Legislature(2015 - 2016)HOUSE FINANCE 519
03/24/2016 09:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB231 | |
| HB222 | |
| HB77 | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 77 | TELECONFERENCED | |
| += | HB 231 | TELECONFERENCED | |
| += | HB 222 | TELECONFERENCED | |
| + | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 247
"An Act relating to confidential information status
and public record status of information in the
possession of the Department of Revenue; relating to
interest applicable to delinquent tax; relating to
disclosure of oil and gas production tax credit
information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage
facility tax credit, and the qualified in-state oil
refinery infrastructure expenditures tax credit;
relating to the minimum tax for certain oil and gas
production; relating to the minimum tax calculation
for monthly installment payments of estimated tax;
relating to interest on monthly installment payments
of estimated tax; relating to limitations for the
application of tax credits; relating to oil and gas
production tax credits for certain losses and
expenditures; relating to limitations for
nontransferable oil and gas production tax credits
based on oil production and the alternative tax credit
for oil and gas exploration; relating to purchase of
tax credit certificates from the oil and gas tax
credit fund; relating to a minimum for gross value at
the point of production; relating to lease
expenditures and tax credits for municipal entities;
adding a definition for "qualified capital
expenditure"; adding a definition for "outstanding
liability to the state"; repealing oil and gas
exploration incentive credits; repealing the
limitation on the application of credits against tax
liability for lease expenditures incurred before
January 1, 2011; repealing provisions related to the
monthly installment payments for estimated tax for oil
and gas produced before January 1, 2014; repealing the
oil and gas production tax credit for qualified
capital expenditures and certain well expenditures;
repealing the calculation for certain lease
expenditures applicable before January 1, 2011; making
conforming amendments; and providing for an effective
date."
Co-Chair Thompson indicated that Commissioner Hoffbeck and
Mr. Alper would be providing a 30 thousand foot overview of
oil and gas tax credits. The committee would not be hearing
the bill sectional in the current meeting. There would be
an overview of issues that generated the legislation. He
offered that there would be several meetings on the bill at
which time there would several opportunities to discuss the
bill and to ask questions at future meetings.
10:36:38 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "Oil and Gas Tax
Credit Reform: HB 247" dated March 24, 2016 (copy on file).
He began by providing a couple of brief opening statements.
He opined that HB 247 was a critical piece of the
governor's overall fiscal plan for the current year and
into the future. The administration saw a sustainable oil
and gas tax credit program as vital for the State of
Alaska. He pointed out that the key word was "sustainable."
The plan would have to be sustainable going forward. He
reported that when the bill was first introduced in House
Resources Committee it was presented primarily as a budget
issue. The House Resources Committee found the bill to be
much more of an oil and gas tax policy issue.
Commissioner Hoffbeck reported that the hearing focused on
both budget issues and oil and gas tax policy issues. The
administration saw that both needed to be dealt with. The
state could not offer any certainty to the industry on the
tax credit program if the credits were paid at a level that
the state could not sustain or afford. He thought there had
to be a balance between the credits the industry desired or
needed and what the state was capable of paying. He
mentioned the overview of the preliminary spring revenue
forecast presented earlier in the current week. He
highlighted that the department was looking at oil prices
that were essentially range-bound somewhere between $35 and
$60 per barrel. He remarked that if prices dropped below
$35 per barrel drilling would essentially cease. Oil would
likely come off the market and oil prices would eventually
rebound. If the price of oil were to reach much beyond $60
per barrel a significant amount of oil would hit the market
causing a brief spike. Eventually the supply would
overwhelm demand causing the price to drop again. He
suggested that it was pretty consistent with the thinking
across the board as far as what people saw in the oil
industry. In terms of talking about a rebound and hoping to
get $100 per barrel it did not appear to be in the future.
He added that the state's credit program was being paid out
at a level more consistent with $100 per barrel to $110 per
barrel oil. The governor felt that it was a critical thing
to deal with if the state were to have some kind of
certainty within the oil and gas tax credit program. What
he put forward in the bill was to reduce the state's annual
outlay. He wanted to protect the net operating loss credit
program within the bill which he added was the most
critical piece of the credit program. It was a field
leveler between the legacy producers and the newcomers. He
furthered that the state needed to have a way to limit the
amount of repurchases in any given year in order to control
the state's outlay.
10:40:30 AM
Commissioner Hoffbeck explained that the state needed to
strengthen the minimum tax because in the current price
environment Alaska was essentially a 4 percent gross tax
state. The price of oil needed to be above $80 per barrel
before that would change. The administration did not see
the price increasing above $80 per barrel any time in the
future. The minimum tax really became "the" tax. He
mentioned that the administration sought more transparency
in the credit program to facilitate more dynamic
discussions. The credits were a large outlay and he thought
it was important for the people of Alaska to know where
their money was being spent and what returns were being
received. Lastly, due to the repercussions of the
governor's veto from the previous year, the department
thought it was very important the state had some kind of
visible commitment to paying the existing credits. The
state wanted to avoid any uncertainty in the financial
markets that the credits that had been earned would be
paid. He concluded that he had highlighted the underlying
components of the decision making process in crafting the
legislation currently before the committee. The
administration hoped the final version reflected these
components once it went through the legislative process.
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation: "Oil and Gas Tax
Credit Reform: CS HB247 (RES)." He indicated he would only
be focusing on the highlights of the bill in the current
meeting. He hoped there would be additional opportunities
to delve into the deep details of the bill in another
meeting.
10:42:36 AM
Mr. Apler advanced to slide 2: "History of Oil and Gas
Production Tax Credits":
FY 2007 thru 2015, $7.4 Billion in Credits
North Slope
· $4.3 billion credits against tax liability
· Major producers; mostly 20% capital credit
in ACES and per-taxable-barrel credit in
SB21
· $2.1 billion refunded credits
· New producers and explorers developing new
fields
Non-North Slope (Cook Inlet & Middle Earth)
· $100 million credits against tax liability
· Another $500 to $800 million Cook Inlet tax
reductions (through 2013) due to the tax cap
still tied to ELF
· $900 million refunded credits (most since 2013)
Mr. Alper explained that Alaska had been in the business of
paying tax credits by statute since 2007. In the time
period between FY 07 and the end of the previous fiscal
year [2015] about $7.4 billion worth of oil and gas tax
credits had been paid or paid through reduced taxation by
the State of Alaska. The largest share was from the North
Slope where the bulk of the production and value was, with
the majority used against tax liability, about $4.3
billion. He explained that the major producers were able to
subtract certain credits against their tax payments before
writing any checks to the state. Previously under the era
of Alaska's Clear and Equitable Share (ACES) it was
primarily the 20 percent capital expenditure credit. Since
the transition to SB 21 [Short Title: OIL AND GAS
PRODUCTION TAX - legislation passed in 2013] it had been
the per taxable barrel credit, a sliding scale credit
between zero and $8 dollars.
Mr. Alper also pointed out a very large number on the North
slope of $2.1 billion that had been refunded (the state
wrote checks and the legislature appropriated money every
year to repurchase tax credits primarily going to new
players in the field - the new producers and the explorers
that were looking for and developing new oil).
Mr. Alper continued to the non-North Slope area which
included Cook Inlet and Middle Earth (Interior Alaska).
There was no current production in Interior Alaska but
there was some exploration. However, the number of players
and the numbers of credits were too small to be released
without violating confidentiality law which accounted for
lumping all of the non-North Slope together. He reported
that only $100 million had been used against tax liability
because of less work and because there were statutory caps
(maximum taxes in the Cook Inlet that were put into place
in 2006 as part of the PPT bill). There was not a
significant amount of tax liability in the first place,
therefore there was not to offset. He furthered that about
$900 million through the previous year had been refunded -
repurchased in tax credits in the previous several years.
10:45:00 AM
Mr. Alper pointed to the graph on slide 3: "History of Oil
and Gas Production Tax Credits: Refunded Tax Credits by
Region." He explained that the most obvious feature in the
graph was the growing red wedge representing the Cook Inlet
and other non-North Slope areas. It used to be relatively
small but had started growing in 2012 or 2013. It was a
response to the additional work that had been done since
the passage of the Cook Inlet Recovery Act and related
legislation in 2010. He reported a large ramping up of work
some of which resulted in resolving some of the supply
uncertainty that South central was experiencing at the
time. It had grown to where, of the money the state spent
in the previous year, over 60 percent was outside the North
Slope in terms of refundable tax credits. The state was
seeing similar numbers were seen for FY 16.
Mr. Alper turned to slide 4: "Forecast of O&G Revenue and
Tax Credits." He explained that the first of the three bars
was all unrestricted oil and gas revenue prior to any
credits. The number was theoretical. The middle bar
represented in dark green was the actual money received by
the state, the difference between the two was the money
taken as credits against tax liability. The red bar
reflected the revenue after subtracting the repayment
checks for tax credits. Suddenly in FY 15 the oil revenue,
which had decreased from $2.3 billion before credits
against liability to $1.7 billion, was only about $1.0
billion. He was only talking about unrestricted oil and gas
revenues which included royalties, corporate income tax,
property tax, and the production tax. He thought the graph
made it look like FY 15 was a good year and did not reflect
back far enough. If a person were to look at FY 12 the
state had about $8 billion to $9 billion worth of oil
revenue. The reduction was a major shift of consciousness
for the state forming a budget, while switching to a
climate of structural deficits. Going down from FY 15 to
the present things were getting even worse, likely tied to
the further reduction in the price of oil and the growth in
the tax credit program. The forecasted tax credit number
for FY 17 was about $825 million. He reported that for the
first time the amount was a larger number than all of the
state's unrestricted oil and gas tax revenues. The state
would be functionally negative on oil and gas in FY 17 for
the first time ever.
10:48:10 AM
Mr. Alper advanced to slide 5: "Work Done Since Last
Session":
· Governor's line-item veto capped FY16 spending at
$500 million
· Temporary liquidity crisis; many meetings
with industry and others to help reassure
lenders
· Multiple presentations with history, current
practice, and possible changes
· Joint Resources in Kenai, June 17
· Three "regional" presentations to Senate
Working Group September through November
· All presentations on BASIS; we're prepared
to go through similar information for the
committee
· Development of reform legislation including plan
for transition from current system
Mr. Alper explained that the results of the governor's line
item veto limiting spending to $500 million helped to cover
everything that was in the cue at the time. The governor's
primary mission was to start a conversation. He was aware
that it was a big issue that needed addressing. He did
something dramatic in order to put a process in place that
lead to legislation in the 2016 session. He relayed that
the administration was taken by surprise by the degree the
industry reacted, stopping lending because of a fear of
even greater cutbacks and spending in future years. The
commissioner of DOR and other senior members of the
administration had met with industry assuring repayment of
the state's obligations. He stated that there could
possibly be slight delays during the transition period.
However, the state was working towards a system that would
keep everyone whole. Any changes to the statutes would be
forward looking rather than retroactive. He mentioned the
liquidity crisis being resolved. Loans were being made
again and everyone was going about their business.
Meanwhile, through the previous interim there were several
meetings and presentations. The first one was a Joint
Resources Meeting in Kenai in June where the Department of
Revenue made a major presentation. Senator Giessel put
together a working group of Senators and members of
industry. The group had a series of hearings in the
previous fall providing very detailed presentations on the
credit structure on the North Slope, Cook Inlet, and in the
middle earth area. Each of the presentations were on BASIS
through the Senate tax credit working group. He encouraged
members of the committee to review them. He relayed that
they could be brought before the committee as well. They
provided a significant amount of detail. He furthered that
out of the hearings and discussions with the administration
a reform package in the form of legislation that included
the plan for transition from the current system to ensure
enough money would be available to keep the system whole
through that time. The legislation had been introduced at
the beginning of session as HB 247 (Short Title: TAX;
CREDITS; INTEREST; REFUNDS; O & G).
10:50:37 AM
Mr. Alper moved on to slide 6: "Major Bill Themes":
1. Reduce the state's annual cash outlay
2. Protect Net Operating Loss credits as a playing
field leveler between legacy producers and
newcomers
3. Limit repurchases
4. Strengthen the minimum tax
5. Be more open and transparent
6. Honor and pay credits earned to date and through
any transition period
Mr. Alper indicated that the slide reflected the
commissioner's introduction which outlined the themes the
governor hoped to accomplish through a tax credit reform
package. He read the list.
10:51:06 AM
Mr. Alper turned to slide 7: "Major Bill Concepts in
Governor's Proposal":
1. Exploration Credits- sunset and transition
2. Cook Inlet Drilling Credits- phase out while
retaining operating loss credits
3. Repurchase Limits- limit cash outlay
4. Remove Exceptions / Loopholes
5. Strengthen Minimum Tax- prevent certain credits
from going below the floor, plus increase to 5%
6. Other Provisions- technical cleanup,
transparency, interest rate reform
Mr. Alper explained that the slide went into greater detail
of the concepts that were in HB 247. He would not drill
down into the details in the current hearing. There would
be time to discuss them in other hearings. He reviewed the
list. He explained that many of the exploration credits
were nearing sunset. The intent would be to allow them to
sunset and transition away from direct support of
exploration. The Cook Inlet drilling credits were very
large and were created to resolve the Cook Inlet supply
crisis. The proposal included phasing those out while
retaining the operating loss credits. The proposal also
included placing some sort of caps on the physical
repurchases, specifically dollar values per company. He
furthered that there were a number of exceptions and
loopholes in the statutes that became apparent in a low-
price environment that needed to be cleaned up.
Mr. Alper continued that the proposal included
strengthening the minimum tax. However, it was discovered
that, although the 4 percent floor governed tax payments by
the major producers, as the state got into a period of a
sustained low prices there were other circumstances where
tax payments could go below the 4 percent number. The most
prominent one began in January 2016: If a major producer
had an operating loss they could use their operating loss
credits to reduce their payments below the floor all the
way to zero. The legislation was looking to strengthen the
minimum tax and to bump up the minimum tax rate from 4
percent to 5 percent. He relayed that there were a number
of other provisions in the legislation including technical
cleanup of existing law, the concept of transparency, and
reform to the interest rate structure for delinquent taxes.
He concluded that he had presented the guts of the bill.
Mr. Alper scrolled to slide 8: "Content of Future
Presentations":
· We provided five different presentations to the
prior committee; all are on BASIS
· History and development of our credit system
· History and application of the minimum tax
· Various credits and how they have been used,
which ones haven't been, and what is sun setting
· Detailed forecasts and scenario analysis
· Details and modeling of specific provisions
· Explanation of changes made in prior committee
· Life cycle modeling of typical new projects, with
impact of legislation
Mr. Alper mentioned that the House Resources Committee had
met 24 times on the subject of HB 247 over a period of 6 to
7 weeks. The Department of Revenue provided the committee
with five different presentations all of which were
available on BASIS. He wanted to be working with
legislators and staff to determine the appropriate
information and the order in which it should be brought
before the House Finance Committee. Some of the larger
concepts in the previous presentations included the history
and development of Alaska's credit system going back to the
early 2000's, how the minimum tax evolved over the years
going back to the 1970's during the Economic Limit Factor
(ELF) era, how the various credits worked, how the credits
had been used, which credits were never used, and what
credits would sunset. Additional content included looking
at scenario analysis and what might happen if certain
changes were made. He elaborated that DOR had done a
significant amount of modeling of specific and more
mathematically complicated provisions of the bill. He also
informed committee members that he would be reviewing the
changes made by the House Resource Committee which were
reflected in the committee substitute and how the bill had
evolved.
Mr. Alper reported that DOR had developed a new model
called a "Life Cycle" model that looked at individual
fields. He cited the example of a new player coming to town
wanting to develop a 50 million barrel field with an
assumption for capital spending, a certain timing, and a
certain set of credits. He wondered if the state's cash
flow could be determined. He was interested to know what
the state's cash flow would look like and what the cash
flow of the producers would look like. He also wanted to
know how the changes in the current legislation affect the
profitability and the state's cash flow. The department was
capable of generating new scenarios at the request of the
committee.
Mr. Alper concluded his presentation and made himself
available for questions.
HB 247 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson indicated the committee would have
several additional meetings in order to dig into the
details of the bill. He reviewed the agenda for the
afternoon.