Legislature(2017 - 2018)SENATE FINANCE 532
05/12/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB34 | |
| HB111 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 111 | TELECONFERENCED | |
| += | SB 34 | TELECONFERENCED | |
| + | TELECONFERENCED |
CS 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."
3:08:21 PM
Vice-Chair Bishop MOVED to ADOPT proposed committee
substitute for CSHB 111(FIN), Work Draft 30-LS0450\V
(Nauman, 5/12/17).
Co-Chair MacKinnon OBJECTED for discussion.
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, reviewed the
document "Summary of changes from Version B to Version V,"
(copy on file):
Substantive change:
· Section 27: Subsection (n) of Version B was
removed in Version V. This is reflected on page
18, where the former subsection (o) is now
subsection (n).
The former subsection (n) allowed half of a
carry-forward loss from a new development to be
applied immediately against the taxpayer's
liability, with the remaining half carried
forward until the development entered production.
This change aligns the CS with current statute.
The change in Section 27 necessitated a
conforming change which removed section 1 from
the previous version, on page 1. Removing
subsection (n) also removes the need for the
Alaska Oil and Gas Conservation Commission to
determine the start of regular production for the
purposes of (n).
Technical changes:
· Section 5, Page 4, lines 4-5 of Version V:
changes "for a credit for work performed" to "for
a credit for a lease expenditure incurred." This
language is consistent with existing statute.
· Section 6, Page 4, lines 22-23 of Version V:
makes the same change from Section 5, which
repeals that language in the future to conform to
the future repeal of the Oil and Gas Tax Credit
Fund.
· Section 20, Page 14, line 29 and lines 30-31 of
Version V: Changes "for work performed before
Jan. 1, 2018," to "for an expenditure incurred
before Jan. 1, 2018." This language is consistent
with existing statute.
· Section 23, Page 16, line 24: Changed "the" to
"that" before "calendar year."
· Section 27, Page 18, line 26: Changes "or carry
it forward" to "or carry any unused portion
forward."
· Section 27, Page 19, lines 2-3: adds "before the
application of any credits under this chapter" to
further clarify the intent of the provision. The
intent is that, when applying carry-forward
annual losses, they need only be applied, at the
taxpayer's discretion, to the point at which the
tax due is the equivalent of the minimum tax
before the application of any other credits to
the minimum tax.
· Section 31, Page 19, line 19: Changed "regardless
of when the credit was earned or issued" to "for
work performed on or after July 1, 2016" to
accurately reflect the bill sections the
applicability addresses.
3:12:22 PM
Co-Chair MacKinnon WITHDREW her OBJECTION. There being NO
OBJECTION, the Senate CS for CSHB 111(FIN) Version V was
ADOPTED.
3:13:07 PM
Co-Chair MacKinnon mentioned testimony from taxpayers and
asked whether there was an issue regarding a backlog in
Department of Natural Resources (DNR).
ED KING, SPECIAL ASSISTANT, DEPARTMENT OF NATURAL
RESOURCES, acknowledged that there was a backlog in
processing seismic data in the department. He recounted
that following the passage of SB 21, there had been a
drastic increase in seismic activity to recover credits
being offered. This was largely due to the change in the
bill language regarding net operating loss credits moving
to 45 percent and stacked to the 40 percent in
AS 43.55.025(a)(4), allowing a total of 85 percent of
expenses to be turned into credits. That led to a lot of
new seismic data sets since the passage of HB 185 in 2003.
Co-Chair MacKinnon asked if Mr. King could provide an
estimate of the magnitude of the change.
Mr. King provided that half a terabyte or less for the last
ten years, or until 2013, when the increase was seen. He
informed that the department had gone from 1 terabyte per
year to 250 terabytes in the previous year, and in 2017 the
department had received 277 terabytes. This equated to a
backlog of 450 terabytes of data, or the equivalent of
processing 400 applications.
Co-Chair MacKinnon stated that it had been suggested that
the committee consider a timeline in statute for DNR to
certify the data. She asked how that would impact the
process.
Mr. King stated that it was not physically possible to
process the data sets in the recommended timeline of 120
days. He estimated that it would take two to three years to
process the data. He thought the most recent version of the
bill repealed the credit, and they did not expect to
receive similar amounts of data in the future.
3:17:07 PM
Vice-Chair Bishop asked whether it was a question of
updating the technology.
Mr. King answered in the affirmative. He continued that the
IT department had worked to the limits of the technology
available. He also indicated updating further would be an
expensive change for a temporary problem.
Vice-Chair Bishop wondered if the department could reach
out to the University of Alaska Fairbanks, to aid them with
their computer systems.
Co-Chair Mackinnon recognized that Senator Olson had joined
the committee and recognized Senator Cathy Giessel in the
audience.
3:18:40 PM
Senator Hughes wondered what happened after the process was
finished. She understood that there was also a time-lag
after the data returned to DOR. She asked for an
explanation of what was sent to DOR.
Mr. King pointed out that part of the DNR process was to
certify data that was submitted. The credit required that
the relevant data be sent to the state. The department held
that data confidential for ten years and then it was
released to the public. When the original bill creating the
credit was introduced, the department had not anticipated
the problem. He stated that some of the data files were
corrupted files and the department began in 2012 to take a
closer look at the data provided to them. He deferred to
the Department of Revenue for its process.
3:20:48 PM
Co-Chair MacKinnon asked about the timeframe on the backlog
of seismic data. She asked whether it would take 10 years
to catch up and inform the taxpayers of what they could
expect.
Mr. King stated that the department would work as
expeditiously as possible with the given resources. He
thought the three to five-year time window was more
realistic.
3:22:01 PM
Co-Chair MacKinnon referred to a new fiscal note from DOR
(OMB component 2476), and mentioned that the CS adopted was
what was needed to remove cash credits and no more. She
stated a belief in the current tax system and remarked the
50/50 change in the status quo was unrelated to the cash
credits and was removed to maintain focus on eliminating
cash credits.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
stated that there was no change to the fiscal note. He
stated there were three components to the fiscal note: one
looked at the impact on state revenues, the second on the
state's obligation to pay for tax credits, and the third
component was tracking of the carry forward volumes, where
the expenditures turned into value that could be used to
offset future taxes. The ring-fence provision was removed
and did not affect the assumptions in the fiscal note.
There were some concerns with the change, but those were
outside the scope of the current discussion. The fiscal
note in the previous committee contained a version in which
specific credits could be used below the minimum tax that
lead to a negative revenue item of roughly $20 million to
$40 million per year. The "V" version of the bill had a
much smaller number, typically a negative $5 million to a
negative $10 million. It was not the kind of number he
would consider material because the value was the mirror
image of savings that would otherwise be given out in a
cash credit. In the status quo, a certain amount of Middle
Earth credits (approximately $10 million per year) would be
cashed out and now could be transferred to some other
producer or would be used to offset a company's own
corporate income tax.
3:25:41 PM
Mr. Alper continued that the second half had to do with the
budget side, or the reduction to the state's expectation of
buying credits. That is almost fully zeroed out once the
existing backlog of credits works its way through the
system. There would be reductions in expenditures of
roughly $150 million per year after a few years. The sum
total of the reduced expenditures was $1.3 billion to $1.4
billion, seen migrating to below the line. That was the
future tax offset value that companies would have in hand
as they would now be carrying expenditures forward. He
underlined that this was a universe of $3.7 billion to $3.8
billion of forecast spending that would be turned into
carry forwards. Those carry forwards would be used to
offset at statutory rate of 35 percent. The prior version
of the bill had a line for 2027 of $1.785 billion but that
number contained a $460 million uplift, or interest
provision, component that had since been removed. The
current bill was $1.445 billion, or $120 million higher.
One part had to do with clarifying language saying that a
company carrying forward their lease expenditures could
only use them to reduce the value to the number that led to
the floor after using other credits. Whereas the [Senate]
Resources Committee version would have led to some loss of
per barrel credits, that adds about $60 million in credits
being carried forward. The additional 60 million was due to
the scope of carry forwards to include Middle Earth. There
were estimated to be $60 million in carry forwards over the
ten year fiscal note period.
3:28:24 PM
Senator von Imhof wanted to fully understand Mr. Alper's
remarks. She paraphrased a portion of Section 27 of the
bill [language taken from version Q on BASIS]:
A taxpayer may apply in that year equal to that amount
combined with lease expenditures before the
application of any credits under this chapter to the
equivalent of the tax due.
""
Senator von Imhof asked Mr. Alper to repeat his comments
about interaction between carry forward NOLs and per barrel
credits, in particular the sliding scale per barrel
credits.
Mr. Alper stated that under current law, companies'
expenditures were used to their taxable value. The 35
percent tax calculation was applied to that, then the per
barrel credit was subtracted. By introducing carry forward
lease expenditures into the mix, the value that is subject
to the 35 percent tax is reduced. The Senate Resources bill
said that the carry forwards were applied to lead to a
calculation where the 35 percent of net was equivalent to 4
percent of gross. It was the amount that lead to the
minimum tax. However, it did not account for the
possibility that, without the addition of carry forwards, a
company could use some amount of per barrel credits to get
to the minimum tax calculation. By wording it this way, the
CS allowed the company to choose the amount it wanted to
carry forward, and thereby minimize the amount of the carry
forward to preserve the ability to use the carry forwards
in a non-carry forward scenario. In a lifecycle analysis,
it meant the company was able to preserve some amount of
them to use in a subsequent year and be used to offset
another year's taxes. The bottom line was that it added up
to about $60 million in tax equivalent value over the
course of the present fiscal note.
3:30:57 PM
Senator Hughes referred to the chart on the fourth page of
the fiscal note and remarked that due to inflation, that
$1.445 billion would be worth less. She confirmed that
there was nothing to account for inflation.
Mr. Alper concurred, and stated that the sum total value of
the tax benefit to companies would be the same before and
after the passage of the bill, but the state would be
benefitting from the time value of money.
Senator Micciche asked if the difference in the time value
of money was reflected in the total revenue impact.
Mr. Alper replied in the negative. He stated that the
revenue impact was relatively minor. He used the example of
a company that was carrying forward a lease expenditure,
and the related project coming into production. It would
show as a slight tax reduction in the fiscal note as the
company was applying the carry forwards against their
taxes. That would not have been seen in the status quo as
those would have been paid out in credits.
Senator Micciche asked if the difference was worth
attempting to capture in the budget section of the fiscal
note.
Mr. Alper stated that the budget impact was far larger than
the revenue impact. Some small portion of the impact was
migrating to the revenue side.
Senator Micciche was attempting to understand the time
value shift from cash payment to carry forwards.
Mr. Alper stated that had those been paid out in cash
credits over 10 years, the credits would have been in the
hundreds of millions of dollars. Looking at all of the
carry forwards, the state's expense in 2028 was
significantly lower than what would have been paid out in
the intervening years. It was a material savings for the
state.
3:34:45 PM
Co-Chair MacKinnon asked if the administration was in favor
of the CS.
Mr. Alper could not speak to the matter. He relayed that he
would be briefing the administration on the components of
the bill. There was not currently an official position.
Senator Hughes asked about the timeframe and delays
involved in the issuing of certificates. She asked whether,
once DNR has completed its work, the considerable delays
were justified.
Mr. Alper relayed that the delays from DOR were not
necessarily related to DNR data analysis delays. The
43.55.025 credits were sometimes pushed behind something
with a tighter deadline. The credits had at times fallen
behind by a few months or a year. The credits were issued,
but were subject to future review. When auditing the
underlying tax year, any missing piece could be reviewed.
The exploration credits do not carry that same authority.
The credits were considered a final determination. So long
as the data was received, the department was able to issue
the certificate. He specified that, when issuing an
exploration credit, the tax division had considered it a
final determination and had therefore a higher standard to
ensure that everything had been paid and was as it should
be. That led to the creation of the certificate, which
acted as a placeholder in the line to receive credits.
House Bill 111 said that companies would receive a
certificate from day 1, which did not have a cash value,
but gave them a position in line to receive credits.
3:38:34 PM
Senator Hughes appreciated the fact that the division was
more deliberative with exploration credits due to the final
audit question. She understood that there was only about a
four-page application and should be easy to review.
Mr. Alper stated that the application document was
relatively brief, and the time-consuming portion of the
process was examination of receipts.
Co-Chair Hoffman referred to the chart on page 5 of the
fiscal note. He remarked on a big swing in 2027 of over
$150 million from $60 to $80 per barrel.
Mr. Alper specified that the $40 per barrel oil price was
where the major producers were losing money. In the status
quo, if a major producer had an operating loss and was able
to carry it forward into the next year, they could use the
loss credits to reduce their payments to below the minimum
tax to zero. Due to the change in the bill, there was no
more loss credit, only a carry forward. The floor hardening
provision does not have much impact at higher or lower
price points. There was an unusual circumstance in the $60
set, with positive numbers in later years and negative
numbers in earlier years. The modelling contained the
presumption that there would be reduced production and
increasing costs so that operating costs increase at $60
oil in 2025 and 2026, assuming 350,000 barrels per day. The
same impacts at $60 per barrel oil were seen as at $40 per
barrel oil in later years. It was something of an oddity in
the forecast.
3:42:53 PM
Senator von Imhof referred to page 4 of the fiscal note.
She pointed to line A in the middle of the page and asked
what the line referred to.
Mr. Alper replied that the line reflected the expectation
that under the status quo companies were earning NOL
credits. The line referred to companies who were not major
producers. He stated that the losses would be cashable
under current law, and the cash credit was eliminated in
the present bill. The main change from the bill was getting
the state out of the business of buying cash credits. That
primary change was reflected in Line A. It showed the sum
total of the credits the state would not be purchasing.
Senator von Imhof referred to the "NOTE" box on the bottom
of page 4 of the fiscal note. "…assume that all outstanding
credits earned before 1/1/18 … are funded through
appropriation and purchased by the state." She asked for
clarification.
Mr. Alper referred to the [DOR] Revenue Sources book and
the spring forecast. There was a very large number in
expected demand for credits in FY 18. The line stated
current demand, plus the demand carried over following the
governor's veto, and was over $1 billion. The expectation
was that those would be paid so that by getting those off
the book in 2018, the demand for credits in FY 19 was
limited to the credits coming onto the books in FY 19,
primarily loss credits for work done in 2017 due to natural
delays in processing. The sentence meant that the
legislation was not changing the underlying forecasts in
the Revenue Source book, it was simply stating how it was
changed with the passage of the bill.
3:45:41 PM
Co-Chair MacKinnon wanted to clarify for the record the
interaction of the sliding scale per barrel adjustment with
other 43.55.024 credits. Senator von Imhof had referred to
this and Mr. Alper had restated his perspective. She made
clarifying remarks:
There was some questions following my remarks at the
beginning of yesterday's hearing as to the intent of
the CS in handling the sliding scale per barrel with
other .024 adjustments. The Majority in the Senate
supports and stands by SB 21 and the increased
production that has resulted from this legislation. At
this time, we are choosing to not take a position on
the advisory opinion that was issued in December 2016
and in March 2017 by the Department of Revenue.
Therefore, the CS does not change that if a sliding
scale per barrel adjustment is used, the small
producer tax credit and the new oil per barrel credit
cannot reduce taxes below the minimum tax or it
applies to zero. This is not to be construed as an
endorsement of the advisory bulletin, should a
taxpayer elect to challenge that in court in the
future, but instead as a desire to end refundable tax
credits and make only the changes necessary in our tax
code to accomplish that purpose.
Co-Chair MacKinnon asked Mr. Alper whether that was clear.
Mr. Alper remarked that Co-Chair MacKinnon and other
members had made clear on the record their concerns with
the advisory bulletin.
3:47:37 PM
Co-Chair MacKinnon went on to clarify for the record the
use of credits against prior year's liabilities:
In Sections 4, 7, and 14 in Version V, the intent is
that credits earned in any year may be used against
prior year's outstanding liabilities with Department
of Revenue related to oil and gas production tax. That
was a singular "prior year." The intent is not to
allow a company to refile prior year taxes that were
previously paid for the purposes of applying for
credits and then ask the state for a refund on the
original tax payment. However, if a company amends a
return and owes additional tax, we intend the company
is able to pay that additional liability with credits.
Companies should not be able to use credits to use to
pay something that has already been paid.
Co-Chair MacKinnon again asked Mr. Alper whether what she
had read was clear.
Mr. Alper stated that the clarifying statement was clear.
He referred to Sections 4, 7, and 14 of the current bill.
He stated that although it seemed counter-intuitive, they
wanted to close the door on any possibility for a company
to be able to use credits to pay a tax that had already
been paid, then use credits to receive a refund.
3:49:21 PM
AT EASE
4:05:36 PM
RECONVENED
Vice-Chair Bishop MOVED to ADOPT conceptual Amendment 1.
Co-Chair MacKinnon OBJECTED for discussion.
Ms. Cramer discussed Amendment 1:
Page 19, line 1, following "year"
Insert "and any credits under this chapter,"
Page 19, line 2, following "(e)"
Delete "before the application of any credits under
this chapter"
Page 19, line 3, following "(f)"
Insert "before the application of any credits under
this chapter"
Ms. Cramer informed that there had been a drafting error
and the intent was the same.
Co-Chair MacKinnon WITHDREW her OBJECTION. There being NO
further OBJECTION, Amendment 1 was ADOPTED.
Co-Chair MacKinnon informed that the committee had checked
with Mr. Alper on the conceptual amendment and had
confirmed that there was no issue. She stated for the
record that he was nodding his head.
Vice-Chair Bishop MOVED to report SCS CSHB 111(FIN) as
amended out of Committee with individual recommendations
and the accompanying fiscal note. There being NO OBJECTION,
it was so ordered.
SCS CSHB 111(FIN) was REPORTED out of committee with a "do
pass" recommendation and with one forthcoming fiscal impact
note from the Department of Revenue.
4:08:28 PM
AT EASE
4:10:40 PM
RECONVENED
Co-Chair MacKinnon and Vice-Chair Bishop extended thanks to
staff and agencies for their assistance.
Senator Hughes thanked Senator Cathy Giessel and her staff.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 34 DOA Response Memo 4.12.17 LR.pdf |
SFIN 5/12/2017 9:00:00 AM |
SB 34 |
| SB 34 Amendments 1 and 2 MacKinnon.pdf |
SFIN 5/12/2017 9:00:00 AM |
SB 34 |
| HB 111 v V Sectional Analysis.pdf |
SFIN 5/12/2017 9:00:00 AM |
HB 111 |
| HB 111 Senate Finance V 20170512 - Fiscal Impact 2017 Spring Forecast.pdf |
SFIN 5/12/2017 9:00:00 AM |
HB 111 |
| HB 11 Summary of Changes B to V.pdf |
SFIN 5/12/2017 9:00:00 AM |
|
| HB 111 Work Draft version V.pdf |
SFIN 5/12/2017 9:00:00 AM |
HB 111 |
| HB 111 DNR - Size of Tax Credits Surveys.pdf |
SFIN 5/12/2017 9:00:00 AM |
HB 111 |
| HB 111 Amendment 1 MacKinnon.pdf |
SFIN 5/12/2017 9:00:00 AM |
HB 111 |