HB 263-PRODUCTION TAX CREDIT; DISCLOSURES  1:42:48 PM CO-CHAIR SEATON announced that the next order of business would be HOUSE BILL NO. 263, "An Act relating to information concerning oil and gas taxes, including information about expenditures that must be provided in order to claim an oil and gas production tax credit for those expenditures, and relating to the disclosure of that information; and providing for an effective date." 1:43:18 PM REPRESENTATIVE GARDNER moved to adopt CSHB 263, Version 27- LS1053\E, Bullock, 2/17/12, as the working document. There being no objection, Version E was before the committee. 1:43:50 PM REPRESENTATIVE GARDNER, speaking as one of the joint prime sponsors of HB 263, informed the committee that [Version E] was offered as an amendment to HB 110 [in the House Resources Standing Committee] and on the House floor. Although she ultimately pulled the amendment to HB 110, she said she understood there was support for it from members of the committee. She then directed attention to a document in the committee packet entitled "Disclosure Requirements for Film Tax Credits". Those in the film industry who want to do business in Alaska and claim the film tax credits must disclose the following: name of the taxpayer, project title, amount of the Alaska expenditure, production schedule, production type, communities where expenditures occurred, wages paid to residents and nonresidents, costs in in-state Alaska shipping, shipping to Alaska, location fees, facility rentals, services, food, lodging, and amount of tax credit that is rewarded. All of the aforementioned is public record for the film tax credits. Over a two-and-a-half year period, the tax credits have totaled $24,329,051.20, which isn't a huge amount. However, for the $4 billion that the state has invested in the oil industry tax credit, there is relatively little known. 1:46:07 PM REPRESENTATIVE GARDNER surmised that most [legislators] are supporters of various tax incentives and credits, and have goals in terms of those. However, very little is known about what has been purchased with those tax incentives and credits. She opined that it's the legislature's problem that it didn't establish [disclosure requirements for the oil and gas industry] in the beginning. There is no knowledge, with any specificity or detail, on what $4 billion [in tax incentives and credits] has been spent. Therefore, the legislature can't pinpoint what's really working, that is where the incentives are working and where they are paying for work that would be performed regardless of the incentives. She reminded the committee of testimony from various experts including Dr. Pedro van Meurs and Robin Brena, regarding how little the legislature knows about what is being spent on the North Slope in comparison to what Norway and other countries with much tighter control of their data know. Although she acknowledged that perhaps the Department of Revenue (DOR) may know the information, it doesn't help the legislature make decisions. Representative Gardner emphasized when the state spends $4 billion, the legislature should know how effective [the tax incentives and credits] are in getting oil in the pipeline. 1:48:16 PM REPRESENTATIVE GARDNER explained that HB 263 is an effort to get oil in the pipeline. The legislation specifies that notwithstanding the normal taxpayer confidentiality, a taxpayer that asks the state for money under the tax incentives and credit program needs to be prepared to release to the public the following: the taxpayer's name, a general description of the category of work being performed, and the location where the work is being performed. A lease that is being explored merely requires the name of the lease or a broad idea of a unit. She stressed that there is no desire to obtain trade secrets or proprietary information rather she seeks responsible accountability for what is being spent on the North Slope. 1:50:45 PM REPRESENTATIVE P. WILSON said she didn't recall whether other legislation includes the requirement to publish the information on the Internet. REPRESENTATIVE GARDNER explained that she discussed with DOR what would be the easiest and most cost effective way to provide the required information. She said she was merely trying to avoid any additional expense and was only seeking efficiency. 1:51:37 PM CO-CHAIR SEATON referred to a memorandum from Legislative Legal Services dated February 16, 2012, regarding confidentiality and the belief that perhaps the legislation should include another section. He asked if that was accomplished with [the latest version] of HB 263. REPRESENTATIVE GARDNER responded that was the intention and she believes it was accomplished with the language on page 3, beginning on line 15 of Version E. 1:53:19 PM REPRESENTATIVE FEIGE asked if the language in HB 263, Version E, is the same language that applies to other tax credits. Or, if information is what is sought, then he questioned why it isn't required for all tax credits. REPRESENTATIVE GARDNER answered that is something that might be considered, but in this case it's the volume of money [that raises the need for the information to be on the Internet]. For smaller credits, she wasn't sure that it was necessary to have regular reports and postings on the Internet, although as a matter of principle it's probably a good idea. She offered the public disclosures candidates for public office must file as an example. In this case, the state is spending $4 billion and she opined that it's irresponsible of legislators not to know with certainty [whether tax incentives and credits are working]. She acknowledged that there is always a cost/benefit ratio, but as a matter of principle everyone should have the information. 1:55:00 PM CO-CHAIR FEIGE expressed the need for the rules to apply to everyone fairly and evenly. Applying this to one single industry seems to be selective, even though he acknowledged that the [oil and gas industry] does provide a considerable amount of revenue to the state. Referring to the language in paragraph (10) [on page 2], Co-Chair Feige reminded the committee that there are existing laws that preclude the release of information that would give competitive advantage to other companies in the same industry. He recalled DOR's testimony from a previous hearing, in which the department reminded the committee that it can't make information public unless it's lumped together with information from at least three other companies. Therefore, one company can't determine what a particular company is spending in a particular area. He opined that the language in paragraph (10) "notwithstanding AS 40.25.100(a) and AS 43.05.230(a)" can't be ignored otherwise it would be taking away competitive advantages from these companies. REPRESENTATIVE GARDNER said that as a matter of policy it is left to the legislature to determine if every single tax credit should be a matter of public record. Although she said she wouldn't object to the aforementioned, that's not what she is trying to do with HB 263. She explained that she's not doing the aforementioned, in part, because of the economies of scale. Again, $4 billion is a lot of money as is the $24 million for the film tax credits. Where state money is being spent, there should be accountability in terms of the public knowing exactly what the money is being spent on and who is the beneficiary, she said. Representative Gardner opined that while she supports taxpayer confidentiality, she also supports fiscal responsibility on the legislature's part. She explained that with this legislation, she is suggesting that the taxpayer determines whether to participate in a state program and part of the price of participating in this generous state tax credit program is to release broad categories of information. She specified that she wants to be able to tell Alaskans whether the state is buying maintenance and what kinds of repairs or exploration are being purchased, in general terms. Furthermore, a taxpayer who wants to participate in the tax credit system should have his/her name attached to the funds the taxpayer receives. 1:59:00 PM CO-CHAIR SEATON related his belief that legislators have been in the dark about heavy oil production and tests on the North Slope. He then expressed concern that if legislators don't understand whether tax credits are being effectively used to develop heavy oil, it doesn't seem that the state can target its tax credits and determine whether more or less tax credits are necessary. Is the purpose of HB 263 to obtain that sort of discrimination of information in order to determine whether the tax credits are going toward shale oil or heavy oil, he asked. REPRESENTATIVE GARDNER agreed that is exactly what she wants to know. She clarified that she wants to have a better idea in terms of accountability, where the same money [tax credit] could be more effective, or where to invest more because of the ability to see that it actually stimulates the type of activity desired. 2:00:40 PM CO-CHAIR FEIGE asked whether it would make more sense to tie a tax credit to actual performance. REPRESENTATIVE GARDNER acknowledged that's another approach. CO-CHAIR FEIGE pointed out that with such an approach, the state wouldn't have to deal with issues of giving away competitive edge. REPRESENTATIVE GARDNER opined that there are complications, strengths, and weaknesses with any approach. Currently, there isn't enough information to know where the incentives and tax credits are being effective. Therefore, HB 263 is her proposal to address the issue. 2:01:47 PM CO-CHAIR FEIGE pointed out that [on page 3, lines 13-14] the legislation provides a "detailed description of the purpose of  the expenditure". He inquired as to what exactly "detailed" means and how much extra would it cost to implement. He further inquired as to what entity would establish the level of detail. 2:02:39 PM JOHN LARSEN, Audit Master, Tax-Production Audit Group, Department of Revenue, responded that there may be a couple of different answers. Generally, when DOR obtains cost information from companies, it has attached the account code and the description of the account. Most often that description will relate what's necessary to know about the expense without having an additional language burden on the taxpayer. 2:03:21 PM CO-CHAIR SEATON asked whether a modifier should be placed with the language "detailed description" so that it's by account code or something that reaches the level of description that the sponsor has discussed but wouldn't be of concern to the industry. MR. LARSEN said a modifier doesn't immediately come to mind, but he offered to give it some thought. 2:04:33 PM CO-CHAIR SEATON, referring to Version E, asked whether there would be confusion among DOR as to what "detailed description of  the purpose of the expenditure" means and whether a modifier is necessary so that the industry would know exactly what is meant. He asked whether the language is confined/explanatory enough that both DOR and the industry would understand the meaning of it or is a modifier necessary. 2:05:35 PM CO-CHAIR SEATON, while waiting for Mr. Larsen to join the meeting, opened public testimony on HB 263. Upon ascertaining that no one wished to testify, he closed public testimony. 2:07:08 PM MR. LARSEN said that he doesn't see the benefit of modifying the language in the legislation. He offered to inform the committee in regard to the information DOR is currently receiving. CO-CHAIR SEATON clarified that he didn't want to insert language in statute if it's unclear. He opined that it's clear to him that the language "detailed description of the purpose of the  expenditure" is a more general description, but he wanted to be sure DOR and industry understands the language. He requested that Mr. Larsen provide the answer to the committee in writing. 2:08:41 PM REPRESENTATIVE P. WILSON inquired as to whether DOR would be able to obtain that [detailed description of the purpose of the expenditure] information without "stepping on toes" in terms of the proprietary information that has to be protected. In further clarification to Mr. Larsen, Representative P. Wilson specified that she is referring to the information being requested from the producers. MR. LARSEN answered that DOR currently receives information very similar to what the legislation requests, if not the same information. He said he didn't believe that would violate any proprietary information because it's coming from a single source. When information is received from a company it's only coming from them about their operations and it's not being shared on an individual basis with anyone else. REPRESENTATIVE P. WILSON pointed out that the legislation specifies that the information will be published on the Internet and in a report to the legislature. Therefore, can DOR do that without worrying about the proprietary information, she asked. MR. LARSEN stated that personally he would want some advice from the Department of Law regarding the applications of HB 263 as it applies to AS 40.25.100 and AS 43.05.230. Additionally, DOR can submit information under AS 43.55.890 and not be in conflict with confidentiality provisions. 2:11:17 PM CO-CHAIR SEATON related his understanding that HB 263 would only be for information, generalized description of those expenditures, submitted by companies that wanted to obtain funds from the state; that information would be publicly available to the legislature. Basically, the state is buying information that would then be public, he surmised. In other words, this [information becoming public] refers only to expenditures that qualify for credit, such that if the company didn't apply for the credit the disclosure wouldn't occur. 2:12:39 PM LENNIE DEES, Audit Master, Tax-Production Audit Group, Department of Revenue, stated his agreement with Co-Chair Seaton's understanding, and added that he understood that HB 263 would ask for information pertinent to expenditures for which a tax credit was claimed. In accordance with AS 43.55.890, DOR would be able to aggregate the information in order not to violate any of the confidentiality provisions. CO-CHAIR SEATON surmised that Mr. Dees is referring to expenditures that are not the basis of a credit claim, for which HB 263 wouldn't apply. MR. DEES agreed that the information for which a credit is not claimed wouldn't be part of this particular disclosure. 2:14:24 PM CO-CHAIR FEIGE reminded the committee that these credit programs were placed in statute to encourage a particular kind of activity. Therefore, the committee must consider if requiring a detailed description causes companies not to make that expenditure, in which case the state isn't accomplishing anything with its credit program. He then requested that DOR provide a list of the types of expenditures and the level of detail that the department currently receives. He related his understanding that DOR receives a fair amount of information with regard to production and expenditures related to that production, much of which details down to the level of the individual wellhead. However, due to confidentiality laws that data can't be released to the public, although the state knows that information. MR. DEES confirmed that as part of DOR's data assessment, it has been determining the many different levels of data received from the various companies. The department would be able to provide the committee with a list in order that it can have a sense of the level of data the department currently receives. 2:17:38 PM CO-CHAIR SEATON requested that the list also indicate what DOR would interpret to be a "detailed description of the purpose of  the expenditure" for a group. He asked whether it would be enough for a detailed description of a company to say they would be building a pipeline or would it be necessary that there are 20 pre-welded elbows. He reiterated the need to know what DOR would interpret as a "detailed description of the purpose of the  expenditure". 2:18:33 PM CO-CHAIR FEIGE surmised that by requiring further levels of detailed expenditures and to expose what is currently confidential data, the language seems to imply that the data being provided to the state is either somehow incomplete or somehow erroneous or not representative of the purpose for which the tax credit is being granted. He asked whether DOR has ever had instances in which there were integrity issues with the data that was provided. MR. DEES informed the committee that DOR performs due diligence and audits on those tax credits. Of course, there may be instances in which the department disagrees with some of the particulars of the expenditures, but that's at a very detailed invoice level. Over the last year, in cooperation with industry DOR has tried to develop some broader categories of expenditures. The department is trying to develop definitions of various categories of cost that would mean the same to each company from which the data is obtained. The aforementioned would provide an indication for what the money is being spent. The department is still in the process of developing that list, he said, particularly in terms of further refining the data to a lower level that is meaningful to DOR and the industry without getting into minutia. 2:21:55 PM CO-CHAIR SEATON acknowledged that without some sort of detailed description requirement, some charge that most of the credits are being spent on maintenance rather than capital improvements. Furthermore, at this point there is no statutory requirement for DOR to provide the legislature with enough information to determine whether the [tax credits] were spent on maintenance or drilling a well. 2:22:52 PM REPRESENTATIVE GARDNER clarified it is not her intention or belief that any of the tax filings are incomplete, erroneous, or not representative. She further clarified that she doesn't fault the oil industry for not having this information, but rather faults the legislature for not having the foresight to realize the information would be necessary when it embarked on the tax credit process. The information, she opined, is necessary to understand in order to know how effective [the tax credit process] is and to determine how it can be more effective. She then emphasized that her goal with HB 263 is to protect members of DOR and protect them from erroneously releasing information. From the Gleason decision she read the following: The division broadly interprets what it considers taxpayer confidential information under applicable statutes and will not disclose such information to the municipalities specifically or to the public generally. The division considers all information that it receives from a taxpayer as taxpayer confidential, even if it doesn't contain the particularities of a taxpayer's business affairs and is obtainable from the public domain. REPRESENTATIVE GARDNER noted that the Gleason case was about property taxes. She then explained that she wants to protect DOR from having to make a judgment decision. Therefore, she wants the taxpayer to specify who they are and what they are applying for in categories that make it adequate for the legislature to know what they are doing in broad terms. 2:24:51 PM REPRESENTATIVE P. WILSON said she knows the oil industry tracks legislation being considered, and therefore she assumed it does not object to HB 263 because no oil industry representative is present to object to it. 2:25:36 PM CO-CHAIR SEATON announced that HB 263 would be held over for another hearing so anyone having concerns with HB 263 can come forward. If no one comes forward to testify he, too, would assume there is not a problem with the legislation. Co-Chair Seaton then asked whether there is any current information that the state is legally entitled to receive and that DOR has asked companies to report that companies have refused to report. 2:27:03 PM DONNA KEPPERS, Audit Master, Tax-Production Audit Group, Department of Revenue, answered that all the information DOR has requested of the companies has been provided by the companies through a series of workshops that has taken place over the last year. The department has been able to provide all the information it can while maintaining the confidentiality provisions that are in place. She informed the committee that with the five-year look back DOR could not disclose some of the cost categories of some of the independents and majors because of the inability to meet the three producer/explorer aggregation rules of AS 43.55.890. 2:28:09 PM CO-CHAIR SEATON related his understanding that there were some categories of information requested that the state had the legal right to obtain, but wasn't being provided to DOR. However, he understood Ms. Keppers' testimony to be that all information the state has a right to obtain and the state has requested has been provided by the producers. MS. KEPPERS clarified that all the information that DOR has asked for from taxpayers for purposes of the five-year look back and the cost categories has been provided. She said she wasn't familiar with another type of information request for which the information wasn't provided. MR. LARSEN prefaced his comments by saying he wasn't sure if this was to what Co-Chair Seaton was referring. He then related that in the process of developing the categories for the five- year look back DOR ran into difficulty because every company's accounting system is unique to that company. Therefore, depending upon how a company aggregates data within its own organization, particularly in a look-back situation in which historical information is being requested, to a certain degree DOR had to settle on the "lowest common denominator" of categories of cost. When the workshop process began, DOR had a larger list than just the five categories of cost. In some instances, some companies could provide a greater level of detail on a particular cost category than others. Therefore, in order to maintain consistency in the data and reporting, DOR felt that it was important for every company to report on the same categories of cost for purposes of the look back. In the current workshops, DOR is trying to expand the categories of cost to obtain a greater level of detail. He related his belief that the aforementioned should be attainable in the future. In order to obtain the information DOR requests, the company must program its system such that how the company records its costs can be mapped into what DOR wants reported. 2:32:15 PM CO-CHAIR SEATON said he was not referring to the look back or the categories for future accounting, but rather he was referring to any categories under Alaska's Clear and Equitable Share (ACES) that DOR wasn't receiving. He reiterated his understanding that DOR is being provided all the information it needs for auditing purposes. MR. DEES replied that is correct; currently, in the area of cost data, there isn't any that DOR isn't being provided. 2:33:05 PM CO-CHAIR FEIGE asked whether there will be fewer problems making the data public once the reporting and information categories are equalized between all the players throughout the state because DOR will be able to include more companies into its collective database, and thereby be able to exceed the three company minimum reporting requirement. MR. DEES noted his agreement that an aggregate should be easier to disclose. The problems with AS 43.55.890, the aggregation of data, arise when DOR tries to perform analysis on the cost and consider independent companies versus major companies and producers versus explorers. In certain types of costs, there may only be one or two companies with an expenditure of a certain type. In terms of the state as a whole, there shouldn't be problems with aggregation. 2:35:06 PM CO-CHAIR SEATON posed a situation in which the state has information on credits for Prudhoe Bay or Kuparuk, where ConocoPhillips Alaska, Inc., BP, ExxonMobil Corporation, and Chevron participate in the unit. Since there are at least four companies, he asked whether DOR wouldn't release that information because it's four companies in an aggregated operation or would that information be released under the current aggregation interpretation. MR. LARSEN responded that he didn't believe DOR would have a problem reporting that information under the provisions of AS 43.55.890 because with four companies the requirement would be met. He offered to address any specific question related to a specific report. 2:36:29 PM CO-CHAIR SEATON surmised then that when credits are being applied for on Prudhoe Bay then that would be released as credits applied for and paid on Prudhoe Bay. He asked if the individual credit and expenditure amounts can be obtained for each [unit] that has three or more participants in the unit. Co-Chair Seaton clarified that he is referring to DOR's interpretation of aggregate. Therefore, is the amount of credit that has been applied for by Kuparuk public information that's available to the legislature because there are three or more participants in the field, he asked. MR. DEES replied no, he hasn't provided the credit information by unit rather he has strictly provided the information regarding whether the credits were earned via being deducted from production tax liability as opposed to those that were applied for in the form of transferrable tax credit certificates. In further response to Co-Chair Seaton, Mr. Dees confirmed that if the information is aggregated among three or more producers or explorers, the information can be disclosed on a unit basis per AS 43.55.890. 2:39:33 PM CO-CHAIR SEATON, referring to language page 2, lines 21-22, that says "detailed description of the purpose of the expenditure", asked whether that language would describe the classes of expenditures that DOR is creating. MR. LARSEN pointed out that the language in paragraph (10) on page 2 is the same as the language in paragraph (3) on page 3, and therefore DOR will obtain the same information under both paragraphs. CO-CHAIR SEATON asked if a "detailed description of the purpose  of the expenditure" is basically the description DOR would use and would encompass the categories that DOR would require going forward. MR. LARSEN replied yes. 2:41:09 PM CO-CHAIR SEATON surmised that the difference in the categories that DOR will require going forward is that it will be for DOR's information, but not for the legislature. MR. LARSEN responded no, and related that the categories that DOR is working on for the future would be for aggregating the data and reporting to the legislature and the public. CO-CHAIR SEATON surmised then that the data would be aggregated but wouldn't be available by companies based on the credits for which they are applying. MR. LARSEN replied yes. In further response to Co-Chair Seaton, Mr. Larsen expressed concern that even if HB 263 passes, there is a conflict with AS 43.55.890 in terms of releasing the data by individual company. He reiterated the need to involve the Department of Law prior to releasing any data. In response to Co-Chair Seaton, Mr. Larsen agreed to contact the [department's] attorney general regarding clarification on this matter. 2:43:55 PM CO-CHAIR FEIGE opined that under the new categories although DOR wouldn't be able to disclose the individual companies, the information could be [aggregated] with three or more companies that receive the credit to provide a fairly detailed explanation to the legislature regarding how a particular credit program is being spent. MR. LARSEN answered that he believes that's correct. CO-CHAIR FEIGE surmised then that the legislature would be able to evaluate what the state's credit program is generating in terms of expenditures. MR. LARSEN, characterizing it as a matter of semantics, clarified that the credit programs don't generate expenditures, rather they reimburse expenditures that have been incurred for a particular category of costs. CO-CHAIR FEIGE explained that the legislature would know where the state's expenditures, in the form of reimbursements, are being spent in terms of categories but not necessarily which company. MR. LARSEN agreed that [DOR] would have a good accounting of the categories of cost on an aggregated level, but not by individual companies. 2:45:45 PM REPRESENTATIVE P. WILSON recalled asking that question early on to which she was told it wouldn't be a problem. She then asked whether [DOR staff] is now saying it would be a problem. MR. LARSEN replied no, and specified that disclosing the information at a company level is the problem for DOR not the disclosure of information. The lack of not having the information aggregated is cause for concern. 2:46:23 PM CO-CHAIR SEATON related his understanding then that DOR would inform the legislature the amount of the credit by wells on the North Slope, but wouldn't inform the legislature as to which companies are actually drilling the wells because that would be company specific data. MR. LARSEN answered that's correct. As Mr. Dees indicated earlier, the one way DOR has tried to break that down for people is based on whether a credit has been received for those who have a tax obligation. In other words, they deduct a credit directly from their tax payment compared to those who do not have a tax obligation, and therefore receive a transferrable tax credit certificate. He noted that the original holder of the transferrable tax credit certificate can redeem it for cash. Therefore, rather than detailing the information on an individual company basis, DOR has made an effort to provide another level of detail on the gross cost reported themselves by detailing it into those two categories. 2:47:53 PM CO-CHAIR SEATON related his appreciation for DOR trying to get around the restrictions that have been placed on the department regarding not disclosing information on a company-by-company basis. He surmised that DOR is trying to identify a grouping of companies in order to provide some understanding because statute requires a grouping of three or more companies in order to disclose the data. MR. LARSEN agreed with Co-Chair Seaton's assessment, but clarified that DOR isn't trying to get around any statutory regulations, rather it's trying to operate within the confines of existing statute while providing the legislature and the public with as much information as possible. 2:49:13 PM CO-CHAIR SEATON recalled that public testimony had been closed for HB 263, but announced that he will re-open it at the next hearing of the legislation. 2:50:01 PM REPRESENTATIVE GARDNER stated that she [and the other joint prime sponsors] will work on the issue with AS 43.55.890 to make the legislation explicit. She also stated that she [and the other joint prime sponsors] will speak with DOR regarding its categories and how well they comport with what the legislation seeks in terms of understanding what is being done and paid for without revealing any competitive secrets. 2:50:44 PM CO-CHAIR SEATON requested that [at the next hearing] DOR explain whether [all the companies] applied for credits on the expenditures and whether the credits are going to be in two different segments, that is will the AS 43.55.025 exploratory tax credits be in the same category as the AS 43.55.023 regular capital expenditure credits and did [all companies] apply in the fiscal year in which the expenditures or loss carry forward occurred that didn't get into credits. He requested that DOR inform the committee in regard to how the credits are going to definitely apply to the amount of expenditures. Many in the legislature want to know by category what proportion of the total spent is being taken by the state. [HB 263 was held over.]