03/31/2010 09:00 AM Senate FINANCE

SENATE BILL NO. 305                                                                                                           
                                                                                                                                
     "An Act relating to the tax on oil and gas production;                                                                     
     and providing for an effective date."                                                                                      
                                                                                                                                
9:22:29 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman informed  the committee about a  new CS for                                                                    
SB 305 and a new  Senate Finance Committee zero fiscal note.                                                                    
He said  there was also  a small technical amendment  to the                                                                    
new CS. He  noted that public testimony  had been previously                                                                    
taken on the bill.                                                                                                              
                                                                                                                                
9:23:04 AM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  MOVED to  ADOPT a CS  for SB  305, labeled                                                                    
26-LS1577\T, Bullock,  3/30/2010, as the version  before the                                                                    
committee.                                                                                                                      
                                                                                                                                
Co-Chair Stedman OBJECTED.                                                                                                      
                                                                                                                                
9:23:34 AM                                                                                                                    
                                                                                                                                
DON BULLOCK, ATTORNEY,  LEGISLATIVE LEGAL SERVICES, reminded                                                                    
the committee  about the definition of  production taxes and                                                                    
lease expenditures. The production tax  value of oil and gas                                                                    
is what the  tax is applied to. Starting with  PPT and ACES,                                                                    
the production  tax value  is basically  the gross  value at                                                                    
the point  of production minus allowable  lease expenditures                                                                    
under AS 43.55.165 adjusted under  AS 43.55.170. Because the                                                                    
lease expenditures are related  to the production tax value,                                                                    
whenever oil and  gas are separated for  tax purposes, lease                                                                    
expenditures must  be allocated.  They are addressed  in the                                                                    
bill.                                                                                                                           
                                                                                                                                
Mr.  Bullock explained  that currently  the allocations  are                                                                    
required because  of special provisions  that relate  to oil                                                                    
and  gas produced  in Cook  Inlet, as  well as  gas produced                                                                    
outside of  Cook Inlet  and used  in the  state. The  tax is                                                                    
basically "25 percent plus". The  25 percent rate is applied                                                                    
to the production  tax value of all oil and  gas. The "plus"                                                                    
is  a  progressive  tax  that   increases  in  rate  as  the                                                                    
production tax  value rises above  $30. The  main difference                                                                    
between Version  T and the  previous version of the  bill is                                                                    
that the new version provides  for a progressive tax on gas,                                                                    
whereas the previous  version just had a  progressive tax on                                                                    
oil.                                                                                                                            
                                                                                                                                
Mr. Bullock pointed out that the  title of the bill has been                                                                    
amended  to  reflect  the  contents  of  Version  T  and  is                                                                    
narrowed to address the progressive rates.                                                                                      
                                                                                                                                
9:25:51 AM                                                                                                                    
                                                                                                                                
Mr. Bullock addressed  the first section of  the bill, which                                                                    
amends  AS 29.60.850(b),  and did  not appear  previously in                                                                    
Version P,  the earlier  version of the  bill. It  says that                                                                    
money that is generated by  the progressive taxes on oil and                                                                    
gas is available for appropriation  to the Community Revenue                                                                    
Sharing Fund.  The Fund was  made for the purpose  of making                                                                    
community  revenue   sharing  payments   to  municipalities,                                                                    
reserves, and communities  for public purposes. It  is not a                                                                    
dedicated  fund,   it  merely   identified  money   that  is                                                                    
available for appropriation.                                                                                                    
                                                                                                                                
Mr.   Bullock   explained   that   Section   2   amends   AS                                                                    
43.55.011(e),  the  main  tax provision,  to  make  separate                                                                    
references to the monthly progressive  taxes on oil and gas.                                                                    
The progressive tax on oil,  gas produced in Cook Inlet, and                                                                    
gas produced  elsewhere and  used in the  state are  used to                                                                    
determine the  rate, which  is the  average amount  of those                                                                    
three  values compared  to $30.  If that  amount is  greater                                                                    
than $30, the rate is increased.                                                                                                
                                                                                                                                
Mr. Bullock  related that Section  3 Amends  AS 43.55.011(g)                                                                    
to have  the tax  rate determined  using the  production tax                                                                    
values  of  oil and  the  production  tax  values on  a  BTU                                                                    
equivalent  basis of  gas  produced in  Cook  Inlet and  gas                                                                    
produced  elsewhere  and  used  in the  state.  Gas  in  and                                                                    
outside of Cook  Inlet are subject to caps on  the tax. They                                                                    
are considered "tax-favored production".                                                                                        
                                                                                                                                
Mr.  Bullock  explained  that  Section   4  provides  for  a                                                                    
progressive  tax applicable  to gas  production that  is not                                                                    
included in AS  43.55.011(g) as amended in Section  3 of the                                                                    
bill.  It provides  that  the  tax rate  is  applied to  the                                                                    
production tax value  of a BTU equivalent of  gas. There was                                                                    
no counterpart  to this  section in  the earlier  version of                                                                    
the bill. For  both progressive taxes in (g)  and (p), there                                                                    
is  no change  in  the range  from which  that  tax rate  is                                                                    
determined.                                                                                                                     
                                                                                                                                
9:28:55 AM                                                                                                                    
                                                                                                                                
Mr. Bullock  stressed that every  time there is a  change in                                                                    
the tax scheme, there must  be a corresponding change in the                                                                    
installment payments.  Section 5  amends AS  43.55.020(a) to                                                                    
describe  the  determination  of  the amount  of  a  monthly                                                                    
installment. There  is also a  makeup payment at the  end of                                                                    
the year.  The monthly  payments should  reflect one-twelfth                                                                    
of the liability for the tax for the year.                                                                                      
                                                                                                                                
Mr.  Bullock  said that  Section  6  Amends AS  43.55.020(d)                                                                    
relating to a  settlement with the royalty  owner, by adding                                                                    
references to the production tax  on gas. He emphasized that                                                                    
the  production  tax  values  are what  the  tax  rates  are                                                                    
applied to.                                                                                                                     
                                                                                                                                
Mr.   Bullock   explained   that   Section   7   amends   AS                                                                    
43.55.160(a),   relating  to   the   determination  of   the                                                                    
production tax value of oil  and gas, by providing the means                                                                    
for  determining the  production tax  value of  oil and  the                                                                    
production  tax value  of gas  separately. It  also reorders                                                                    
some subparagraphs.                                                                                                             
                                                                                                                                
9:30:38 AM                                                                                                                    
                                                                                                                                
Mr.  Bullock  noted that  Section  7  in the  prior  version                                                                    
amended  the   same  section.  This  version   provides  for                                                                    
determination of  the value with  reference to both  oil and                                                                    
gas.                                                                                                                            
                                                                                                                                
Mr. Bullock  informed the committee  that Section  8 relates                                                                    
to  the allocation  of lease  expenditures  between oil  and                                                                    
gas. Currently, the Department of  Revenue has the authority                                                                    
to make the  allocation under AS 43.55.165(h).  Section 8 of                                                                    
Version  T  amends  that  section   by  requiring  that  the                                                                    
Department    of   Revenue    consider   allocating    lease                                                                    
expenditures in proportion to the  BTU equivalent barrels of                                                                    
oil  and  gas produced  from  each  lease or  property.  The                                                                    
purpose   is  to   provide   a   reasonable  allocation   of                                                                    
expenditures  between oil  and gas.  He explained  how taxes                                                                    
were on the gross value at  the point of production prior to                                                                    
PPT  and  ACES,   which  is  now  the   starting  point  for                                                                    
determining   the   production   tax  value.   Since   lease                                                                    
expenditures are applied to the  gross value at the point of                                                                    
production  to  determine  the  production  tax  value,  the                                                                    
leases for oil and gas need to be allocated separately.                                                                         
                                                                                                                                
9:32:21 AM                                                                                                                    
                                                                                                                                
Mr.  Bullock spoke  of Section  9  as being  similar to  the                                                                    
provision in Section 8. This  section adds a new subsection,                                                                    
AS 43.55.170(d), which  has to do with  adjustments to lease                                                                    
expenditures.  It  directs  the  Department  of  Revenue  to                                                                    
consider allocating  adjustments based on the  proportion of                                                                    
the BTU equivalents of oil and gas produced.                                                                                    
                                                                                                                                
Mr.  Bullock turned  to Section  11 which  makes progressive                                                                    
tax provisions in  the bill retroactive to  January 1, 2010.                                                                    
There was no similar provision  in the earlier bill. Because                                                                    
of the  retroactive effect and because  installment payments                                                                    
will  be made  after December  31 and  before the  effective                                                                    
date,  Section   10  requires  that   should  there   be  an                                                                    
installment payment,  that underpayment would be  made up at                                                                    
the first installment payment due after the effective date.                                                                     
                                                                                                                                
Mr. Bullock  concluded with Section  12 which makes  the Act                                                                    
take effect immediately.                                                                                                        
                                                                                                                                
9:33:58 AM                                                                                                                    
                                                                                                                                
Mr. Bullock  said there were  some sections in  the previous                                                                    
version  that don't  have  corresponding  provisions in  the                                                                    
current bill. Sections  3, 4, and 8 in  the previous version                                                                    
are no longer needed.                                                                                                           
                                                                                                                                
9:35:08 AM                                                                                                                    
                                                                                                                                
Senator Thomas asked  if Section 4 is  specific to producers                                                                    
with  production in  both Prudhoe  Bay and  Cook Inlet.  Mr.                                                                    
Bullock clarified that  the tax caps apply after  the tax is                                                                    
determined.                                                                                                                     
                                                                                                                                
Senator Huggins  referred to  Section 8  and asked  if there                                                                    
was a  separate effective date  for the allocation  of lease                                                                    
expenditures  for   oil  and  gas.  Mr.   Bullock  said  the                                                                    
department  is required  to  have  separate effective  dates                                                                    
now.  Section 8  introduces a  new provision  which suggests                                                                    
the department should consider allocating on a BTU-                                                                             
equivalent basis.                                                                                                               
                                                                                                                                
ROGER  MARKS, PETROLEUM  CONSULTANT,  LOGSDAN &  ASSOCIATES,                                                                    
LEGISLATIVE BUDGET  & AUDIT,  explained that  the department                                                                    
had  the   authority  to  adopt   regulations  for   a  cost                                                                    
allocation  method  to implement  the  tax  as it  currently                                                                    
works. The  method the department  adopted is the  method in                                                                    
Version T.                                                                                                                      
                                                                                                                                
9:37:48 AM                                                                                                                    
                                                                                                                                
Senator Egan asked about the  sunset date of 2022 in Section                                                                    
5, page 6, line 21. Mr.  Bullock said the special tax breaks                                                                    
for  Cook Inlet  gas and  gas produced  and used  within the                                                                    
state are  applicable before  2022. Senator  Egan understood                                                                    
that the tax breaks go away in 2022.                                                                                            
                                                                                                                                
Co-Chair Stedman WITHDREW his  OBJECTION to adopting Version                                                                    
T. There being NO OBJECTION, it was so ordered.                                                                                 
                                                                                                                                
Co-Chair Hoffman MOVED to ADOPT Amendment 1:                                                                                    
                                                                                                                                
     Page 9, line 29                                                                                                            
     Delete "oil produced during a month from"                                                                                  
                                                                                                                                
Co-Chair Stedman OBJECTED.                                                                                                      
                                                                                                                                
Mr.  Bullock  explained  that   the  amendment  corrects  an                                                                    
oversight   made  when   drafting  the   bill.  It   removes                                                                    
extraneous language.                                                                                                            
                                                                                                                                
Co-Chair  Stedman WITHDREW  his  OBJECTION.  There being  NO                                                                    
OBJECTION, Amendment 1 was adopted.                                                                                             
                                                                                                                                
9:40:32 AM                                                                                                                    
                                                                                                                                
Senator  Olson  asked  about the  distinction  between  Cook                                                                    
Inlet gas and  other gas fields above the  68th parallel. He                                                                    
wondered if the  Nenana gas field was  included. Mr. Bullock                                                                    
responded that the  law applies to all gas  and oil produced                                                                    
in the  state. The  special provisions are  narrowly focused                                                                    
on  gas and  oil produced  in  Cook Inlet  and gas  produced                                                                    
outside of Cook  Inlet and used in the  state. Senator Olson                                                                    
commented that those who live  above the 68th parallel "feel                                                                    
like a stepchild".                                                                                                              
                                                                                                                                
9:41:55 AM                                                                                                                    
                                                                                                                                
Mr. Marks  explained the fiscal  note by discussing  some of                                                                    
the technical changes made in  the bill. He related that two                                                                    
progressivity buckets have  been established. One represents                                                                    
current  oil  and gas  activity,  and  the other  bucket  is                                                                    
export gas.  The progressivity surcharges  for oil  and Cook                                                                    
Inlet and in-state gas would  be calculated together. If the                                                                    
two  were  to  be  separated,  progressivity  on  oil  would                                                                    
increase and  there would  be a tax  increase, which  is not                                                                    
the intent  of the bill.  There was a concern  about keeping                                                                    
the bill revenue neutral.                                                                                                       
                                                                                                                                
Mr. Marks  pointed out that  in the previous version  of the                                                                    
bill  there  was  some  discussion   of  a  credit  for  the                                                                    
difference  between  the  taxes calculated  after  the  bill                                                                    
passed and before. That was  deemed to be cumbersome, so the                                                                    
two  buckets  were  rated   for  progressivity.  No  current                                                                    
activity  would see  a tax  increase. Export  gas would  not                                                                    
dilute  the  oil  progressivity factor.  The  Department  of                                                                    
Revenue fiscal  note is a  zero note because of  the changed                                                                    
progressivity structure.                                                                                                        
                                                                                                                                
Co-Chair Stedman  added that it  would simplify  the process                                                                    
so  the   industry  does  not   have  to  do  two   sets  of                                                                    
calculations. Mr. Marks said that was correct.                                                                                  
                                                                                                                                
9:46:24 AM                                                                                                                    
                                                                                                                                
Senator Huggins asked  if progressivity on gas  in this bill                                                                    
is the same as it currently is. Mr. Marks concurred.                                                                            
                                                                                                                                
9:47:01 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman MOVED  to  report CSSB  305  (FIN) out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal note.                                                                                                       
                                                                                                                                
There being NO OBJECTION, it was so ordered.                                                                                    
                                                                                                                                
CSSB 305  (FIN) was REPORTED  out of Committee,  as amended,                                                                    
with a "do  pass" recommendation and with a  new fiscal note                                                                    
by  the  Senate  Finance  Committee for  the  Department  of                                                                    
Revenue.