Legislature(2017 - 2018)BUTROVICH 205
04/19/2017 02:00 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 111 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 19, 2017
1:58 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha von Imhof
Senator Shelley Hughes
Senator Kevin Meyer
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Bert Stedman
COMMITTEE CALENDAR
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 111(FIN)(EFD FLD)
"An Act relating to the oil and gas production tax, tax
payments, and credits; relating to interest applicable to
delinquent oil and gas production tax; relating to carried-
forward lease expenditures based on losses and limiting those
lease expenditures to an amount equal to the gross value at the
point of production of oil and gas produced from the lease or
property where the lease expenditure was incurred; relating to
information concerning tax credits, lease expenditures, and oil
and gas taxes; relating to the disclosure of that information to
the public; relating to an adjustment in the gross value at the
point of production; and relating to a legislative working
group."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 111
SHORT TITLE: OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
SPONSOR(s): RESOURCES
02/08/17 (H) READ THE FIRST TIME - REFERRALS
02/08/17 (H) RES, FIN
02/08/17 (H) TALERICO OBJECTED TO INTRODUCTION
02/08/17 (H) INTRODUCTION RULED IN ORDER
02/08/17 (H) SUSTAINED RULING OF CHAIR Y23 N15 E2
02/08/17 (H) RES AT 1:00 PM BARNES 124
02/08/17 (H) Heard & Held
02/08/17 (H) MINUTE(RES)
02/13/17 (H) RES AT 1:00 PM BARNES 124
02/13/17 (H) Heard & Held
02/13/17 (H) MINUTE(RES)
02/17/17 (H) RES AT 1:00 PM BARNES 124
02/17/17 (H) Heard & Held
02/17/17 (H) MINUTE(RES)
02/20/17 (H) RES AT 1:00 PM BARNES 124
02/20/17 (H) Heard & Held
02/20/17 (H) MINUTE(RES)
02/22/17 (H) RES AT 1:00 PM BARNES 124
02/22/17 (H) Heard & Held
02/22/17 (H) MINUTE(RES)
02/22/17 (H) RES AT 6:30 PM BARNES 124
02/22/17 (H) Heard & Held
02/22/17 (H) MINUTE(RES)
02/24/17 (H) RES AT 1:00 PM BARNES 124
02/24/17 (H) Heard & Held
02/24/17 (H) MINUTE(RES)
02/27/17 (H) RES AT 1:00 PM BARNES 124
02/27/17 (H) Heard & Held
02/27/17 (H) MINUTE(RES)
02/27/17 (H) RES AT 7:00 PM CAPITOL 106
02/27/17 (H) Heard & Held
02/27/17 (H) MINUTE(RES)
03/01/17 (H) RES AT 1:00 PM BARNES 124
03/01/17 (H) Heard & Held
03/01/17 (H) MINUTE(RES)
03/01/17 (H) RES AT 6:00 PM BARNES 124
03/01/17 (H) Heard & Held
03/01/17 (H) MINUTE(RES)
03/06/17 (H) RES AT 1:00 PM BARNES 124
03/06/17 (H) Scheduled but Not Heard
03/06/17 (H) RES AT 6:30 PM BARNES 124
03/06/17 (H) Heard & Held
03/06/17 (H) MINUTE(RES)
03/08/17 (H) RES AT 1:00 PM BARNES 124
03/08/17 (H) Heard & Held
03/08/17 (H) MINUTE(RES)
03/08/17 (H) RES AT 6:00 PM BARNES 124
03/08/17 (H) Heard & Held
03/08/17 (H) MINUTE(RES)
03/09/17 (H) RES AT 5:00 PM BARNES 124
03/09/17 (H) -- MEETING CANCELED --
03/10/17 (H) RES AT 1:00 PM BARNES 124
03/10/17 (H) Heard & Held
03/10/17 (H) MINUTE(RES)
03/11/17 (H) RES AT 12:00 AM BARNES 124
03/11/17 (H) -- MEETING CANCELED --
03/13/17 (H) RES AT 1:00 PM BARNES 124
03/13/17 (H) <Bill Held Over from 3/11/17>
03/14/17 (H) RES AT 3:00 PM BARNES 124
03/14/17 (H) -- Continued from 3/13/17 Meeting at
1:00 PM --
03/15/17 (H) RES RPT CS(RES) NT 4DP 4DNP 1AM
03/15/17 (H) DP: PARISH, DRUMMOND, JOSEPHSON, TARR
03/15/17 (H) DNP: TALERICO, BIRCH, RAUSCHER, JOHNSON
03/15/17 (H) AM: WESTLAKE
03/20/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/20/17 (H) Heard & Held
03/20/17 (H) MINUTE(FIN)
03/21/17 (H) FIN AT 9:00 AM HOUSE FINANCE 519
03/21/17 (H) Heard & Held
03/21/17 (H) MINUTE(FIN)
03/21/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/21/17 (H) Heard & Held
03/21/17 (H) MINUTE(FIN)
03/22/17 (H) FIN AT 9:00 AM HOUSE FINANCE 519
03/22/17 (H) -- Continued from 3/21/17 at 1:30 PM --
03/22/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/22/17 (H) Heard & Held
03/22/17 (H) MINUTE(FIN)
03/23/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/23/17 (H) Heard & Held
03/23/17 (H) MINUTE(FIN)
03/24/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/24/17 (H) Heard & Held
03/24/17 (H) MINUTE(FIN)
03/25/17 (H) FIN AT 10:00 AM HOUSE FINANCE 519
03/25/17 (H) Heard & Held
03/25/17 (H) MINUTE(FIN)
03/27/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
03/27/17 (H) Heard & Held
03/27/17 (H) MINUTE(FIN)
04/07/17 (H) FIN AT 1:30 PM HOUSE FINANCE 519
04/07/17 (H) Heard & Held
04/07/17 (H) MINUTE(FIN)
04/08/17 (H) FIN AT 1:00 PM HOUSE FINANCE 519
04/08/17 (H) Moved CSHB 111(FIN) Out of Committee
04/08/17 (H) MINUTE(FIN)
04/09/17 (H) FIN RPT CS(FIN) NT 4DP 4DNP 2NR 1AM
04/09/17 (H) DP: GARA, GUTTENBERG, SEATON, FOSTER
04/09/17 (H) DNP: WILSON, THOMPSON, PRUITT, TILTON
04/09/17 (H) NR: ORTIZ, GRENN
04/09/17 (H) AM: KAWASAKI
04/10/17 (H) MOVED TO BOTTOM OF CALENDAR
04/11/17 (H) TRANSMITTED TO (S)
04/11/17 (H) VERSION: CSHB 111(FIN)(EFD FLD)
04/12/17 (S) READ THE FIRST TIME - REFERRALS
04/12/17 (S) RES, FIN
04/13/17 (S) RES WAIVED PUBLIC HEARING NOTICE,RULE
23
04/13/17 (S) FIN WAIVED PUBLIC HEARING NOTICE,RULE
23
04/14/17 (S) RES AT 3:00 PM BUTROVICH 205
04/14/17 (S) Heard & Held
04/14/17 (S) MINUTE(RES)
04/15/17 (S) RES AT 9:00 AM SENATE FINANCE 532
04/15/17 (S) Heard & Held
04/15/17 (S) MINUTE(RES)
04/15/17 (S) FIN AT 9:01 AM SENATE FINANCE 532
04/15/17 (S) <Pending Referral> Uniform Rule 23
Waived
04/15/17 (S) FIN AT 2:00 PM SENATE FINANCE 532
04/15/17 (S) <Pending Referral> Uniform Rule 23
Waived
04/15/17 (S) RES AT 2:00 PM SENATE FINANCE 532
04/15/17 (S) Heard & Held
04/15/17 (S) MINUTE(RES)
04/17/17 (S) RES AT 1:00 PM BUTROVICH 205
04/17/17 (S) Heard & Held
04/17/17 (S) MINUTE(RES)
04/17/17 (S) RES AT 5:00 PM BUTROVICH 205
04/17/17 (S) Heard & Held
04/17/17 (S) MINUTE(RES)
04/18/17 (S) RES AT 2:00 PM BUTROVICH 205
04/18/17 (S) Heard & Held
04/18/17 (S) MINUTE(RES)
04/19/17 (S) RES AT 2:00 PM BUTROVICH 205
WITNESS REGISTER
ROGER MARKS, Legislative Consultant
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Discussed loss recovery: how it works under
SB 21, and how it would work under some possible modifications
in CSHB 111(FIN)(EFD)(FLD).
ACTION NARRATIVE
1:58:39 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 1:58 p.m. Present at the call to
order were Senators von Imhof, Coghill, Hughes, and Chair
Giessel. Senator Meyer arrived shortly thereafter.
HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
2:01:28 PM
CHAIR GIESSEL announced consideration of HB 111. [CSHB
111(FIN)(efd)(fld) was before the committee.] It was heard for
the first time on April 14; then two hearings on April 15, two
hearings on April 17, and yesterday, April 18, the committee
heard from the Department of Revenue and a legislative
consultant. Today they would hear from the other legislative
consultant, Mr. Roger Marks, who would talk about loss recovery
and cost recovery and the different ways those play out in HB
111.
2:02:08 PM
ROGER MARKS, Legislative Consultant, Alaska State Legislature,
Juneau, Alaska, testified that he was asked to discuss loss
recovery, how it works under SB 21, and how it would work under
some possible modifications.
2:02:49 PM
SENATOR WIELECHOWSKI joined the committee.
2:03:07 PM
MR. MARKS explained that the current tax system, SB 21, is a net
tax system with a 35 percent rate. There is a floor on that net
tax equal to 4 percent of the gross revenue. His examples look
at North Slope non-GVR oil, but the loss mechanisms for GVR oil
are similar, so there is not a lot to be gained by looking at
them separately.
The definition of loss recovery (slide 3) is when 35 percent of
loss value is used to reduce taxes in future years. So, if he
has $50 in income, $50 in gross revenue and $150 in costs, he
has a $100-loss. At the tax rate of 35 percent, the value of
that loss is $35 in terms of being able to deduct it.
2:04:37 PM
Slide 4 illustrates how losses are recovered under SB 21. First,
there is a floor of zero on the production tax value (PTV),
which is the same as the net value less the upstream costs. A
loss is a cost (upstream "lease expenditure") that is not
deductible in calculating the PTV (because the PTV has a floor
of zero). If a company's gross value is $20, and upstream lease
expenditures are $25, it can only use $20 to get down to zero
PTV. So, $5 of that is a loss. Under SB 21 losses are recovered
where 35 percent of the losses become a credit.
Three things can be done with a credit: it can be carried
forward to reduce taxes in future years, it can be sold to
another taxpayer (transferable credits), and that hasn't had an
active market since its inception in 2006, or if the taxpayer
qualifies to be cashed out by the state with limitations.
The losses under SB 21 can bring the tax below the gross floor
to zero and any unused credits can be carried forward.
2:06:49 PM
Slide 5 illustrated how a loss is generated under SB 21 in Year
1 as follows:
ANS Price $30
Transportation Cost ($10)
Gross Value $20
Upstream Costs ($25)
PTV $0
Loss $5
Loss Carryforward Credit (LCFC)
35 percent of loss $1.75
2:07:30 PM
CHAIR GIESSEL asked where royalty comes into play.
MR. MARKS replied that basically one has royalty barrels and
non-royalty or taxable barrels. Here he is talking about the
taxable barrels. So, in the case of a 1/8 royalty contract, if a
company produces eight barrels, it will write a check for 12.5
percent of the value of one barrel, and then the seven barrels
are subject to the exercise on slide 5. The upstream costs are
the costs associated with producing both royalty and non-royalty
barrels.
CHAIR GIESSEL asked how long it takes for a company to ask for
royalty relief.
MR. MARKS answered it takes a lot of time and effort and
involves reviewing of a lot of material. Of the companies that
have gotten royalty relief, he wasn't familiar with the
timeframe involved.
2:09:08 PM
Slide 6 illustrated how a loss is generated under SB 21 in Year
2 as follows:
ANS Price $55
Transportation Cost ($10)
Gross Value $45
Upstream Costs ($25)
PTV $20
Tax before LCFC $7
LCFC ($1.75)
Tax before p/bbl credit $5.25
Per barrel credit ($3.45)
Tax $1.80
Gross minimum $1.80
2:11:16 PM
He was asked to analyze the modifications (slide 7).
1. Instead of converting the loss to a credit at 35 percent the
loss itself is carried forward and deducted along with the other
lease expenditures:
-no longer refundable
-no longer transferable: losses stay with the company that
earned it
He said there is no mathematical difference between giving a
credit of 35 percent of the loss or deducting the gross amount
of the loss and subjecting it to a 35 percent tax rate. That
would be illustrated in the next slides.
2. The floor is hardened: can't use losses to bring below the
gross minimum. Unused losses can, with some exceptions, still be
carried forward just as in the current SB 21.
2:13:09 PM
Slide 8 illustrated how under these modifications a loss could
be generated using the same assumptions under SB 21 (a few
slides back).
Generating a Loss: Year 1
ANS Price $30
Transportation Cost ($10)
Gross Value $20
Upstream Costs ($25)
PTV $0
Loss $5
Loss of $5 (instead of converting this loss to a credit at a 35
percent rate), is carried forward to the next year.
2:13:49 PM
Slide 9 illustrates how the tax is calculated using this
modification Year 2: Carrying the Loss Forward @ $55 Price
ANS Price $55
Transportation Cost ($10)
Gross Value $45
Upstream Costs ($25)
PTV $20 (Under the current regime, since the loss that was
carried forward had already been subjected to a 35 percent rate,
he calculated the 35 percent tax and then deducted credit.)
Loss carried forward ($5)
Tax base $15
Tax before per barrel credit of $5.25
Per barrel credit (only $3.45 of the $8 credit can be used
bringing the Tax to $1.80 (equal to the gross minimum floor with
a 45 percent gross.)
MR. MARKS explained with GVR oil, a company can use the per
barrel credit to bring its tax below the gross floor, but that
doesn't affect the loss recovery mechanism. That's what happens
at a price of $55, and since the loss carried forward credits
don't bring the tax below the gross floor, the answer is the
same under SB 21 and these modifications.
2:15:58 PM
CHAIR GIESSEL commented that he was basically taking slide 6 and
comparing it to slide 9 and saying the result is the same.
MR. MARKS answered yes, adding that the reason one gets the same
result is because there are two different ways of monetizing a
$5 loss under the modifications.
CHAIR GIESSEL commented that neither one of those brings the
loss below the 4 percent minimum tax floor.
2:17:16 PM
MR. MARKS agreed, and said he would show what happens at lower
prices.
SENATOR VON IMHOF asked what his models showed at oil prices of
$60, $65, and $70.
MR. MARKS replied they show the same result.
2:18:44 PM
Slide 10 illustrated SB 21 Year 2: using the Loss Credit at a
price of $40:
ANS Price $40
Transportation Cost ($10)
Gross Value $30
Upstream Costs ($25)
PTV $5
Tax before LCFC $1.75
LCFC ($1.75)
Tax before p/bbl credit $0.00
Per barrel credit ($0.00)
Tax $0
Gross minimum $1.20
Under SB 21 a company can use its loss credits to bring the tax
below the gross, which is what happened in this example.
2:20:52 PM
Slide 11 illustrated what would happen at $40 using the two
modifications in Year 2:
ANS Price $40
Transportation Cost ($10)
Gross Value $30
Upstream Costs ($25)
PTV $5
Loss of $5 carried forward ($1.57) (He explained that under this
modification you can't bring your taxes below the gross floor,
so he "back calculated" the loss carried forward to get to the
gross floor. That is $1.57.)
Tax base $3.43 (subjected to a 35 percent tax rate)
Tax before p/bbl credit $1.20
Per barrel credit ($0.00)
Tax $1.20
Gross minimum $1.20
He explained that the LCFC could not bring tax below the gross
minimum tax, because it increases under the proposal from $0 to
the gross minimum.
2:23:38 PM
CHAIR GIESSEL asked if the example on slide 11 had the choice of
using the loss carry forwards in total or maximizing them and
foregoing the per barrel credit.
MR. MARKS answered that according to a department advisory
bulletin, SB 21 addresses the order in which the credits can be
used, and loss credits are used first. Then the per barrel
credit is used. If the proposed mechanism used the same order,
there wouldn't be a choice. Right now, one can't use the per-
barrel credit to bring tax below the floor, and if one can't use
either the loss or the per-barrel credit to bring tax below the
floor, he didn't think it would make a difference which order
was used, because at the end of the day the tax would be $1.20.
CHAIR GIESSEL added that would be because in this concept the
floor is hardened.
MR. MARKS replied, "exactly."
2:25:49 PM
He pointed out under the current SB 21, for the GVR oil, one
could use the specific per barrel credit for that oil to bring
the tax all the way down to zero. Economically, that is a "very
important provision" given the challenges that GVR oil faces.
Under the proposal, a floor is articulated on how far one can
carry losses, but not on a per-barrel credit, and the order in
which those are used may matter. That should be considered.
CHAIR GIESSEL asked if the loss carry-forward could be carried
forward.
MR. MARKS responded if a company generates a loss - slide 8
generates a $5 loss - any loss you can't use in one year, you
can carry forward to subsequent years.
2:28:05 PM
CHAIR GIESSEL said on Saturday, Mr. Marks presented slides about
a competitiveness boundary between different taxing
jurisdictions for oil. She asked what factors he used to
establish it. Was it solely this numeric calculation in the tax
policies?
MR. MARKS replied that question has a lot of aspects. On
Saturday, he "sort of scratched the surface" on the logic he
used, and asked if she meant for him to discuss the role and
limitations of using "government take."
CHAIR GIESSEL answered yes. She wanted to know how the
modifications discussed in this hearing would change Alaska in
terms of competitiveness.
MR. MARKS asked if he should talk a little bit about the roles
of using government take and competition in establishing a
fiscal system.
CHAIR GIESSEL answered yes.
2:30:45 PM
MR. MARKS said if a person examines anything, he circles it and
looks at it from a lot of different angles: cash flow to the
state, cash flow to taxpayer, efficiency of operations, timing
of revenue, cost recovery, how risk/reward balance is shared,
for instance.
A very important aspect of that examination is how Alaska's tax
system compares to other jurisdictions. Stepping back further,
he said in 1959, the state got statehood and in 1962 the state
was trying to figure out how to develop the North Slope. It
could have started its own state-owned oil company, but people
decided to bring the experience, the expertise, and the
resources of the international oil community to Alaska to drill
on the North Slope. That's the point at which development on the
North Slope became subject to the forces of competition, and
over the years those forces have intensified. The Soviet Union
broke up in 1989, and that opened a lot of resources that were
closed before, and world-wide competition became much more
intense. Technology has increased, as well, and oil is found in
more places further intensifying the competition. There is
capital to develop these resources, but capital is very fluid.
It is also finite, and so it will go where it gets the best
deal.
What is meant by fair share? Mr. Marks said over the last 35
years. he has thought that a big part of fair share is being
able to get a similar amount of money to what other similar
places get, just because of the forces of competition. So, any
fiscal evaluation requires a systematic examination of the
competition, and government take is a tool to do that. While it
is imperfect, it is used by many economists.
MR. MARKS said net present value (NPV) is a primary metric that
companies use in picking out where they want to invest. A larger
field with a low rate of return can be much more useful in
making a company grow than a small field with a high rate of
return. The difference in value is two things: money and timing
of how it flows, and government take is a big part of the money
side of that equation.
Using government take requires some judgement, and one element
of that judgement is what peer group an analyst is going to use.
On Saturday, he talked about how he developed his peer group in
terms of their similarities, but he didn't talk about countries
that were not in that peer group and why, but maybe it would be
useful to talk about them now.
2:35:53 PM
MR. MARKS said he could think of four jurisdictions as perfect
examples of what he didn't include. Ireland is one; it comes out
with the lowest government take in the world, but the industry
joke is that it has no oil. Kazakhstan and Azerbaijan have
spectacular resources at low cost, but they have very high
government take, because they can command it (their resources
are so good, and their costs to develop are so low). Iraq has
high government take, but they have development contracts called
technical service contracts. These came into play in Iran after
the Iran/Iraq war when a lot of fields were damaged, and Iraq
wanted them repaired. Iraq instituted the technical service
contracts, under which if a company gets a field up and running,
it gets reimbursed dollar for dollar. All its costs get
reimbursed, including many costs that have a profit component,
and then it gets a fixed amount of dollars per barrel for every
barrel that gets produced. BP bid a lot of these for $1/barrel.
They don't have to pay any royalties or production tax; maybe
some corporate income tax. The rate of return on getting
reimbursed right away, plus $1 dollar, is infinity.
Caelus, for example, has this world class discovery on the
western North Slope, and what if for some reason they walked
away from that and the state wanted it developed. So, the state
says we're going to develop in the following way: we're going to
reimburse every dollar you put into it, plus $1/barrel. That
would be high government take, but companies would be lining up
around the block to get into that field. The bottom line is it
would not be appropriate to have those jurisdictions in the peer
group. That is what he means by "judgement."
2:39:17 PM
MR. MARKS said in 2013, three economists were working for the
administration on ACES; all three of them separately looked at
government take and found that something was "very very wrong."
Similar groups were getting somewhere around 60-65 percent and
SB 21 was crafted to come in around that at higher prices. The
last DOR Sources Book two years after the ACES regime when SB 21
was in effect indicates production was up by 50-60,000 barrels.
Everyone knew the oil was there, but companies were not
developing it, because under ACES, there was no upside potential
(which was reflected in the government take). So, under high
prices comparing ACES to SB 21 with 50-60,000 more barrels, the
state is getting more money under SB 21. The effect it had focus
was changing the government take.
In the exercise of looking for a peer group, Mr. Marks said he
looked at how a country was established and took an average of
government take at $40-100/barrel. He added that although using
government take is an imperfect tool, most economists
acknowledge that it is a very useful tool with which to look at
competition.
2:42:30 PM
SENATOR HUGHES asked if Alaska moves from a credit system where
the loss is subtracted from the tax to a deduction system,
subtracting it from the production tax value, and wants to keep
the competitive boundary in mind, what he would advise them to
do.
MR. MARKS replied that he had not modeled these modifications by
themselves, so that could be a request through Legislative
Budget and Audit (LB&A). It would be a simple exercise and would
not take long.
CHAIR GIESSEL asked if she should request that.
SENATOR HUGHES answered yes.
SENATOR VON IMHOF said yesterday another presenter talked about
using the per-barrel credits and the NOLs together where the NOL
would go as far as they could and then the per barrel credits
would kick in. That means the state could get more of the NOLs
forwarded to subsequent years. She asked Chair Giessel if she
would also request that Mr. Marks compare that with what he is
presented here over a two or three-year period using a couple
different price points.
MR. MARKS answered he would be happy to do that.
CHAIR GIESSEL said she would make that request, and asked if
that is what slide 11 did.
MR. MARKS responded the question is probably about how the per-
barrel credit would interact with the minimum floor.
CHAIR GIESSEL said that Senator von Imhof's question was what
happens with the NOLs if only part of them ($1.57 of the $5) is
being used, and rolling the remainder forward in year 3 when
maybe the Alaska North Slope crude price has gone up.
2:46:43 PM
MR. MARKS reminded the committee that these losses were
generally at $30. The losses for GVR oil would be generated at
higher prices. Ultimately, generating a loss, unless prices stay
really low for a long time and then recover, the issue is timing
and finding a net present value (NPV). So, the question is how
firm to make the floor, and the policy question then becomes if
the floor is "sacred" or not. If one wants to keep the floor
perforated, or eliminate it, it's important to understand those
are policy calls.
CHAIR GIESSEL said that was a good point that LCF would not be
an issue at higher prices in non-GVR scenarios, because
companies would reduce their costs to no longer be at a loss. It
would be interesting to consider that under the GVR scenario, as
well.
MR. MARKS reminded the committee that GVR oil has the $5/barrel
credit provision to bring tax down to zero. In his judgement,
given the challenges of GVR oil, that is a useful feature of SB
21.
2:51:02 PM
SENATOR VON IMHOF said the challenge legislators have is ending
the state purchasing program for these cash certificates, but it
has a large amount of cashable credits in limbo, and the
questions is what to do with those while modeling what the
future may look like with newly generated NOLs. Does it make
sense to "rev-up this third-party taxpayer market," and can he
create that within his model?
MR. MARKS divided that up into two questions: what to do about
the $1 billion in unpaid credits and how to use the market of
taxpayers being able to sell their credits. The reasons the
transferable credit market never took off are twofold: one from
the seller and one from the buyer. If the seller had $100 tax
credit, the way it would work is someone would buy that credit
and then they could use it to take $100 off their taxes. The
problem is that it made no sense to pay face value for that, so
the buyers were low-balling the holders of the credits. That is
why the refundable program was put in place in 2007, where the
state started buying credits at 100 cents on the dollar. So, one
of the problems with transferable credits is that buyers don't
get face value for them.
On the buyers' side, the reason the market never took off is
those credits had a lot of limitations on what could be done
with them: what year they could be used, or how much could be
used, for instance.
What to do with the $1 billion cashable credit balance? Given
the state's cash flow situation, that is a big problem. Mr.
Marks said one way would be pay it out very slowly over time,
although that obviously has a net present value impact. But if
the state were to write a check for $1 billion right now for
those, it would make the budget debate even more difficult.
2:55:47 PM
SENATOR MEYER said the reason legislators went to SB 21 was to
come up with a tax system that had four pillars: it's fair,
simple, durable, and creates more production. He wasn't sure it
was all that simple, but the proposed changes in HB 111 might
make it even more complex. He asked if Mr. Marks had any
suggestions on what could be done to it to meet those four goals
while making Alaska competitive.
MR. MARKS replied that a lot of things need to be balanced in
establishing a tax system, and government take is not the bottom
line. Competitiveness is another dimension, and SB 21 is
competitive. If the issue is the gross minimum and whether the
state should be getting revenue no matter what, it is already
getting the royalty no matter what. That royalty is based on
gross, at high prices, which affects owners of expensive assets.
But the state has the budget to look at, as well, and another
dimension is the question of if fiscal stability is changing the
system. Since prices have dropped, some jurisdictions have
modified their systems. Alberta has a very complicated royalty
system (they don't have production taxes), and it gets changed
frequently as prices go up and down. It is a fairly progressive
system. In general, companies expect tax changes maybe every 10
years, but changing it a lot creates instability. He recalled
advising five different governors on the gas line that the first
thing they should do is get a constitutional amendment for
fiscal stability, because no one is going to spend $50 billion,
and then once the asset is in place, have something like ACES
happen to it where all the value the state thought it would get
was taken away.
He said, "Sometimes there is a price to pay for not changing
taxes, but sometimes there's a price to pay for changing them,
and there's some value in just letting something, albeit
imperfect, just dissipate for a while rather than constantly
modifying it."
SENATOR MEYER said SB 21 meets three of the goals, but asked if
there is a way to make the tax structure simpler, the one thing
it isn't.
MR. MARKS answered that he needed to think about that for a
while before issuing a judgement.
SENATOR MEYER suggested he send an email to the chairman who
would distribute it.
CHAIR GIESSEL said she still has the four pillars from SB 21,
and the bullet point of "fair" stated "fair to Alaska" and the
"simple" pillar talked about "being balanced."
3:03:01 PM
SENATOR COGHILL thanked Mr. Marks for "being willing to go
another round with us" on making sure value is brought out of
this field. He said that the credit system under SB 21 can't be
maintained, but legislators also want to retain some value for
those on the North Slope who have already made some huge
commitments, whether it's a march down in their credits or a
recognition of investment value. Yesterday, one of their
consultants said price sensitivity will continue to distort that
value, because Alaska goes in and out of a gross and net system
on a regular basis. The idea was to retain the value of the NOLs
into the future, but some of the mechanisms in SB 21 make that
complicated, and throwing cash into the budget only to get
vetoed by the Governor is not a good systemic way to move
forward.
He said one of the ways the system returns value for investment
is by using a variable per-barrel credit that is price
sensitive, and asked if Mr. Marks had thought through a way to
get that based on a principal rather than a price.
MR. MARKS asked if he was referring to the sliding-scale, per-
barrel credit.
SENATOR COGHILL answered yes. He is trying to get a clearer
picture of how to keep the value for those who have invested as
the state "marches down" its cash investment.
MR. MARKS said he didn't understand his question, but the
sliding-scale, per-barrel credit was the way to offset the high
royalties at low prices. As the price goes up and royalty
becomes less of an issue, the credit goes down. One of the
imperfections of the sliding-scale credit is that it is dollar-
based rather than being a percentage of something. "Having
something fixed in the code that is a set per-dollar amount
eventually will stop doing what you want it to do for one reason
or another."
SENATOR COGHILL commented that it seems like they are trying to
not pay some of these credits, but still let people retain value
for investment, and the current complex system has so many
moving pieces to it that he is still trying to understand it. He
was probably asking his question "in-artfully," and decided to
withdraw it.
MR. MARKS replied the he would be delighted to discuss this with
him any time.
CHAIR GIESSEL remarked that can happen by going through the
Legislative Budget and Audit Committee (LB&A).
CHAIR GIESSEL thanked Mr. Marks for his presentation and said as
the state faces this fiscal challenge and as she thought about
the tax structure over the last three years, she convened the
Tax Credit Working Group with senators from Resources and
Finance Committees, Native corporations, industry, and labor.
They began to "wrestle with" the credit system focusing on Cook
Inlet at that time, because that was where most of the cashable
credits were going.
She divided this topic into three buckets: the $700 million in
cashable credits that are now worthless, and that the Senate
seriously wants to solve, what to do going forward in terms of
accruing more debt in these cashable credits, and reviewing SB
21 (the Senate believes it is working).
She said now they have found that because of this incredibly
complex system and the way the credits work, the floor isn't
hard, so that must be dealt with. However, changing one element
affects other elements, so it is a challenge.
CHAIR GIESSEL said she would forward the questions generated
today through the LB&A process to Mr. Marks and Mr. Ruggiero,
legislative consultants.
3:14:31 PM
CHAIR GIESSEL adjourned the Senate Resources Committee meeting
at 3:14 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGENDA - 4 - 19 -17.pdf |
SRES 4/19/2017 2:00:00 PM |
|
| HB 111 - Presentation by Marks - Loss Recovery - 4 - 19 - 17.pdf |
SRES 4/19/2017 2:00:00 PM |
HB 111 |