Legislature(2015 - 2016)BUTROVICH 205
04/05/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing | |
| SB130 | |
| Continuation of Dor Overview of Alaska Oil and Gas Tax Reform | |
| SB129 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 247 | TELECONFERENCED | |
| += | SB 130 | TELECONFERENCED | |
| *+ | SB 129 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 130-TAX CREDITS;INTEREST;REFUNDS;O & G
[Contains discussion of HB 247.]
3:45:00 PM
CHAIR GIESSEL announced consideration of SB 130 and invited Mr.
Alper to continue the Department of Revenue's presentation that
will begin on slide 31.
^Continuation of DOR overview of Alaska Oil and Gas Tax Reform
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR),
Juneau, Alaska, said Director Alper will continue the
presentation, but he was available for questions on SB 130.
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
Juneau, Alaska, said slide 31 has the title "Impact on Specific
Industry Sectors." Slide 32 points out how particular sectors of
the oil and gas economy would be impacted by the specific
provisions of the bill at different price points. He said the
provisions of SB 130 do not impact the North Slope major
producer at higher prices (generally above $85/barrel where the
minimum tax kicks in). Below that level is where the minimum tax
tends to take precedence over the 35 percent net tax. The bill
attempts to raise the minimum tax from 4 percent to 5 percent.
In a period of very low prices such as now, and especially into
a second consecutive year, the issue of using net operating loss
(NOL) credits to reduce payments below the minimum tax floor
comes into play, and SB 130 would prevent that from happening.
It would cause those additional NOL credits to be rolled forward
and be added to the stack of NOL credits for use in a future
year after the price has recovered.
CHAIR GIESSEL asked at what price the 12.5 percent royalty
begins to spiral upward to over 100 percent.
MR. ALPER answered that happens when the profits begin to be
very constrained at anywhere less than $50/barrel.
3:48:23 PM
SENATOR STEDMAN asked what taking the floor from 4 to 5 percent
means in dollars and what the trigger point is to get out of it.
At some point, he also wanted a discussion on the per-barrel
sliding credit when the floor gets triggered, which the Senate
hadn't heard, because it was put in by the House. He also wanted
to know if they had NOL credit figures for FY15/16/17 and what
the expectations are for them getting paid off.
MR. ALPER explained that he would try to "unpack" Senator
Stedman's questions. First off, he would deliver details of
raising the floor from 4 to 5 percent and the trigger point in
his follow-up presentation tomorrow, but under the current
system, $78 is the cross-over point of existing the minimum tax.
Because of the way the cost and tax curves work the higher the
minimum tax gets, the higher the cross-over gets. It's in the
high $70s at the 4 percent level and it will be in the $80s at
the 5 percent level.
The fiscal note to the original bill did not delve into stacking
up of net operating loss (NOL) credits, because the numbers
didn't became apparent until the spring revenue forecast. An
updated fiscal note currently attached to the House companion
bill, CSHB 247, has numbers for both the original bill and the
amended bill. Hardening the floor raises revenue by $150 to $200
million a year at these prices, but the NOL that is forced to be
carried over due to the floor hardening and raising goes up to
about $700 million in a couple of years and to about $1.5
billion by 2019/20.
SENATOR STEDMAN followed up saying a verbal answer is kind of
okay, but it would be beneficial for the committee to see the
current NOL operating and capital numbers for FY16/17 on paper.
Lawmakers, as policy makers, need to clearly recognize the
magnitude of what they are dealing with. He also needs help with
how much of the non-deductible capital costs are applicable to
the carry-forward credits, and a clear understanding of how Cook
Inlet and Middle Earth are being treated differently than the
North Slope.
MR. ALPER said Mr. Stickle was back in the office taking notes
as they speak, and the stacking up of the NOL credits is in the
most current fiscal note, which is on BASIS. He clarified when
he says $700 million or $1.5 billion, that's in credits - after
the multiplication of whatever the much larger loss was,
multiplying times the credit percentage.
3:54:19 PM
Slide 33 shows that the North Slope new or smaller producers
that have built the newer fields will see no change at higher
oil prices, but a more substantial impact below the 85 percent
range. Because of the nature of the GVR, the new oil tax
provisions of SB 21, their per-barrel credit is allowed to drop
taxes to zero (the production from those fields is not
susceptible to the minimum tax). SB 130 attempts to harden the
floor by making new oil susceptible to the minimum tax, as well.
So, effectively there is an increase in some cases from a zero
to a 5 percent gross tax that would substantially impact the
smaller producers more than the major producers. Likewise, if
the company is an operating loss, the gross value reduction
(GVR) that is used for the benefit of new oil cannot be used to
increase the size of an NOL. The intent is that the NOL would be
limited to 35 percent of the actual cash flow loss and not the
more synthetic calculated loss that includes the GVR.
SENATOR STEDMAN asked if a company has a $27 million credit for
FY17, if any interest accrues. How is it treated once it exists
and is not turned into cash?
MR. ALPER answered that he wasn't sure what provision he was
referring to, but the floor hardening and the requirement of
having an operating loss carry forward for the major producers
is very much deferring of an obligation (because it would still
need to be issued; the deductions would simply be taken in a
future year), but the third bullet on slide 33 would be the
elimination of a benefit (it would not roll forward). If that
number is $27 million, it means that the companies in question
would have an operating loss credit that would be $27 million
less than it would be if they were able to use the GVR in that
calculation.
3:57:10 PM
Slide 34 talks about the impacts to a new project developer on
the North Slope building its first oil field but not currently
producing oil and gas. The NOL credit is baked in at 35 percent
as a provision of SB 21. That is not changed. The credit is
earned, and the question then becomes how to cash it out. Here
there is a little fork in the road. If it's a large company with
global revenues in excess of $10 billion, the state won't cash
out that credit. They can sell it to another company or they can
hold it until they have a liability. For the smaller companies
with revenues below $10 billion, an annual cap of $25 million
per company that would be paid out in a single year is being
proposed. Any credits in excess of that number would be
effectively rolled forward to a future year and continue adding
to the stack of unpaid credits.
SENATOR STEDMAN said he assumed they would see some modeling on
credits under both the current statute and under the proposed
changes, so they can visualize how the treasury was going to
deal with the NOLs two or three years out.
MR. ALPER said he is talking about two different stacks of NOLs:
the ones that are not refundable, because they are owned by the
major producers, a number that gets quite high, and the earned
credits that are cashable, but capped annually, stacking up
alongside them. He would bring a slide tomorrow that would put
some numbers on it. He explained that the fiscal note has a
negative number in savings in some years. That is the result of
credits being earned in one year and the state saving money by
not cashing them out since cashable credits are capped at $25
million/year, roll forward to be paid out in another year.
However, there are circumstances in years three or four, based
on available information, when the state is cashing out more
credits than it otherwise would have under the status quo,
because some of the older ones that rolled forward stack up on
top of each other.
SENATOR STEDMAN rephrased his previous question; when he talked
about the creation of NOL carry forwards, he was talking about
companies with less than $10 billion in one category and the
others in another category, but the Revenue Sources Book lumps
them all together.
MR. ALPER said he will provide those numbers to him, and the Tax
Division would help get him whatever he is looking for.
4:02:13 PM
He explained that in Cook Inlet, (slide 35) the existing
producer who is selling oil and gas generally to the Anchorage
bowl and the Southcentral utility market is paying low to zero
taxes due to the tax caps that have been in place since 2006 and
will be there through 2021. Those companies are currently
eligible for repurchase of their QCE and WLE credits in the 20-
40 percent range. A typical project is around 30 percent, so the
state is effectively paying 30 percent of that spending.
SB 130 repeals those specific credits. In a broad sense if a
company is not in an operating loss situation, it's perfectly
reasonable that they pay zero tax, but refunding the credits to
the company that is paying zero tax while earning a profit seems
a little bit unnecessary, or possibly even excessive, given the
state's current fiscal situation. They are not looking to touch
upon the tax caps themselves, which remain on the books through
the end of 2021.
4:03:46 PM
Slide 36 captures the new Cook Inlet field developer that
currently gets a 25 percent NOL credit that gets stacked along
with what he described for the producers in the previous slide.
Those two credits taken together tend to mean the state is
providing reimbursement in the neighborhood of 50-60 percent for
ongoing work in the Cook Inlet right now. By repealing those
capital and well credits, the intent of the legislation is to
reduce the state's level of ongoing support to 25 percent.
MR. ALPER explained that the 50 percent level seems excessive
given the fiscal realities and the need to prioritize. The
choice was made to prioritize the operating loss credit and
continue the support at 35 percent. Of that 25 percent NOL
credit, the same limitations on repurchase kick in as those on
the previous slide. The larger companies, should that kind of
multi-national be operating in Cook Inlet, would not be able to
cash those certificates and the smaller companies would be
limited by the $25 million annual cap. Everything in excess of
that gets carried forward.
4:05:17 PM
Slide 37 covered the Interior/Frontier area, or Middle Earth,
that is getting 65 percent credits for exploration. That means
the 40 percent exploration credit under most circumstances and a
25 percent NOL. In development they are in the same paradigm as
the Cook Inlet folks: the 25 percent NOL plus the weighted
average of the capital and well credits. By repealing the
capital credits the developer, once they are proven and have
found something, fall under the same 25 percent category that
the Cook Inlet developer does. However, because there is a need
to find that resource in the first place and because there has
been a previous legislative decision made to encourage people to
find and explore for oil and gas in the Interior basins, the
exploration credits have been previously extended through 2022.
That is not being touched in the legislation before them, which
means the state will continue to support exploration work at the
65 percent level in Nenana and Glennallen.
4:06:25 PM
SENATOR COGHILL said these credits have been pretty much dormant
and the expectation is the other credits that apply within the
Cook Inlet have been more valuable.
MR. ALPER said these credits are the ones that have been used.
The dormant ones are the super credits (80 percent for the
Interior and 75 percent for seismic) that were created in 2012
and those are scheduled for sunset. Although one explorer, the
Ahtna Corporation, has talked about an extension.
SENATOR STEDMAN asked what other basins are doing in response to
the lower prices and what kind of credits or fiscal health they
have extended to the industry over the last several years. He
also wanted some comparative work done on Texas or North Dakota.
CHAIR GIESSEL replied that enalytica had responded to similar
questions in other committees and she would ask them to provide
that information to this committee.
SENATOR COSTELLO wanted to know the driving principles behind SB
130.
COMMISSIONER HOFFBECK explained that they looked at the credits
in three categories: ones that weren't used, ones that were used
differently than intended, and ones that had worked well. The
ones that didn't work the way they were intended were either
credits that weren't used or when the focus of the use was not
where it was intended. A prime example is some of the Cook Inlet
Recovery Act credits that were put in place to try and deal with
energy security in Southcentral Alaska, but were equally applied
to oil exploration and development. Everything was done to
preserve the Net Operating Loss Credit, but with some caps on
it. There are no taxes on oil in Cook Inlet and there is no
energy security issue there now, either.
SENATOR COSTELLO asked if the administration's other revenue
generating bills have an overall driving principle. Were
decisions made based on modeling that was done first?
COMMISSIONER HOFFBECK answered that the entire reason behind
these bills is revenues and being able to afford the credits.
4:11:27 PM
SENATOR WIELECHOWSKI said the real behavior they have tried to
incentivize is gas exploration in Cook Inlet, the Interior and
the frontier areas to have gas for local communities, but what
seems to be happening is that a lot of money is being used for
oil exploration and development and asked if it is possible to
develop a system that provides incentives for gas only?
MR. ALPER answered it's doable. They started looking at it this
year when the question started to be asked about the oil versus
gas split. The department looked through historic Cook Inlet
credits and came up with roughly a two-thirds/one-third metric.
Sometimes it's a question of the bill's construction; it has to
be worded in a way that focuses on gas. That is when the
drafters get nervous, because there is a tendency "to not ring-
fence." It's similar to cost allocation issues on the North
Slope and why the gross value reduction is structured the way it
is as part of gross rather than part of net. The most
technically complicated maneuver is how to divide up the lease
expenditures. In some ways, it is a more solvable problem in
Cook Inlet because the taxes are already broken out by field
(it's a multiplier by field), more like the ELF was structured
on the North Slope in the past. It's a challenge, but it's not
impossible, he said.
SENATOR WIELECHOWSKI asked for rough numbers on how much the
state would save if they would allow the continuation of gas
credits but not oil credits in Cook Inlet.
MR. ALPER answered that the overall savings would be about one-
third of that amount because about two-thirds of the money is
currently supporting gas. That changes from year to year and
scenario to scenario.
COMMISSIONER HOFFBECK said this has almost become a backward
looking analysis of the credits, because going forward when
people look for gas, sometimes they find oil and vice versa, and
generally they find them together. So, there would have to be
some kind of allocation of the credits based on the productions.
4:14:21 PM
MR. ALPER said slides 38 & 39 are a very high level summary of
some of the fiscal note information for both the original
version and the latest modifications based on the spring
forecast. So, at the time they introduced the bill they
estimated it to be about a $500 million piece of legislation, at
least in its initial year. Of that, about $200 million in
reductions comes from the repeal of certain provisions as well
as the elimination of "loopholes or unforeseen circumstances in
statute." A second $200 million comes from deferred payments on
credits. The great bulk of that was in the $25 million caps and
similar provisions that said companies are going to be earning
certificates but the state was not going to be fully funding
them in the first year. A couple of other provisions fall in
that category. Finally, there is additional revenue in the
neighborhood of about $100 million between strengthening the
minimum tax, which was worth about $50 million, and then the
increase to 5 percent from 4 percent brings in about another $50
million.
MR. ALPER said a little bit of additional revenue comes from the
proposed interest rate reform, but interestingly, only the
revenue from non-oil and gas taxes. He explained that the
interest rate statutes are in the general revenue statutes that
apply to all 24 taxes. If that change is made and the state gets
a little bit more interest money from a cigarette tax or a
corporate income tax, that show up in the fiscal note going to
the General Fund (GF), but the oil and gas tax assessments end
up going into the Constitutional Budget Reserve, so they aren't
in the fiscal note as going to the GF.
MR. ALPER said the department did a much more granular model
once they had the spring forecast and prepared a fiscal note in
a table format more comparable to what the previous
administration did during the SB 21 hearings and this model is
very much a work in progress. Based on that and the latest
information on some revised company spending information
including in Cook Inlet, the actual elimination part was only
going to eliminate about $50 million a year at first, but then
the deferral went up to $550 million. This is from a lot of
ongoing work in larger projects that would get capped at the $25
million level. That's about $600 million in immediate revenue
savings with some of that rolling into future years.
A big reason for the jump in NOL credits is that some companies
were losing more money than they thought they were going to
lose. A second big reason, which took them a little bit by
surprise, was that the exploration numbers for last year were
far larger than originally anticipated. And that is simply
because of the credit sunsetting. If people were planning on
exploration work in the next five or 10 years, it was worth
their while to front-load that work and get it done now, because
on the North Slope, in particular, the state has 85 percent
credit support for exploration work. Companies leapt at the
opportunity.
Meanwhile, on the revenue side, Mr. Alper said, hardening of the
floor would bring in about $185 million, about $50 million more
than thought, mainly because more of the major producers have
operating losses and will therefore pay more money above that to
get to the minimum tax that the department had calculated six
months ago.
4:18:10 PM
Now the state is seeing a bill of well over $700 million,
although that number drops off dramatically in the next couple
of years. Part of that is because of the inadequacies of their
credit forecasting. They simply don't know what companies are
going to be doing workwise two or three years from now, because
the companies themselves don't know. The department uses the
same somewhat conservative methodology that goes into its
production forecast based on what companies tell them. They go
out to them twice a year and ask what wells they are going to
drill and what projects they are going to do and try to build
that into some sort of a forecast both of spending and revenue
production. It's all tied together in the same data set along
with the credit forecast.
4:18:38 PM
SENATOR MICCICHE joined the committee.
MR. ALPER said the bill was written with an effective date of
July 1, 2016, essentially next fiscal year, but honoring all
existing credits meant they would be paid in full prior to the
effective date, and the department wants to make sure there is
adequate funding to pay for those credits before messing around
with any caps or changes.
He recapped that there is the $200 million through the credit
veto from the previous session when the Governor limited the
credit repurchase to $500 million. The department's revised
estimate for FY17 is $575 million in credits ($575 million plus
the $200 million carry over) that will be fully paid before any
of the provisions of the bill kick in. Anything earned in the
first half of this calendar year prior to the effective date
would also come in under the old system, and therefore, enough
money is needed to pay those.
The bill contemplates a $1 billion transition fund in a one-time
appropriation to the Tax Credit Fund. The number $926,575,000 is
in a fund cap fiscal note attached to this bill. There is no
magic to that number; it is simply the difference between the
$73.4 million in the operating budget and around $1 billion. The
expectation is, were the bill fully implemented as written, the
annual cost of refundable tax credits would be in the
neighborhood of $100 million and could be part of the regular
appropriation process going forward.
4:20:47 PM
SENATOR STEDMAN asked the difference in making the effective
date of July 1, 2016, January 1, 2016 or January 1, 2017, since
January 1, 2016, is extremely retroactive.
COMMISSIONER HOFFBECK responded that the thought process on a
fairly immediate effective date was to prevent a flight to
credits with a January 1, 2017 effective date. They have heard a
lot of testimony in the last few committees about the importance
of the summer season particularly in Cook Inlet, and the July 1,
2016 effective date may have been too aggressive. Having the
retroactive effective date was not seen as being useful in the
process.
MR. ALPER added that he got some push back from his staff based
on changing anything in other than a calendar year. He explained
that for parts of the bill that are referred to when a credit is
earned for an activity (capital credit, for example), any date
on the calendar is fine as long as they get the work done and
can effectively show receipts. However, those that impact the
overall tax calculation - changes to operating loss credits and
that sort of thing - is where there is tremendous resistance to
anything other than a calendar year based change, because of the
nature of the production tax filings. There have been a couple
of years when the department had to effectively split a
company's tax returns in two and do them both in parallel,
because of a tax change in the middle of the calendar year.
SENATOR WIELECHOWSKI asked if the state would be honoring the
existing estimated $625 million in credits to be earned and
payable in FY17.
COMMISSIONER HOFFBECK answered that those credits were already
earned in CY15 and come due on July 1, 2016, which is FY17.
4:24:05 PM
MR. ALPER said slide 44 shows how this fits into the Governor's
overall fiscal plan. He explained that the Governor introduced
10 bills at the beginning of this session: 8 traditional tax
bills: the income tax, the 3 consumption taxes (tobacco,
alcohol, motor fuel), 3 business taxes (fish, mining, and the
cruise ship head tax), plus the Permanent Fund Protection Act,
and the Alaska Industrial Development and Export Authority
(AIDEA) loan bill. The intent of those bills taken together with
the budget cuts were proposed to balance the budget for FY19 -
to transition the state from the structural deficits it is in
now to something where it can consistently have a balanced
budget in place by two years from now - based on projections, at
least, at the time last fall when they were putting this
together. This broader package, specifically this tax credit, is
looking at some sort of certainty. Industry knows the current
situation is unstable and they know something is going to
change. The administration wants to change it and get it over
with and let them have a little bit of certainty going forward.
Likewise, Mr. Alper said, the governor's fiscal plan offers some
funding certainty to the financing community if there is a big
delta between what the state is offering in credits and what it
will be able to repay. They learned that last year with just the
line item veto and it could potentially get a lot worse if the
situation doesn't get better. Meanwhile, as the state is
withdrawing some support for ongoing development, they thought
this companion AIDEA loan bill (SB 129) would be an important
feature. It creates a fourth fund at the AIDEA to concentrate on
oil and gas development loans.
MR. ALPER said that AIDEA has given loans in the oil and gas
industry; it invests throughout Alaska's economy. But the
Revolving Loan Fund attempts to be a diversified portfolio that
touches upon all sectors of the economy. Oil and gas loans tend
to be quite large and a diversified portfolio could very easily
become unbalanced with them. The thought was to create a new
fourth fund in addition to the Revolving Loan Fund, the Energy
Transmission Fund, and the Arctic Infrastructure Fund. Quite
specifically, development loans are for proven reserves not
exploration. They envision that the resource, itself, the value
in the ground, would be part of the collateral that could be
offered on those loans.
A fiscal note capitalizes the fund with $200 million to make the
first loans. One of the features in that legislation is that all
repayments could be deferred for several years, the idea being
to make a loan for building an oil field, for instance, which
might take five years. Once it is in production, they would be
able to start making payments, and it's a revolving fund so that
money could come back and be used to make other loans. That is
how the fiscal plan ties together with SB 130 as one of the 10
pieces.
4:27:53 PM
Meanwhile the DOR must administer all of this. It has a fairly
complex and comprehensive Tax Revenue Management System that is
in its final stages of development. Its portal is called
"Revenue Online" and it allows for online filing. All of the tax
types are currently functional within what is called "TRMS." He
thanked the legislature, particularly Senator Stedman, who
chaired Senate Finance at that moment in 2011 when $34 million
got appropriated to buy the system. It has been very much a
successful software megaproject for the State of Alaska.
So, talking to the software developer about the legislation and
the many changes before them, they are estimating it will take a
little over $1 million in a one-time cost - for programming,
testing, and use of staff. They don't anticipate any additional
changes to administer the program; staffing needs will not
change. A fairly robust amendment process will start this summer
to implement any changes in this legislation as well as some
other oil and gas regulatory changes that have been building up
over the last couple of years.
4:29:31 PM
Finally, he said, all their presentations are out on BASIS where
staff has access to them.
4:30:27 PM
SENATOR STEDMAN remarked that the Senate had never been asked to
look at other committee presentations before, particularly ones
in the House.
MR. ALPER said he would provide the presentations to Chair
Giessel so that they could be put online as part of this
committee's record and be easy to find for everybody.
CHAIR GIESSEL, finding no further questions, said SB 130 would
be held in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| AGDC Board Factsheet.pdf |
SRES 4/5/2016 3:30:00 PM |
AGDC Board |
| AGDC-Resume-Joey Merrick.pdf |
SRES 4/5/2016 3:30:00 PM |
AGDC Board |
| SB129 ver A.PDF |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| SB129 Transmittal Letter.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| SB129 Sectional Analysis.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| SB 129 Presentation to SRES 4.5.16.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |
| DOR Presentation to SRES-4-2-2016.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 130 |
| SB129 Fiscal Note-DCCED-AIDEA-04-01-16.pdf |
SRES 4/5/2016 3:30:00 PM |
SB 129 |