Legislature(2023 - 2024)SENATE FINANCE 532
05/01/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB114 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 114
"An Act establishing an income tax on certain entities
producing or transporting oil or gas in the state;
relating to the oil and gas production tax; and
providing for an effective date."
9:02:13 AM
SENATOR BILL WIELECHOWSKI, SPONSOR, provided a brief
overview of the bill and the bill's history within the
legislature.
9:04:31 AM
FADIL LIMANI, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
introduced himself.
Mr. Limani discussed the presentation, "SB 114 (CS) Oil and
Gas Production Tax; Income Tax, Senate Finance Committee"
(copy on file). He addressed slide 2, "Bill Sponsor Request
to Department of Revenue":
•Updated Fiscal Note
•Government Take Analysis
•Both current statute and SB114 (CS)
•Retrospective view back to a net profits tax in
2006
•Prospective view next ten years
•Confirm whether the tax division has adequate
information, based on what is currently submitted by
taxpayers, to apply the "credit limit" in new section
AS 43.55.024(k), which is the same in both versions of
the bill.
Mr. Limani pointed to slide 3, "Presentation Overview":
•Tax Program History
•Oil and Gas Corporate Income Tax
•Oil and Gas Production Tax
•Proposed Legislation
•Updated Fiscal Note Summary
•Distribution of Profits
•Effective Tax Rates
•Order of Operations
Mr. Limani looked at slide 5, "Oil and Gas Corporate Income
Tax: Historical Review":
•Alaska Net Income Tax Act 1949 (Under AS 43.20)
•Uniform Division of Income for Tax Purposes Act
(UDIPTA) 1959
•Multistate Tax Compact (MTC) 1970 (Under AS 43.19)
•Revised to include adopting Internal Revenue Code
(IRC) by reference unless excluded 1975
•Repealed Individual Income Tax and Retained S-
Corporation Exemption 1980
•Adopted Current Oil and Gas Apportionment Factor on
worldwide income (was separate accounting) 1981
Mr. Limani highlighted slide 6, "Oil and Gas Corporate
Income Tax: Current Fiscal Regime":
•Applies to C-Corporations only
o Many, but not all, companies in Alaska
•"Alaska Taxable Income" determined using an
"apportionment factor"
o Non-Petroleum based on U.S. "water's edge"
activity, apportioned to Alaska based on Alaska's
share of property, payroll, and sales
o Petroleum based on worldwide activity,
apportioned to Alaska based on Alaska's share of
property, production, and sales/tariffs
•Bracketed tax rate, with highest rate of 9.4 percent
on taxable income over $222,000
9:10:10 AM
Mr. Limani pointed to slide 7, "Oil and Gas Production Tax:
Historical Review":
•Economic Limit Factor (ELF) pre-2006
•Petroleum Production Tax (PPT) 2006
•Alaska's Clear and Equitable Share (ACES) 2007
oHB280 (Cook Inlet Recovery Act) 2010
•More Alaska Production Act (SB21) 2013
oHB247 2016
oHB111 2017
Mr. Limani discussed slide 8, "Oil and Gas Production Tax:
Current Fiscal Regime":
SB21 Goals
•Enhance global competitiveness and investment climate
•Incentivize North Slope Development
•Stabilize production
SB21 Summary
•Tax Base = 35 percent Production Tax Value (Gross
Value less lease expenditures)
•Minimum Tax Floor = 4 percent Gross Value
•Progressivity = Sliding scale credit $0 -$8 per
taxable barrel
Co-Chair Hoffman wondered whether the goals had been met.
Mr. Limani asked which goals were referenced by Co-Chair
Hoffman.
Co-Chair Hoffman pointed to the goals laid out as the three
bullet points on page 8.
9:13:05 AM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, DEPARTMENT OF REVENUE, replied that SB 21 had
overall shown a tax reduction to the industry to it
enhanced the state's global competitiveness. He stated that
there had been some new development that showed a result of
incentivizing new development, but he deferred to the
industry remarking on that goal. He stated that a
stabilization of production had occurred since this passage
of SB 21.
Co-Chair Hoffman recalled that a goal was to attempt to
fill the Trans-Alaska Pipeline System (TAPS) to at least
half full at one million barrels per day, and asked for
comment on that.
Mr. Stickel replied that it was an aspirational goal that
was laid out by the administration at the time of SB 21. He
stressed that it should be viewed as "aspirational", and
remarked that TAPS had not reached a million barrels per
day.
9:15:13 AM
Co-Chair Olson noted that the promise of the specific
number of barrels to the pipeline had caught the
legislature's attention, but that had not happened. He
asked what the state could have done to ensure the
achievement of that goal.
Mr. Stickel replied that the subject could be part of a
broader conversation beyond what they were prepared to
discuss.
Senator Bishop stressed that there should be caution when
discussing lofty goals because of the possibility of
litigation.
Senator Kiehl queried the historical analysis on SB 21.
Mr. Stickel replied that there was a separate presentation
on the subject.
Co-Chair Stedman agreed, and asked for a refresher of
presentations on production previously to that legislation,
and the forecasted long-term production compared to the
actual results.
Mr. Limani pointed to slide 10, "Primary Bill Provisions":
• Oil and Gas Corporate Income Tax
• Oil and Gas Production Tax
•Sliding Scale Per Barrel Credit Rate Changes
•Per Barrel Credits tied to Capital Spend
• Retroactive to January 1, 2023
9:20:10 AM
Mr. Limani displayed slide 11, "Oil and Gas Corporate
Income Tax":
Current law, only C-Corporations are subject to
Alaska's corporate income tax Oil and Gas and Non-
Oil and Gas
Proposed Legislation Provisions-SB 114 (CS)
• Would tax oil and gas pass-through entities with
"qualified taxable income" over $4 million at a rate
of 9.4 percent
• "Qualified taxable income" as income from the
production of oil or gas from a lease or property in
the state or from the transportation of oil or gas by
pipeline in the state
Senator Kiehl wondered whether the bill had written the
portion of the income as oil and gas income, other
corporate income tax, worldwide, or waters edge.
Mr. Limani replied with, "oil and gas."
Co-Chair Olson recalled that there would be an amendment to
clarify the corporate tax changes so Alaska could get its
share.
Mr. Limani replied that there was an agreement with the
bill sponsor to incorporate the changes, but remarked that
he had not yet seen a draft of that language.
Mr. Limani looked at slide 12, "Oil and Gas Corporate
Income Tax":
SB 114 (CS) Perspective Fiscal Impacts:
• 28 non-C-Corporation, oil and gas entities doing
business in Alaska. Real revenue impact is uncertain
due to limited data
Co-Chair Olson wondered whether the number was high because
it had a retroactive effective date of 18 months.
Mr. Limani replied in the affirmative.
Co-Chair Hoffman wondered whether the administration had a
position on the retroactive effective date.
Mr. Limani replied that the administration provided their
feedback, but the department would wait to declare a
position until there was proposed language from the bill
sponsor.
Co-Chair Olson surmised that the administration had not
ruled out being against the effective date.
Mr. Limani replied that there was a current review of
amendments.
Co-Chair Stedman wondered whether the administration was
supportive of the concept of the bill.
Mr. Limani replied that the department did not have a
position on the bill.
9:25:24 AM
Senator Wilson queried the estimated fiscal impacts of why
there was a steep decline in outgoing years.
Mr. Limani deferred to Mr. Stickel.
Mr. Stickel replied that the estimated fiscal impacts
displayed on slide 12 showed a decline because 1) the oil
price forecast showed some backwardation, so the oil price
was expected to decrease over time; and 2) the share of
production from the non-seed corporations was expected to
decrease over time.
Co-Chair Hoffman wondered whether the administration had a
position on the S-corporations to C-corporations to level
the playing field in the industry.
Mr. Limani replied in the negative.
Mr. Limani highlighted slide 13, "Oil and Gas Corporate
Income Tax Brackets." He noted that there was a chart on
the left-hand side that summarized the existing tax
brackets. The right-hand side showed what the proposed
legislation.
Co-Chair Stedman wondered whether the previous Department
of Revenue (DOR) commissioner had advocated a change. He
asked whether there was a change in that direction, or if
he misspoke.
Mr. Limani replied that the administration did not
currently have a position on the legislation, and was only
providing the facts as requested by the bill sponsor.
Co-Chair Stedman requested a focus on the bill as amended
in detail.
Senator Merrick queried how many companies fit into each of
the categories displayed on the slide.
Mr. Limani agreed to provide that information.
9:30:04 AM
Senator Bishop requested the modeling of SB 21 as it
originally passed the Senate for a side-by-side comparison.
Co-Chair Olson wondered whether the request was for DOR to
provide that information.
Senator Bishop replied that he would like DOR to provide
that information.
Co-Chair Olson asked whether that was possible of Mr.
Limani.
Mr. Limani replied in the affirmative.
Mr. Limani discussed slide 14, "Oil and Gas Production Tax:
Per Barrel Credits":
SB 114(CS) Proposed Legislative Provisions:
• Would change the per barrel credit rates (sliding
scale per barrel credits only)
• Would limit the per taxable barrel credits to the
amount of qualified capital expenditures
Mr. Limani looked at slide 15, "Oil and Gas Production Tax:
Per Barrel Credits":
Retrospective and Perspective Fiscal Impacts
Mr. Limani pointed to slide 16, "Oil and Gas Production
Tax: Sliding Scale Per Barrel Credits":
Sliding Scale Credit Rate Changes
Mr. Limani highlighted slide 17, "Oil and Gas Production
Tax: Sliding Scale Per Barrel Credits":
SB 114 (CS) "Crossover"
Due to other changes in the bill, the "crossover"
between the gross and net taxes moves from about $53
to $40 per barrel
Mr. Stickel addressed slide 19, "Disclaimer":
• Alaska's severance tax is one of the most complex in
the world and portions are subject to interpretation
and dispute
• These numbers are rough approximations based on
public data, as presented in the Spring 2023 Revenue
Sources Book and other revenue forecasts
• This presentation is solely for illustrative general
purposes.
o Not an official statement as to any particular
tax liability, interpretation, or treatment
o Not tax advice or guidance
• Some numbers may differ due to rounding
9:34:27 AM
Mr. Stickel pointed to slide 20, "Updated Fiscal Note." He
stated that the fiscal table assumed no changes to
production or investment, which was consistent with the
preparation of other fiscal notes for oil and gas tax
legislation. He remarked that each of the major provisions
of the bill were detailed within the slide.
Mr. Stickel discussed slide 21, "Updated Fiscal Note-
Illustration." He stated that the slide showed a range of
prices, but the numbers excluded the retroactive payment
for the January through June 2023 period.
9:40:34 AM
Co-Chair Hoffman looked at slide 20, and requested the
number of impacts going back to the sale to Hillcorp, and
how much money the state received in that timeframe.
9:41:04 AM
AT EASE
9:42:10 AM
RECONVENED
9:42:15 AM
Mr. Limani replied that a similar request was in the works,
and agreed to provide that information.
Senator Merrick wanted to clarify the presentation's bill
version.
9:42:51 AM
AT EASE
9:43:12 AM
RECONVENED
9:43:16 AM
Mr. Limani replied that the modeling in the presentation
incorporated the current version of the bill and the
changes within.
Co-Chair Stedman asked how the department integrated the
Willow Project into the modeling.
Mr. Stickel replied that the Willow Project was
incorporated into the Spring 2023 forecast on a risked
basis, so there was a portion but not all of the potential
production and cost from that field.
Co-Chair Stedman wondered whether there would be an
adjustment up or down with all incorporated costs.
Mr. Stickel responded that adding all costs and revenue
from Willow would result in a lower production tax value
until production came online in about FY 28.
9:45:42 AM
Mr. Stickel displayed slide 23, "North Slope Distribution
of Profits":
• Based on Spring 2023 Forecast for FY 2024
• Assumes "typical" barrel of oil production
• Assumes a single taxpayer on state land, 12.5
percent royalty
• Assumes $2.00 per barrel property tax
• Assumes 4.25 percent effective state corporate
income tax, 21 percent federal corporate income tax
o4.25 percent is based on historical analysis for
companies subject to state corporate income tax
• Does not include any potential changes in company
behavior or investment as a result of this proposal
• For SB114 (CS), impact of capital expenditure limit
on tax credits is estimated based on deductible
capital expenditures
Mr. Stickel discussed slide 24, "Government Take Per
Barrel: Status Quo vs. SB 114 (CS) (Total CapEx)."
Senator Kiehl noted that the 9.4 percent corporate income
tax rate made about a 2 percent difference in the take, but
the previous slide showed that 4 percent was the effective
tax rate. He asked for more detail regarding that
difference.
Mr. Stickel explained that the state corporate income tax
applied to worldwide income as apportioned to Alaska based
on Alaska's share of production, property, sales, and
tariffs. He stated that, generally, Alaska tended to be
slightly more profitable than the rest of the world, so the
effective tax rate was where the 4.25 percent rule was
determined.
Senator Kiehl stated that the next step showed that it was
only a 2 percent difference in the state "take."
Mr. Stickel noted that there was an overall profit, which
was the total cashflow available for distribution. He
stated that royalties, property tax, and state production
tax was removed from that profit. The state corporate
income tax only applied to the remaining share of profits
after those subtractions.
9:51:01 AM
Co-Chair Olson noted that there was a display on the chart
that showed corporate income tax being paid at 50 percent,
but under SB 117 there was a reduction to 48 percent for
the companies that did not pay state income tax.
Mr. Stickel replied that the left and the middle barrel
were based on current law, and the only difference between
them was whether the company was subject to state corporate
income tax.
Mr. Stickel highlighted slide 25, Government Take at
Various Oil Prices: Status Quo (w/ CIT, Total CapEx)."
Mr. Stickel pointed to slide 26, Government Take at Various
Oil Prices: Status Quo (w/o CIT, Total CapEx)."
Mr. Stickel discussed slide 27, "Government Take at Various
Oil Prices: SB 114 (CS) (Total CapEx)."
Senator Wilson queried any comparisons with the neighboring
oil and gas producing states.
Mr. Stickel replied that he did not.
9:55:01 AM
Senator Wilson asked for that comparison.
Mr. Stickel stated that there was not currently a tax
consultant, but agreed to provide some high level
illustrations.
Mr. Stickel looked at slide 28, "Government Take:
Retrospective and Prospective."
Co-Chair Olson queried the effect of SB 21 on the slide.
Mr. Stickel replied that SB 21 had a modest impact on
overall government take.
Co-Chair Stedman remarked that the rate was set at the
federal tax rate, but felt that it was a corporate income
tax issue.
10:00:32 AM
Mr. Stickel addressed slide 30, "Effective Tax Rate: Status
Quo vs SB 114 (CS) (Non-GVR, Total CapEx)."
Mr. Stickel pointed to slide 31, "Effective Tax Rate:
Status Quo vs SB 114 (CS) (GVR, Total CapEx)."
Co-Chair Stedman wondered where the Willow and Pikka oil
fields would fall within the two slides.
Mr. Stickel replied that they were new developments, so
they would likely be eligible for the gross value
production provisions.
10:05:12 AM
Mr. Stickel discussed slide 33, "Production Tax "Order of
Operations": FY 2024."
Mr. Stickel highlighted slide 34, "Production Tax "Order of
Operations": FY 2024 with SB114 (CS)."
Co-Chair Olson wondered whether the 76 percent tax increase
was the actual government take.
Mr. Stickel replied that looking at the actual percentage
of property from the industry should be referred to from
the government take slides, which showed the government
take increasing to 55 percent.
Co-Chair Olson wondered if the state received a
significantly smaller portion than the $566 million.
Mr. Stickel replied that he did not understand the
question.
Senator Kiehl queried the delta in government take as a
percentage.
Mr. Stickel replied that the delta in overall government
take was a 5 to 7 percent increase in government take.
Mr. Stickel pointed to slide 35, "Lease Expenditures
Example: Takeaways":
•Under both status quo (current law) and SB 114 (CS),
companies that spend more in Alaska pay less taxes,
when above the minimum tax floor
•Current law provides a 35 percent tax savings for
additional investments, when above the minimum tax
floor
•Capping tax credits by capital expenditures creates
potential for "gold plating"
•In certain circumstances, SB 114 (CS) would
provide a 135 percent tax saving for additional
investments, when above the minimum tax floor
•Dollar-for-dollar increase in tax credits plus
35 percent tax deduction
•Each company and field would have unique economics,
creating varying incentives between and within fields
•Adds complexity and uncertainty, and encourages
inefficient investment decisions
10:10:11 AM
Co-Chair Stedman looked at slide 28, and wondered whether
the delta change was due to the corporate income tax
change.
Mr. Stickel replied that there were various impacts on the
changes to the state.
Co-Chair Olson handed the gavel to Co-Chair Stedman.
10:13:24 AM
KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ALASKA OIL AND GAS ASSOCIATION, (AOGA) discussed the
presentation, "AOGA Senate Finance Committee May 1, 2023"
(copy on file).
Ms. Moriarty looked at slide 2. She stated that the
legislation was a massive tax increase, and her membership
was unanimously opposed to the bill.
Ms. Moriarty addressed slide 3:
"Alaska's oil and gas remains the single most
important economic engine in the state."
10:15:31 AM
Ms. Moriarty pointed to slide 4, "Cook Inlet Historical
Natural Gas Production and Consumption By End-Use." She
stated that oil and gas companies currently had less money
to invest in Alaska.
Ms. Moriarty discussed slide 5, "Principles":
Governor's principles:
Tax reform must be fair to Alaskans
Encourage new production
Simple so that it restores balance to the system
Durable for the long-term
Ms. Moriarty displayed slide 6, "SB 114 is not the same as
Senate Finance version of SB 21."
Co-Chair Stedman handed the gavel to Co-Chair Olson.
10:21:35 AM
Ms. Moriarty pointed to slide 7, "Current Tax Policy (SB
21) Achieving Principles." The slide detailed actual
production, and the red line was the final DOR forecast
under ACES, which showed that production would continue to
decline at the same level of its trajectory. She stressed
that production had stabilized since the passage of SB 21.
10:25:11 AM
Co-Chair Hoffman noted that the bill would "level the
playing field" for producers. He remarked that the change
in the corporation status would level it in order for
Hillcorp to be in the level with the other corporations. He
remarked that the loophole was never intended until
Hillcorp had purchased the asset. He wondered whether there
was opposition to that particular provision.
Ms. Moriarty replied that AOGA was opposed to every portion
of the bill.
Co-Chair Hoffman surmised that there was support of a dual
system of tax structure for the major producers on the
North Slope.
Ms. Moriarty replied that AOGA worked by unanimous consent,
and she stated that they opposed all sections of the bill.
Co-Chair Hoffman said, "that is why we are the policy
makers."
Senator Kiehl agreed that the slide showed positive and
negative correlations. He remarked that the slide did not
show that roughly every development had the same basic
production curve. He wondered whether the line in 2005 to
2015 correlated to the steep decline to a "long tail" in
production.
Ms. Moriarty replied that it was based on geology, because
it was known that there was "a lot of oil and gas remaining
on the North Slope." She remarked that there was a belief
that there was still 2 billion barrels of oil in the legacy
fields.
Co-Chair Stedman recalled presentations that showed the
forecasts and the actuals of the legacy fields. He noted
that there should have been a consideration of the smaller
operators and their corporation categorization.
10:31:47 AM
AT EASE
10:32:31 AM
RECONVENED
10:32:57 AM
RICH RUGGIERO, PRINCIPAL, IN3NERGY, replied to Co-Chair
Kiehl's question. He stated that it may take ten to fifteen
years to reach 15 percent of production in a new field.
Mr. Ruggiero looked at the presentation, "SB 114, Senate
Finance, May 1, 2023" (copy on file). He looked at slide 2,
"Overview":
The traditional oil and gas business is headed into
unchartered territory adding new levels of risk
Items such as tax rate and credits are just part of
the state's complex fiscal system
Does SB114 incentivize the right behavior and will
it sustain a long term future for oil and gas in
Alaska, and a future where production is stable and
growing so TAPS can continue to operate?
Mr. Ruggiero pointed to slide 3, "Our Experience":
Working on Alaska Oil Taxes:
2006-2012 Administration/Governor PPT, ACES, LNG,
Gas vs Oil
2016-2022 LB and A SB21, HB111, LNG, Ballot
Initiative
General Industry Training
Career Covers Three Perspectives:
Big Oil Operations
Big 3 Service Company
Government Advisor
Mr. Ruggiero discussed his time before the committee during
Alaska's Clear and Equitable Share (ACES) and other
consulting opportunities and oil-centric work in his
resume. He continued to discuss his extensive background I
the field.
10:39:46 AM
Mr. Ruggiero looked at slide 4, "What we bring to the
table":
Fiscal system consulting around the globe, including
Alaska
Contracted by DOR, Governor, Legislature, and now
AOGA
One of a handful of people that have worked in
Alaska petroleum tax issues from PPT through to the
present
Some views shared today have been shared previously
over the last 17 years while working here in Alaska
Our starting point is always that stable, attractive
fiscal systems are designed and administrated based on
agreed goals and drivers that are durable over the
longer term
Alaska needs to decide what its primary drivers are
Mr. Ruggiero noted that several members currently at the
table had been involved in crafting ACES.
10:43:59 AM
Mr. Ruggiero pointed to slide 7, "Understanding Alaska's
Tax Code":
ANSWC value used to set the gross tax percentage
GVPP value used to calculate the gross minimum tax
PTV value used to calculate the preliminary net tax
GVPP value used to determine the allowable credit
level which is then subtracted from the preliminary
net tax
Tax owed is the greater of gross or net after
credits
UNLESS the unit is GVR eligible in which case:
GVPP is reduced by 20 percent or 30 percent
Flat $5 per barrel credit which can pierce the gross
minimum tax floor and take the tax owed to zero
Co-Chair Stedman asked that acronyms be defined.
Mr. Ruggiero looked at slide 8, "Overview, Tax System
Design":
After 40+ years working with dozens of petroleum
fiscal systems:
There is no ideal or best petroleum fiscal
system
Each government has a unique set of
circumstances, resources and drivers
Governments need to balance their needs with
the global competition for investment capital
While change is constant in the industry, recent
global events and pressures are massively shifting how
producers think about, plan and do business
Alaska finds itself facing a common government
conundrum:
Does it place priority on fulfilling short term
revenue needs knowing how much extra it takes
could possibly negatively impact longer term
revenues needed to fund the state for future
generations?
Fiscal system design is part science and part art
10:50:46 AM
AT EASE
10:54:43 AM
RECONVENED
Mr. Ruggiero stated that he had summarized the
introduction, and felt that the remaining presentation
would provide more detail.
SB 114 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 114 DOR Presentation to SFIN 05-01-23.pdf |
SFIN 5/1/2023 9:00:00 AM |
SB 114 |
| SB 114 20230501 in3nergy SFIN FINAL.pdf |
SFIN 5/1/2023 9:00:00 AM |
SB 114 |
| SB 114 AOGA SB 114 Senate Finance 05 01 23.pdf |
SFIN 5/1/2023 9:00:00 AM |
SB 114 |
| SB 114 Support Letters 2.pdf |
SFIN 5/1/2023 9:00:00 AM |
SB 114 |
| SB 114 Opposition Letters.pdf |
SFIN 5/1/2023 9:00:00 AM |
SB 114 |
| SB 114 Support Letters 1.pdf |
SFIN 5/1/2023 9:00:00 AM |
SB 114 |