level, but he wanted an analysis done
on "the impact of just essentially cutting off the tail."
11:10:52 AM
SENATOR SEEKINS said he understood the intent was to encourage
new development, but the effect is to encourage new development
of people who already aren't producing pretty well. He objected
to that on an issue of fairness, because he wanted to also
encourage those who are already producing to go out and do more.
11:12:07 AM
CHAIR WAGONER said he thought it treated both parties pretty
well.
SENATOR BEN STEVENS said he agreed with using incentives to
attract new producers, but questioned how far the state needed
to go. If you're going to keep incentives for the smaller
players, you have to decide what is small and keep it small.
This would raise the amount for every company except three.
11:15:04 AM
SENATOR STEDMAN thought maybe the formula could be tweaked so
the tail accelerated at 5,000 until 30,000 or 25,000 or whatever
barrel-equivalent was decided.
MR. DICKINSON said that changing the .001 to .002 would make
that steeper.
11:17:10 AM
MR. MINTZ said he had additional points in explaining
Substantive Amendment 1 in that language on page 1, line 16,
said: "Make changes throughout the bill to conform to the
deletions above." He didn't have enough time to put in all the
conforming changes that were needed and suggested making this
conceptual.
Secondly, he said the original allowance language in the
governor's bill said that any unused amount could not be carried
forward or be used as a basis for a loss credit. That language
was not in this amendment and he explained the reason it was not
necessary was because the allowance is calculated per month and,
"There is never anything left over that couldn't and wouldn't be
used in that month."
11:19:08 AM
SENATOR SEEKINS moved to adopt Amendment 1 to Substantive
Amendment 1 to change "quantity" on lines 15 and 26, of page 2
to "amount". There were no objections and it was adopted.
SENATOR SEEKINS moved to adopt Amendment 2 to Substantive
Amendment 1 to insert "any amount of oil or gas production or"
after "entities of" on page 3, line 3. There were no objections
and it was adopted.
11:21:47 AM
CHAIR WAGONER said he thought they were going to review how this
provision had enticed small operators to Alaska in seven years.
11:22:14 AM
SENATOR SEEKINS moved to adopt conceptual Amendment 3 to
Substantive Amendment 1 to sunset the provisions of this
amendment seven years from the date of enactment.
CHAIR WAGONER said he would hold this amendment until he got
further information this afternoon.
MR. DICKINSON recapped the three points they wanted to look at
later were what happens if there's a cutoff at 30,000 BOE total
or a combination of cutoff or rapid-slope decline from the full
5,000 BOE (instead of tailing it off); the fiscal impact that
would have at various prices; and the 6:1 valuation formula for
valuation of gas and oil.
CHAIR WAGONER asked if there were any objections to Senator
Seekins' conceptual Amendment 3 [the sunset provision] to
Substantive Amendment 1. There were no objections and it was
adopted.
11:24:59 AM
CHAIR WAGONER announced Substantive Amendment 2 to be up for
consideration. He asked Mr. Mintz to explain it for the
committee.
24G-2
3/22/2006
(12:54 P.M.)
SUBSTANTIVE AMENDMENT 2
OFFERED IN THE SENATE RESOURCES BY _____________________
COMMITTEE
TO: CSSB 305(RES) (24-GS2052\Y) (3/16/06 Work Draft:
Chenoweth)
Page 17, line 31, following "(2)", through Page 18, line 2:
Delete all material and insert "for a month that ends
before April 1, 2013, and to the extent allowed under (g) of
this section, less an amount of the producer's transitional
investment expenditures that has not previously been deducted
under this subsection."
Page 18, line 20:
Delete "(g)"
Insert "(g)(3)"
Delete ", but not more than 1/48 of a producer's
transitional investment expenditures may be deducted in any
month"
Page 22, line 13:
Delete "January 1, 2003"
Insert "April 1, 2001"
Page 22, lines 18 - 19:
Delete "on or after January 1, 2003, and"
Page 22, line 20:
Delete ", multiplied by"
Insert ";"
Page 22, lines 21 - 26:
Delete all material and insert the following:
"(2) an amount of a producer's transitional
investment expenditures may be deducted under (a) of this
section only to the extent that the amount does not exceed
(A) one-half of the producer's qualified
capital expenditures, as defined in AS 43.55.024, that
are incurred during the month, if the producer does
not make an election under (f) of this section;
(B) 1/24 of the producer's qualified
capital expenditures, as defined in AS 43.55.024, that
are incurred during the calendar year, if the producer
makes an election under (f) of this section;"
Page 22, line 27:
Delete "(2) notwithstanding (1)"
Insert "(3) notwithstanding (2)"
Page 29, following line 25:
Insert the following material:
"(d) Notwithstanding any contrary provision of
AS 43.55.160(g)(2), enacted by sec. 26 of this Act, for oil and
gas produced on or after April 1, 2006, and before January 1,
2007,
(1) the number "1/24" in AS 43.55.160(g)(2(B),
enacted by sec. 26 of this Act, shall be replaced by the number
"1/18";
(2) the phrase "calendar year" in
AS 43.55.160(g)(2)(B), enacted by sec. 26 of this Act, shall be
replaced by the phrase "last nine months of the calendar year"."
Page 29, line 26:
Delete "(d)"
Insert "(e)"
11:25:49 AM
MR. MINTZ explained that this kind of transitional investment
expenditure concept is sometimes referred to as the clawback
provision. This language shortened the look back that originally
started in 2003 and provided that only certain percentages of
previous expenditures would qualify for the deduction in
calculating taxable value. The concepts that would be changed by
this amendment would be first, that the look back period would
start on April 1, 2001 [page 1, lines 14-15 of Substantive
Amendment 2]; second, that reducing the deductible expenditures
to 25 percent, 50 percent or 75 percent depending on the year
would be eliminated and it would all be potentially 100 percent
[on page 2, lines 20-21 of Substantive Amendment 2]; and third,
the new concept from Dr. Van Meurs referred to as the two-for-
one concept [page 2, line 3 - 12 of Substantive Amendment 2].
This concept says the capital investments previously made in
past years can only be deducted to the extent that there are new
investment expenditures, referred to as "qualified capital
expenditures," in the month and they would have to be twice as
much as the tax expenditure. Further, the amount of the
producer's traditional investment expenditures, the look back,
could be deducted only to the extent that the amount does not
exceed one-half of the producer's qualified capital expenditures
that are incurred during a month.
MR. MINTZ said that subparagraphs (A) and (B) have two options.
He recalled that subsection (f) of Section 160 says when a
producer calculates taxes on a monthly basis during a calendar
year, it can be done on the basis of the actual monthly lease
expenditures or it could be an annualized approach, which is to
say you look at your lease expenditures over a calendar year and
each month deduct one-twelfth of them. He went on to explain:
Subparagraph (B) of the amendment says if a producer
elects to do it on an annualized basis, when you
compare your current capital expenditures to the look
back or transitional investment expenditures, then you
can deduct up to one-twenty-fourth of the annual
current expenditures during a calendar year.
And then the final part of amendment is simply a
transitional provision that would be towards the end
of the bill, not a codified part of the statute -
because the first calendar year begins in April, that
when you're doing an annualized approach to
calculating your taxes, you are only looking at nine
months of the calendar year and, therefore, on your
deductible look back expenditures, one-half of the
monthly expenditures over nine months, which is one-
eighteenth rather than one-twenty-fourth.... There is
a sunset on this provision, which is shown on line 2,
of page 1. And the whole trigger for being able to
deduct transitional investment expenditures is that it
has to be per month and that's for April 1, 2013.
11:30:54 AM
SENATOR SEEKINS moved to adopt Substantive Amendment 2.
SENATOR BEN STEVENS objected for discussion purposes.
SENATOR ELTON said in a previous amendment, a sunset was
described as seven years after enactment and he thought the
committee might want to use that concept here for consistency.
SENATOR SEEKINS said this assumes the effective date of the tax
would be April 1, 2006 and it was tied to that. He renewed his
objection to both a retroactive tax and a retroactive credit.
11:32:26 AM
SENATOR STEDMAN reminded members that they were looking for a
balance and clearly the bill would have retroactivity in tax
collection and an impact on the industry.
SENATOR ELTON said one of the advantages of an effective date of
April 1 or January 1, for that matter, is that it does extend
credits for winter work that is being done this winter. So,
there is advantage for some players to have an earlier effective
date, because the credits are more important to them than the
tax.
SENATOR STEDMAN said it is hard to estimate how quick the
credits would be used up.
SENATOR STEVENS asked Mr. Mintz to explain again the one twenty-
fourth he talked about earlier in section (B) on page 2, line
10, of Substantive Amendment 2.
MR. MINTZ explained that that section was trying to reconcile
two concepts. The tax is paid on a monthly basis. But in
calculating it, the producer is allowed to elect to take the
annual lease expenditure and divide by twelve and each month
deduct one-twelfth of the annual cost instead of deducting 100
percent of the actual monthly costs. He explained further:
So, there is a one-twelfth that appears in subsection
(f)[page 22, line 8 of CSSB 305(RES)]. In this look
back for transitional investment expenditure concept,
in any one month that the amount of the look back for
transitional expenditures can be deducted is limited
to one-half of the new capital investment. So, under
(A) [page 24, line 21 of CSSB 305(RES)], that's just
very direct and when you're doing it on a monthly
basis, you look at your capital expenditures made that
month and you can't deduct more than one-half of that
amount in transitional investment expenditures. But
when you're annualizing your deductions and deducting
each month, one-twelfth of that year's lease
expenditures, then again you're only allowed to deduct
up to one-half of that month's capital expenditures
and that's one twenty-fourth of the entire year's
capital expenditures.
11:38:07 AM
SENATOR BEN STEVENS asked where the ability to accrue it to the
deduction was in the amendment.
MR. MINTZ replied that the fundamental language that provides
for a deduction of the transitional lease expenditures is on
lines 2 - 4 on page 1.
SENATOR BEN STEVENS noted that language began on page 17, line
31 of the CS and he didn't see the mechanism equating it to the
transitional expenditure.
MR. MINTZ said the existing CS doesn't allow more than one
forty-eighth of the total in any month. That is getting replaced
with a new limit, which compares to new capital investment for
the month and no more than one-half of that amount can be
deducted.
SENATOR BEN STEVENS asked if the fact that the transitional
expenditure can't be used to bring the ratepayers' liability
down to zero was not being addressed.
MR. MINTZ replied that language was still in the CS on page 18,
lines 3 - 4.
11:40:43 AM Recess 11:41:35 AM
CHAIR WAGONER called the meeting back to order at 11:41:35 and
announced that the committee had a motion to adopt Substantive
Amendment 2 before it. Seeing no objections, he said it was
adopted.
11:42:13 AM Recess 2:07:19 PM
CHAIR WAGONER called the meeting back to order at 2:07:24 PM. He
announced that the committee would take up Substantive Amendment
1 am again. He recapped that it eliminated the separation of
Cook Inlet and the $73 million standard deduction.
2:08:55 PM
SENATOR STEDMAN said further analysis had been brought to the
committee on the way the formula was written. It excluded the
first 5,000 barrels a day from PPT tax, but this exclusion would
have slowly tapered down in an exponential fashion to 55,000 a
day before it hit zero.
He moved to adopt Amendment 4 to Substantive Amendment 1 to
change the multiple factor in the formula of .1 (or 10 percent)
to .2, which would steepen that curve and would still exclude
5,000 barrels, but it would end at 30,000 barrels a day.
CHAIR WAGONER said that Roger Marks authored the analysis.
2:10:17 PM
ROGER MARKS, Petroleum Economist, Department of Revenue,
explained that the first page of his power point, Producer 2005
Daily Production (BOE Equivalents), just showed the date-set for
2005. It showed each producer in the state and their barrel of
oil equivalent. He commented, "What is shown here is that at the
55,000 barrel-limit, everyone except BP, ConocoPhillips, and
ExxonMobil would get some tax free allowance."
He said the next page, Allowance Mechanisms, showed what the
curve looked like in terms of allowance percentage depending on
average daily production. The proposed amendment, with the 5,000
barrels and the .1 multiplier and no cut off, showed at 5,000
barrels a day, a producer would get a 100-percent allowance, but
that dropped pretty rapidly to 50 percent up to a 9,000 barrels-
a-day spectrum when it would decline at a slower rate. The
proposed amendment tapered off to zero at 55,000 barrels a day.
It also illustrated a cutting off at 30,000, where it just about
dropped straight off the graph. The other idea was to substitute
.2 for the .1 that would cause the allowance to go to zero in
30,000 barrels a day. He explained that it still dropped fast
initially, but then kind of tapered off more quickly than
before.
2:13:56 PM
MR. MARKS said his third graph, Amendments - Annual Cost to
State ($millions), showed the effects in annual costs to the
state. Chevron was the only company that had more than 30,000
and less than 55,000 barrels a day. At 45,000 barrels a day, its
tax-free percentage was only about 2 percent. He explained:
In terms of revenues, it doesn't make much of an
impact.... the general slope of that line is for every
$1 increase in prices, it's about $1.9 million of
revenue less to the state.
The other approach, he said, would be to change the multiplier
to .2 and having a more-rapid drop off. The costs to the state
are reduced - the graph showing that for every $1 in price, it's
about $1.2 million a year less to the state. He suspected the
annual revenue numbers would drop with declining production each
year.
2:16:03 PM
Finally, Mr. Marks pointed out how this compares with the $73
million in the governor's bill. He estimated seven companies
would get full allowances originally, but thought about it more
and changed that to nine full allowances. A $73 million
allowance with a 20 percent deduction would amount to about $130
million per year. He estimated that about 98 percent of the oil
hits that $73 million peak at fairly low prices - of about $20
to $25 and higher.
2:17:30 PM
MR. MARKS corrected his earlier estimate reported by Mr.
Dickinson for a crossover point at about $35 per barrel and he
had mistakenly thought that the 5,000 barrels a day was a
credit, not an allowance. When he realized it was an allowance,
that made the crossover point go much higher - to about $85 a
barrel.
2:17:59 PM
SENATOR BEN STEVENS asked if he assumed the $130 million would
be the maximum loss to the state, because all the companies
might not use the full deduction.
MR. MARKS replied that was the difference between the structure
in the governor's bill and the structure of the amendment. Once
the $73 million allowance is hit with the governor's bill, it
stops; under the amendment it continues going up with the price.
MR. DICKINSON explained that $130 million was the estimate for
nine full equivalents using all the credits. Fourteen companies
were actually listed and six of those would get partial credit.
It was an estimate of the aggregate.
SENATOR BEN STEVENS reiterated that was the point he was trying
to make. The $130 million would be the maximum amount of loss to
the state, but it would be an aggregate of the 14 companies.
SENATOR BEN STEVENS asked if Mr. Marks' calculations could be
carried out on actual costs given the known BOE equivalents. He
asked if the yellow line on page 3 was an estimate.
MR. MARKS replied that the yellow line was his estimate of what
the revenues would be with the .2 multiplier. "The reason at $15
ANS, the amount is zero, is we estimate average cost of about
$15 a barrel to get from the market to net income."
SENATOR BEN STEVENS asked if the assumptions on the input were
taken from current production scales (on page 1 of the power
point).
MR. MARKS replied yes.
SENATOR STEDMAN asked if altering the slope reduced the state's
financial exposure by one-third at the high end.
MR. MARKS replied yes and that comes to about $1.2 million per
$1 ANS price from $1.9 million - about 37 percent.
SENATOR STEDMAN asked if that would still give a 5,000-barrel a-
day exclusion for the start up companies.
MR. MARKS replied yes. He said everybody on his list on page 1
that is producing 5,000 barrels or less would still get 100
percent of their production excluded. He reminded them that
Kerr-McGhee and Pioneer were starting up with 20,000 barrels, so
under that proposal, about 10 percent of their production would
be excluded, or about 2,000 barrels.
2:24:10 PM
CHAIR WAGONER said it looked like at that level of production, a
company was getting a relatively small credit.
2:26:00 PM
SENATOR STEDMAN objected to the amendment for discussion
purposes and said that by changing the multiplier and dropping
the slope and driving the allowance to zero barrels at 30,000
exponentially versus the cliffing-approach of the other style
would be in the best interests of the state and still give
benefit to the industry on the smaller producing fields. Even
the larger producing fields get a little bit of a break in the
beginning.
SENATOR BEN STEVENS asked what the average BOE equivalent of a
satellite on the North Slope was.
MR. MARKS replied just in Prudhoe Bay there are five satellites
currently producing an average of about 6,600 barrels per day -
Midnight Sun, Polaris, Orion, Aurora, and Borealis.
SENATOR BEN STEVENS asked if that would put them at the
seventieth percentile on their chart.
MR. MARKS replied that the satellites belong to the Prudhoe Bay
producers and because this was a company-wide allowance, they
would not get an allowance themselves.
SENATOR BEN STEVENS asked if the intent of the legislation and
the in-field allowance was to promote development of small
fields and satellites, (most recently Pioneer and Oooguruk at
about 20,000 barrel per day). He wondered if this would actually
serve those it was designed for because it was a pretty slow
mechanism for cost recovery.
MR. MARKS replied that even under the governor's proposal of $73
million that was company-wide, the satellites were small
operations of the big three and probably wouldn't see a benefit.
Part of the governor's goal was to attract small and new
companies and he believed that should continue.
2:30:21 PM
SENATOR BEN STEVENS suggested that this provision allowed them
to maintain that benefit, but in a different way.
MR. MARKS agreed.
SENATOR BEN STEVENS asked if this amendment replicated the
result for the small operators.
MR. MARKS responded that the governor's bill was designed to
replicate the result of the ELF and this amendment would not
replicate that result.
SENATOR BEN STEVENS refined his question and asked if this
amendment replicated the result for smaller independent
operator.
MR. MARKS replied yes for those producing under 5,000 barrels a
day.
SENATOR BEN STEVENS said it was recognized that the heartburn
behind the $73 million allowance was that it was company-wide
and he asked if this treated smaller companies differently than
the bigger ones.
MR. MARKS replied that Kerr-McGhee and Pioneer would still pay a
tax under the governor's bill once their $73 million was
achieved, but they would start paying tax sooner under this
amendment.
SENATOR BEN STEVENS asked, "At any form of the amendment? Not
any of the three proposals that you have - the one that was in
the original amendment, the 30,000 or the .2 multiplier?"
MR. MARKS replied, "That's correct."
SENATOR BEN STEVENS asked if he said they would pay sooner.
MR. MARKS replied, "I believe so."
2:33:28 PM
SENATOR SEEKINS said the first $73 million based on 5,000
barrels a day at $40 a barrel under the governor's bill was tax-
free and applied to everyone.
CHAIR WAGONER agreed.
SENATOR SEEKINS continued saying that this amendment provided
that once a company hits 30,000 barrels a day, it would get no
tax relief all the way back to the first barrel. Only if it kept
production under 5,000 barrels a day would it get 100 percent of
the tax relief and that would quickly go down from there, so
that at 20,000 barrels a day a company would have to pay 90
percent of the tax.
MR. DICKINSON replied under the governor's proposal, at 20,000
barrels assuming a $40 price, a company would get 5,000 barrels
tax-free. But because the amendment gives 10 percent credit to
20,000 barrels, that drops the tax-free barrels to 2,000.
2:35:15 PM
CHAIR WAGONER said he originally talked to Dr. Van Meurs about
everyone getting the 5,000-barrel deduction under a 55,000-
barrel ceiling and he came up with this formula that basically
reduced more of the credit from the medium producers.
2:35:57 PM
SENATOR SEEKINS said his concern was that a big producer
wouldn't have incentive to open up a new field.
CHAIR WAGONER said he wanted to give an allowance to everyone
for production under 55,000 barrels.
2:38:23 PM
CHAIR WAGONER reminded the committee that the amendment adopting
the .2-multiplier was before it [Amendment 4 to Substantive
Amendment 1]. A roll call vote was taken. Senators Dyson,
Stedman, Elton, and Wagoner voted yea; Senator Ben Stevens and
Seekins voted nay; so the amendment was adopted.
2:39:41 PM
SENATOR SEEKINS moved to adopt conceptual Amendment 5 to insert
the equivalent value of $40 a barrel.
SENATOR STEDMAN objected for further discussion because he
wasn't sure that was needed.
SENATOR ELTON agreed with Senator Stedman and reasoned that the
one-third difference in revenue to the state seemed pretty
constant with each of the values along the bottom axis and
putting in a specific price would distort it.
2:41:25 PM
SENATOR SEEKINS pointed out that according to the graph, at $40
a barrel it would cost the state $30 million and under $60 a
barrel, it would cost the state about $55 million. He noted that
Robynn Wilson, Director of the Tax Division, was nodding her
head yes.
2:42:48 PM
SENATOR BEN STEVENS said he thought this component in the
original bill gave relief up to $14.3 million per taxpayer and
that was it. He asked Senator Seekins to restate his motion.
2:43:41 PM
SENATOR SEEKINS stated that it was a conceptual amendment to
limit the tax credit at an equivalent of $40 a barrel, in terms
of dollars. "Either we go to a floating or a fixed somewhere.
I'm not necessarily opposed to a floating barrel as long as we
understand exactly the size of the credit we're looking at."
SENATOR STEDMAN pointed out that the credit had been reduced
substantially from the governor's numbers.
CHAIR WAGONER added that it had nothing to do with the price of
oil per barrel for anyone producing less than 5,000 barrels.
SENATOR SEEKINS said he wanted it on the record that their
intent was to fix it at some range or to allow it to slide if
this model were adopted.
2:45:38 PM
SENATOR STEDMAN said the graph was geared to barrels, not
dollars, so the cost estimate line was in the future and could
be skewed one way or the other.
2:45:59 PM
SENATOR ELTON said the way he understood Senator Seekins'
amendment was that there would be a fourth line that would climb
at the same rate the yellow line did, but when it reached $40 a
barrel, it would flat-line across the rest of the graph.
SENATOR SEEKINS said he had accomplished getting this discussion
on the record, which is what he wanted to do, and then he
withdrew his amendment.
2:46:53 PM
CHAIR WAGONER thought they should look further at his amendment,
because if a company were producing 5,000 barrels a day, it
would get a certain credit at $40 a barrel. If the price was
allowed to float at $60 a barrel, it would get one-third more
credit. At $80 a barrel, it would get a double-credit.
2:47:38 PM
SENATOR BEN STEVENS said he objected to the motion. He
elaborated that an infield allowance is not an unusual credit
and the $73 million allowance was designed to address the new
explorer to the North Slope and to the Alaska industry. He
argued that both history and recent testimony indicate that a
substantial amount of investment comes over six or seven years
before there is any income. The smaller fields won't be
ratepayers and this is designed for the small independent to get
the capital cost recovery it needs to stay in business. He said
the discussion was beginning to drift off the intent of the
provision, which was towards attracting investment from new
players and "putting parameters and constraints that just
continually shrink and shrink and shrink on the incentive, it's
not going to have any impact. So, therefore, I object to the $40
limit."
SENATOR SEEKINS said he already withdrew the amendment.
SENATOR BEN STEVENS said he thought it was brought back.
2:50:08 PM
SENATOR ELTON agreed that they must look at whom they were
incentivizing.
2:51:20 PM
SENATOR SEEKINS moved to adopt Substantive Amendment 1 as
amended. SENATOR BEN STEVENS objected because of the reduction
of the multiplier. A roll call vote was taken; Senators Stedman,
Elton, Dyson, and Wagoner voted yea; Senators Ben Stevens and
Seekins voted nay; so Substantive Amendment 1 am was adopted.
2:54:53 PM at ease 2:56:19 PM
CHAIR WAGONER called the meeting back to order and announced the
committee would take up deleted language on page 3, line 24, of
Technical Amendment 1 that was divided into Substantive
Amendment 5.
MS. JACKSON, staff to the Senate Resources Committee, said this
language concerned how to calculate gross value at the point of
production (POP). The governor's bill (page 11, line 1)
authorized three methods of calculating gross value. One was
using an RSA (royalty settlement agreement) between the state
and a single producer; the second was using a royalty valuation
that was acceptable to DNR or the Department of the Interior;
and the third used a formula that was developed by the DOR that
had estimates of values based on factors like published price
indices, quality differentials, and transportations costs. She
said flag on using RSAs for two counts. The first was an issue
of equal protection - which is just a matter of fairness.
MS. JACKSON explained that courts generally require taxpayers to
be treated similarly in similar situations. Now, Alaska has
producers that have RSAs and those that don't. Moreover, the
ones that have RSAs are not all the same. So, there are several
sets of dissimilarities. The Department of Law raised that same
question according to Dan Dickinson.
She said the second issue raised about using RSAs was that Econ
identified as much as 40 cents a barrel difference in some cases
that would amount to about $300 million over 10 years under a
25/20 plan, for instance.
3:01:32 PM
MS. JACKSON noted that RSAs were not allowed in language on
pages 16 - 17 of the CS, but it unfortunately got twisted to
allow RSAs for one methodology but not the other. So, the
technical amendment that was before the committee yesterday,
placed the phrase - "may not incorporate by reference a royalty
value, royalty value methodology or royalty settlement
agreement" - so that it applied to either the methodology
developed by the DNR or by the Department of Interior or another
formula that might be developed by the Department of Revenue.
3:03:21 PM
SENATOR BEN STEVENS said he appreciated the explanation, but he
didn't agree with the outcome. He said SB 305 originally had
three sections under AS 43.45.150 (d) [page 11, lines 1 - 26]
that said roughly:
1. a royalty value determined under a royalty settlement
agreement between a producer and the state, with
adjustments if appropriate:
2. a formula prescribed by the Department of Revenue or
Department of Interior; or
3. another formula described by the Department of Revenue
which reasonably estimates a value for the oil or gas at a
specific geological location such as a point of tender or
point of delivery.
He went back to Mr. Puliam's presentation that had the best
reasoning, which said half of the oil the state gets its revenue
from is royalty oil and about half of that is under royalty
settlement agreements. Then the other half is under the
severance system; and in reality, there are three main severance
payers and nine or 10 other little ones that operate under
similar, but different agreements that aren't RSAs. So, he
interpreted Mr. Puliam's presentation to say one of the reasons
this is so complex is because the state has three ratepayers,
one, which pays under an RSA under a tax valuation methodology.
So, putting it all under a RSA methodology would be an effort to
simplify the valuation calculation of liability owed whether it
be an RSA or a severance agreement. He summarized that they are
trying to simplify the proposed system, but the existing system
is already complicated. He interpreted this section as giving
the department the discretion to use the price established in a
settlement agreement across the board for the same ratepayer and
to get rid of the complications. He said the royalty payer has
different payment streams depending on which field the oil came
from. "So, there's all kinds of reasons for the 40-cent
variation and where it's produced, who the partners are...."
He pointed out that the RSAs have been litigated and agreed to
as a way to price oil that is coming out of the ground and he
didn't understand why the proposers of this amendment were so
opposed to giving the department the ability to use them when it
came to calculating a production tax obligation.
3:08:09 PM
SENATOR ELTON said:
The compelling argument is that we don't want to get
ourselves into a position where two different
companies operating in the same field may have two
different tax rates based on royalty settlements that
one has and one may not have or royalty settlements
that both have that just provide a different value to
the royalty oil. To me it adds complexity. That's my
view of the language in the governor's bill. I do
think the obvious solution is the solution that is
part of this substantive amendment.
3:09:43 PM
SENATOR BEN STEVENS said that each taxpayer has different tax
calculations, because they have different shipping costs, for
one thing; and he restated his question:
What is the reason why royalty settlement agreements
that have been litigated in court, that have been
agreed upon by the state, agreed upon by the
ratepayer, what is the reasoning for not incorporating
it? I haven't seen it.
SENATOR SEEKINS inserted that he understood the CS on page 17,
lines 22 - 23 said: "(B) may not incorporate by reference a
royalty value, royalty valuation methodology, or royalty
settlement agreement." and that "incorporate by reference" meant
to make a part of the agreement. He believed they were saying
when this methodology was agreed to, it couldn't incorporate
another agreement that was already in place somewhere. "In other
words, it has to be new all to itself."
SENATOR BEN STEVENS agreed. But he said the original bill said
previous agreements could be used "in whole or in part" and "or
portions of it may be used".
SENATOR SEEKINS agreed with that, but said they way he
understood it, the whole agreement couldn't be incorporated by
reference.
SENATOR BEN STEVENS said he didn't read that in the substantive
amendment.
SENATOR SEEKINS said he didn't either.
ROBYNN WILSON, Director, Tax Division, DOR, said she didn't have
much experience with royalty agreements or rates. She thought
Mr. Mintz might have more information on this point.
3:12:38 PM
CHAIR WAGONER asked if he was still online and said the debate
was to keep the original language or keep the CS language
because some companies don't have royalty settlement agreements.
MR. MINTZ advised that it was unlikely the courts would find
equal protection problems in the tax arena under the
administration's bill because of similar situations already in
existence. He used Proposition 13 in California as an example
where two people could live in identical houses next door to
each other and one could be paying 10 times as much in property
taxes than the other because the houses were purchased on
different dates. However, he thought there might be other policy
reasons why the legislature would not want to allow royalty
settlement formulas to be used.
He said that Senator Ben Stevens had accurately characterized
this is a way of simplifying calculations and avoiding
duplication. However, he express some uncertainty about how the
amendment would work because it said that a formula under (d)
may not incorporate a reference to royalty value or methodology,
but yet (d)(1) still referred to a royalty valuation
methodology. The two seemed to contradict.
MS. JACKSON said all three pieces were before the committee. The
governor's bill, the CS, which already eliminated royalty
settlements as a method of valuation, and the amendment that was
directed at the CS.
3:17:44 PM
SENATOR SEEKINS replied that he thought there was a conflict.
The amendment says you can't even talk about RSAs in the
agreement and he thought that would be a big mistake. He didn't
object to an RSA being brought into the new agreement, but he
objected to saying they should not be able to "refer to a
royalty value, royalty valuation or royalty settlement
agreement".
MS. JACKSON remarked that two attorney said you have a problem
and two have said you don't.
SENATOR BEN STEVENS said public policy should not be designed
around an entity with a tax liability that is trying
intentionally to circumvent the law and stated further:
With that said, the royalty settlement agreements are
agreements between the state and the individuals who
owe a liability under those royalty settlement
agreements and they are in agreement on a valuation of
the production that is being transferred at a point of
value. To preempt the use of the agreement as it
transfers into liabilities under other statutory rules
and obligations that we create as a legislature, to
me, doesn't make sense. Why should we say we can do it
here, but you can't use that method here. But if you
want to use that method here and it works and it's a
settlement agreement and there's been no litigation or
violation, we'll take a look at it. It doesn't say the
department "shall"; it just says the department "may".
The other thing is on the equal protection, under
Blacks Law, on the definition of equal protection, it
has a couple different rationale and basis tests. If I
might, Mr. Chairman, it says: 'In all equal protection
cases, the crucial question is whether there is an
appropriate governmental interest suitably furthered
by the differential treatment.' I believe there is a
governmental interest suitable for differential
treatment under this case as demonstrated. And with
that, Mr. Chairman, I'm finished. Thank you very much
for your patience.
3:21:52 PM
SENATOR ELTON said he supported the amendment, because it was
counterintuitive to believe that a taxpayer wouldn't elect the
lowest value because that would be in his best interest. But if
they do that, in fact, based on a royalty settlement agreement,
two companies could easily be operating in the same field and be
paying two different tax rates creating a fairness issue.
Without this amendment, companies would be encouraged to battle
out royalty values.
3:23:22 PM
SENATOR ELTON moved to adopt Substantive Amendment 5.
SENATOR DYSON said he thought this amendment should be held
until they get to another amendment that is already in their
stack of amendments.
3:24:06 PM
SENATOR ELTON withdrew his motion.
CHAIR WAGONER said he would hold this amendment until the
committee dealt with Section 20.
3:25:30 PM recess 3:39:04 PM
CHAIR WAGONER called the meeting back to order and announced
Substantive Amendment 3 by Senator Stedman to be before the
committee. It consisted of two options - 3A and 3B; one would
replace the progressivity issue. He suggested they discuss both
options before adopting one of them.
24-GS2052\Y.39
Chenoweth
3/22/06
SUBSTANTIVE AMENDMENT 3A
OFFERED IN THE SENATE BY SENATOR STEDMAN
TO: CSSB 305(RES), Draft Version "Y"
Page 5, line 30, through page 6, line 5:
Delete all material and insert:
"(g) In addition to the taxes levied under (e) and (f)
of this section, there is levied upon the producer of oil a
tax for oil produced during that month from each lease or
property in the state, less any oil the ownership or right
to which is exempt from taxation. The tax levied under this
subsection is equal to
((ANS wellhead price - $40) x .0025) x ANS wellhead price
x (1 - PPT rate)
where
(1) "ANS wellhead price" means the prevailing
value for oil produced in the Alaska North Slope area; and
(2) the PPT, or production property tax, rate is
25 percent."
Page 6, line 10:
Delete "West Texas Intermediate"
Insert "Alaska North Slope"
Page 6, lines 11 - 12:
Delete "West Texas Intermediate"
Insert "Alaska North Slope"
Page 6, lines 16 - 17:
Delete "United States Gulf Coast price of West Texas
Intermediate"
Insert "price of Alaska North Slope"
AND
24-GS2052\Y.41
Chenoweth
9/6/06
SUBSTANTIVE AMENDMENT 3B
OFFERED IN THE SENATE BY SENATOR STEDMAN
TO: CSSB 305(RES), Draft Version "Y"
Page 5, line 30, through page 6, line 5:
Delete all material and insert:
"(g) In addition to the taxes levied under (e) and (f)
of this section, there is levied upon the producer of oil
or gas a tax for oil or gas produced during that month from
each lease or property in the state, less any oil and gas
the ownership or right to which is exempt from taxation.
The tax levied under this subsection is equal to
((WTI price - $40) x .002) x ANS wellhead price x (1 - PPT
rate)
where
(1) "WTI price" means the average price for the
month of West Texas Intermediate crude oil;
(2) "ANS wellhead price" means the prevailing
value for oil produced in the Alaska North Slope area; and
(3) the PPT, or production property tax, rate is
25 percent."
Page 6, lines 16 - 17:
Delete "United States Gulf Coast"
SENATOR STEDMAN noted a drafting error in the formula on the
line 7 that says ".002". It should be ".2". He said there were
two options, but one idea.
SENATOR BEN STEVENS asked, as a point of order, if the amendment
was being edited now.
CHAIR WAGONER replied yes.
3:41:55 PM
SENATOR STEDMAN said the way to counter the declining government
take figure at high prices was to modify the 25 percent PPT. He
did this by adding a slight multiplier to the formula
established by Econ One when the price of oil hit $40 WTI (West
Texas Intermediate). That price was used for several reasons.
One, the WTI is an actively traded market and, therefore, easily
identified; and two, it is very difficult to artificially move.
He said it was also possible to use the price of Alaska North
Slope crude (ANS), which is $2 less. He argued that the
advantage to the state of having a progressivity feature when
oil prices advance is that it provides stability because when
the tax gets out of balance like ELF did, one side becomes
disadvantaged and wants to reopen or renegotiate.
3:46:28 PM
SENATOR DYSON said using the consumer price index (CPI) had been
discussed.
SENATOR STEDMAN responded that he didn't think using the CPI was
a good idea because it didn't correlate with oil prices and the
trigger point might need to be moved quickly to keep everything
in balance.
SENATOR DYSON added that costs to the producers go up with
rising labor, material, and fuel costs.
SENATOR ELTON said he understood the first half of the equation
on line 7, but he didn't understand the rationale for the second
half.
3:51:00 PM
SENATOR STEDMAN explained:
This is a deductible tax that goes against the gross
value instead of the net like the PPT does. It's
deductible against the PPT. We have to work through
the mathematics and look at the net effect.
3:52:14 PM
SENATOR SEEKINS said starting the multiplier at $40 a barrel
without the rest of the formula, at the current price of oil
being in the $60-range would emulate a 30/20 PPT. He didn't know
if that was the intent of the amendment or not.
SENATOR STEDMAN replied that Econ One did quite a bit of chart
work on this. He explained:
When you take into account the state's royalties,
property taxes and corporate income tax from the
industry, that's when they get a true picture of the
dynamics of what this is doing. The royalty and tax
scenario the state uses is regressive in nature, so as
the price of oil goes up, the state take declines. So,
in order to counteract that without totally removing
that system, we've got to make something that's
progressive enough to outweigh that and to flatten it.
SENATOR BEN STEVENS said he opposed the amendment and explained
why:
And I question the reasoning why a tax is exempt from
a tax. It is really just an attempt to separate a new
revenue stream out of the existing equation we have.
This could easily be in addition to subsection (e),
which is the formula and the item that says there will
be a rate - the tax is equal to a percent of
production tax - it could be easily added on to - the
whole amendment could just be added under (e) and not
be a new subsection and, therefore, it wouldn't be
exempt from taxation. I am questioning the reason why
we need to segregate this additional revenue stream
from the same formula, the same taxation. That's
number one.
Number two - I have issue with WTI as the trigger
price mechanism and ANS wellhead as the valuation
method for the taxation itself. I have issues with it
for a number of reasons, but mainly the reason is is
that we've heard throughout testimony, over the last
couple of weeks, a whole variety of different costs
deducted from WTI to ANS wellhead. We heard one
economist say it's $7; we heard one economist say it's
$6; we heard one say it's $4.25; and then we have $2.
So what is the differentiation there? And as far as
I'm concerned the WTI is a trigger-happy hunter,
because it initiates the progressivity clause prior to
the price that we're taxing all the other oil that's
valued. So, as far as I'm concerned, I don't think we
need to have the second half of the equation based on
the fact that I don't think it needs to be exempt from
the tax that they're already being taxed on and it
should just be WTI. I think it would be a much simpler
methodology - and without question - I oppose line 13,
so I'll take the opportunity to say it again....
3:58:39 PM
SENATOR DYSON asked to see a WTI and an ANS price at $60.
SENATOR BEN STEVENS interrupted saying, "I did the math - 28
percent. The effective rate at $60 under this formula would be
28 percent. It would be a 3 percent increase or $1.67 a barrel."
SENATOR DYSON asked if he was referring to this paragraph by
itself or in addition to the 25 percent.
SENATOR BEN STEVENS replied the $1.67 would be the result of the
formula on line 7 at $60 would equate to a 28 percent PPT; and
he used $4.25 as the difference between WTI and ANS.
4:00:13 PM
SENATOR STEDMAN said, "Econ One has calculated the effective
rate at 25/20 without an escalator at $60 at 17.6 and with this
escalator it would be moved from 17.6 to 20.6 - at $60; at $50,
it would move from 15.9 percent to 17.4 percent; and then at
$40, it's 13.6 and there's no effect at $30 other than the
trigger point.
He added Econ One's rationale for using WTI was that it was a
fluid market versus the relatively inactive market of ANS. The
$40 trigger could be moved sometime later on.
4:02:03 PM
SENATOR STEDMAN discussed Substantive Amendment 3A and his
concerns with the complexity of dealing with the tax
deductibility. He asked Econ One to create the same slope from
that $40 trigger with a multiplier and they inserted the ANS
price, which moved the factor from .002 to a .025 factor. He
thought using ANS would be easier conceptually, but the fluid
market would be lost.
4:03:41 PM
SENATOR DYSON asked him to explain the process he went through
with Econ One to decide on the $40-trigger.
SENATOR STEDMAN said he is comfortable with using $40-trigger
because that is the top in a range of prices from $30 - $40 that
industry uses for its economic modeling. The entire government
take number generated by Econ One had a slight regressive bent;
that's why he selected $40. It is also at the top end of the
industry range and would have minimal effects on their long-term
planning. It takes the belly out of the government take numbers.
The intent here is not to get an excessively - put the
state in a position of high oil prices where we take
all the upside away from the industry. The idea here
is just to keep the balance and give them the upside
percentage along with the state's. If oil prices end
up at $70 or $80, our percentage share doesn't
decline, because there's a multiple effect that the
industry gets by allowing that to happen. But in my
personal opinion, that shouldn't happen to either
side.
SENATOR DYSON said he appreciated that and didn't want the state
to suffer the dip.
SENATOR STEDMAN reiterated that $40 is good number.
SENATOR BEN STEVENS commented that the effective rates they are
talking about are all based on assumptions.
The only thing we should be calculating on, because
the only thing everybody is looking at is that 20/25
and what the effect of the escalator is going to be.
And the way I calculate it, this makes it under
current prices to be at 28 percent and that's probably
on the low side because I'm not a very good economist
or mathematician. Thank you Mr. Chairman, and I'll
maintain my objection.
4:10:31 PM
SENATOR STEDMAN said Econ One indicated that the total
government take from 2007 to 2016 at $60 a barrel, with a 25/20
scenario, was about 60 percent (including the federal
government) and 40 percent profit to the industry. With the .2-
escalator on it, the government take goes to 61.8 percent, a 1.8
percent change.
SENATOR BEN STEVENS asked if that 1.8 referred to dollars.
SENATOR STEDMAN replied that it referred to a percent, but that
figure could be moved into dollars, which would be figured on
volume and price. "The bigger the volume, the bigger the
dollars."
SENATOR BEN STEVENS said his figures indicated that it referred
to dollars.
4:11:45 PM
SENATOR ELTON said he thought the difference Senator Stedman was
talking about in going from $60 to $61.8 was total government
take; Senator Ben Stevens was talking about what is the
percentage of the state's take and he thought that might go up 3
percent under this formula.
4:12:31 PM
SENATOR STEDMAN reiterated that the combined effect of both
state and federal government on the industry was 1.8 percent -
using Econ One numbers.
4:16:10 PM
SENATOR STEDMAN moved Substantive Amendment 3B that used WTI in
the formula.
CHAIR WAGONER and SENATOR BEN STEVENS both objected.
4:16:55 PM
SENATOR DYSON said he favored using this amendment with ANS in
both places.
SENATOR STEDMAN withdrew his motion and moved to adopt
Substantive Amendment 3A.
SENATOR DYSON moved to change the multiplier rate from ".0025"
to ".0020" on line 7.
SENATOR STEDMAN said he had no objection to that.
SENATOR ELTON objected. He said that change resulted in two
fairly significant changes. He elaborated:
I mean we had before us two different ways of doing an
amendment that produced two lines that were the same.
And what we have done if we accept the amendment to
the amendment is we now have two different lines, one
of them flatter than the other. And so that's the
reason for my objection. I prefer a steeper line, Mr.
Chairman.
SENATOR DYSON defended his amendment to the amendment saying
that ANS is a more stable price to use and more closely reflects
what Alaska's product brings on the market. And further he said:
The wider swings of WTI, I don't know that it gains us
anything and I think the .002 multiplier accomplishes
exactly what Senator Stedman wants, which is to take
the dip out of the line in the out at the higher
prices and so that was my reasoning.
SENATOR STEDMAN said that moving the multiplier down would not
adversely affect taking the belly out of the line; it would move
the government take numbers down slightly, but he was very
comfortable with it.
4:20:02 PM
SENATOR BEN STEVENS said he didn't object to the amendment.
CHAIR WAGONER asked for a roll call vote. Senators Ben Stevens,
Dyson, Stedman, and Wagoner voted yea; Senator Elton voted nay;
and the Amendment 1 to Substantive Amendment 3A was adopted.
4:21:18 PM
SENATOR BEN STEVENS moved to place the tax in this amendment on
top of the exiting tax in section (e) beginning on page 4, line
25, of CSSB 305(RES) and delete "or right to which is exempt
from taxation" on page 4, lines 27 - 28. His intention was to
take away the tax exemption and separation of the revenue
streams and simply add to the production tax rate.
SENATOR STEDMAN said he knew if they tried to make it a tax on
net instead of a tax on gross, the formula would be altered
substantially and Substantive Amendment 3A would have to be
rewritten.
4:24:10 PM
SENATOR BEN STEVENS removed his motion so it could be properly
drafted.
4:25:19 PM
CHAIR WAGONER said the committee would go ahead and act on
Substantive Amendment 3A am and allow Senator Stevens to come
back with a redrafted amendment and consider it at that time.
SENATOR STEDMAN said he wanted Econ One to check the
calculations to make sure they know the effect of what they are
doing.
4:26:20 PM
Chair WAGONER said that could be done in the Finance Committee.
SENATOR BEN STEVENS said, "Not by me; I'm not on Finance."
CHAIR WAGONER announced that the committee had Substantive
Amendment 3A amended before it. He asked for a roll call vote.
Senators Elton, Seekins, Dyson, Stedman, and Wagoner voted yea;
Senator Ben Stevens voted nay; so it was adopted.
4:28:15 PM
CHAIR WAGONER announced Substantive Amendment 4 to be up for
consideration.
SUBSTANTIVE AMENDMENT 4
OFFERED IN THE SENATE RESOURCES COMMITTEE BY SENATOR WAGONER
Page 45, line 4, delete:
"the provision of this subsection apply for a lessor's
royalty interest under an oil and gas lease as follows:
(1) the rate of tax levied on oil and gas produced
(A) from the Cook Inlet basin, as that term is
defined in (a) of this section, is 1.5 percent;
(B) except as provided in (A) of this paragraph, is 5
percent;
(2) the rate of tax is applied to
(A) the amount of royalty paid to the owner by the
producer; or
(B) the value, in the case of royalty oil or gas
taken in kind by the royalty owner, of that
royalty oil or gas determined
(i) in accordance with the royalty valuation
methodology in the lease or other
governing agreement between the owner and
the producer; and
(ii) at the point of delivery of that royalty
oil or gas to the owner;"
Page 5, line 4, following "taxation", insert:
For oil and gas produced from the Cook Inlet Sedimentary basin,
the tax is equal to one and a half percent of the gross value at
the point of production of the oil and gas. For all other oil
and gas, the tax is equal to five percent of the gross value at
the point of production of the oil and gas. However, if the
department determines that, for purposes of reducing the
producer's tax liability under this subsection, the producer has
received or will receive consideration from the lessor
offsetting all or a part of the producer's royalty obligation,
other than a deduction under AS 43.55.020(d) of the amount of a
tax paid, the tax under this subsection is equal to 20 percent
of the gross value at the point of the production of the oil and
gas.
MS. JACKSON explained that Substantive Amendment #4 dealt with
private royalty on the committee's roadmap. She said, "The
problem with the CS is that the language that was given did not
match what ended up in the CS." So, that was the first thing
that was worked out between members of AOGA and some private
royalty owners. The department that came up with a number of
small concerns. The reason this is a substantive amendment was
because it dealt with private royalty. She explained that the
amendment kept the 1.5 percent tax in the Cook Inlet Sedimentary
basin, but a 5 percent tax in all other areas. The addition is
on page 2, line 2, where it reads:
However, if the department determines that, for
purposes of reducing the producer's tax liability
under this subsection, the producer has received or
will receive consideration from the lessor offsetting
all or a part of the producer's royalty obligation,
other than a deduction under AS 43.55.020(d) of the
amount of a tax paid, the tax under this subsection is
equal to 20 percent of the gross value at the point of
the production of the oil and gas.
She said that this penalty provision of 20 percent applied
essentially to situations when the producer and royalty owner
entered into an agreement in an attempt to game the system.
4:31:20 PM
MS. JACKSON said the department is comfortable with the 5
percent language, but hasn't expressed anything one way or the
other in terms of the 1.5 percent for the Cook Inlet basin. The
chairman elected to put that into the bill. The current
percentage tax rate in the Cook Inlet basin is approximately a
1.2 percent (on private royalty).
4:32:08 PM
SENATOR BEN STEVENS referenced page 5, line 7, of the CS that
said "gas" was at 1.5 percent and all other was at 5 percent.
CHAIR WAGONER said he was not aware that there was any oil at
the time, but he was asked to put it in.
MS. JACKSON added that she was told this insertion of "gas",
which was requested initially by the department, was incorrect
on the CS.
SENATOR BEN STEVENS asked if most of the private royalty
ownership in the Inlet is currently gas.
CHAIR WAGONER replied yes and the majority of it is in the Kenai
gas field.
SENATOR BEN STEVENS asked then if the other 5 percent would
apply to mainly oil production on the Slope.
CHAIR WAGONER replied yes - that was his understanding.
SENATOR BEN STEVENS asked if they could agree to interpret the
1.5 percent as a gas tax and the 5 percent as an oil tax.
CHAIR WAGONER said he didn't know if they agreed upon it, but
that's the way it was explained to him.
4:35:01 PM
SENATOR BEN STEVENS said this has huge impacts on state policy
and he wanted people to know that as they move forward. They
were essentially saying the state's tax on gas equals 30 percent
of its tax on oil.
SENATOR SEEKINS asked if they are just looking at gas, why did
the administration want to put oil into the equation.
MS. JACKSON replied that it didn't want to at first. The
original CS had "oil and gas"; then the administration wanted to
insert "gas"; then it came back and wanted "oil and gas", which
is where they are now.
CHAIR WAGONER said he thought it was a matter of consistency
more than anything else.
4:37:04 PM
SENATOR SEEKINS moved to adopt Substantive Amendment 4.
SENATOR STEDMAN pointed out that line 5 on page 1 of the
amendment referred to "Cook Inlet basin" and line 20 referred to
"Cook Inlet Sedimentary basin".
MS. JACKSON explained that line 5 was being deleted and
"Sedimentary" was reinserted on line 20.
4:38:06 PM
SENATOR BEN STEVENS reiterated that this is a significant policy
change and he wanted to be consistent.
SENATOR SEEKINS said he thought the tax would be applied to this
one sedimentary basin and not anywhere else in the state.
4:41:33 PM
CHAIR WAGONER said he would get that question answered. He noted
there were no further objections and Substantive Amendment 4 was
adopted. He recessed the meeting until 10 a.m. tomorrow, March
24, at 4:42:39 PM.
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