Legislature(2005 - 2006)
05/05/2006 09:53 AM House FIN
| Audio | Topic |
|---|---|
| Start | |
| SB169 | |
| SB305 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 305(FIN) am
An Act repealing the oil production tax and the gas
production tax and providing for a production tax on
oil and gas; relating to the calculation of the gross
value at the point of production of oil and gas and to
the determination of the value of oil and gas for
purposes of the production tax on oil and gas;
providing for tax credits against the production tax on
oil and gas; relating to the relationship of the
production tax on oil and gas to other taxes, to the
dates those tax payments and surcharges are due, to
interest on overpayments of the tax, and to the
treatment of the tax in a producer's settlement with
the royalty owners; relating to flared gas, and to oil
and gas used in the operation of a lease or property
under the production tax; relating to the prevailing
value of oil and gas under the production tax; relating
to surcharges on oil; relating to statements or other
information required to be filed with or furnished to
the Department of Revenue, to the penalty for failure
to file certain reports for the tax, to the powers of
the Department of Revenue, and to the disclosure of
certain information required to be furnished to the
Department of Revenue as applicable to the
administration of the tax; relating to criminal
penalties for violating conditions governing access to
and use of confidential information relating to the
tax, and to the deposit of tax money collected by the
Department of Revenue; amending the definitions of
'gas,' 'oil,' and certain other terms for purposes of
the production tax, and as the definition of the term
'gas' applies in the Alaska Stranded Gas Development
Act, and adding further definitions; making conforming
amendments; and providing for an effective date.
Representative Hawker MOVED to ADOPT work draft #24-
GS2052\N, Chenoweth, 5/4/06, as the version of the bill
before the Committee. Representative Kerttula OBJECTED for
discussion purposes.
10:00:06 AM
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF
REVENUE, highlighted the comparative revenues of the
Petroleum Production Tax (PPT) bill as received through the
Governor and the Department of Revenue. (Copy on File).
Ms. Wilson explained the key points, which provides a tax &
credit rate of 20% and a progressivity tax based on net.
The base allowance credit provision was retained from the
House Resources Committee (HRC) version. The Cook Inlet oil
& gas is treated differently.
10:04:40 AM
Ms. Wilson pointed out the general tax rate of 20% with ¾
revenue exclusion in Cook Inlet oil. In the Senate Finance
Committee (SFC) version, value exclusion on gas revenue
(GRE) had been included. The Senate addressed Cook Inlet
oil by providing a special tax rate of 5% on the net;
however, technical concerns were voiced, which left no
provision for cost allocations. The House Finance Committee
(HFC) version removes the 5% net and uses the GRE with ¾
exclusion, providing a 5% effective tax rate.
10:06:30 AM
DAN DICKINSON, CONSULTANT, TAX DIVISION, DEPARTMENT OF
REVENUE, observed that because of net versus gross, the
effect lowers the tax rate on Cook Inlet oil and would make
less than 5%.
10:07:04 AM
Ms. Wilson pointed out that in the draft before the
Committee, Cook Inlet gas was treated differently, using a
tax ceiling of 19 cents. The credit rate remains at 20%;
the private royalty rate is 5% on oil and 1.67% on gas, and
includes a provision for receiving a commissioner's report.
The gas revenue value exclusion (GRE) in the Senate version
was incorporated, providing 2/3 of the gross value excluded
on gas.
10:08:17 AM
Representative Kerttula asked if that meant 1/3 of the 20%
tax. Ms. Wilson referenced Section 160, which divides the
net value, indicating that 2/3 of the net value would be
excluded and the remaining 1/3 taxed at the 20%, except in
Cook Inlet.
Representative Kerttula asked about the Cook Inlet credits.
Ms. Wilson explained that it is a statewide tax system and
the credits can be used anywhere within the State.
10:09:09 AM
Ms. Wilson discussed progressivity, based on the net and in
contrast to the HRC version, where it is based on gross.
The trigger point & slope were increased.
10:09:48 AM
Representative Hawker asked if the trigger point would move
up or down "dollar-wise". Ms. Wilson said the trigger point
was brought down from $45 to $35 dollars net.
Co-Chair Meyer asked at current oil prices, what would the
effective tax rate be if it were imposed. Ms. Wilson
replied at $70 dollars, it would be calculated at 25%.
Representative Kerttula questioned the reason for
determining the progressivity on the net rather than on the
gross. Ms. Wilson replied it was clearly a policy call. A
progressivity based on net recognizes costs better than on
the gross; however, if placed on gross, it could accommodate
better the differences between oil and gas. If there was a
windfall profit piece dependant on the price of oil, a
progressivity based on gross could be a better plan.
Mr. Dickinson agreed and pointed out several effects as
costs increase and on the gross, there could be a smaller
margin at the $20 dollar price.
Representative Kerttula reiterated that net value had been
used to calculate everything else. She suggested it would
be simpler to use the same value for progressivity. Mr.
Dickinson argued that in terms of simplicity, the proposed
concept results in the same tax base for the 20% & for the
increase.
10:13:41 AM
Ms. Wilson continued, the progressivity is based on the net
and that valuable oil and gas in the State means that there
would be no special gas progressivity.
Representative Joule identified certain costs and the
inclusion of the progressivity twice. Ms. Wilson informed
that had been a different measure and would not be deducted
twice. The bill before the Committee provides for two
different measures - the Petroleum Production Tax (PPT) rate
and progressivity, both taken against the same net value.
10:15:39 AM
Ms. Wilson identified the deductibility of the progressivity
tax. Under all the bills, progressivity is a separate tax
and cannot be deducted for net value. This transition was
originally called the "claw back", evolving during the
legislative process. The version before the Committee
adopts the Senate language, providing a five-year look back
for capital expenditures and a 2-for-1 recouping, equaling
20% credit.
The version before the Committee adopts a seven-year rolling
sunset, which means that if a company were not yet
commercially producing, their seven years would not start
until the beginning of their commercial production.
She addressed the allowance based on barrels. The version
before the Committee retains a $12 million dollar credit,
based on current investment. The credit is only available
for up to ½ of the current investment.
10:18:46 AM
Representative Hawker suggested that a fixed credit amount
would be a better solution as the other option punishes
small producers. Co-Chair Chenault explained that the
intent was to look at "gold plating" without affecting the
smaller producers. The HFC version looks to adjust that.
10:19:46 AM
Ms. Wilson commented that the base allowance provides for a
10-year sunset, creating a rolling sunset. The safe harbor
language was adopted from the Senate version with a 95%
required, annual true up; if paid monthly, there would be no
interest on that amount. If a company pays less, there is
interest on the unpaid balance. If the company does not pay
the full amount, there would be interest but no penalty.
Co-Chair Meyer asked why there would be no penalty. Ms.
Wilson responded, there are penalty provisions in the
general administration section and that interest would be
sufficient.
10:21:26 AM
Ms. Wilson pointed out an effective date of July 1, 2006.
Also, during the first six months, the company has the
option to pay under the old Economic Limit Factor (ELF)
system.
Representative Hawker worried that it would provide only six
months to the Department to get regulations in place. He
asked assurance if that was possible. Ms. Wilson could not
provide 100% certainty, however, noted that the Department
expects to hire extra regulation writing staff.
10:23:01 AM
Representative Joule asked if the Department of Revenue
would be the only Department providing audits. Ms. Wilson
responded that in the transitional provision, the primary
'push' would be writing regulations by the Department of
Revenue. She acknowledged that the Department of Natural
Resources has employees for auditing the values.
Mr. Dickinson added that the Department of Natural Resources
will use the standard in current law to look at gross value.
The change in net moves it to up-stream costs. Any
additional obligations resulting from the legislation will
be addressed by the Department of Revenue.
10:24:53 AM
Ms. Wilson noted that the spill surcharge, referred to as
"split-nickel" results in two cents suspended and three
cents collected. In the version before the Committee, it
maintains the amount of five cents, but decreases it to one
cent suspended and collects four cents.
Representative Kerttula asked if the Department of
Environmental Conservation had seen the provision. Mr.
Dickinson replied, there had been no analysis on that
portion of the bill.
10:26:28 AM
Ms. Wilson pointed out that the surcharge treatment would
not be creditable or deductible and is the same as in the
Senate version.
The version before the Committee extends the SB 185
exploration credit for ten years. It fixes language in
current statute regarding the $20 million dollar Cook Inlet
limit. Under the bill, there is no deduction or credit for
abandonment of old facilities.
Representative Kerttula interjected that "old" would not be
allowed but the new production would be. Ms. Wilson agreed.
Representative Kerttula questioned if abandonment issues had
been addressed more than twice. Ms. Wilson stated that the
language had been improved from the Senate version but not
expanded to that extent.
Representative Kerttula asked if abandonment costs had been
figured into exploration costs. Mr. Dickinson said yes;
yet, commented that mediation costs created a large
uncertainty and are costs included in the full cycle.
Representative Kerttula did not understand how they could be
determined and requested back up. Mr. Dickinson noted there
had been past estimates and that the difficulty in
estimation does not mean it would be left out.
Representative Kerttula voiced her concern.
10:30:30 AM
Representative Kelly asked about the 185 credit & the
extension of the sunset. Ms. Wilson explained that under
the PPT, foreign exploration expenditures could be claimed.
Under SB 185, a producer would be allowed a 40% credit,
based on mileage-distance from current wells. Any dollar
for exploration costs could not be claimed twice. Mr.
Dickinson referenced Page 7, Line 30, which clarifies the
four programs. Ms. Wilson noted that was additional
language and a change from the House Resource Committee
(HRC) version.
10:32:51 AM
Ms. Wilson discussed the extent the credits could be used.
They cannot be used to offset the progressivity tax, rather
against the PPT tax. The version of the bill before the
Committee allows credits to be transferable. Only 20% of
the purchaser's liability can be offset.
The HRC version provides for up to $10 million dollars of
refundable credits; the version before the Committee does
not provide for refundable credits. A credit would be
available at the end of the year for any annual loss based
on the tax rate.
10:34:19 AM
Representative Kerttula inquired how many times a single
expenditure could be deducted. Ms. Wilson replied that
under the PPT bill, a capital expenditure could be deducted
and receives a 20% credit. She added, it also comes off in
the federal taxation.
Representative Kerttula inquired what the total deductible
percentages would be. Ms. Wilson replied, a top marginal
rate of 35% was used for federal tax and in the worldwide
arena, the deduction could be a portion based on business in
Alaska compared to everywhere else.
Representative Kerttula requested more information regarding
those numbers.
Representative Hawker pointed out different tax systems
applied to the same taxpayers and did not believe they could
receive compounded deductions. He refuted the idea of
"double dipping".
Mr. Dickinson pointed out that a deduction could lower the
tax. The company is allowed to take the deduction, but
those costs can be used only one time.
10:38:19 AM
Representative Kerttula asked about the carry-forward time
limit and how the State could protect against using that in
low oil years. Mr. Dickinson explained that at the end of
the tax, there would be a point when the costs overwhelm the
ability to produce. He acknowledged that if prices fall,
PPT revenues could be reduced to zero, but when prices rise,
the State again would be collecting revenues.
Representative Kerttula advised there was no language
inclusion to protect against that scenario. Mr. Dickinson
noted that there is no guarantee for receiving revenue when
investments are not profitable. The proposed system is a
profit-based tax.
Representative Kerttula indicated the problem with a roll-
forward. Mr. Dickinson reiterated that profits are not a
year-by-year thing. To determine the actual investment, it
is important to determine the amount made in consecutive
years.
Representative Kerttula reiterated concern with the carry-
forward protections generating revenue. Mr. Dickinson
stated that the Administration has been careful in
addressing those concerns by including the property taxes.
The proposal offers four different revenue-generating
avenues.
10:42:15 AM
Ms. Wilson pointed out language removed from the HRC
version, regarding the gross value by the Department of
Natural Resources. She anticipated an amendment to restore
that language, as it places responsibility on the Department
to determine excess lost tax.
Representative Kerttula asked how the point-of-production
definition works.
ROBERT MINTZ, ATTORNEY, CONTRACTING WITH THE DEPARTMENT OF
LAW, explained that the main change reflected in the version
of the bill before the Committee is the refinement of the
definition of gas treatment. There was concern raised by
the industry that gas treatment was overly defined because
it included field dehydration. The version of the bill
before the Committee, clarifies that fuel dehydration is not
a part of gas treatment.
10:45:10 AM
Representative Kerttula asked if that was the only reference
to gas treatment, now upstream. Mr. Mintz said yes and
noted other refinements in the language such as the
definition of the gas-processing plan. The bill contains a
definition of gross value at the point of production.
Ms. Wilson continued, the Senate version contained a
provision allowing the Department of Revenue to write
regulations incorporating provisions of the Internal Revenue
Code #482, which deals with the transfer pricing issues. In
the federal arena, it could come up with transactions
between a domestic company and their foreign affiliates.
10:47:34 AM
Ms. Wilson mentioned catastrophic oil spills, which the
Governor's original bill had not addressed. In the HRC
version, it was not deductible and that language was removed
from the Senate version. The proposed version does not
include catastrophic oil spill language, language defined in
Statute. The language in the HRC version addresses a spill
in marine waters, which is removed and would be deductible.
Oil spills could be deductible if the occur on the lease and
not through fraud or negligence.
Mr. Mintz noted it is important to understand how the bill
is intended to work. The number of non-deductible items is
not an exhaustive list. They are only examples of specific
costs. If not included, then one returns to the fundamental
definition, which is "direct, ordinary, necessary costs of
exploring or producing oil and gas". Clean-up costs would
sometimes be deductible and would not be listed as an
exclusion.
10:50:54 AM
Representative Kerttula said that the State would continue
to participate in the 470 Fund to help clean up spills. She
urged further clarity on that section.
10:51:23 AM
Ms. Wilson noted additional language in the Senate version,
regarding exploration credits that the Department of Natural
Resources would provide. The language was incorporated into
the version of the bill before the Committee. She noted
additional clarifying language regarding regulations after
industry practice.
10:52:43 AM
Representative Kerttula requested a comparison, including
the Senate Resources Committee (SRC) version. Co-Chair
Chenault recommended that be made available.
AT EASE: 10:53:52 AM
RECONVENE: 10:54:00 AM
10:54:05 AM
Ms. Wilson proceeded with an overview of the bill.
Page 2, Lines 16-25, provides intent language added from the
Senate version clarifying that the Department of
Environmental Conservation would reduce program costs.
Page 3, Line 29, highlights the general tax rate of 20%.
Page 4, Lines 23-31, clarifies the progressivity language.
Subsection (G) provides the slope factor percentage of
.256%.
10:55:37 AM
Page 6, Line 2, illustrates the trigger point; $35 dollars
is the net value. She compared the resulting price index.
Ms. Wilson pointed out language on the Cook Inlet gas, Lines
9-13, intended not to exceed 19 cents. That number was
taken from the March average gas ELF in Cook Inlet.
Mr. Dickinson added that the (J-K) formula at net, averages
the tax rate and that there are value shifts in making the
calculation.
10:58:06 AM
Ms. Wilson continued Page 6, Section 7, Lines 6-18, provides
language for the "safe harbor" true-up @ 95%.
Page 8, Line 2, indicates a credit rate of 20%. Lines 12-
29, provides language in which the Department of Natural
Resources provides exploration data.
Page 10, Lines 30-31, highlights the transitional provisions
of the 2 for 1, carrying that language onto Page 12. Page
11 indicates the five-year look back; the 2 for 1 is listed
on Lines 13-19.
Ms. Wilson continued, Lines 22-28 indicates the 7-year
sunset. Mr. Dickinson interjected information regarding
sunset needs. The companies would be in a position to claim
production expense and would need a window to make that
claim. The intent makes a transitional investment. It
places a new producer on the same footing as a company
producing before the bill became effective.
11:01:04 AM
Ms. Wilson referenced Page 12, Lines 4-17, language taken
from the Senate version, in which the producer receives a
credit on a facility subject to regulation. Also, the
producer would support all rate proceedings for tariffs.
She pointed out that there was a piece in the Senate version
regarding audits, which was not included in the version
before the Committee.
Representative Hawker recognized that language came from the
Senate and understood the need for a regulated facility, but
thought that Section 2 was problematic. He asked about
applying it to all circumstances, which makes a definitive
statement regarding discount service costs.
11:04:09 AM
Mr. Dickinson agreed with Representative Hawker,
acknowledged the uncertainties involved with the issue.
Representative Hawker mentioned parties receiving credit.
He asked if the Department of Revenue would have to be
included in each transaction with the industry. Mr.
Dickinson replied they would be involved with every
transaction involving physical assets receiving credit.
Representative Hawker worried about the fiscal costs
associated with that.
11:06:22 AM
Representative Weyhrauch interjected that it appears to give
the consumer a break. Mr. Dickenson agreed.
Representative Kerttula thought companies could come forward
and file evidence. She maintained that it is not onerous.
Mr. Dickinson advised that the State would have to regulate
the profits and rate of returns. Representative Kerttula
countered that situation could be unfair. Mr. Dickinson
agreed that it might be a "good goal", but the language does
not identify that.
11:09:11 AM
Ms. Wilson continued, Page 12, Lines 30-31, removes old
language and is consistent with the Senate version. Mr.
Dickinson explained the removed language references a sunset
provision.
Ms. Wilson pointed out that Page 13, Line 16, provides the
10-year extension in which SB 185 appears.
Page 15, the amendments contained on Lines 19-28, corrects a
statutory concern regarding the Cook Inlet credit.
Representative Hawker requested clarification.
Ms. Wilson explained that the original intent was that no
additional credits would be granted if Cook Inlet reached
$20 million dollars. The statutory language states that
credits would not be granted, implying that they would not
be granted anywhere. That language was adjusted. The other
concern dealt with the October date. The amendment sets a
more fair approach and provides another year.
11:12:16 AM
Representative Hawker pointed out the "no cap" on the North
Slope. He questioned if there should be a cap placed on
Cook Inlet exploration efforts.
11:12:54 AM
Ms. Wilson explained that Page 19, Section 25, allows for
the Department to use RSA values. She requested that
language be amended to include provisions determining cost
effectiveness. Representative Hawker noted support for that
solution. Mr. Dickinson offered to work with Representative
Hawker.
Representative Kelly pointed out that there had been a lot
of work done on the RSA and wondered how the goal of
"acceptable language" would be achieved. Mr. Dickinson
replied the Administration would appreciate making the
concept work for everyone.
11:15:56 AM
Ms. Wilson referenced Page 20, Lines 8-9, which provides the
GRE, language taken from the Senate version. Lines 6-8
indicate a value exclusion for Cook Inlet oil.
Representative Kelly realized it would be challenging to
satisfy needs for all sized fields. He recommended further
work to determine those areas as well as the community
subsidies.
SB 305 was HELD in Committee for further consideration.
11:18:47 AM
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