Legislature(2013 - 2014)HOUSE FINANCE 519
04/06/2013 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| + | SB 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 6, 2013
9:04 a.m.
9:04:44 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 9:04 a.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Representative Beth Kerttula; Michael Pawlowski, Advisor,
Petroleum Fiscal Systems, Department of Revenue; Susan
Pollard, Oil, Gas, and Mining Section, Department of Law;
Joe Balash, Deputy Commissioner, Department of Natural
Resources.
SUMMARY
CSSB 21(FIN) am(efd fld)
OIL AND GAS PRODUCTION TAX
CSSB 21(FIN) am(efd fld) was HEARD and HELD in
committee for further consideration.
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
providing a tax credit against the corporation income
tax for qualified oil and gas service industry
expenditures; relating to the oil and gas production
tax rate; relating to gas used in the state; relating
to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax
credits for certain losses and expenditures; relating
to oil and gas production tax credit certificates;
relating to nontransferable tax credits based on
production; relating to the oil and gas tax credit
fund; relating to annual statements by producers and
explorers; establishing the Oil and Gas
Competitiveness Review Board; and making conforming
amendments."
9:05:26 AM
Representative Costello MOVED to ADOPT the HCS CSSB 21(RES)
as a working document. There being NO OBJECTION, it was so
ordered.
9:06:39 AM
MICHAEL PAWLOWSKI, ADVISOR, PETROLEUM FISCAL SYSTEMS,
DEPARTMENT OF REVENUE, provided the Power Point,
"Department of Revenue Sectional Review HCS CSSB 21(RES)
April 5, 2013" (copy on file).
9:07:30 AM
AT EASE
9:07:57 AM
RECONVENED
Co-Chair Stoltze requested that members to hold questions
until the end of each section.
Mr. Pawlowski turned to Slide 2, "Main Provisions", which
listed the items of discussion in the order they would be
presented:
•Interest Rate for Delinquent Tax Payments and Refunds
of Overpayments of Taxes
•Income Tax Credit for Qualified Oil and Gas Service
Industry Expenditures
•Production Tax Rate - 33%
•Repeal of Progressivity
•Gross Value Reduction
o Establishes 20 % reduction from the gross value
at the point of production for North Slope oil
and gas produced from
1) new units,
2) new participating areas in existing units and,
3) expanded acreage.
•Tax Credits
o Eliminates current 20% capital expenditure tax
credit for North Slope after December 31, 2013.
o Increases tax credit for carried-forward annual
losses to 33% for the North Slope after December
31, 2013.
o Establishes a $5 per barrel of oil tax credit
for some production.
o Establishes a sliding scale credit for
production not qualified for the $5 credit.
o Extends small producer credit.
o Revenue report to legislature in 2016
o Lease expenditures and joint interest billings
o Oil and gas infrastructure fund in AIDEA
Mr. Pawlowski turned to Slide 3, "Interest Rate Delinquent
Taxes." He noted that members could find the provision on
Page 3, lines 9 through 19 of the bill:
* Sec. 5. AS 43.05.225 is amended by adding a new
subsection to read:
(b) On and after January 1, 2014, unless
otherwise provided,
(1) when a tax levied in this title becomes
delinquent, it bears interest in a calendar
quarter at the rate of three percentage
points above the annual rate
charged member banks for advances by the
12th Federal Reserve District as of the
first day of that calendar quarter
compounded quarterly as of the last day of
that quarter;
(2) the interest rate is 12 percent a year
for
(A) delinquent fees payable under AS
05.15.095(c); and
(B) unclaimed property that is not
timely paid or delivered, as allowed by
AS 34.45.470(a).
Mr. Pawlowski continued with Slide 3:
Amends AS 43.05.225(1) to set the interest rate at 3%
points above the annual rate charged member banks for
advances by the 12th Federal Reserve District
compounded quarterly.
oCurrently, the interest rate is the greater of
either 5% points above the annual rate charged
member banks for advances by the 12th Federal
Reserve District OR the annual rate of 11%
compounded quarterly.
•Eliminates the 11% alternate annual rate.
•Applies to many tax types.
•Applies against the State for refunds of overpayments
of taxes.
•Interest rate change as of January 1, 2014.
Mr. Pawlowski stated that if a company overpaid its taxes
the state would owe the company a refund, and if it
underpaid, the state would be owed the difference according
to the interest rate. He relayed that the bill would
simplify the tax structure so that the rate would no longer
be a greater than or less than scenario, but a fixed
floating percentage rate of 3 percent above the federal
funds rate. He said that the rate applied to many different
tax types.
9:11:50 AM
Representative Holmes asked whether the new rate could
cause businesses to withhold money because more money could
be made elsewhere.
Mr. Pawlowski replied that upstream oil and gas activities
typically had high hurdle rates. He said that overpaying a
tax in order to get a refund from the state, at 3
percentage points above a lower amount, would not be
beneficial to companies. Conversely, the 3 percentage
points, was close to what the Internal Revenue Service
(IRS) applied and seemed more feasible.
Representative Gara discussed when Alaska's Clear and
Equitable Share (ACES) had been passed people had expressed
concern that companies would not accurately report profits.
He wondered if removing the 11 percent rate would take away
the incentive for companies to accurately report profits.
He asked whether more underpayments or overpayments had
been made.
Mr. Pawlowski answered that historically there had been
more underpayments than overpayments. He said that the
concern about accurate profit reporting had been discussed
in the previous committee. He warned that being punitive
for things that were often outside of a company's control,
when the state had not had the ability to execute decisions
quickly, could be stifling to the business climate.
9:14:30 AM
Co-Chair Stoltze asked if the tax provision was the same
provision employed in the Carlson case.
SUSAN POLLARD, OIL, GAS, AND MINING SECTION, DEPARTMENT OF
LAW, responded the tax provision was an issue in the
Carlson case; the Supreme Court had to decide whether the
provisions of AS 43.55.225 would apply to the damage award
in the case. The decision in the case was that the
provision would not apply.
Co-Chair Stoltze understood that the case of the Carlson
decision the interest rate had been egregiously placed on
the state.
Ms. Pollard replied that the state had argued that the 11
percent rate in AS 43.05.225 did not apply to the Carlson
case. She furthered that the penalty provisions were well
within statute and separately assessed. She said that
unlike other tax provisions where a tax could be settled,
interest accrued and could not be compromised.
Co-Chair Stoltze relayed that the Carlson case involved
out-of-state fishermen who had sued the state because they
believed they had been treated unfairly because their
licensure rate for participating in exclusive use fisheries
was higher than the rate for in-state fishermen.
Co-Chair Stoltze recognized Representative Kerttula in the
room.
9:18:09 AM
Mr. Pawlowski highlighted Section 8 of the bill:
Sec. 8. AS 43.20 is amended by adding a new section to
read:
Sec. 43.20.049. Qualified oil and gas service industry
expenditure credit.
(a) For a tax year beginning after December 31, 2013,
a taxpayer may apply a credit against the tax due
under this chapter for a qualified oil and gas service
industry expenditure incurred in the state. The total
amount of credit a taxpayer may receive in a tax year
may not exceed the lesser of 10 percent of qualified
oil and gas service industry expenditures incurred in
the state during the tax year or $10,000,000.
(b) A taxpayer may not apply more than
$10,000,000 in tax credits under this section in
a tax year. A tax credit or portion of a tax
credit under this section may not be used to
reduce the taxpayer's tax liability under this
chapter below zero. Any unused tax credit or
portion of a tax credit under this section may be
applied in later tax years, except that any
unused tax credit or portion of a tax credit may
not be carried forward for more than five tax
years immediately following the tax year in which
the qualified oil and gas service industry
expenditures were incurred.
(c) An expenditure that is the basis of the
credit under this section may not be the basis
for
(1) a deduction against the tax levied under
this chapter;
(2) a credit or deduction under another
provision of this title; or
(3) any federal credit claimed under this
title.
(d) Notwithstanding any contrary provision of AS
40.25.100(a) or AS 43.05.230(e), for a year that
three or more taxpayers claim a tax credit under
this section, the department may publish the
aggregated amount of tax credits claimed under
this section and a description of the qualified
oil and gas service industry expenditures that
were the basis for a tax credit under this
section.
(e) In this section,
(1) "manufacture" means to perform
substantial industrial operations in
the state to transform raw material
into tangible personal property with a
useful life of three years or more for
use in the exploration for, development
of, or production of oil or gas
deposits;
(2) "modification" means an
adjustment, equipping, or other
alteration to existing tangible
personal property that has a useful
life of three years or more and is for
use in the exploration for, development
of, or production of oil or gas
deposits; "modification" does not
include minor product alterations or
inventory activities;
(3) "qualified oil and gas service
industry expenditure" means an
expenditure directly attributable to an
in-state manufacture or in-state
modification of tangible personal
property used in the exploration for,
development of, or production of oil or
gas deposits, but does not include
components or equipment used for or in
the process of that manufacturing or
modification.
Mr. Pawlowski shared that the provision had been added to
the governor's original bill with the intent of
incentivizing activity outside of the direct focus of the
bill. He asserted that a vibrant service industry was
critical to support a vibrant oil and gas industry. He
relayed that the goal behind the credit was to focus on
giving a benefit to companies that were doing manufacturing
or modification work in-state that supported the oil and
gas industry.
Mr. Pawlowski spoke to Slide 4:
Amends the Alaska Net Income Tax Act by adding a new
section, AS 43.20.049.
· Provides a tax credit for the lesser of 10 % of
qualified oil and gas industry service
expenditures incurred in the state or
$10,000,000.
· Applies against tax liability, may be carried-
forward for no more than 5 tax years after the
expenditures were incurred.
· Qualified oil and gas service industry
expenditure must be directly attributable to the
in-state manufacture or modification of tangible
personal property that has a useful life of 3
years or more used in the exploration,
development, or production of oil or gas.
Mr. Pawlowski stated the "qualified oil and gas service
expenditure" was defined on Page 5, lines 3 through 15. In
order to qualify for the credit the company first had to be
a tax payer. Several companies in the state, due to their
corporate organization were not subject to the tax. The
credit was directly targeted to companies that were tax
payers and only allowed companies to use the credit against
their tax liability. The credit was not transferable but
was a direct benefit to companies doing work in the state
that was directly tied to the manufacturing and
modification of the type of large infrastructure necessary
to support the oil and gas industry.
9:20:30 AM
Representative Wilson asked for an example of what would
qualify under the credit.
Mr. Pawlowski replied the "hot oil" units and modules had
been considered. He mentioned the fabrication that occurred
in the Interior; value added work that built
infrastructure.
Representative Holmes understood that the credit applied
not to people buying the products but to the people
manufacturing them.
Mr. Pawlowski pointed to Page 4, lines 25 through 27:
(1) a deduction against the tax levied under this
chapter;
(2) a credit or deduction under another provision of
this title; or
(3) any federal credit claimed under this title.
He elaborated that there was a limitation on double
qualifying the expenditures. If an integrated oil company,
doing its own fabrication work wanted to claim the credit,
the fabrication work expenditures could not be used as a
deduction under the production tax. The intent was to focus
the credit on the companies that were supporting the
industry, as the logistical support was an important piece
for an overall healthy industry.
Representative Holmes asked if a company was not paying
taxes in year one, could the credit be carried forward into
future years when taxes would be paid.
Mr. Pawlowski responded in the affirmative.
9:22:48 AM
Representative Holmes wondered if the credit would be aimed
at attracting new work in the state or would it apply to
work that had already been done in the state.
Mr. Pawlowski replied that the intent was to increase work.
He offered that it would benefit some of the work currently
happening in the state. The intent of the credit was to
give the production and manufacturing facilities in the
state a leg up to compete against outside work.
Representative Gara believed that everyone on the committee
would like to see increased work; however, the credit was
not incentivizing new work but giving a 10 percent credit
to work that was already happening.
Mr. Pawlowski rebutted that there was work currently being
done in the state. The hope was that as industry investment
grew Alaskan businesses would be competing for a larger
amount of the work.
Representative Gara wondered what percentage of the work
was already being done in the state.
Mr. Pawlowski replied that he did not know the percent. He
stated that it would be difficult to determine the number.
Vice-Chair Neuman asked about a scenario related to the
building of a liquid natural gas (LNG) facility.
Mr. Pawlowski did not believe a facility would qualify
under the credit. He added that if the facility was
manufactured in the state then it would qualify; however,
the company would have to be manufacturing the facility
itself and not the actual outcome of the product that the
plant produced, in order to receive the credit.
Vice-Chair Neuman asked whether an existing LNG export
facility or manufacturing facility could qualify for the
credit.
Mr. Pawlowski replied in the negative. He relayed that the
LNG was not tangible personal property with a useful life
of three years or more, but rather was a product that was
used immediately.
9:28:49 AM
Co-Chair Austerman understood that the liquification plant
that was planned for the LNG project in Fairbanks was a
module that would be developed, created and built in-state
and would be eligible for the credit.
Mr. Pawlowski replied that if the actual plant was
fabricated and assembled in the state then the plant would
qualify.
Co-Chair Austerman asked whether $10 million was the
maximum benefit.
Mr. Pawlowski responded that the benefit was 10 percent of
the qualified expenditures as a lesser of $10 million.
Mr. Pawlowski continued to Page 6, lines 11 through 13:
(2) on and after January 1, 2014, the tax is equal to
the annual production tax value of the taxable oil and
gas as calculated under AS 43.55.160(a) multiplied by
33 percent.
Mr. Pawlowski stated the change would move away from the
current sum of a 25 percent tax plus the progressive tax.
He spoke to Slide 5:
· AS 43.55.011(e) is amended to levy an annual flat
tax rate of 33%. Applies to oil and gas produced
after December 31, 2013.
· AS 43.55.011(g), the monthly progressivity tax, is
repealed as of January 1, 2014.
· Producers of oil and gas still make estimated
monthly installment payments.
Co-Chair Stoltze handed the gavel to Co-Chair Austerman.
Representative Gara spoke to the decision to get rid of the
progressive tax. He understood that most of the current
progressivity tax was paid by Exxon, Conoco Phillips and
British Petroleum. He asked whether any of the corporations
were obligated to spend any of the progressivity tax
credits in Alaska.
Mr. Pawlowski replied no; there was no direct statutory
requirement in the bill that any tax reduction must be
spent in-state.
Representative Gara asked whether any analysis had been
done as to what portion of the money would be spent in
Alaska.
9:32:20 AM
Mr. Pawlowski replied that the intent was for a broader
improvement of the economics in the state. He said that
instead of focusing solely on the small, zero sum game of
the revenues generated that would be used in the state, the
administration had looked at improving the overall
economics to attract more outside capital. The analysis had
been developed with consultants from both the Department of
Revenue and the legislature.
Representative Gara clarified that there had been no
analysis done that would determine what portion of the
money would be spent in-state.
Mr. Pawlowski hoped that the companies would reinvest more
in-state than they earned, and that opportunities in the
state would become more attractive in order to draw in more
capital. He shared that the administration wanted investors
to see Alaska as a destination for investment.
9:33:54 AM
Co-Chair Austerman requested that the administration
address and provide detail concerning the language on Page
6 of the bill.
Mr. Pawlowski explained that the production tax was
currently divided into two separate taxes: the base 25
percent tax and the additional tax rate added to the base,
which was referred to as a progressivity tax. The tax was
calculated monthly based on a mathematical equation that
stated that above 30 dollars a barrel of btu equivalent
production tax value, or the profit before tax per barrel,
the tax rate itself increased four tenths of a percent.
Currently, the mathematical equation determined percentage
changed each month based on oil price, company spending,
and oil production. The base tax rate of 25 percent was
increased to 33 percent in the current legislation. Rather
than having a base tax and adding a tax rate, the bill
would increase the tax and allow that to be the flat tax
rate.
Representative Wilson asked whether the department would
outline the differences between all versions of the bill.
Mr. Pawlowski replied in the affirmative.
Representative Wilson asked if there was a requirement that
corporations spend a certain amount of tax credits in-
state.
Mr. Pawlowski replied no. He felt that the tax rate, tax
credits and tax deductions had to be examined together in
order to understand the integrated system and the way it
would affect the economics.
9:37:25 AM
Representative Gara quoted a statement by the governor in
2010:
"I am not interested in choosing progressivity so they
(the companies) can take that money and invest it
somewhere else. If they are willing to invest it here
I am open to considering it but I am standing up for
Alaskan's in this and not some other country."
Representative Gara wondered what had changed the
governor's analysis of the situation.
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES, referred to a presentation given to the
committee the prior day regarding investment relative to
other places in the world, as prices had varied. He said
that the ability to make decisions was only as good as the
most recent period of data reported. He relayed that there
was a drop in oil prices after the spike in 2008, and that
the gap between Alaska and other oil producing states had
significantly increased.
9:39:24 AM
Representative Gara understood that the states where
production had increased since 2008 were using newly
developed fracking technology and that there had not been
an increase in conventional oil production.
Mr. Balash replied that he had been speaking to investment
dollars and not to production. He elaborated that the
relative pace at which the state had been attracting
investment was the issue at hand. He stressed that the 2009
benchmarking study showed that Alaska had been in-line with
the rest of the U.S. and the globe; in the years since the
evidence was overwhelmingly in the opposite direction.
Representative Munoz inquired about the projected revenue
implications connected to the shift from 35 percent to 33
percent.
Mr. Pawlowski replied that as a general rule of thumb,
before credits or the application of other pieces of the
bill, each one percent move in the tax rate was equivalent
to approximately $100 million.
Representative Munoz asked how the 33 percent in the new
system compared to ACES at lower prices.
Mr. Pawlowski replied that ACES was 25 percent less the
certain amount of tax as prices rose. As oil prices fell he
33 percent would become a tax increase at lower prices. He
said that the number was off-set at some price levels by
other pieces in the legislation. He offered that 33 percent
at many price levels at the lower end of price ranges would
be a higher tax rate than the current 25 percent under
ACES.
9:42:42 AM
Representative Costello queried any discussion that had
occurred related to bracketing versus the elimination of
progressivity.
Mr. Balash replied that the best summation of the oil tax
problem had come from the legislative consultant PFC
Energy, which had identified five key issues with ACES; in
each case the line could be drawn back to progressivity.
In attempting to address progressivity in current law the
department had found that progressivity created problems in
a company's ability to plan. One of the significant
problems that had been identified was that if the current
mechanism was converted from a function to a bracket there
would still be a net trigger; there would still be rates
that changed from month to month. The HCS CSSB 21(RES)
version addressed the per barrel credit by bringing a more
progressive system. The administration did not have a
problem with a progressive system, but progressivity as a
mechanism was an unfixable problem requiring the removal of
progressivity altogether.
9:45:52 AM
Representative Costello wondered what other sections of the
bill were most important looking at the 33 percent rate.
She noted that the 33 percent was not the rate that
companies would be paying in the future.
Mr. Pawlowski answered that it was important to consider
the tax rate in conjunction with the removal of the
qualified capital expenditure credit, the carry forward
loss credit, the small producer credit, the gross revenue
exclusion, the sliding per barrel credit and the basic
development of a net system. All of the items combined
formed the government take. He explained that the tax
system under discussion was one element of the total burden
that industry paid to the state. When looking at the tax
rate, the impact of credits and the gross revenue exclusion
had to be considered because the combination created an
effective tax rate.
Co-Chair Stoltze relayed that PFC Energy would address the
committee later in the day.
9:48:35 AM
Representative Kawasaki questioned whether the investment
of capital expenditures by corporations in Alaska had
increased.
Mr. Balash replied that the issue was how much investment
the state was attracting in comparison to the global
investment pool.
Representative Kawasaki asserted that the states that were
attracting more investment were using hydraulic fracking,
which was not a practice in Alaska. He questioned whether
it was a fair comparison.
Mr. Balash replied that fracking was not taking place all
over the world. When the larger, global considerations
were taken into account the state was simply not competing
with global market. He stated that Alaska was not competing
for the growth in capital spending for upstream oil and gas
investment around the world. He admitted that the advent of
hydraulic fracking had made an improvement to the
production of tight resource formations but pointed out
that higher oil prices were also a factor.
9:52:19 AM
Representative Kawasaki asked how amending AS 43.55.011(e)
would address the issue.
Mr. Balash replied that the base tax rate was a key driver
of the marginal influences on investment decisions made by
companies.
Mr. Pawlowski added that around the world increasing oil
prices, coupled with increased innovation and technology,
was driving investment that was leading to increased
production; Alaska was not experiencing the same growth
trend. The administration believed that the reason Alaska
was falling behind was due to a tax rate that increased as
prices rose. The tax increases under ACES was diminishing
the effect that increasing prices had on driving investment
behavior. The flat tax would allow the price signal to
follow into the system and benefit the state, as it does in
the rest of the world.
Co-Chair Austerman hoped that the conversation would
respond to the question of what percentage the state would
take. He believed the point was of particular interest to
the public.
Mr. Pawlowski replied that the intent of the afternoon
meeting was to allow members to understand where in the
bill the various mechanisms that the consultants would
integrate into an economic picture for Alaskans could be
found.
9:56:18 AM
Representative Thompson wondered how much of the money
being spent on the North Slope was related to locating and
producing new oil compared to investment in the maintenance
of continued oil flow.
Co-Chair Stoltze hoped industry would be able to answer the
question later. He believed that the committee accepted the
concept that tax policy influenced behavior.
Mr. Pawlowski continued to Slide 6:
· Amends AS 29.60.850(b) to eliminate the reference
to AS 43.55.011(g) and substitutes the corporate
income tax.
· Statute directs appropriation not to exceed
$60,000,000 or amount when added to fund balance,
equals $180,000,000.
· No change is made to the eligibility
determinations for community revenue sharing
payments or to authority of legislature to
appropriate any amount.
Mr. Pawlowski pointed to Page 2, lines 9 through 16 of the
legislation. He shared that current revenues from the
progressivity surcharge were softly dedicated directly to
the community revenue sharing fund. He remarked that in the
original version of the bill the community revenue sharing
fund was targeted back to the Alaska net income tax, which
included corporate income tax on oil and gas tax payers as
well as the broader economic activity of all corporate
income tax payers.
Co-Chair Stoltze hoped the issue would be a smaller part of
the committee's discussion.
10:00:28 AM
Mr. Pawlowski clarified that no changes would be made in
the eligibility determinations or to the authority of the
legislature to appropriate any amount to the fund. The
intent was to maintain the system under which communities
had been operating. The current version of the bill
relinked the community revenue sharing back to the
corporate income tax as a source of funding.
Mr. Pawlowski discussed slide 7: "Qualified Capital
Expenditure Tax Credit."
· The 20 percent qualified capital expenditure tax
credit is limited to expenditures incurred before
January 1, 2014 to explore for, develop, or produce
oil and gas deposits on the North Slope.
· Tax credits for expenditures incurred to explore
for, develop, or produce oil and gas deposits south
of the North Slope are not impacted.
· The full amount of a tax credit certificate may be
issued in a single year.
Mr. Pawlowski spoke to Page 14, line 17 of the legislation.
Under current law when a company made a qualified capital
expenditure credit on the North Slope, two tax certificates
were issued; the credit had to be divided and taken over
two years. The spending itself generated the credit and
then the credit was spread out in order to smooth the
fiscal impact on the state. The general obligation was
created by the act of spending. The legislation would allow
the capital credits to be taken in a single year. The
change would close out the 20 percent capital expenditure
credit for the North Slope in the calendar year 2013.
Expenditures made during 2013 would still generate the 20
percent capital credit, but expenditures after January 1,
2014 would no longer generate the credit.
Co-Chair Stoltze asked if the provision could result in a
loss of revenue to the state.
Mr. Pawlowski replied that the provision would become an
increase in revenue for the state because the state would
no longer be paying the credits.
10:03:34 AM
Representative Holmes understood that the underlying
concept of the provision was that the state had been
incentivizing spending rather than production.
Mr. Pawlowski responded that when the administration began
the process to repeal progressivity it was discovered that
the repeal of progressivity was balanced by the repeal of
the credits. The administration wished to simplify the tax
rate as well as reduce the obligation for the state of the
credits.
Representative Holmes hoped for a deeper public discussion
that included the credits outstanding and the obligations
of the state
10:05:19 AM
Representative Munoz asked about the increase in tax filers
who were not tax payer. She noted the provision that stated
that the tax filers were not owed a tax liability to the
state.
Mr. Pawlowski stated that 19 tax payers were currently
filed, 6 actually paid tax and 13 received enough in tax
credits that their tax liability was zero. An additional 33
companies in the state had not produced oil but had filed
for tax credits. He noted that the information could be
found in the tax division's annual report.
Co-Chair Stoltze asked if the report listed the taxpayers
by name.
Mr. Pawlowski replied that they were listed as anonymous
filers.
Representative Munoz requested a copy of the report.
Mr. Pawlowski said he would provide a copy to the
committee.
10:07:09 AM
Representative Costello queried the state's outstanding
obligation for the qualified capital expenditure credit.
Mr. Pawlowski clarified that the question was for the
current FY14 fiscal year.
Representative Costello requested the total potential
liability to the state through the credit.
Mr. Pawlowski responded that the estimate for FY15 was
approximately $850 million.
Representative Costello wondered whether the credits were
the driving force behind new exploration that had occurred
in recent years.
Mr. Pawlowski stated that industry found credits important,
but that the credits needed to be balanced by the tax rate.
He said that if the state had a punitive tax system the
credits would not be enough to overcome the tax system. The
Brooks Range had given statements concerning the challenges
faced which seeking out financing for new developments.
10:09:39 AM
Representative Kawasaki asked if Department of Revenue had
a copy of the audited capital expenditures available to the
committee members.
Mr. Pawlowski responded that the department regularly
audited before credits were issued. He understood that the
committee would need to go into executive session or sign a
confidentiality agreement in order to see confidential tax
payer information.
Representative Kawasaki recalled that when the original
bill was drafted the intent had been to incentivize more
exploration, production and development. He expressed
concern that there were only 500 wells on the North Slope
compared to most other hydrocarbon basins, such as Wyoming,
which had 20,000 wells.
Representative Gara asked how many tax payers there were
prior to ACES.
Mr. Pawlowski clarified that the numbers were not in
reference to before ACES, rather that there were currently
19 potential tax payers, 6 of which actually paid tax. The
remaining 13 received enough in tax credits to reduce their
tax liability to zero. He added that there were an
additional 33 that filed and received the exploration
credits.
Representative Gara noted the major oil companies had
testified that they were not interested in exploring
outside of their units. He understood that the future of
the state involved incentivizing new exploration and new
fields online. He suggested that the extra 46 companies
trying to get oil into the pipeline was beneficial to the
state, even though the companies were not paying taxes,
because they generated activity.
Mr. Pawlowski replied that the activity in the state was
not as beneficial when put into the context of the activity
occurring worldwide. The HCS CSSB 21(RES) did not repeal
the exploration credit.
10:14:26 AM
Representative Gara believed that ACES was poorly worded.
He wondered why the state could not rewrite the credit so
that it related to direct well activity.
Mr. Pawlowski replied that a common statement made by
companies was that Alaska often tended to micromanage
development. He had observed during the evolution of the
legislation a departure from trying to narrowly define what
was incentivized. Rather than trying to design an incentive
that generated targets toward wells or facilities the
legislation would give a credit per barrel of oil. Instead
of trying to incentivize what might result in production
the benefit should be directly tied to the barrel of oil
produced.
10:16:16 AM
Representative Gara recalled from previous testimony that
one out of every 20 wells that were drilled proved useless.
Taking away the credit for companies to spend money on
wells could deter investment and other production related
activity.
Mr. Pawlowski explained that the exploration incentive
credit could still be used by qualifying companies. He said
that there was a loss carried-forward credit in the
legislation would generate a credit for companies that
spent the money to drill an exploration well, and had no
tax liability, that could be turned into the state for
cash. He explained that the reason that the credit was
lower than under ACES was because the bill reduced taxes
overall.
Vice-Chair Neuman asked whether moving to a base qualified
capital expenditure tax credit would simplify the tax code.
Mr. Pawlowski replied that that base tax rate was the
primary simplification to the system. He reiterated that
the administration wanted to focus the incentive on
production.
10:21:07 AM
Mr. Pawlowski addressed Slide 8, "Carried-Forward Tax
Credit AS 43.55.023(b)":
· Based on the amount of a producer's or explorer's
adjusted lease expenditures that were not
deductible in calculating the annual production
tax values for that year.
· Retains 25% credit for a carried-forward annual
loss for adjusted lease expenditures incurred
outside of the North Slope.
· Provides a tax credit of 33% for a carried-
forward annual loss for adjusted lease
expenditures incurred after December 31, 2013 on
the North Slope.
Mr. Pawlowski directed members to Page 15, line 14 of the
bill. The previous qualified capital expenditure credit was
based on qualified capital expenditures and was available
to the major producers or a small producer that did not
have a tax liability. The loss carried-forward credit was
targeted specifically to companies that were spending more
than they were earning, which narrowed the range of
eligible companies. He stated that the administration
believed that matching the 33 percent tax rate was an
important policy objective because it would keep the new
investors with the companies that were already in
production. He encouraged the committee to keep the loss
carry-forward consistent with the base tax rate.
Mr. Pawlowski continued to Slide 9, "AS 43.55.024 Credit":
· Extends the small producer credit to 2022 (from
2016) for producers of less than 100,000 BTU
equivalent barrels of daily production.
· Non-transferable, only applies against AS
43.55.011(e) tax.
· Establishes a $5 per barrel credit for each
barrel of taxable oil that qualifies for a gross
revenue exclusion.
· Establishes a sliding scale credit from $8 to
zero based on monthly gross value of oil produced
on the North Slope that does not qualify for the
gross revenue exclusion. Not applicable against
the minimum tax.
Mr. Pawlowski explained that the credit was a $12 million
credit per company and provided a base level of support for
smaller producers in the state. The credit was non-
transferrable and only applied against the production tax.
Representative Gara queried the definition of a small
producer based on the number of barrels produced in a day.
Mr. Pawlowski clarified that the $12 million credit was for
a producer with 50,000 barrel equivalent or less per day,
but that the credit itself went up to less than 100,000,
with a phase out between the two.
Vice-Chair Neuman asked about the ramifications of
returning to a btu equivalent measurement.
Mr. Pawlowski replied that the btu equivalent in AS
43.55.011(g) was the progressivity function that determined
the tax rate. The reference to btu equivalent barrels was
retained in the small producer credit section of the
legislation and was a production volume for the purposes of
determining a fixed tax credit.
10:26:38 AM
Co-Chair Austerman requested further clarification
concerning the $12 million fixed credit.
Mr. Pawlowski replied that the small producer credit was a
fixed amount per company and not per project. The small
producer received a fixed annual credit of $12 million
until the point above 50,000 btu equivalent was reached, at
which time the value of the credit itself would decline.
Co-Chair Austerman asked for more detail.
Mr. Pawlowski believed it would decline to $6 million and
then down to zero. He noted the equation in Section
43.55.024(c), subsection 2. He stated that no changes were
being made to the way in which the credit functioned in
current law, but was extending the time period with which a
company could enter production and qualify for the credit.
The legislation included an addition to the 02.4 credits;
the credits were non-transferrable and only usable by the
company that was generating the credit. He directed
attention to Page 18 of the legislation which listed the
per barrel credits:
Sec. 26. AS 43.55.024 is amended by adding new
subsections to read:
(i) A producer may apply against the producer's tax
liability for the calendar year under AS 43.55.011(e)
a tax credit of $5 for each barrel of oil taxable
under AS 43.55.011(e) that meets one or more of the
criteria in AS 43.55.160(f) and that is produced
during a calendar year after December 31, 2013. A tax
credit authorized by this subsection may not reduce a
producer's tax liability for a calendar year under AS
43.55.011(e) to below zero.
(j) A producer may apply against the producer's tax
liability for the calendar year under AS 43.55.011(e)
a tax credit in the amount specified in this
subsection for each barrel of taxable oil under AS
43.55.011(e) that does not meet any of the criteria in
AS 43.55.160(f) and that is produced during a calendar
year after December 31, 2013, from leases or
properties north of 68 degrees North latitude. A tax
credit under this subsection may not reduce a
producer's tax liability for a calendar year under AS
43.55.011(e) to below the amount calculated under AS
43.55.011(f). The amount of the tax credit for a
barrel of taxable oil subject to this subsection is
(1) $8 for each barrel of taxable oil if the
average gross value at the point of production
for the month is less than $80 a barrel;
(2) $7 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $80 a
barrel, but less than
$90 a barrel;
(3) $6 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $90 a
barrel, but less than
$100 a barrel;
(4) $5 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $100 a
barrel, but less than $110 a barrel;
(5) $4 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $110 a
barrel, but less than $120 a barrel;
(6) $3 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $120 a
barrel, but less than $130 a barrel;
(7) $2 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $130 a
barrel, but less than $140 a barrel;
(8) $1 for each barrel of taxable oil if the
average gross value at the point of production
for the month is greater than or equal to $140 a
barrel, but less than $150 a barrel;
(9) zero if the average gross value at the point
of production for the month is greater than or
equal to $150 a barrel.
10:31:03 AM
Representative Wilson wondered if it would be an
oversimplification to make all of the credits by-the-barrel
credits.
Mr. Pawlowski responded that the easy oil was gone. He said
that the economics of production required a variety of
styles of credits in order to support the more expensive
development.
Representative Wilson wondered whether more credits could
be given to companies working with the harder to produce
oil.
Mr. Pawlowski replied that the structure in the bill had
come from the previous committee in an attempt to increase
the effective tax rate at higher prices.
Representative Wilson requested a written response
highlighting the advantages and disadvantages of a simple
per barrel credit.
Co-Chair Stoltze remarked that the administration was
presenting an agnostic and clinical view of the changes
made by another committee; the administrations original
bill was not before the committee.
Mr. Pawlowski appreciated the clarification.
10:34:43 AM
Mr. Balash communicated that a later presentation would
highlight how the GRE would be the most effective tool for
new production.
Representative Gara asked how the $8 to zero sliding-scale
"mini-progressivity" element shown on Slide 9 compared to
progressivity under ACES. He shared that currently, after
$30 of profit was made on a barrel, progressivity was .4
percent per dollar.
Mr. Pawlowski deferred the question to economists and
consultants. He furthered that slides would be developed
that would best illustrate an answer.
10:37:41 AM
Representative Gara asked for verification that the $5 per
barrel credit only related to new oil.
Mr. Pawlowski replied in the affirmative.
Representative Gara remarked that the way the credit was
currently designed it applied to leases given in 2003 for
oil that had gone in to the pipeline in the past. He argued
that the legislation would incentivize something that had
already been done.
Co-Chair Stoltze remarked that the question would be held
for later.
Mr. Pawlowski relayed that the next slide in the
presentation would provide further information.
Co-Chair Austerman quoted Page 6 of a presentation from the
previous day:
"At the year-end 2010 the Energy Information Agency
and the Federal Department of Energy put remaining
North Slope reserves at 3.7 billion barrels of oil."
Co-Chair Austerman assumed that the fields mentioned were
legacy fields. He probed the determination of the
percentage of new oil versus old oil in the legacy fields.
He wondered how much of the 3.7 billion barrels of oil the
sliding scale could be applied to.
10:40:02 AM
Mr. Balash answered that the 3.7 billion was cited for the
year-end 2010; production since had brought the number down
to 3.3 billion barrels. He thought that for comparison
purposes; the central North Slope, on-shore, mostly state
land, undiscovered resource estimated to be recoverable was
approximately 3.1 billion barrels that should qualify under
the GRE. He observed that the sliding scale credit, when
oil was $110 per barrel, offered a lot of incentive for a
company to produce oil reserves already in the ground. He
said that the 3.3 billion barrels estimated by the
department could produce for decades.
Mr. Pawlowski clarified that the 3.3 billion that started
off as the 3.7 billion estimated in the slide was not
generally seen as eligible for the targeted incentives
toward the geologically new production.
10:43:38 AM
Representative Costello wondered what would be the lowest
effective tax rate and the highest for both the current and
proposed tax systems.
Mr. Pawlowski spoke specifically to the legacy fields
because they were the easiest to calculate. Under ACES, the
lowest effective tax rate was essentially zero because
credits could be used to off-set the minimum tax. The
highest effective tax rate was the 75 percent, which was a
combination of the 25 percent base rate plus the potential
50 percent of progressivity. He qualified that the 75
percent rate kicked in at extremely high oil prices. Under
the bill the highest effective tax rate would be 33
percent. He offered that having a fixed tax rate benefited
companies because the company could plan around the tax
rate using credits to off-set expenses. Under 33 percent
and the $8 top zero sliding scale the 4 percent gross
minimum would raise to a maximum of 33 percent on the net;
under ACES it could go from zero to 75 percent.
Representative Costello believed that the discussion should
take into account lower oil prices. She requested a
comparison of the effect of progressivity at higher prices
versus the sliding scale.
Mr. Pawlowski replied that the administration would address
the issue later in the day. He appreciated the recognition
that there was a difference between a progressive tax and
progressivity.
Representative Holmes expressed concern that if oil prices
dropped under ACES the state would be in financial trouble.
She asked whether the credits would go into negative at the
expense of the state if there was no minimum effective tax
rate under ACES.
Mr. Pawlowski replied that it was true. He stated that in
low prices, high spending, and many credits being generated
could set the stage for a negative tax liability situation.
Incumbent producers would not have the ability to turn the
credits into the state for a cash payment, the credits
would be carried forward. The impact would be negative and
would erode the state revenues into the following year.
10:48:09 AM
Representative Gara understood that at the highest price
possible the tax rate would only rise to 33 percent.
Mr. Pawlowski replied in the affirmative. The credit would
be used to offset taxes, similar to the capital credit
under ACES.
Representative Gara hypothesized that the highest tax rate,
at the highest price of $200 per barrel, would be 33
percent under the sliding scale.
Mr. Pawlowski replied in the affirmative.
Representative Gara wondered whether the 4 percent minimum
could go lower.
Mr. Pawlowski replied that a small producer or exploration
credit could be used against the sliding scale, but the
aforementioned credits were targeted and specific credits.
Representative Gara asked if a company's tax payment could
be below zero under the credits that the bill left on the
books.
Mr. Pawlowski said that he would get back to the committee.
He stated that the sliding scale was targeted to specific
production; the reality of the 4 percent minimum tax was
still large when compared to a zero tax. He said he would
need to add up all of the possible credits that would
remain under the system to conclude if the number could be
taken to zero.
Representative Gara questioned whether the state had been
in a situation under ACES where less than a 25 percent tax
had been collected.
Mr. Pawlowski stated that he would follow up with the
committee with the information.
10:50:56 AM
Mr. Balash thought that a review of several months in 2009
might reveal that the state did fall below 25 percent on a
monthly basis.
Representative Munoz asked if the administration
anticipated a problem with the nominal dollar figure verses
a percentage in the per barrel scenario.
Mr. Pawlowski replied that it would be an issue in long-
term economics. He stated that it was, more often than not,
a benefit to the state. He said that the fear had been
adding an additional level of complication by adjusting for
the payments. He thought that lowering the per barrel
credit would be a larger issue.
10:55:36 AM
RECESSED
12:21:23 PM
RECONVENED
Mr. Pawlowski discussed slide 10: "Gross Revenue Exclusion
for North Slope Oil and Gas (Gross Value Reduction):
· For oil and gas produced north of 68 degrees North
latitude, the gross value at the point of production
is reduced by 20 percent for the oil or gas produced
from:
1) Leases in a unit established after January 1,
2003;
2) New reservoirs in an expanded participating
area within a unit formed before January 1, 2003;
or
3) Acreage added to an existing participating
area with approval by the Department of Natural
Resources.
Mr. Pawlowski stated that the GRE was technically a
reduction in the gross value. He noted that the provision
could be found on Page 24, line 24 of the legislation. The
provision would examine new developments both within and
outside of existing units in an effort to reduce the gross
production tax value by 20 percent of the gross value of
the particular oil and gas that was produced. Under the
current system the state did not distinguish between
multiple different fields or different types of oil and gas
being produced when taxing a company. In the spirit of
simplicity, the mechanism focused on the barrel rather than
investment or spending. The bill defined where the barrels
came from and then counted them differently at the level of
the gross value.
12:25:35 PM
Mr. Pawlowski discussed the distinctions.
Mr. Balash stated that when oil fields were explored and
discoveries were made the fields generally covered more
than a single lease, at which time the leases were brought
together in a unit. Within the unit existed a two
dimensional boundary and a new unit that was brought into
production would be easy to count as new oil. Only two
units producing presently would qualify on the unit test:
Oooguruk and Nakiachuk. In both cases those units were
brought forward by companies that were making investment
commitments with a great degree of uncertainty. The
decision to include them in the proposal had been made in
an attempt to be fair. He relayed that when a company came
to the state and made a discovery, and then took the step
of unitizing, as they moved into production they identified
for the Division of Oil and Gas what their participating
area would be; the parts of the reservoir that would
contribute to production from the wells that would be
drilled in the plan of development. Once a company moved
into production there was the possibility that another oil
producing reservoir might be found. Multiple participating
areas could exist in the unit proper and a new
participating area in a legacy field would be considered
new oil.
12:31:43 PM
Mr. Balash discussed the expansion of an area included in
an existing field. He said that when the areas were
established they were based on the expectation of how
production would occur based on the technology available at
the time. As time has passed technology has advanced to the
point that companies could access further out and drive
production from the extended areas, which required
companies to apply for an expansion of the participating
area. If a participating area expanded in a legacy field,
the area could qualify for the GRE if the company was able
to satisfy the department concerning the accountability of
the production.
ADJOURNMENT
12:34:12 PM
The meeting was adjourned at 12:34 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HCS CSSB 21 RES Sectional for HFIN 040513 final.pdf |
HFIN 4/6/2013 9:00:00 AM |
SB 21 |
| HCS CSSB RES 21 SECTIONAL ANALYSIS FINAL.pdf |
HFIN 4/6/2013 9:00:00 AM |
SB 21 |
| NEW FN SB21HCSCS(RES)-DOR-TAX-04-05-13.pdf |
HFIN 4/6/2013 9:00:00 AM |
SB 21 |
| NEW FN SB021HCSCS(RES)-DNR-DOG-4-5-13.pdf |
HFIN 4/6/2013 9:00:00 AM |
SB 21 |
| SB 21 Fiscal Impact Presentation HFIN.pdf |
HFIN 4/6/2013 9:00:00 AM |
SB 21 |