Legislature(2009 - 2010)BARNES 124
02/15/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB308 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 308 | TELECONFERENCED | |
| += | HB 217 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 308-OIL AND GAS PRODUCTION TAX
[Contains discussion of HB 337]
1:06:15 PM
CO-CHAIR NEUMAN announced that the only order of business is
HOUSE BILL NO. 308, "An Act relating to the tax rate applicable
to the production of oil and gas; relating to credits against
the oil and gas production tax; and relating to the period in
which oil and gas production taxes may be assessed." [Before
the committee was the proposed committee substitute for HB 308,
labeled 26-LS1328\E, Bullock, 2/5/10 ("Version E").]
1:08:44 PM
DAN DICKINSON, CPA, Consultant to the Legislative Budget and
Audit Committee, noted that his presentation today is a follow-
up to his 2/8/10 presentation in which he discussed two of the
six changes to current statute that are proposed by Version E of
HB 308. He said he will be discussing the other four proposed
changes as well as some of the issues raised by the Department
of Revenue (DOR) in testimony before the committee on 2/10/10.
1:09:41 PM
CO-CHAIR NEUMAN recalled Co-Chair Johnson's 2/10/10 statement to
the Department of Revenue in which he advised that his intent as
sponsor of HB 308 is to create more jobs and investment in
Alaska, and that he will continue moving the bill forward while
agreeing with the administration on some things that are similar
between HB 308 and the governor's bill [HB 337] and disagreeing
on other things.
MR. DICKINSON responded that he will address the issues as he
comes to them in his presentation. He drew attention to slide 3
and noted that it depicts where the proposed changes can be
found in Version E. He said many of the changes are technical;
however, six are substantive and those are the changes he will
address.
1:11:38 PM
MR. DICKINSON began his presentation with discussion about the
proposed change that interest would not be due on retroactive
regulation changes prior to those regulations being implemented
[slide 5]. He pointed out that both production tax and royalty
tax are due on the last day of the month following the month of
production [AS 43.55.020(a)], and this is the cash flow that
keeps the state going.
1:12:01 PM
MR. DICKINSON, in response to Co-Chair Neuman, further explained
that every 30 days the state can change whether a royalty is in-
kind or in-value, but that change is forward-looking by, he
believes, 120 days. In response to Representative Guttenberg,
he said the state has changed from royalty in-value to royalty
in-kind about 20 times on the North Slope over about 33 years,
but he is unsure about Cook Inlet. In response to
Representative Seaton, he said the royalty is exempt from
taxation regardless of whether it is in-kind or in-value.
1:13:33 PM
MR. DICKINSON returned to his presentation and noted that the
amount of tax that is due for a particular month can change at a
later date because of a number of things, such as a retroactive
revision of tariff. If additional tax is due because the value
of the oil changed, the taxpayer must pay that tax plus interest
from the time that original tax payment was due. It is explicit
in law that in settlement the Department of Revenue can
compromise on the tax amount without having to take the
settlement before a judge. The department can also settle in
regard to whether there will be a penalty for tax underpayment.
However, current law does not mention interest and therefore the
department cannot change the amount of the interest due.
1:15:21 PM
MR. DICKINSON explained that the 2007 act, Alaska's Clear and
Equitable Share (ACES), made several major changes and very
explicit directions were given to the Department of Revenue to
write regulations [slide 6]. One major change related to oil
transportation - the cost of shipping oil through the Trans-
Alaska Pipeline System (TAPS) and on tankers. Under ACES, the
transportation cost is the lower of actual cost or what the
Department of Revenue determines as reasonable cost [AS
43.55.150]. However, the department has not yet said how it
will calculate those reasonable costs. Therefore, a taxpayer
that is currently deducting what it pays for TAPS might owe more
money once the department publishes its new regulations for the
transportation standard.
MR. DICKINSON, in response to Co-Chair Neuman, expounded
further. Under the change proposed by both HB 308, Version E,
and the governor's bill, a taxpayer would not owe interest on
additional tax due as a result of the new transportation
regulations. However, if this change is not made, a taxpayer
will be required to pay interest when those regulations are
finally implemented.
MR. DICKINSON continued his presentation, stating that there is
a similar dynamic in regard to the upstream or lease costs;
transportation being the downstream cost after leaving the
lease. Under ACES, a lease expenditure is not deductible unless
it is specifically allowed by Department of Revenue regulation
[AS 43.55.165(a)]. The regulations affecting 2007 were just
adopted this last quarter, and taxpayers must now look back over
the past two years to see if they owe additional tax as a
consequence of these new regulations.
1:17:52 PM
REPRESENTATIVE SEATON inquired whether that was limited by the
standard deduction methodology so that those regulations are
really only going to be currently applicable because the lease
expenditures were limited by the percentage increase; thus, the
regulations were not really necessary at that time.
MR. DICKINSON replied that for the limitations under [AS
43.55.165](j) and (k), a taxpayer would clearly not be affected
by the definition for 2007, 2008, and 2009 because this
requirement that the department define it by regulation was not
there under the rules for 2006, the year that laid the base and
which increases by 3 percent a year.
1:18:59 PM
MR. DICKINSON returned to his presentation and explained that
the production tax is a yearly tax. Twelve estimated payments
are made and these are trued up in March. Many of the ACES
reforms were affective in the middle of the year, which required
that two half years be melded into a single year. It took the
Department of Revenue several years to write the regulations on
that. There were also new report requirements [AS 43.55.030 and
AS 43.55.040] and there were new rules for exploration credits
[AS 43.55.025].
MR. DICKINSON noted that slide 7 summarizes the Department of
Revenue's status for each of these projects. The reporting
requirements were published in May 2008, effective June 2008.
The next project was the changing of 35 sections of the
regulations which included the mid-year regulations; those were
adopted in September 2009 and became effective in October 2009.
The regulations for exploration credits were adopted in November
2009, effective December 2009. Regulations regarding deductible
lease expenditures were adopted in January 2010, effective
February 2010. Regulations regarding reasonable cost of
transportation have not yet been adopted, but the public draft
was released in February 2010. There are also a number of other
projects, some which will have retroactive effects, and some
which will not; of these major projects, a period of nearly two
years has gone by in which the taxpayers have not necessarily
known what their obligations are.
1:21:23 PM
MR. DICKINSON said Governor Parnell's proposal would require
that interest be waived by amending AS 43.55.020(i) [slide 8].
Two things make the governor's proposal more explicit than HB
308, Version E, and committee members may want to consider the
governor's language to ameliorate the language of Version E.
The first is the recognition that just because there are no
regulations does not mean there are no rules; a taxpayer still
needs to consider what tax would be owed under existing rules.
The second is that Governor Parnell's proposal is explicitly
retroactive.
REPRESENTATIVE P. WILSON understood Mr. Dickinson to be saying
the tax goes back retroactively, but the interest does not.
MR. DICKINSON answered correct. Under both of these approaches,
the tax is always going to be retroactive and the amount of
money owed is not going to change; it is just who is bearing the
interest for it.
1:23:47 PM
MR. DICKINSON continued his presentation and advised that if the
governor's approach was adopted by HB 308, Version E, the
restructuring [of AS 43.05.225] would not be required and half
the sections in the bill would disappear because all of
references would no longer need to be changed [slide 8]. He
pointed out that currently under Section 6 of Version E, page 3,
line [4], all the changes would be to subsection (a), but when
AS 43.05.225 itself was changed, the (a) was not introduced,
which may cause confusion in how that all ties together.
MR. DICKINSON, in response to Representative Seaton, stated that
the governor's bill just deals with the issue of production
taxes, but HB 308, Version E, would affect all taxes. In
response to Co-Chair Neuman, he explained that the governor's
provision would be in AS 43.55 which deals just with production
taxes, and HB 308, Version E, deals with AS 43.05 which deals
with interest on all taxes.
1:26:18 PM
MR. DICKINSON, in response to Representative Tuck, clarified
that the governor's bill alleviates only the interest due, not
the tax that is due. In further response, he said HB 308,
Version E, does not waive the other non-production taxes that
are due and both HB 308, Version E, and HB 337 deal only with
the interest issue.
REPRESENTATIVE TUCK understood that Section 6 of Version E, page
3, line 4, should read "Sec. 43.05.225(a)."
MR. DICKINSON responded correct.
1:27:38 PM
REPRESENTATIVE SEATON inquired whether both bills would affect
the interest that would be due on settlement amounts that have
been negotiated for the amount of tax that is due. He further
understood that under the governor's bill a waiver of interest
on settlements would not be discretionary.
MR. DICKINSON, in regard to the first part of Representative
Seaton's question, replied that he thinks this affects
settlements and non-settlements the same way. Currently, when
there is a settlement of an issue, agreement is reached on the
amount due and interest is added on top of that. Mr. Dickinson
said that during the seven years when he was the director of the
Division of Tax settlements were typically more by the issue
than by the dollar amount, and one of the first things that was
done in settlement discussion was the identification of the
amount of each issue and everyone was aware of the interest that
was tagged with it. In a settlement under current law, neither
the attorney general nor the Department of Revenue can
compromise the amount of the interest, but the amount of penalty
and amount of tax due can be compromised.
1:30:03 PM
MR. DICKINSON, in regard to the second part of Representative
Seaton's question, stated that waiver of the interest is not
discretionary in both HB 337 and HB 308, Version E. However,
there is an important distinction and one thing he would like to
talk about is possible upgrades to the governor's language in
Version E. Under the governor's proposal the Department of
Revenue would be required to make a determination that "the
producer made a good faith estimate of its tax obligation in
light of the regulations then in effect when the payment was
due" [slide 9]. Therefore, the department must first make a
determination that the taxes were paid in good faith and then
the interest waiver automatically follows. Mr. Dickinson
suggested that members consider an improvement to the governor's
language such that the department would not be required to make
a determination of good faith and the interest would just be
automatically waived. However, interest would be charged in
those cases where the department makes a determination that a
taxpayer acted in bad faith [slide 10].
1:31:37 PM
REPRESENTATIVE SEATON posed a scenario in which a dispute is
settled and the producer agrees that it owes the state $100
million from two years ago, but no interest is due on that
settlement amount. He asked whether that would be the
discretionary or non-discretionary point that is being talked
about by Mr. Dickinson. For example, there would be no reason
to pay the full taxes because the producer would know that
waiver of the interest in the settlement is mandatory.
MR. DICKINSON responded that there are two parts to the answer.
The first part is that this does not change the law as it
affects settlements. The attorney general and the commissioner
must still approve the settlement of the principal amount and
the penalty if they are different than what was assessed. The
only case in which the waiver of interest would be required is
when the amount in dispute arises as a consequence of there not
being a regulation in place and the regulation comes in after
the fact; thus, a carte blanche waiver of interest would not be
the case. Additionally, a timeline is being talked about here.
The statutory requirement came in 2007, the regulatory
fulfillment came in 2009, and under the current six-year statute
of limitations it may be 2012-2013 before an assessment is
issued. The interest between 2010 and 2013 is not changed at
all by these rules. All that is changed is the application of
the interest before the rules were in place up until they came
into place. From then on, once the rules are official and known
by the taxpayers, it is as if the rule had always been there.
1:34:41 PM
REPRESENTATIVE SEATON surmised the aforementioned would not
apply to Prudhoe Bay or Kuparuk production.
MR. DICKINSON replied that the fixing of costs at 2006 levels
will only apply to the lease expenditure issue. The downstream
transportation was not affected by that; neither was how the
22.5 percent and 25 percent rates are meshed, nor how the
reporting requirements are dealt with.
1:35:39 PM
REPRESENTATIVE P. WILSON understood the governor's bill would
deal only with the production tax, but that HB 308, Version E,
would deal with all of the taxes. She asked whether that would
apply only to the timeline between when it started and when the
regulations are in place.
MR. DICKINSON answered yes. He said he believes the intent in
both bills is only to deal with the issue of when a taxpayer has
to file a return and does not know what the rules are. Then
there is the question of whether that happens in the cigarette
tax or the alcohol tax as opposed to the production tax; so when
he used the term "all" he meant the other 20 tax types of the
state's 21 tax types.
1:37:05 PM
REPRESENTATIVE KAWASAKI commented that it seems the committee is
taking up a bill that has not yet been calendared. He said he
thinks it may be out of order to talk about the governor's bill
until the provisions of HB 308, Version E, are addressed and it
is known how those provisions would impact the state. He would
therefore prefer to stay away from HB 337 until it is before the
committee.
CO-CHAIR NEUMAN responded that the Department of Revenue talked
to the committee about the governor's bill on 2/10/10.
Additionally, members should have HB 337 in their offices
because it has been read across the House floor. The point is
to look at where there is agreement between the two bills and
develop the best legislation to move forward; therefore, Mr.
Dickinson looked at the department's presentation and at HB 308,
Version E, and is presenting those likenesses and differences.
REPRESENTATIVE KAWASAKI reiterated his discomfort with drawing
another bill into the discussion unless it is officially planned
to do that.
1:39:56 PM
REPRESENTATIVE GUTTENBERG, in regard to the good faith estimate
language on slide 9, (1)(B), inquired how good faith is defined.
MR. DICKINSON replied that he does not know and an attorney
would need to be asked. He said that in some ways he was
speaking to this same point when he suggested the improvement to
the governor's language [slide 10, second bullet]. He noted
that four versions of transportation regulations have come out
so far [slide 7] and that the department is considering two very
different approaches for these regulations. So, while the
taxpayers are familiar with the four versions that have come
out, they are still left with having to figure out which version
will be the most likely. The point is that until the department
really defines something, there is not really a rule out there.
1:42:55 PM
REPRESENTATIVE GUTTENBERG stated he was unaware that there were
regulations in the past regarding facility sharing [slide 7].
He asked whether there will be impacts on taxes from these
regulations.
MR. DICKINSON said that is the exact point. There is currently
a rule, but the rule has never mentioned facility sharing.
Until that rule is adopted, taxpayers are going to act as if
there is not a special rule for facility sharing and that it is
just like any other cost. When a law is passed that says the
department shall now define by regulation, there is no rule in
place until the department actually does so.
CO-CHAIR NEUMAN stated that a taxpayer is acting in good faith
when adhering to the rules that are currently in place and a
change in the rules that increases the taxpayer's taxes does not
negate this; therefore the taxpayer should not have to pay
interest.
MR. DICKINSON agreed that that is the intent of the bill.
1:45:44 PM
REPRESENTATIVE SEATON, in regard to Mr. Dickinson's suggested
change to HB 308, inquired whether it would it make sense to say
that if a taxpayer has paid its full tax obligation under the
rules that existed at the time, then the interest is waived.
MR. DICKINSON responded that that would cover many situations.
However, in a situation where a cost is a cost as defined by the
department by regulation, there is technically no rule that
applies. A lot of time could be spent trying to figure out what
rule should have applied. For example, should a taxpayer have
looked by analogy to some other section of the regulations, or
applied the statute directly, or known the regulations were
coming.
CO-CHAIR NEUMAN interjected that under ACES it is up to the
Department of Revenue to make the determination that a taxpayer
acted in good faith.
1:47:54 PM
REPRESENTATIVE SEATON stated that there were regulations in
place [when ACES passed], so if a company paid its taxes
consistent with the regulations existing at the time, then that
could be the bar to qualify as acting in good faith.
MR. DICKINSON reiterated that that might make sense in a lot of
situations. However, he is asterisking that when the law
changed in July 2007, the regulations had been written under
prior laws, so it must be determined what pieces apply and how
well they apply. For example, Alaska had separate accounting
income tax from 1978-1981, but the regulations for that were not
written until 1980. In a large hearing on this case in the
1990s one of the things being fought was what rules were in
place if the regulations were not there. Conflicts occur
because there are two ways to think about something.
1:51:42 PM
REPRESENTATIVE TUCK posed a scenario in which there are no
regulations in place, but a company still pays what it estimates
its taxes would possibly be. In this case the interest could be
waived under all tax schemes when regulations are implemented at
a later date. He asked whether under HB 308 a company that did
not make any tax payments would be considered to not have acted
in good faith and would therefore owe interest.
MR. DICKINSON said he hesitates to answer because that is
getting into attorney areas. However, in general he does not
think there is an obligation to follow regulations that have not
been properly adopted. This is because not all regulations that
get proposed get adopted.
1:53:43 PM
MR. DICKINSON returned to his presentation and addressed the
proposed tax rate tied to resident hire under Section 15 of HB
308, Version E [slide 12]. He explained that this section
applies to taxpayers that are subject to the base tax rate of 25
percent under AS 43.55.011(e)(1). Any direct labor that is a
lease expenditure would have to be accounted for as being either
resident or nonresident by a set of definitions. At the end of
the year, the taxpayer could get a tax rebate if its resident
hire rate is at least 80 percent. The new effective tax rate
would then be somewhere between 20 percent and 25 percent. If
an 80 percent resident hire rate is not achieved, the taxpayer's
tax rate would remain at 25 percent. He recommended this
provision become effective at the beginning of a year because a
change in mid-year would require lots of regulation writing.
1:55:38 PM
REPRESENTATIVE KAWASAKI, in regard to the third bullet on slide
12, inquired how the accounting of direct labor as resident or
nonresident would work in a practical manner. For example,
there are many nonresident subcontractors working on what would
be considered a lease expenditure deduction.
MR. DICKINSON said he will be addressing this in future slides
and that this question is a good point because the production
taxpayers comprise less than one-fourth of the actual employees
in the oil patch.
1:57:40 PM
REPRESENTATIVE SEATON understood that the Department of Revenue
currently limits what is an allowed expenditure. He asked
whether the third bullet on slide 12 would mean establishing a
new category and that the state would mandate what the companies
put into lease expenditures as well as limit what is put into
lease expenditures
MR. DICKINSON replied no, there is no mandating. The rules
about what constitutes a lease expenditure have been established
by the Department of Revenue. A separate test would then say
that the labor in that is classified as either resident or
nonresident and the ratio would subsequently be determined. He
said he will be dealing with how the labor is defined and how it
all fits together later in his presentation.
1:59:30 PM
MR. DICKINSON returned to his presentation, noting that slide 13
depicts how the resident hire ratio translates into an effective
tax rate after the rebate. He said he started at a 70 percent
resident hire ratio because that is currently the average rate
in the oil patch according to Department of Labor & Workforce
Development figures. He explained that the tax rebate would be
0 percent for resident hire ratios between 70 percent and 80
percent. Starting with 80 percent, there would be a 2 percent
rebate for every 2.5 percent incremental increase in the
resident hire ratio. From a 97.5 percent resident hire ratio to
100 percent, the tax rebate would increase by 4 percent. The
effective tax rate would be calculated by multiplying the rebate
amount by the 25 percent nominal [base] tax rate. Thus, for 70-
80 percent local hire ratios, the effective tax rate would
remain at 25 percent. At an 80 percent ratio the effective tax
rate would drop to 24.5 percent and at 100 percent local hire
the effective tax rate would drop to 20 percent.
2:01:18 PM
REPRESENTATIVE KAWASAKI cited the issue brought up by Marcia
Davis, Deputy Commissioner of the Department of Revenue, where a
company might choose to fire a non-Alaskan to reach a 2.5
percent increment rather than hire an Alaskan as a new employee.
He asked why a step approach was used rather than a linear
approach.
MR. DICKINSON answered that later in his presentation he will
explain why a linear slope would work better.
2:02:33 PM
MR. DICKINSON moved to slide 14, a depiction of oil industry
nonresident workers from a Department of Labor & Workforce
Development publication. He said that in 2008, 29.8 percent of
the 17,000 workers in the oil industry were out-of-state, which
translates to 5,043 out-of-state workers and about 12,000 Alaska
resident workers.
MR. DICKINSON provided an example [slide 15] of the impact of
the tax rebate derived from the Department of Revenue's
[2/10/10] presentation. He pointed out that when a company's
resident worker ratio is right next to the line between tiers,
an increase in the ratio of just 0.5 percent would have a huge
[per employee] tax effect. However, when the ratio is not near
a tier line, an increase in the ratio would have a small [per
employee] tax effect. This tiered, or step, method makes it
difficult to determine what the tax effect will be for a change
in the number of resident employees. He said the extreme
example put forth in a [2/11/10 Anchorage Daily News] article
correctly depicted that the hiring of just one Alaskan would
result in a $30 million tax savings [slide 16].
2:05:02 PM
MR. DICKINSON provided another example of the impact of the tax
rebate. He posed a scenario in which Company C, the
hypothetical company used in the Department of Revenue's 2/10/10
example, has 4,500 resident workers for a ratio of 70 percent
[slide 18]. The addition of 650 resident workers would bring
the ratio to 79.98 percent. This increase would be at no cost
to the state because the ratio must be at least 80 percent to
receive a rebate. He offered his understanding that the sponsor
of HB 308 purposely chose 80 percent because it is significantly
higher than the state's current average of 70 percent. He
pointed out that his example is expressed as number of workers
while HB 308, Version E, is written in terms of hours.
Therefore, he has provided an example on slide 19 that uses 2000
hours a year per worker.
2:06:36 PM
MR. DICKINSON said his purpose in providing these two different
examples is to illustrate that a small increase in the worker
ratio, even as little as one hour, could result in a large tax
rebate, and the opposite could also occur whereby a large
increase in the ratio results in no tax rebate. Therefore,
Representative Kawasaki was therefore correct in his
identification of this problem.
MR. DICKINSON moved to another example [slide 20] in which a
large company has 5,200 resident workers [out of 6,500 total
workers] for an 80 percent ratio and a 24.5 percent tax rate.
If that company increased its ratio to 82.49 percent by adding
162 resident workers there would be no change in its tax rate.
He suggested a formula as an answer to this problem. [The
formula depicted on slide 21 would be a continuous function with
rounding. The rebate would be equal to the tax base (production
tax value) times the higher of resident hours divided by total
hours or 0.8, less 0.8. That would transform resident hire
rates between 80 percent and 100 percent into a series from 0
percent to 20 percent.] He said he has attached "the bottom
pieces" in his suggested formula, but that a formula could be
run that hits the "tops" or the "middles". Regardless of which
piece is used, the point of using the formula is that any extra
hour or extra worker will move a company by the same amount.
2:08:02 PM
REPRESENTATIVE TUCK noted that even if the linear formula is
used there would be no tax rebate for increasing the number of
resident workers when the ratio still remains below 80 percent.
He therefore surmised that it is possible a company converting
from nonresident workers to resident might not receive a tax
rebate for some time.
MR. DICKINSON responded correct, the 80 percent is a choice that
has been made and getting up to that 80 percent would get a
company no additional tax breaks.
2:09:20 PM
REPRESENTATIVE KAWASAKI commented that a carrot is being given
to those employers who hire Alaskans but a stick is not being
used on those that refuse to hire Alaskans. Could this baseline
be lowered, he asked.
MR. DICKINSON replied that a decision must be made on where the
baseline is and whether there is a penalty below that or a
benefit above. He added that a better way to answer this
question is to look at what is really happening in the oil patch
and to look at another problem. For example, at a previous
meeting the question was raised about whether a company could
simply not report its nonresident workers and not apply for a
deduction, thereby letting its taxes rise as a result of not
taking that deduction but still coming out ahead because of the
rebate. The answer to that question is yes.
2:11:20 PM
MR. DICKINSON provided an example of how this would work for the
year 2009 for the entire North Slope using the assumption of a
$10 billion tax base/production tax value (PTV) [slide 23].
Under AS 43.55.011(e)(1), that $10 billion is taxed at a rate of
25 percent, thus the total tax burden is $2.5 billion. The
maximum possible resident hire rebate on that tax burden would
be 20 percent or $500 million. In 2008 there were 5,000
nonresident workers in the industry at an assumed average wage
of $100,000, for a total of $500 million in nonresident wages.
Not claiming the nonresident wages as lease expense would result
in the wages not being deductible, and the tax base would go
from $10 billion to $10.5 billion, which would increase the tax
burden by $125 million. However, the rebate would drop the tax
rate from 25 percent to 20 percent, which would decrease the tax
burden by $500 million. The taxpayer would therefore come out
ahead by $375 million. Thus, setting up a situation where this
can occur does not drive companies to hire more Alaskans, which
is the point of HB 308, Version E.
2:14:32 PM
CO-CHAIR NEUMAN pointed out that a large corporation will often
form several corporations within itself so that A buys from B,
and C buys from D, and D buys from A, and therefore who reports
labor costs can get pushed down the line. He said this needs to
be kept in mind when looking at the next set of Mr. Dickinson's
slides so that the state does not get gamed in this regard.
MR. DICKINSON reviewed four possible solutions that he has
discussed with the sponsor to prevent the no reporting of
nonresident wages [slide 24]. One solution would be to shift
the scale so that resident hire would only swing the tax rate
between 24 percent and 25 percent rather than 20 percent and 25
percent. This way, the swing would only be $100 million, rather
than $500 million, and therefore it would not be worth not
reporting nonresident workers in the deduction.
CO-CHAIR NEUMAN interjected that slide 28 lists the largest
employers in the oil and gas industry.
2:16:40 PM
MR. DICKINSON continued his review of solutions, saying that a
second solution would be to put out rules that require that any
time any labor is included as a lease expense, all the labor
from that company must be included. This would address the
issue of pass through that was raised by Co-Chair Neuman.
However, the problem with putting down more rules is that it
results in ever more complex rules to get there, which is not
Co-Chair Johnson's intent. A third solution would be to focus
on new hires only and provide a specific dollar rebate for every
new Alaskan. The problem with this solution is that it does not
recognize a company that already has a good Alaska hire rate
above a company that does not; so, part of the issue is whether
the intent is to focus on new hires versus the overall
experience. A fourth solution, given the structure of the
industry, would be to have the Department of Revenue
commissioner publish the amount of the tax rate each year. This
tax rate would be based upon the resident hire ratios of the 10-
20 largest employers in the industry that are generating the
lease expenditures.
2:18:56 PM
MR. DICKINSON said his reason for stating "given the structure
of the industry" is that he wants to focus on what is really
happening on the North Slope, which is that the producers are
the taxpayers, but employees are working for the operators and
not necessarily the producers [slide 25]. This is because
producers hire an operator to operate the field for them and it
is the operator that hires the employees that actually work in
the field. Typically, however, much of the field work is done
by contractors. According to Department of Labor & Workforce
Development numbers, direct employment in the oil and gas
industry is [4,055] while indirect employment in oilfield
services is [12,875].
2:19:54 PM
MR. DICKINSON, in response to Co-Chair Neuman, noted that the
Department of Revenue's annual summary shows there are 15
entities that file production tax [slide 26]. Twelve of those
are filing a zero return or a return for $10 or $15 that is
based upon the requirement to pay a conservation surcharge of 5
cents for every oil barrel produced. There are really only
three large taxpayers and two small taxpayers.
MR. DICKINSON further explained that the structure on the North
Slope is in units. On the Prudhoe Bay unit, "ConocoPhillips"
produces about 130,000 barrels a day, "BP" produces about
96,000, "ExxonMobil" about 130,000, "Chevron" about 4,000, and
some other taxpayers are down in much smaller ranges; "BP" is
the operator and passes on the costs proportionately to how much
oil each producer is being assigned. The Kuparuk unit is
operated by "ConocoPhillips" and "BP" gets about 50,000 of the
80,000 barrels that are produced there each day.
"ConocoPhillips, BP, and ExxonMobil" own most of the production
from each of the fields. These three majors are not a part of
the "Pioneer and ENI" group. "Anadarko" has a piece of the
Alpine field. "Chevron" has very small pieces in several
fields. Thus, while there are quite a few different fields, the
underlying ownership is by three large corporations and those
corporations depend upon the operator. The Oooguruk field is
operated by "Pioneer" and all the rest are operated by either
"BP or ConocoPhillips."
2:22:28 PM
MR. DICKINSON related that production is about 700,000 barrels
per day or about 250 million barrels a year, according to 2009
fiscal data. Cook Inlet produces about 10 percent of that, most
of which is in gas. However, Cook Inlet pays less than one-half
of one percent of the taxes because under the current production
tax law the economic limit factor (ELF) was frozen in place for
the Cook Inlet until 2022. Thus, the tax for Cook Inlet oil is
zero and the tax for Cook Inlet gas is about 17.5 cents per
thousand cubic feet (Mcf).
CO-CHAIR NEUMAN interjected that at one-half of one percent of
the taxes, Cook Inlet production is minimal compared to Prudhoe
Bay.
2:23:43 PM
MR. DICKINSON pointed out that AS 43.55.024 provides a $1
million per month credit for production that is less than 50,000
barrels per day [slide 27]. Thus, most of the taxpayers in Cook
Inlet, as well as the smaller taxpayers on the North Slope, have
no production tax obligation other than the AS 43.55.011(i)
conservation charge, which is only in the tens of dollars. This
leaves the state with three major producers covering 95-98
percent of the taxes and two others picking up the remainder.
MR. DICKINSON, in response to Representative Tuck, said "NS"
stands for North Slope and the fields listed on the top half of
slides 26 and 27 are North Slope fields. He further pointed out
that his statements about who is paying tax and who is not are
based purely upon his own estimates because he has not seen the
tax returns for any of the companies as that is confidential
information. He said he is certain about his conclusions,
however.
2:25:24 PM
MR. DICKINSON directed attention to a list of the state's
largest oil and gas industry employers [slide 28]. He said "BP,
Conoco, and Chevron" are field operators and are probably the
employers of the 4,000 direct employees. All the rest of the
employers on the list are oil field service companies. He
further noted that this list shows only those employers under
the categories of oil and gas extraction and oil field services.
There are additional North Slope oil and gas industry employers
under the categories called catering and security, engineering,
communications, and construction. "ConocoPhillips and BP" will
make decisions on which contractors to hire and he therefore
surmises that the sponsor's goal with HB 308, Version E, is to
make the number of residents in a contractor's workforce an
important bid variable. This would be accomplished through the
[fourth suggested solution on slide 24], which sets the tax rate
by looking at the industry as a whole.
2:28:22 PM
MR. DICKINSON noted that "Exxon" is the operator of Point
Thomson, but is not on the list of the top 100 employers because
that field is not yet producing and that corporation is not the
operator of any other fields. He turned to slide 39 and pointed
out that the Prudhoe Bay field constitutes most of the oil
production in Alaska and all of the work being done on Prudhoe
Bay goes through to the three largest taxpayers. Kuparuk is the
next largest oil producer and all of the work on that field will
also go through these three largest taxpayers. He said his
point in reviewing this is that the industry-wide work may be
best reflected by looking at an industry-wide employment number
as opposed to parceling it out between each taxpayer.
CO-CHAIR NEUMAN commented that Mr. Dickinson is talking about a
structure that offers a beneficial bid variable to a lot of the
support companies.
2:30:34 PM
MR. DICKINSON, in response to Representative Kawasaki, explained
that the Department of Labor & Workforce Development reports
employment numbers in ranges. Thus, on slide 28 the two numbers
depicted under the column for total employees represent that
range; where there are no numbers depicted in that column, the
numbers immediately above the blank space are applicable. He
added that this information is available in the department's
document entitled, Nonresidents Working in Alaska, 2008, that
was released in [January 2010].
REPRESENTATIVE EDGMON stated he would like to see a breakdown in
the nonresident column [of slide 28] as to how many of those
positions could actually be filled by Alaska residents. He
surmised that some of those are skilled positions that Alaska's
workforce cannot support. For example, a commercial fisherman
from Alaska could work as a laborer but not as a chemical
engineer. This type of breakdown would help show the potential
for converting these jobs from nonresidents to residents.
2:32:35 PM
REPRESENTATIVE GUTTENBERG said he has worked on the North Slope
most of his life and he does not at all read HB 308, Version E,
as a jobs bill. The bill is based on total work hours and has
nothing to do with wages. It would use state revenue to buy
jobs for Alaskans plus give the companies hundreds of millions
of dollars, all without knowing whether that money will be used
to put more oil into the line or provide legacy jobs. There is
nothing that says those jobs will be high-paying, high-skilled,
generational legacy jobs. While he recognizes that the bill
will come back with major changes, there is nothing that says
jobs are needed on the North Slope. Giving money to the
industry to hire Alaskans is not the right track because it
would be a subsidy for existing jobs, he opined. The bill would
not create new jobs or new investment. Industry says Alaskans
are too expensive to hire, therefore if industry receives
anything it should be the difference in cost between hiring a
resident versus a nonresident. He cited examples for why he
believes the bill would create inefficiencies rather than
efficiencies, and said he thinks the bill could be written in a
whole different way that would better reflect the real economic
situation.
2:38:40 PM
REPRESENTATIVE SEATON said it seems there would not be any
impetus for 12 of the 15 companies to hire Alaskans given that
they have no production tax liability. He surmised that this
provision is therefore targeted only at the three payers of
production tax.
MR. DICKINSON agreed the provision is targeted at the production
tax. The operators are the critical link between the taxpayers
and the contractors and that three-step removal is important.
2:40:26 PM
REPRESENTATIVE TUCK, in regard to resident versus nonresident
hire, presumed that this would be for workers that have to do
with particular leases.
MR. DICKINSON answered that generally to be qualified the labor
must be a lease expenditure.
2:40:56 PM
REPRESENTATIVE TUCK inquired whether catering and security,
engineering, transportation, communications, and construction
are positions that are typically held with lease expenditures
[slide 28].
MR. DICKINSON responded yes. Such positions in the oil patch
are deductible lease expenditures. While these services can
happen in different industries, in Alaska they tend to happen
predominantly in the oil industry.
REPRESENTATIVE TUCK surmised that there is potential for this
provision to reach into other industries that are not included
on slide 28.
MR. DICKINSON replied yes, this would make them part of that
total equation.
2:42:35 PM
CO-CHAIR NEUMAN requested the help of the Department of Labor &
Workforce Development in answering both Representative Edgmon's
question and Representative Guttenberg's concerns. Given the
economic multiplier effect, he presumed that the impact of the
local hire provision could be widespread.
2:44:07 PM
REPRESENTATIVE TUCK asked whether a company that uses a lot of
subcontractors would be able to come out ahead by not reporting
the subcontractors' nonresident workers.
MR. DICKINSON replied that all the taxpayers do lots of
contracting. Non-reporting of nonresident workers would mean
the penalty of no tax deduction for that cost. However, as he
discussed earlier, the problem could arise that the rebate
benefit outweighs the penalty, which would incentivize a company
to not report the nonresident workers that it employs directly
as well as all the way through to the subcontractors. It
therefore does not make sense to create a system, as Version E
might, where this could happen.
2:45:59 PM
REPRESENTATIVE TUCK stated he does see where there are any
checks and balances in regard to a company with direct employees
that are predominantly residents but has subcontractors that are
predominantly nonresident. What is to keep that company from
not reporting its subcontractors' nonresident workers, he asked.
He further understood that the Department of Revenue can see who
a company's direct employees are. He inquired whether this is
also true for the company's subcontractors.
MR. DICKINSON answered yes. One of the things that will happen,
this bill aside, is that most of the time and effort will be
spent looking at contracting because that is how most of the
work is done. Under current labor figures, one-fourth of the
labor is done by employees and three-fourths is done by
contractors. The work done by contractors is the vast majority
of deductible lease expense. The effect on a taxpayer of not
reporting the dollar spent to hire a nonresident to do lease
work is the same whether it is paid directly as a wage or is
bounced down through a contractor or a subcontractor.
2:47:43 PM
REPRESENTATIVE GUTTENBERG asked how Mr. Dickinson sees the first
three bullets on slide 29 being addressed. He further asked
whether there would be a reason for leaving out overhead labor,
contractor labor, or professional service labor from the
resident hire calculation.
MR. DICKINSON responded no, but posed a scenario to outline the
problem. A taxpayer gets a bill from the operator. The
operator gets a bill from a contractor. The contractor built
some things with materials and labor. A bill is presented at
each point. Someone goes to a hardware store and buys a unit
that has already been built. Someone built that unit from
manufactured parts. So, how far down does this go? These are
issues that he therefore thinks should be figured out in statute
rather than regulation because they could be very problematic.
2:50:20 PM
REPRESENTATIVE SEATON pointed out that right now the state has a
limitation on allowable expenses. However, under Version E
there would be both allowable and required expenses which would
result in mandating a company to declare something as a lease
expenditure or mandating what a company can deduct. He inquired
whether that gives the state a lot of additional problems.
MR. DICKINSON returned to slide 24 which provides four options
for solving that particular problem and said that option two
fits Representative Seaton's description. He said this option
would require a bunch of new rules and he does not think that is
the most appropriate way of solving the incentive problem that
he identified earlier. However, he continued, he does not think
that option four would be a mandate. In further response, he
explained that the notion behind option four is that there are
only three taxpayers responsible for 97 percent of the tax and
all three are basically in the same sets of units and hiring the
same kind of contractors. Therefore, the overall ratios of
those contractors could be looked at and used to set the tax
rate for all three major taxpayers. This way there would be no
major winners and no major losers. These three taxpayers would
then be driving towards the hiring of more residents.
2:53:38 PM
REPRESENTATIVE SEATON said he thinks option four gets to not
having a company-specific profit tax rate. He asked whether his
understanding is correct.
MR. DICKINSON explained that the structure of the net tax would
not be changed. The profits determine the base. The tax would
be a rate times the base, and the rate would be determined by
the taxpayer's local hire. For example, there are several sets
of rates for federal income tax - individual, married, and so
forth - and each of these rates is applied to the same base.
2:55:33 PM
MR. DICKINSON provided a quick overview of the next 10 slides in
his presentation. He said [slides 32-35] address the proposed
30 percent credit for well work. Slide 34 outlines the
differences of putting this provision under AS 43.55.023 or
under AS 43.55.025. Slide 35 compares the definitions of well
work between HB 308, Version E, and the governor's bill. Slide
37 addresses the proposed change in the statute of limitations.
The Department of Revenue used to have three years to set the
amount of tax due, but typically that three-year statute was not
met and this resulted in extensions. In 2007, the statute of
limitations was extended to six years for production taxes.
Under HB 308, Version E, the statute of limitations would be
returned to three years. He pointed out that the statute of
limitations does not apply in cases of fraudulent returns or
when it can be shown there was an intent to evade taxes. The
statute of limitations only applies for a disagreement and
subsequent audit. Tax avoidance, not tax evasion, is where the
statute of limitations comes in.
2:57:35 PM
MR. DICKINSON concluded by drawing attention to slide 39 which
depicts the decline of Alaska oil production. He said that 20
years ago Alaska was producing 2 million barrels a day and today
it is only producing 600,000 barrels a day.
CO-CHAIR NEUMAN noted that the governor's bill was read across
the House and Senate floors on 2/10/2010. He urged members to
address further questions to staff at the Department of Revenue
and Department of Labor & Workforce Development.
[HB 308 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| Dickinson Presentation CS HB 308 2.15.10.pdf |
HRES 2/15/2010 1:00:00 PM |
HB 308 |