Legislature(2009 - 2010)BARNES 124
03/17/2010 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 | |
| + | TELECONFERENCED |
HB 308-OIL AND GAS PRODUCTION TAX
[Contains discussion of HB 337]
1:05:43 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 HB 308, Version 26-LS1328\E, Bullock, 2/5/10.]
REPRESENTATIVE OLSON moved to adopt the new proposed committee
substitute (CS) for HB 308, Version 26-LS1328\P, Bullock,
3/17/10, as a work draft.
REPRESENTATIVE SEATON objected for discussion purposes.
1:07:00 PM
CO-CHAIR JOHNSON requested Mr. Dan Dickinson to explain the
changes made by Version P.
DAN E. DICKINSON, CPA, Consultant to the Legislative Budget and
Audit Committee, noted he is a self-employed certified public
accountant doing some work for the Legislative Budget and Audit
Committee, and HB 308 is part of that work. He began with a
summary of the eight changes and provisions proposed under
Version P [slide 3]. The first change is to the progressivity
provision. Version P would leave the rate the same but change
the base [the previous proposed committee substitute, Version E,
would have changed the rate]. In response to Co-Chair Neuman,
he described base and rate by providing an example using sales
tax: the goods being sold are the base and a 3 percent sales
tax is the rate. However, progressivity is more complicated
because different rates apply to different amounts. He used an
income tax example to explain progressivity: one tax rate
applies to income between $0 and $15,000, another tax rate
applies to the income between $15,000 and $20,000, and another
tax rate applies to income between $20,000 and $25,000.
1:10:10 PM
MR. DICKINSON said the second change is to the interest rate
provision. Version P would set the interest rate charged by the
state for delinquent tax to be the federal funds rate plus 3
percent with no ceiling [Version E proposed the federal funds
rate plus 2 percent with a ceiling]. The third change is to the
provision that no interest is due on [additional tax owed as a
result of implementing] retroactive regulations; Version P
adopts the governor's version of this provision [HB 337, SB 271]
with a few minor changes.
MR. DICKINSON said the fourth change is a new provision made by
Version P that would allow credits to be applied immediately
rather than over two years as required by current statute under
the Alaska's Clear and Equitable Share (ACES) legislation. The
fifth change is to the 30 percent credit provision for well work
in which one definition from Version E is reworded slightly.
The sixth provision is restoration of the three-year statute of
limitations which remains the same as Version E. The seventh
change is a new provision that would remove the requirement for
matching spend when a company wants to sell its credits to the
state. He said this provision is also proposed in the
governor's bill. The eighth change is that the tax rate tied to
resident hire, as proposed in Version E, has been removed.
1:12:06 PM
CO-CHAIR NEUMAN noted that Co-Chair Johnson's goal as the
sponsor of HB 308 is to work with the administration in regard
to similar legislation proposed by the governor [HB 337]. He
said Version P incorporates the positive aspects of both the
bills to create jobs.
MR. DICKINSON pointed out that four of the major issues
addressed in Version P are also addressed in the governor's
bill, although treatment of the issues in the two bills may not
be identical. Those four issues are: interest would not be due
on retroactive regulations prior to their implementation,
credits would be spread over one year, there would be a distinct
credit for well work, and no matching spend would be required in
order for the state to purchase credits.
REPRESENTATIVE SEATON removed his objection. There being no
further objection, Version P was before the committee.
1:13:57 PM
CO-CHAIR JOHNSON, in response to Representative P. Wilson,
stated that the removal in Version P of a tax rate tied to
resident hire does not diminish his desire to encourage resident
hire. He had anticipated five minutes of discussion on that
issue, but instead it took two days. The real issue of HB 308
is to build a structure that allows people to invest and spur
development and he does not want to cause a sidetrack from that
because the bill would still create jobs, just maybe not for
Alaskans as he had hoped.
1:15:39 PM
MR. DICKINSON commenced his presentation, addressing the topic
of progressivity [slide 5]. He said that under the federal
personal income tax rules each bracket represents an amount of
income that is taxed at a different rate, but the state's
current production tax law does not have this feature. Rather,
the same tax rate is applied to the net value of every single
barrel of oil. The current base rate is 25 percent and is
always there; progressivity then adds an additional 0 to 50
percent up to a maximum production tax of 75 percent, and this
then applies to every bit of value generated on every barrel.
1:17:03 PM
MR. DICKINSON explained that Version P would create two
production tax brackets [slide 6]. The first bracket would be
the base tax rate of 25 percent on the value of each barrel up
to $30 per barrel. Once above $30 per barrel, the second
bracket would be the 25 percent base rate plus progressivity.
He noted that $30 per barrel has always been used to trigger the
progressivity calculation.
MR. DICKINSON compared progressivity under current law and as
proposed by HB 308, versions P and E [slide 7; note: Version "S"
on the slide is a typographical error, it should read Version
"P"]. Under current law, the tax rate is established by taking
the value per barrel, subtracting $30, and then adding 0.4
percent for every dollar that is left. For example, for $10 of
additional production tax value above $30, an additional 4
percent in progressivity is added to the 25 percent base, for a
total tax of 29 percent that is applied to every barrel.
Version P would maintain the current 0.4 percent progressivity
rate, but the base would be the same as the number used to
calculate the rate. Thus, the base would be production tax
value less $30 per barrel, and the progressivity would be
applied only to the net value above $30. Version E would have
taken the production tax value per barrel, subtracted $30, and
then added 0.2 percent for every dollar left [which would then
be added to the 25 percent base].
1:19:53 PM
MR. DICKINSON, in response to Representative Kawasaki, said the
progressivity provision is under sections 5 and 6 of Version P.
CO-CHAIR JOHNSON added that this is the same way the federal
income tax is based. A certain tax rate is applied to the first
amount of income and anything above that income amount is taxed
at a different rate; the total amount of income is not taxed at
the higher rate.
MR. DICKINSON, in response to Co-Chair Neuman, said the net
value is determined by subtracting all of the downstream costs
of transportation and all of the upstream costs of producing the
oil and gas. The idea behind the current tax is that all the
costs are subtracted and what is left is the net value.
1:22:17 PM
MR. DICKINSON compared the state's current progressivity tax
system [AS 43.55.011(g)] to the federal income tax system to
show the difference in tax that would be paid. Assuming a 25
percent tax rate, under both systems the total amount of tax
paid on a net value income of $27, $28, $29, or $30 per barrel
would be the same [slides 8-11]. At a net value income of $31,
$32, $33, $34, or $35 per barrel, more tax would be paid only on
the amount above the $30 under the federal income tax system;
but under the state's progressivity system, more tax would be on
all of the $31, $32, $33, $34, or $35 of income [slides 12-16].
1:24:27 PM
MR. DICKINSON, in response to Co-Chair Neuman, explained that
most states with income tax, as well as the federal corporate
and personal income taxes, use a progressivity measure. For
example, sales taxes typically have a different rate for food
and clothing than for luxuries. Most states have one or two
different rates, but Alaska's corporate income tax has nine
different brackets between $0 and $100,000 and everything above
$100,000 is at one rate. In further response, he explained that
his examples on slides 8-16 are focused on only one piece of
Alaska's production tax. Royalties, property taxes, the base
rate of the production tax, and the floor of the production tax
are all regressive. The income tax is mildly progressive.
Overall, Alaska's system remains a regressive system. However,
in situations of very high prices, such as $130 per barrel, the
progressivity piece so dominates the state take that the system
is actually progressive.
1:26:59 PM
MR. DICKINSON, in response to Representative Kawasaki, said the
income shown on slides 8-16 is increasing; it is depicted in
yellow and increases from the bottom to the top of the graphic.
This income increases less fast than the whole. Under the
state's progressivity system (right graph), as the per barrel
net value increases, the income increases very slowly relative
to the increase in the tax; whereas, under the federal income
tax progressivity system (left graph), the tax increases less
slowly so the income increases more.
1:28:03 PM
MR. DICKINSON, in response to Representative Tuck, said the
relationship between income and tax is 75 percent income and 25
percent tax [slides 8-11] until the bracket trigger [of more
than $30 net value per barrel] is reached. In further response,
he agreed that on slide 16 the ratio between income and tax is
nearly 50:50 [for the depicted net value of $35 per barrel]. He
clarified, however, that the graphics are not representative of
either the actual federal income tax rate or State of Alaska
progressivity under AS 43.55.011(g). The graphics are simply to
illustrate the point of how progressivity moves.
1:29:55 PM
MR. DICKINSON resumed his presentation, noting that the chart on
slide 17 is from the Department of Revenue and depicts the
nominal and marginal tax rates under current law. The graph
shows that when the progressivity trigger is hit, there is a
very rapid change in the marginal rate because each percentage
that is added is applied to a very large base.
MR. DICKINSON said slide 18 depicts what would happen under
Version P, which would change the state's current system to a
bracketed system. Under Version P, the nominal rate is a little
bit lower and rises less quickly, and there is not a sudden leap
in the marginal rate when progressivity is triggered [slide 19].
Instead, as the tax rate increases, the marginal rate also
increases.
1:31:25 PM
MR. DICKINSON, in response to Representative P. Wilson,
explained that the red line on slide 18 is the nominal rate
under current [ACES] law. For example, at a net value of $100
per barrel, the tax rate would be roughly 42 percent. When the
value goes from $100 to $101, more of that dollar is consumed by
tax so the marginal tax rate on that additional dollar is more
like 70 percent because of how progressivity works.
CO-CHAIR NEUMAN understood the marginal rate to increase
proportionately at a much higher number than the nominal rate.
MR. DICKINSON agreed, saying one reason it is higher is because
as soon as the progressivity threshold is reached under the
current law there is an immediate bump-up in the marginal rate.
This bump-up is because every dollar then immediately has this
new rate applied to it.
1:33:20 PM
MR. DICKINSON, in response to more questions from Representative
P. Wilson, said that to calculate the tax rate, every dollar of
additional value that is taxed creates also a higher rate.
Under current law, the rate and the base both increase after $30
net value is reached. When there is no progressivity, the
nominal rate is 25 percent and it always applies. Once
progressivity is hit, the progressivity formula determines what
is added to the 25 percent base rate, so the tax rate goes up;
thus, nominal means the actual rate. Marginal means how much of
each additional dollar earned goes to the tax collector.
1:35:30 PM
MR. DICKINSON, in response to several questions from Co-Chair
Neuman, said the progressivity rate is 0.4 percent for every
additional dollar. The red line [ACES nominal rate] on slide 18
is where the 0.4 percent is seen for each additional dollar; as
each dollar is increased along the X axis, the tax rate
increases by 0.4 percent. The green line [ACES marginal rate]
increases much more quickly [than the ACES nominal tax rate]
because what it is being applied against is also getting larger.
REPRESENTATIVE SEATON interjected that the [ACES marginal rate]
could also be thought of as the windfall profit tax. It is a
windfall profit tax because progressivity is triggered when the
net value is above the area where the base tax applies. He said
windfall profit is the term that was used during deliberations
on ACES, and it seems to him that conversations during these
deliberations are being ignored.
MR. DICKINSON responded that under the Department of Revenue
assumption for slide 18, there is a $26 cost per barrel that is
not visible in the diagram. Therefore, everything depicted on
the diagram is profit. Whether it is windfall or not can be
debated, but there is no tax unless there is a profit. When
deciding whether to make an investment that will generate an
extra dollar, the decision maker considers who will receive that
extra dollar. Thus, someone thinking about an investment thinks
about the marginal rate, not the average rate, and that is why
the [ACES marginal rate] is important to look at.
1:38:00 PM
REPRESENTATIVE SEATON noted the graph depicts marketplace prices
above the $30 per barrel profit at which progressivity kicks in.
He cautioned that the graph not be confused with the decision
point on whether to drill a well which is based on production
and anticipated hurdle rates and anticipated revenues. At some
point in time a decision maker will look at anticipated profit
and that is when discussion about what happens above the $30
profit trigger will occur.
CO-CHAIR NEUMAN said a company looks at how fast its netback
will be because it must have fluid capital for reinvestment, and
that is what HB 308 is about.
MR. DICKINSON replied tax is one of the things taken into
consideration when a company performs calculations to decide
whether to invest. The [ACES marginal tax] is what will be used
in that calculation. He said he does not think many investors
will ignore the tax when making the calculation, and while tax
will not be the only thing that is considered it is clearly
something that is part of the calculation.
1:41:15 PM
REPRESENTATIVE GUTTENBERG inquired whether there is a graph
showing total government take when operating along this line.
MR. DICKINSON answered he had such a graph in his previous
presentations, but for today's presentation he only has slides
about production tax.
CO-CHAIR NEUMAN urged members to look at charts in the committee
packet provided by Representative Seaton comparing estimated
production taxes.
REPRESENTATIVE GUTTENBERG asked whether the total government
take rises as much as the graph shows [slide 18] or is capped;
i.e., does the state take come out of the federal take or does
it all rise together.
MR. DICKINSON responded both effects are there. For income tax
there is simply some switch between state take and federal take.
However, property tax is fixed, so as the value per barrel of
oil increases the percentage going to property tax decreases.
Thus, graphs showing total government take have curves that
slope up as the marginal rate increases, but the variation is
generally between 65 and 55 percent.
1:43:20 PM
REPRESENTATIVE TUCK surmised the green line representing the
ACES marginal tax [slide 18] is not how much in a dollar is
invested, but rather how much an additional dollar is made.
MR. DICKINSON replied correct.
MR. DICKINSON, in response to Representative P. Wilson, said the
red line depicted on slide 18 is the nominal rate under current
[ACES] law. The purple line represents the new nominal rate
that would go into effect if Version P became law.
MR. DICKINSON, in response to Representative Tuck, explained
that Version P would create a bracketed system like that for
personal [federal] income tax. He confirmed that the graph on
slide 18 can be used as a comparison between current law and
Version P.
1:45:47 PM
MR. DICKINSON returned to his presentation, noting that slide 20
depicts the mechanics of why there is a very large increase as
the net value moves from $30 to $31. At $30, the base tax rate
is 25 percent under both [Version P's proposed bracket
methodology and current ACES methodology]. At $31, the
progressivity tax is triggered - under Version P's bracket
methodology the 25.4 percent tax would apply only to the
additional $1, the other $30 would remain at 25 percent; under
current ACES methodology the 25.4 percent applies to the
additional $1 as well as to the other $30, which generates 12
cents more in tax. This 12 cents jumps the effective tax rate
[on that $1] by 12 percent, from 25 percent to 37 percent.
1:48:05 PM
CO-CHAIR NEUMAN, in regard to this tremendous increase for just
one more dollar, inquired whether this same rate follows through
for net values of $32 or $34.
MR. DICKINSON pointed out that the initial bump in the green
line [ACES marginal tax] on slide 19 is the jump from 25 to 37
percent. After that initial bump, the marginal rate increases,
although it does not continue at that slope. The marginal rate
also increases more rapidly than the nominal rate, but most of
the change occurs because of the jump in the base.
MR. DICKINSON, in response to Representative Tuck regarding
slide 20, confirmed that "personal federal income tax
progressivity" is the same as what is proposed by Version P, and
["AS 43.55.011(g) Progressivity"] is the same as current law
under ACES.
MR. DICKINSON, in response to Representative Guttenberg,
clarified that because the jump from 25 percent to 25.4 percent
is on $31, the effective rate on that $1 is 37 percent. He
further confirmed that for each subsequent dollar there is a
jump.
1:50:30 PM
REPRESENTATIVE SEATON surmised the state is taxing on the
nominal rate, not the marginal rate, and that Mr. Dickinson is
extracting the marginal rate to explain the effect of the tax on
that portion of dollars above the $30 profit per barrel.
MR. DICKINSON answered correct, the state uses the nominal rate,
but that does not make the marginal rate any less real. A
company calculates its taxes with the nominal rate, but the
marginal rate tells what is really happening.
MR. DICKINSON, in response to Co-Chair Neuman, reiterated that
the nominal rate is what a company needs for calculating its
tax, but the marginal rate tells a company what is really going
on with any additional investment or cash inflow when it tries
to figure out what will happen if it adds an additional dollar.
REPRESENTATIVE SEATON said that happens with an additional
increase in price, not an additional investment, so it is not an
investment. That calculation can be made, but it does not tie
into a company's investment, it may tie into investment
strategy. Looking at the marginal on what a dollar earns is
totally based on the differential between the Alaska North Slope
(ANS) West Coast (WC) price and a company's expenses in that
month's time. Therefore, it is a price variable, not an
exploration or production variable, so it is important to not
get these things confused.
1:52:39 PM
CO-CHAIR JOHNSON said he does not think there is any confusion
at all because he thinks the marginal tax rate does influence
investment, so they correlate. Testimony was recently heard
that the ability to get a return on investment is what triggers
a company's investment decisions. This is precisely what the
companies were talking about regarding return on investment.
REPRESENTATIVE GUTTENBERG surmised that even if a company does
nothing, profits will be made because the price of oil is going
up regardless of what a company does; therefore, a company may
not do anything until it can take better credits off its money.
MR. DICKINSON responded that, clearly, taxes are thought about,
along with a forward-looking price forecast. He cited Ronald
Reagan who, during a time of very high incremental and marginal
tax rates, said it was better to make four movies rather than
five because taxes made the fifth movie not worth doing. Thus,
decisions are made based on the marginal tax rates.
1:54:42 PM
CO-CHAIR NEUMAN interjected that taxes can get to the point
where netback on the profits is not there, and in essence that
is what progressivity is. A company making money in Alaska is
not a bad thing because then the company will continue to invest
more in Alaska. When taxes get too high, it will affect how
much money a company wants to continue to invest in Alaska.
MR. DICKINSON reiterated that clearly taxes are part of the
decision and clearly they are not the only part of the decision.
1:55:32 PM
MR. DICKINSON commenced his presentation, describing what
happens in production tax as the destination value increases
[slides 21-23]. He said the figures in these slides are based
on the assumption that the destination value is $26 higher than
the production tax value per barrel of oil. The slides compare
current tax law with the tax proposed by Version P. As the
destination value increases, the amount of tax paid under
Version P would be less than that paid under current law because
the Version P tax rate would remain at the 25 percent base rate
when destination values are [between $26 and $56] (the red
triangle at the bottom left of the graph).
MR. DICKINSON, in response to Representative Seaton, said that
at a destination value of $156 per barrel, the production tax
would be roughly $10 less per barrel under Version P than under
current law.
1:57:13 PM
MR. DICKINSON compared current law, Version P, and the previous
committee substitute [Version E], which posed to halve the
current progressivity rate [slide 22]. At destination values
above $90 per barrel, Version P would generate more
progressivity than would Version E.
MR. DICKINSON, in response to Representative Tuck regarding
slides 21-23, explained that destination values of $0-$26 per
barrel are the amounts where a company is recovering its costs.
Destination values of $26-$56 (the red triangle) are within the
thirty-dollar bracket and above $56 is when progressivity
applies. Therefore, progressivity would apply to everything in
the blue line [current law]; but in the purple line [Version P],
progressivity would apply only to the amount above the thirty-
dollar bracket [above the destination value of $56]. In further
response, he clarified that for Version P the 25 percent rate is
all that would apply to destination values of $56 or less.
MR. DICKINSON, in response to Co-Chair Neuman, explained that
"PTV" is the production tax value, which is what is taxable
after subtracting all costs. The Department of Revenue used $26
for these costs, so he imported that figure into these graphs.
MR. DICKINSON, in response to Representative P. Wilson,
confirmed the turquoise line on slide 22 represents [Version E].
1:59:28 PM
MR. DICKINSON explained the black line on slide 23 represents
the base tax rate of 25 percent, and depicts the amount of
production tax that would be paid per barrel at each destination
value if there was no progressivity. It can therefore be seen
how much tax is generated from progressivity. At a destination
value of $136, Version P would remove about one-quarter to one-
third of the progressivity. At destination values around $90,
Version P would halve the progressivity, but the amount of
progressivity being halved is much smaller.
REPRESENTATIVE SEATON, in regard to the destination value of
$136, stated that under a 25 percent base rate the tax would be
about $30 and under current law the tax would be about $60.
Thus, at $136, the total production tax of $60 under current law
would be about 50 percent [of the destination value], which
means the companies would be retaining about 50 percent.
MR. DICKINSON agreed that is correct, roughly speaking.
2:01:16 PM
MR. DICKINSON reviewed slide 24 which depicts the progressivity
that would be generated over a time period of one year in which
the oil price increases by $10 each month. At $50 [in
destination value] no progressivity would be generated under
either current law or Version P because of the $26 in production
costs and the $30 at which there is no progressivity. As the
destination value rises, the increase in progressivity is more
under current law than Version P. For example, at a destination
value of $140, Version P would bring in about $420 million per
month in progressivity, whereas the current law would bring in
about $600 million.
REPRESENTATIVE P. WILSON surmised that as price goes up, Version
P would allow producers to keep more money [than current law].
MR. DICKINSON replied correct.
2:03:02 PM
MR. DICKINSON, in response to Co-Chair Neuman, stated there are
five bites at the apple that a producer must worry about:
federal tax, and State of Alaska property tax, production tax,
income tax, and royalties, given 99 percent of the production in
Alaska is on state land. The revenue generated per barrel is
primarily from the state income tax and state production tax and
not so much the property tax. In further response, he confirmed
that slide 24 shows neither the total tax nor the 25 percent
base production tax; it only shows the progressivity.
2:04:00 PM
REPRESENTATIVE SEATON noted that a third of the tax difference
between Version P and current law would be taxed by federal
income tax anyway. So, under Version P, a producer would pay a
little over one-third of that difference to the federal
government instead of the State of Alaska.
MR. DICKINSON answered that is correct because this would be
fully deductible for federal taxes.
REPRESENTATIVE P. WILSON inquired what difference it makes to
the company as to who it is paying the tax to.
MR. DICKINSON responded probably not much, but every dollar that
is deductible only has a 35 percent effect on income tax.
Changing state taxes by $1 would change federal income tax by 30
cents; so, net, a company would still be 65 cents ahead.
2:05:08 PM
REPRESENTATIVE P. WILSON, given that producers would be looking
at overall taxes and not just Alaska taxes, asked what the
difference would be if Alaska lowered its taxes and the federal
government then took it anyway.
MR. DICKINSON pointed out that of the eight largest producing
states, the combined federal and State of Alaska tax is much,
much higher at current price levels than it is in any of the
next seven. Further, the Gulf of Mexico has no state taxes so
only federal taxes apply. Thus, when making a decision, one
piece of a company's thinking is that in Alaska it would keep 35
percent of the money but in the Gulf of Mexico it would keep 65
percent.
2:06:58 PM
CO-CHAIR NEUMAN inquired whether Alaska's taxes are similar to
those of Alberta, Canada, before Alberta's taxes were changed a
year or two ago.
MR. DICKINSON replied that in 2007, Alberta instituted a much
higher royalty under a document called "Our Fair Share".
Royalty in Alberta is like tax in Alaska, and Alberta also has a
property tax and an income tax. This increase resulted in much
push-back by industry, and last week Alberta announced that
starting in 2011 it will roll back the rates to lower than they
were in 2007. The limit of no more than 5 percent in the first
year of a well's existence will stay.
2:08:53 PM
CO-CHAIR NEUMAN related that Alberta had a tremendous loss in
revenue, which forced the roll back to create more investment.
MR. DICKINSON agreed, saying the statements made by the Alberta
government last week were focused on attracting industry
investment because investment had fallen off or not increased in
some areas to the degree that had been hoped. In further
response, he said an important distinction between Alberta and
Alaska is that Alberta is much more heavily invested in gas than
is Alaska. The gas price has fallen by several hundred percent
from its high point and gas probably accounts for the majority
of Alberta's royalties.
2:10:44 PM
REPRESENTATIVE GUTTENBERG understood that the [marginal rate]
from progressivity is 37 percent on the dollar over $30. He
asked what happens to the investment dollar, such as what
credits are received for that investment dollar.
MR. DICKINSON answered this is accounting for any dollar change.
So, if a company did not invest and therefore generate an extra
dollar of free cash flow, this would have the same effect and
that is the whole reason it is structured the way it is. That
is to say, the state is going to pick up a significant portion
of a company's investments because every time an investment is
made it is deductible, and in Alaska even capital expenses are
deductible costs and lower the production tax value (PTV), which
is the value that is taxed. By deliberately choosing the high
point of the marginal rate, it can be shown that the state is
picking up over 90 cents of every dollar invested and taking
over 90 cents of every additional dollar being earned, although
that problem does not happen very often.
2:12:15 PM
REPRESENTATIVE GUTTENBERG surmised that in some ways the higher
the rate, the more a company gets back on its investment dollar.
MR. DICKINSON responded that the investment dollar has an
immediate value from the state. When making an investment, a
company is looking for long-term return. If less is spent
initially, then the rate of return might look better, but
ultimately a company is looking at the return that will be
received in future years. So, just looking at the dollars, an
investor would like to invest at a point at which the marginal
rate is very high and then collect it all later when the
marginal rate is lower.
2:13:11 PM
REPRESENTATIVE GUTTENBERG inquired how that affects the total
lifting cost.
MR. DICKINSON replied there are two ways an investor can think
about those taxes. When the marginal rates are very high, an
investor is writing a much larger check. When the marginal rate
is really high, a drilling manager is not thinking that the
government is paying for most of what he or she is doing because
actual out-of-pocket costs remain relatively constant and what
is changing is the amount of tax that a company pays on that.
REPRESENTATIVE GUTTENBERG argued the drilling manager is not
doing that because an accountant is doing that. He said
legislators have heard repeatedly that the most important thing
is stability. The most stable location shown to legislators by
industry was a place where the government take was something
like 95 percent and had not changed in 30 years. There are lots
of things in play and legislators are trying to balance all
those things against what is in the state's best interest.
REPRESENTATIVE P. WILSON commented that in locations like the
aforementioned there are no environmental rules so the companies
have much lower costs than in the U.S.
2:15:21 PM
MR. DICKINSON returned to his presentation and addressed the
proposed interest rate provision for delinquent taxes [slide
26]. Version P would do away with a floor [and ceiling] and
would charge the federal funds rate plus 3 percent, which is the
same general interest rate that a corporation would pay for
underpayment of tax under the Internal Revenue Service system.
In response to Co-Chair Neuman, he said slide 26 incorrectly
states Version S instead of Version P.
CO-CHAIR JOHNSON explained this interest rate is being proposed
because a taxpayer that is delinquent on taxes through no fault
of its own should not be punished. However, an intentional
mistake would be another set of circumstances. In response to
Co-Chair Neuman, he confirmed that it is the commissioners in
the administration who make the initial assessment as to whether
an underpayment is intentional.
2:17:58 PM
MR. DICKINSON related that under current law the interest rate
on delinquent taxes is 11 percent, although the rate did go
slightly above that for a short period (red line on slide 27).
The federal funds rate is currently at a historic low of 0.5
percent (dark blue line). Under Version P, the interest rate
would be the federal funds rate that is announced each quarter
plus 3 percent; thus, the current rate under Version P would be
3.5 percent (turquoise line).
REPRESENTATIVE TUCK, in regard to Co-Chair Johnson's previous
statement, said he can see how someone would intentionally hang
on to money knowing a good rate of return would be received on
that money through investments or even deposits.
CO-CHAIR JOHNSON responded that is why the ceiling on the
interest rate was removed. Should the interest rate go up in
the future, he did not want the state to be stuck with a
ceiling. Additionally, Version P would make the rate consistent
with what the federal government charges for use of its money.
2:19:33 PM
MR. DICKINSON discussed the proposed provision for interest from
retroactive regulations [slide 28]. Version E would not have
considered tax payments owed as a result of retroactive
regulations to be delinquent. Version P adopts the more complex
scheme proposed under the governor's bill, which is that the
Department of Revenue (DOR) is required to waive the interest
between the time of production and implementation of the
regulation if an underpayment arises. However there is one
difference between the governor's bill and Version P: under the
governor's bill, DOR is required to make a finding that the
producer acted in good faith; Version P provides that no
interest is due if DOR does not find that the producer failed to
make a good faith estimate.
2:21:03 PM
REPRESENTATIVE SEATON asked whether that puts the onus on DOR to
come up with a legal demonstration that the taxpayer acted in
bad faith.
MR. DICKINSON replied he does not think it is a question of bad
faith. Rather, if DOR finds something that appears not to be in
good faith, then it can require interest. He said it is unclear
to him where the burden of proof would be, but Version P takes
away the affirmative requirement that DOR determine good faith
beforehand in every case.
REPRESENTATIVE SEATON said he thinks it would be advisable to
obtain a legal opinion as to whether that change makes a shift
of burden to the department to prove something.
2:22:25 PM
REPRESENTATIVE SEATON noted that slide 26 states the proposed
interest rate would apply to almost all taxes, but the
discussion has been about only one tax. He inquired what the
implications would be across all the other departments from this
proposed change in general law and asked which taxes this change
would apply to.
MR. DICKINSON answered he believes this change would not apply
to the property tax, the insurance tax, and a third tax which he
cannot remember at the moment.
REPRESENTATIVE SEATON said this does not tell members what the
economic effect is to the state given that all of these other
taxes would be covered by this bill.
MR. DICKINSON responded he has not done a fiscal note on this
provision, but the vast majority of the taxes that would be
affected, in terms of dollars, are the production tax and the
income tax. All the other taxes together would constitute only
2-3 percent of the total tax burden compared to those two.
MR. DICKINSON, in response to Co-Chair Neuman, said he does not
know of any models that are being built to look at the incidence
of delinquency in the insurance, fisheries, or other taxes.
CO-CHAIR NEUMAN suggested Representative Seaton discuss with Mr.
Dickinson the modeling being done related to production tax.
2:25:34 PM
REPRESENTATIVE SEATON asked whether Mr. Dickinson has looked at
the dollar effect of any retroactive regulations that apply to
Cook Inlet or other small producers that are not in Prudhoe Bay
or Kuparuk where a standard deduction was implemented for
upstream expenses [for the time period of 2007-2010].
MR. DICKINSON replied the upstream expenses that were frozen are
one piece of the calculation. For Prudhoe Bay and Kuparuk there
is downstream transportation. The law changed in 2007, the
regulations were not implemented until 2010, so there were three
years in which the gross value could vary. The capital piece
was not frozen and the capital piece is of the same order of
magnitude as what he has seen for Prudhoe Bay and Kuparuk.
Roughly speaking for those three years, the piece of costs that
will be regulated that way is larger than the piece of cost that
was frozen.
2:27:49 PM
MR. DICKINSON, in response to Co-Chair Neuman, clarified that
slide 26 focuses on the interest rate and slide 28 focuses on
the issue of regulation changes. He confirmed that penalties
would not be applied to any additional tax that is owed as a
result of the changes.
MR. DICKINSON reviewed the proposed provision for credit
recovery [slide 29]. The 2007 ACES legislation required that
certain credits be recovered over a two-year period. Version P
would restore the 2006 rule that allowed credit recovery over a
one-year period. He related that the Department of Revenue has
advocated for this change because the two-year period has
created a lot of complexity with very little value.
MR. DICKINSON, in response to Co-Chair Neuman, confirmed this
provision would assist the Department of Revenue.
2:29:23 PM
REPRESENTATIVE SEATON recalled that the reason for implementing
the two-year credit recovery period was to protect the state
from having to pay large capital credits during times of low oil
prices when taxes would be lower because of the profits-based
tax system. He asked whether the assumption now is that the era
of high oil prices is here to stay so there is no longer a need
to worry that they may go back down.
MR. DICKINSON answered that that argument might hold up under an
assumption that a level of high and low investment corresponds
exactly with the years of high and low revenue. While looking
through Department of Revenue slides, the only argument that he
saw advanced for advocating a two-year credit recovery period
was that most places have two, three, or four years. The
federal tax code considers five years to be much accelerated.
In-so-far as these credits are considered analogous to
depreciation, [one year] was the fastest depreciation found
around the world and therefore the department was trying to
spread it out. He said he thinks it assumes a precision in the
correspondence that may not have been seen over the past two and
a half years.
2:31:17 PM
REPRESENTATIVE GUTTENBERG said he is looking for the practical
effect on this same subject: who has benefitted and who has
been unable to use the credits.
MR. DICKINSON responded that given the prices seen over the two
and a half years this statute has been in effect, he believes
the three large taxpayers have probably used their credits
fairly effectively and still have a lot of tax obligation
remaining for the state. In further response, he said the other
taxpayers can have the state purchase their credits. Having to
hold off on some of that cash flow for six months might have an
effect in the first year, but for a company in roughly a steady
state of investment not much difference would be seen in the
cash flows by having to split the credits over two years.
2:32:48 PM
MR. DICKINSON outlined the proposed provision for capital
investment credits [slide 30]. Version P would only provide a
change to a definition; therefore, it would provide a 30 percent
credit for well work that includes operating and capital costs.
He compared the differences between Version P and the governor's
bill. The governor's bill would rewrite the existing
exploration credits in AS 43.55.025 as well as insert a
development well credit [slide 31]. Version P would take the
existing system of lease expenditures and allow certain lease
expenditures that are used for well work to also qualify for the
30 percent credit. In response to Co-Chair Neuman, he confirmed
that development wells would include the reconditioning of old
wells, the notion being to develop a well further even if it has
been producing for awhile.
2:34:18 PM
REPRESENTATIVE SEATON observed that Version P would provide a 30
percent credit for both capital and operating expenses for well
work. He inquired whether the governor's bill also proposes the
30 percent credit for operating expenses.
MR. DICKINSON replied he believes the governor's bill is for
both because there is no specific requirement that it be a
capital cost. In response to Co-Chair Neuman, he said that this
well work would be an upstream cost, not a midstream cost.
Version P requires it be a lease expenditure first, and then
this is a subset of lease expenditures; there is nothing similar
to that in the governor's bill. In further response to
Representative Seaton, he stated that Version P includes
injector wells while the governor's bill specifically excludes
service [injector] wells. He said intangible development costs
(IDC) are all the costs that are necessary for drilling a well.
First, however, this must be a lease expenditure and, if not, it
would be excluded.
2:37:38 PM
REPRESENTATIVE GUTTENBERG inquired as to what the state gives
now for well work.
MR. DICKINSON answered that any capital expense is already
included and is at a 20 percent credit, and capital investments
already include the creation of wells. Version P would boost
that 20 percent credit to 30 percent. He explained that at the
point of production the well fluid coming out of the ground is a
combination of oil, gas, water, and sand, and it requires time
and money to separate them. Version P would provide that the
costs for getting the fluid out of the ground are eligible, but
the costs dedicated to separation would not be eligible.
2:38:48 PM
REPRESENTATIVE GUTTENBERG observed that expenses for putting in
a well, such as hooking up the Christmas tree and flow lines and
constructing the shack would be capital expenditures. Then
there are normal yearly maintenance expenses which are covered
under operation expenses. Enhancements would be such things as
fracking, more seismic work down in the well, and so forth. He
asked whether the state gives credits for that now. He further
asked where the definition of a service well can be found.
MR. DICKINSON, regarding the definition of a service well,
responded that he goes to the definitions in Alaska regulations,
which he believes are those used by the Alaska Oil and Gas
Conservation Commission (AOGCC). In regard to the difference
between maintenance and capital expenditures, he said fracking
is considered an intangible drilling cost that would currently
be eligible for a 20 percent capital cost credit. Version P
would raise that 20 percent credit to 30 percent. In further
response, he confirmed that the governor's bill would also raise
this to 30 percent.
CO-CHAIR NEUMAN added that the idea behind this provision is to
help re-develop older fields to raise production.
2:40:56 PM
REPRESENTATIVE SEATON referenced page 9, lines 29-31, of Version
P and inquired what is "26 U.S.C. 263(c)". He further asked
whether the language on these lines means that all operations of
the well itself during the entire operation of the field will be
given a 30 percent tax credit for operating expenses. Will
pumping the oil through a collector line be the only thing that
does not receive this credit, he queried.
MR. DICKINSON, regarding the second question, replied no. He
explained that the huge above-ground facilities on the North
Slope are separation facilities. The cost of the well is below
the ground and where it hits the Christmas tree is where the
cost deductions cease.
2:43:13 PM
REPRESENTATIVE SEATON offered his belief that under the
definition on page 9, the injector wells, operation of the
injector wells, pressurizing of the field, bringing the fluid to
the surface, and anything connected to that portion of operating
these fields would all receive a 30 percent credit.
MR. DICKINSON answered that the processing by which the gas is
pressurized up before being re-injected is not eligible for the
credit.
2:43:50 PM
REPRESENTATIVE SEATON understood an injection well is permitted
under Version P. Given that operation during production
includes costs of operating a well and moving well fluids up, he
inquired how the costs of operating a well are excluded when an
injection well is specifically allowed.
MR. DICKINSON responded that upon listening to Representative
Seaton's definition, perhaps more language would be appropriate
and could be done here in statute or in the regulations. He
explained that an injection well is not bringing fluids to the
surface; rather, it is pumping something back down into the
well. For purposes of an injection well, the process of
drilling the well would be included. But, during production,
well related expenditure would be the cost of operating a well
and moving the well fluids.
2:45:14 PM
REPRESENTATIVE SEATON requested that the sponsor state his
intent on this language when the committee gets to discussion.
REPRESENTATIVE P. WILSON requested that before the next meeting
on HB 308, Mr. Dickinson provide members with something that
shows the cumulative effects of all of this and whether anything
will be left for the state.
MR. DICKINSON replied there will be quite a bit left for the
state and there will be a fiscal note from the administration
that will tie together all the net effects.
REPRESENTATIVE P. WILSON said she would like to see the effect
in picture form rather than in words.
CO-CHAIR NEUMAN requested Mr. Dickinson to work with Deputy
Commissioner Davis of the Department of Revenue.
2:47:40 PM
MR. DICKINSON returned to his presentation and addressed the
proposed provision that would change the current statute of
limitations for production tax from six years to three years
beginning with the 2011 tax year [slide 32]. He said this
provision is the same in Version P as it was in Version E.
MR. DICKINSON discussed the provision that would remove the
matching spend requirement [slides 33-34]. He explained that
under current law, a producer that is producing fewer than
50,000 barrels per day can bring its transferable credits to the
state for purchase, assuming the producer has already lowered
its taxes to zero. He clarified that these would be credits
that have come about as a consequence of investment, not as a
consequence of being a small producer. Currently, three
conditions must be met for the state to purchase these
transferable credits: 1) it is not earlier than allowed on the
certificate, a condition that will become moot if the earlier
provision to change the certificates is enacted; 2) within 24
months of applying for a certificate, the taxpayer pays out a
similar amount in capital investment or lease bids - this is the
requirement that would be removed by Version P; and 3) there are
no other outstanding tax liabilities.
MR. DICKINSON concluded by noting that the local hire provision
that was included in Version E has been removed from Version P.
2:49:44 PM
CO-CHAIR NEUMAN requested further explanation regarding the
first condition that must be met.
MR. DICKINSON responded there are currently two paths a company
can take if it makes an investment or does something that earns
a credit: the company can use the credit itself or it can get a
transferable tax certificate from the Department of Revenue. A
transferable tax certificate can be sold to another party, held
for use in a future year, or sold to the state.
CO-CHAIR NEUMAN added that Version P would allow use of the
transferable credits within the first year.
MR. DICKINSON related that when a taxpayer uses the credit
itself, it estimates its taxes every month and applies one-
twelfth of the credit. Everything is then trued up at the end
of the year when the actual credit is known.
CO-CHAIR NEUMAN said this allows for more fluid capital for
reinvestment.
MR. DICKINSON replied yes, the notion is to make reinvestment as
quick and effective as possible.
CO-CHAIR NEUMAN noted there are incentives in Version P to try
to attract that reinvestment.
MR. DICKINSON agreed. The idea behind this bill, as articulated
by Co-Chair Johnson and the governor, is that making specific
things subject to the credits, like well work, which is the
nexus of the production, encourages reinvestment in these areas.
CO-CHAIR NEUMAN remarked that what must be found is that sweet
spot for stimulating reinvestment back into Alaska and finding
out whether a reduction in taxes results in the industry
reinvesting that money back into Alaska. The goal is for that
reinvestment to create more jobs in Alaska for Alaskans.
2:52:39 PM
CO-CHAIR JOHNSON stated that every drill rig provides 100
Alaskan jobs. More than a tax credit for well workovers, HB 308
is about the human element of jobs. At some point the state
must look at the human consequences should that well not be re-
worked to provide more oil down the pipeline. Version P should
slow the fall in jobs that is now happening.
2:55:46 PM
REPRESENTATIVE SEATON recalled a producer's previous testimony
about wanting to have more on the upside, which is what HB 308
is intended to do. At that time there was discussion about re-
initiating a balance on the downside if more is added on the
upside. To provide the public and committee members the time to
review the amendment he is proposing in this regard, he moved
Conceptual Amendment 1, written as follows [original punctuation
provided], to be considered at the next meeting:
Page 2 after line 22
Insert new Section 5
AS 43.55.011(f) is repealed and reenacted to read:
(f) The provisions of this subsection apply to oil and gas
produced from each lease or property within a unit or
nonunitized reservoir from which 1,000,000,000 BTU
equivalent barrels of oil or gas have been cumulatively
produced by the close of the most recent calendar year and
from which the average daily oil and gas production during
the most recent calendar year exceeded 100,000 BTU
equivalent barrels. Notwithstanding any contrary provision
of law, a producer may not apply tax credits to reduce its
total tax liability under (e) of this section for oil and
gas produced from all leases or properties within the unit
or nonunitized reservoir below 10 percent of the total
gross value at the point of production of that oil and gas.
If the amount calculated by multiplying the tax rate
determined under (g) of this section times the total
production tax value of the oil and gas taxable under (e)
of this section produced from all of the producer's leases
or properties within the unit or nonunitized reservoir is
less than 10 percent of the total gross value at the point
of production of that oil and gas, the tax levied by (e) of
this section for that oil and gas is equal to 10 percent of
the total gross value at the point of production of that
oil and gas.
Renumber following sections accordingly
CO-CHAIR JOHNSON objected for future discussion purposes.
2:58:11 PM
MR. DICKINSON, in response to Co-Chair Neuman, drew attention to
slide 36, which depicts Alaska's past, present, and projected
oil production for the years 1965-2019.
CO-CHAIR NEUMAN pointed out that the projection is for a
decrease in oil production; the projection is not even for
holding a level amount of production. He noted that oil
production affects 90 percent of the state's general fund
revenue and it is only three companies that are paying these
taxes, which is something to be concerned about.
2:59:38 PM
REPRESENTATIVE SEATON noted that Conceptual Amendment 1
addresses the previous version of the bill, Version E. He said
it is his hope that the committee will be able to look at the
issue and how the amendment would have affected things had it
been in effect over the past three years.
[HB 308 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 308 Version P 3.17.10.pdf |
HRES 3/17/2010 1:00:00 PM |
HB 308 |
| CSHB 308 v.P Sectional Analysis.pdf |
HRES 3/17/2010 1:00:00 PM |
HB 308 |
| HB308 RDC Letter.pdf |
HRES 3/17/2010 1:00:00 PM |
HB 308 |
| HB 308 LOS State Chamber.pdf |
HRES 3/17/2010 1:00:00 PM |
HB 308 |
| CSHB 308 v.P Technical Aspects.pdf |
HRES 3/17/2010 1:00:00 PM |
HB 308 |