Legislature(2017 - 2018)HOUSE FINANCE 519

03/20/2017 01:30 PM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
02:23:49 PM Start
02:24:37 PM HB115
04:56:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 2:15 PM --
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 20, 2017                                                                                            
                         2:23 p.m.                                                                                              
2:23:49 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 2:23 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Randall Hoffbeck, Commissioner, Department of Revenue;                                                                          
Representative   Garran   Tarr;    Lisa   Weissler,   Staff,                                                                    
Representative Andy Josephson.                                                                                                  
PRESENT VIA TELECONFERENCE                                                                                                    
HB 111    OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                             
          HB 111 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HB 115    INCOME TAX; PFD CREDIT; PERM FUND INCOME                                                                              
          HB 115 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
Co-Chair Foster reviewed the agenda for the day.                                                                                
HOUSE BILL NO. 115                                                                                                            
     "An  Act  relating  to  the  permanent  fund  dividend;                                                                    
     relating  to the  appropriation of  certain amounts  of                                                                    
     the earnings reserve account;  relating to the taxation                                                                    
     of  income  of  individuals;   relating  to  a  payment                                                                    
     against the  individual income  tax from  the permanent                                                                    
     fund  dividend  disbursement;   repealing  tax  credits                                                                    
     applied  against  the  tax  on  individuals  under  the                                                                    
     Alaska  Net  Income  Tax  Act;  and  providing  for  an                                                                    
     effective date."                                                                                                           
2:24:37 PM                                                                                                                    
Representative Thompson MOVED to ADOPT Amendment 13 (copy                                                                       
on file):                                                                                                                       
     Page 2, line 9:                                                                                                            
          Delete "a new subsection"                                                                                             
          Insert "new subsections"                                                                                              
     Page 2, following line 18:                                                                                                 
          Insert a new subsection to read:                                                                                      
                    "(c)     In    accordance     with    AS                                                                    
               37.13.145(b)(1),      and     subject      to                                                                    
               appropriation,  33  percent   of  the  amount                                                                    
               available for distribution  under (b) of this                                                                    
               section shall be  reserved for dividends. The                                                                    
               remainder  of  the  amount  calculate  to  be                                                                    
               available for distribution  under (b) of this                                                                    
               section  shall be  reduced by  the difference                                                                    
               between  the amount  calculated under  (1) of                                                                    
               this subsection  and the amount under  (2) of                                                                    
               this  subsection  if  the  amount  calculated                                                                    
               under  (1)  of  this subsection  exceeds  the                                                                    
               amount under (2) of this subsection:                                                                             
                         (1) the total amount of oil and                                                                        
                    gas production taxes  under AS 43.55.011                                                                    
                    -  43.55.180,   mineral  lease  rentals,                                                                    
                    royalties,  royalty  sale proceeds,  net                                                                    
                    profit shares under  AS 38.05.180(f) and                                                                    
                    (g),   and   federal   mineral   revenue                                                                    
                    sharing  payments  and bonuses  received                                                                    
                    by  the state  from mineral  leases that                                                                    
                    are deposited  into the general  fund in                                                                    
                    the current fiscal year;                                                                                    
                         (2) the sum of $1,200,000,000."                                                                        
Co-Chair Seaton OBJECTED for discussion.                                                                                        
Representative Thompson read from a prepared statement:                                                                         
     In  times of  higher  revenue, we  reduce  how much  is                                                                    
     spent  from  the Permanent  Fund.  This  concept is  no                                                                    
     different then from a family  manages their money: when                                                                    
     they  make more  money,  they quit  drawing from  their                                                                    
     savings  account. The  draw limit  was  modeled by  the                                                                    
     administration.  The  $1.2  billion  threshold  is  not                                                                    
     arbitrary. The administration  vetted this number using                                                                    
     their model,  a model that  was vetted by  Mackenzie, a                                                                    
     very   reputable   financial   consulting   firm.   The                                                                    
     administration  determined that  the  draw  limit is  a                                                                    
     critical  addition  to   protecting  the  dividend  and                                                                    
     preserving the  Permanent Fund value.  The commissioner                                                                    
     of  revenue  last year  in  May  signed a  letter  that                                                                    
     states,  "In  preserving the  value  of  the fund,  the                                                                    
     revenue limit also protects the  divided. In short, the                                                                    
     revenue  limit is  a critical  addition  to the  bill."                                                                    
     Members who  say the draw limit  is unnecessary because                                                                    
     the  forecasts  are  low  need  to  consider  that  the                                                                    
     forecasts  have  consistently  been  inaccurate.  Their                                                                    
     forecasts only go  forward 5 years. When  you look over                                                                    
     the last 10 years the  forecasts have not been correct.                                                                    
     They  have been  way off.  Without the  draw limit  the                                                                    
     state  will have  a smaller  Permanent Fund,  a smaller                                                                    
     percent POMV, and a smaller PFD.                                                                                           
Representative Thompson pointed out that the commissioner                                                                       
was in the room if anyone wanted to hear from him.                                                                              
Co-Chair Foster invited the commissioner to come up to                                                                          
provide a statement.                                                                                                            
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
concurred  with   the  statements  made   by  Representative                                                                    
Thompson. The  administration had always felt  that the draw                                                                    
limit was an important component  within the bill to protect                                                                    
the  durability of  the fund  and the  dividend and  to take                                                                    
volatility out of  the State of Alaska's  revenue stream. He                                                                    
reiterated  that it  was one  of  five "must  haves" in  the                                                                    
bill. The administration supported the amendment.                                                                               
Co-Chair  Seaton  continued to  have  some  interest in  the                                                                    
amendment. He  had looked at  a draw point of  $1.5 billion.                                                                    
He also looked  at different levels, but had  not decided on                                                                    
an  appropriate  amount.  He   was  concerned  that  if  the                                                                    
proposal  was enacted  at $90  per barrel  of oil  the state                                                                    
would still  be in a  deficit. He opposed the  amendment. He                                                                    
suggested  that perhaps  it would  be  appropriate down  the                                                                    
Co-Chair Seaton MAINTAINED his OBJECTION.                                                                                       
A roll call vote was taken on the motion.                                                                                       
IN FAVOR: Tilton, Wilson, Pruitt, Thompson                                                                                      
OPPOSED: Gara, Grenn, Guttenberg, Kawasaki, Seaton, Foster                                                                      
The MOTION to ADOPT Amendment 13 FAILED (4/7).                                                                                  
Co-Chair  Seaton  indicated a  CS  would  be drawn  up  that                                                                    
reflected the adopted amendments.                                                                                               
Co-Chair Foster  reported the amendment would  be set aside.                                                                    
The committee would bring back a clean CS for review.                                                                           
HB  115  was  HEARD  and   HELD  in  committee  for  further                                                                    
2:30:48 PM                                                                                                                    
AT EASE                                                                                                                         
2:37:50 PM                                                                                                                    
HOUSE BILL NO. 111                                                                                                            
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     and providing for an effective date."                                                                                      
2:37:50 PM                                                                                                                    
REPRESENTATIVE   GARRAN  TARR,   relayed   that  the   House                                                                    
Resources Committee  thought the state's oil  and gas system                                                                    
was  broken.   She  elaborated  that   when  SB   21  passed                                                                    
[Legislation  passed in  2013  - Short  Title:  Oil and  Gas                                                                    
Production tax]  the price  of oil was  $94 per  barrel. The                                                                    
state had  been operating with  oil prices ranging  from $60                                                                    
to  $100  per  barrel.  The  legislature  did  not  spend  a                                                                    
significant  amount of  time  crafting an  oil  and gas  tax                                                                    
system that worked well in  a low-price environment like the                                                                    
one  the  state  was   presently  experiencing.  There  were                                                                    
unintended   consequences  resulting   from  the   low-price                                                                    
environment  that  were  not   well  studied  and  placed  a                                                                    
significant  burden on  the state  equating  to hundreds  of                                                                    
millions  of  dollars  of  credits  for  some  of  the  most                                                                    
profitable  corporations in  the world.  In crafting  HB 111                                                                    
the House  Resources Committee had looked  at an alternative                                                                    
for credits,  keeping in mind  that Alaska wanted  to remain                                                                    
an attractive  place for investment and  to continue working                                                                    
towards  a  shared goal  of  more  oil in  the  Trans-Alaska                                                                    
pipeline.   The  committee   adjusted  the   underlying  tax                                                                    
structure that would result in  a more appropriate value for                                                                    
Alaska's oil  when prices were  lower. The current  price of                                                                    
oil was $51  per barrel, below what  the legislature thought                                                                    
the low-price  environment was in  2013 when  considering SB
Representative  Tarr  pointed  to   slide  24:  "SB  21  Tax                                                                    
Calculation  AT  Different Prices."  The  slide  was from  a                                                                    
presentation by Ken Alper, the  Director of the Tax Division                                                                    
within the Department of Revenue  (DOR). It showed the SB 21                                                                    
calculation at  different prices. She noted  there were some                                                                    
mathematical  errors on  the sheet.  However, she  wanted to                                                                    
use it as an illustration.                                                                                                      
Representative  Guttenberg  wanted to  be  sure  he had  the                                                                    
correct  form. "Oil  Tax  Analysis by  Rep.  Tarr" (copy  on                                                                    
Representative Wilson  asked if  the committee  would review                                                                    
the     corrections.    Representative     Tarr    responded                                                                    
affirmatively. She  was using the example  to illustrate how                                                                    
the  tax  equation  worked.  She  would  transition  to  her                                                                    
examples   that  were   corrected.  She   directed  members'                                                                    
attention to  the top line  containing the price  per barrel                                                                    
of oil at  $40, $60, $80, $100, $120, $140.  The second line                                                                    
reflected  allowable transportation  expenses of  $9.33. The                                                                    
price per  barrel minus transportation expenses  equaled the                                                                    
gross  value  at  the  point   of  production  (GVPP)  shown                                                                    
beginning in the  first column with $30.67. As  the price of                                                                    
oil went  up the GVPP  went up  by $20. She  highlighted the                                                                    
fourth  line  that  showed the  lease  expenditures  in  the                                                                    
amount  of $30.88.  The lease  expenditures subtracted  from                                                                    
the GVPP  equaled the production  tax value (PTV) net.  In a                                                                    
low-price  environment, the  PTV was  a negative  number and                                                                    
became positive as the price  per barrel increased. Once the                                                                    
PTV was  determined it was  multiplied by 35 percent  to get                                                                    
the per-barrel tax degrading the PTV by one-third.                                                                              
Representative   Tarr   highlighted   the   following   line                                                                    
representing the  per barrel credit. The  committee had some                                                                    
adjustments to  the per barrel  credit to retain  more value                                                                    
per  barrel. She  explained that  the  reason the  committee                                                                    
chose the per barrel credit was  that it was the easiest way                                                                    
to  adjust the  underlying tax  system. She  emphasized that                                                                    
the per  barrel credit  was subtracted  after transportation                                                                    
costs, lease  expenditures, and degrading the  value by 1/3.                                                                    
The   net  profit   system  allowed   investors  to   deduct                                                                    
transportation  costs and  lease expenditures  (although not                                                                    
100  percent  but a  significant  portion  of operating  and                                                                    
capital   expenses).   She    continued   to   explain   the                                                                    
calculation. The  production tax value minus  the 35 percent                                                                    
tax minus the  per barrel credit reflected the  tax per net.                                                                    
The per barrel  credit had a significant amount  of power in                                                                    
the  equation because  of where  the per  barrel credit  was                                                                    
subtracted  from the  value. She  reported that  the minimum                                                                    
tax  reflected in  the line  below the  tax per  net on  the                                                                    
slide represented 4 percent of  the GVPP. She clarified that                                                                    
the GVPP  at $30.67  multiplied by  .04 equaled  the minimum                                                                    
tax. The  system was designed  such that the state  took the                                                                    
higher of  the two: the tax  per net or the  minimum tax. In                                                                    
the example, the minimum tax was  the higher of the two. She                                                                    
wanted everyone  on the same  page in understanding  how the                                                                    
tax  calculation  worked.  She  reemphasized  that  the  per                                                                    
barrel credit had significant power  in the equation because                                                                    
the state had already  provided certain allowable deductions                                                                    
and  reduced  the amount  by  one-third  with  a tax  of  35                                                                    
Representative  Tarr pointed  to the  last few  rows on  the                                                                    
slide  - tax  as percent  of price,  tax as  percent of  the                                                                    
GVPP, and  tax as  percent of the  PTV. She  highlighted the                                                                    
tax  as the  GVPP  in  the first  couple  of columns,  which                                                                    
reflected the  current minimum tax  of 4 percent.  She would                                                                    
be paying close  attention to the tax as percent  of the PTV                                                                    
in  the upcoming  documents based  on the  recommendation of                                                                    
the state's  consultant, Rich Ruggiero. She  elaborated that                                                                    
when  looking at  the overall  tax  amount in  a net  profit                                                                    
system  the focus  should  be  on a  percentage  of the  PTV                                                                    
because it  represented the net  amount. The  production tax                                                                    
value was determined  after subtracting transportation costs                                                                    
and  lease expenditures.  She suggested  that to  understand                                                                    
the overall effective tax rate  the tax should be calculated                                                                    
by using the percent of the PTV.  In looking at the tax as a                                                                    
percent of  the PTV  at lower prices  it was  extremely low.                                                                    
For instance, at  $60 per barrel for oil the  tax as percent                                                                    
of the  PTV was  10 percent  and at $80  it was  18 percent.                                                                    
People talked about  the state's net profit  system having a                                                                    
35 percent  tax. However, in  the current system,  the state                                                                    
never reached the  high rate of taxation until  the price of                                                                    
oil reached  $140 and higher.  The state had  rarely reached                                                                    
that level  of pricing for oil.  She noted that in  2008 oil                                                                    
prices peaked  at $147 per  barrel but was  short-lived. The                                                                    
state had  never seen that  price before or since  then. She                                                                    
opined that getting  to the 35 percent tax  amount would not                                                                    
likely  happen   in  the  near-term  or   longer  term.  She                                                                    
continued that  when the  committee looked at  the tax  as a                                                                    
percent of the PTV it wanted to  focus on the $60 to $80 per                                                                    
barrel  price  range.  She surmised  that  the  state  would                                                                    
likely  be operating  in the  lower  range for  a while  and                                                                    
wanted to do something more reasonable.                                                                                         
2:47:43 PM                                                                                                                    
Vice-Chair Gara gave kudos to  Representative Tarr for being                                                                    
able to do the math on  the $8 per barrel credit. He pointed                                                                    
out that  the chart  was really  for older  oil. He  did not                                                                    
think it applied to the  post 2002 gross value reduction. He                                                                    
asked if he was  correct. Representative Tarr indicated that                                                                    
Vice-Chair Gara was correct.                                                                                                    
Vice-Chair  Gara  asked  about  the post  2002  gross  value                                                                    
reduction (GVR)  oil and  whether there  was a  minimum tax.                                                                    
Representative  Tarr responded  that in  the bill  the floor                                                                    
was  hardened and  there  was a  minimum  tax. However,  the                                                                    
information did not reflect the  GVR reduction, a 20 percent                                                                    
reduction  in the  value  plus  a $5  credit.  She would  be                                                                    
bringing  up  the issue  when  the  change from  credits  to                                                                    
deductions was discussed.                                                                                                       
Vice-Chair  Gara  was  eager  to hear  how  the  bill  would                                                                    
change.  He  wondered  if  he was  correct  in  saying  that                                                                    
presently, without  the bill, there  was no minimum  tax and                                                                    
the GVR tax  rate was lower than the bigger  field tax rate.                                                                    
Representative Tarr answered in the affirmative.                                                                                
Representative  Kawasaki wondered  if there  was some  point                                                                    
between  the $60  to $80  range that  made a  difference. He                                                                    
wondered  if  there  was  a   graphic  showing  that  point.                                                                    
Representative  Tarr  indicated  that  Mr.  Alper  would  be                                                                    
providing a chart in his  presentation to the committee. She                                                                    
concluded that  legislators should  be able  to do  the math                                                                    
themselves  rather   than  relying  on  the   Department  of                                                                    
Revenue.  She  wanted  members   to  have  a  more  intimate                                                                    
understanding of  how the equation  worked. She did  not try                                                                    
to take on any of the modeling activities.                                                                                      
Representative  Kawasaki asked  whether  the  line would  be                                                                    
linear.  He   thought  there  would  be   a  pivotal  point.                                                                    
Representative  Tarr  responded that  it  had  a stair  step                                                                    
approach. Currently, the per barrel  credit was applied when                                                                    
oil prices  reached between  $60 to  $70. She  remarked that                                                                    
there  was a  strange  transition point  between $69.99  and                                                                    
$70.00 -  there was a  significant tax hike. In  prior years                                                                    
she reported  running an  amendment that  used a  formula to                                                                    
smooth out the  transition. She reported that it  was not in                                                                    
the  current  version of  the  bill  but thought  the  House                                                                    
Finance Committee should consider it.                                                                                           
2:51:03 PM                                                                                                                    
Vice-Chair Gara had  been told that the 35  percent tax rate                                                                    
did  not  take effect  until  oil  reach  $150 to  $155  per                                                                    
barrel.  He wondered  how  it  was possible  to  reach a  36                                                                    
percent tax  rate when there  was a  maximum tax rate  of 35                                                                    
percent.  Representative Tarr  explained  that  most of  the                                                                    
time she  looked at the  tax as a  percent of the  GVPP. The                                                                    
consultant  advised  that in  a  net  profit system  it  was                                                                    
better  to determine  the tax  value based  on the  PTV more                                                                    
accurately reflecting the effective tax rate.                                                                                   
Representative Tarr  turned to  the per barrel  credit sheet                                                                    
titled: "CS  HB 111  Analysis of per  Barrel Credit  by Rep.                                                                    
Tarr" (copy  on file). She  highlighted the first  column of                                                                    
the per barrel credit. She  noted that the per barrel credit                                                                    
was not  applied relative to  the overall price  per barrel.                                                                    
It  was applied  to the  GVPP, which  already reflected  the                                                                    
transportation   reductions.  Under   the  current   system,                                                                    
everything  below  $80  received  an  $8  credit.  It  stair                                                                    
stepped down $7,  $6, $5, $4, $3, $2, $,1  to zero. However,                                                                    
under the  current system  once zero  was reached  the state                                                                    
was still  offering a  credit between $140  to $150  for the                                                                    
GVPP.  It meant  the state  was offering  a credit  when oil                                                                    
prices were at $160 per barrel.                                                                                                 
Co-Chair  Seaton asked  for clarification  as  to the  chart                                                                    
being  discussed.  Representative  Tarr  reported  that  the                                                                    
chart  was in  members' packets.  She responded,  "It should                                                                    
say per barrel  credit at the top." She made  clear that the                                                                    
first column  reflected the GVPP.  Under the  current system                                                                    
the state gave $1 credit for  oil priced at $160 per barrel.                                                                    
She had been continually told  by the consultant that in the                                                                    
low-price environment  more would  not be gained  because of                                                                    
expenses. The way  the state could take less at  the low end                                                                    
was  by making  sure to  have a  windfall on  the high  end.                                                                    
However,  under  the current  law,  the  windfall would  not                                                                    
happen until  oil reached $160  per barrel. She  opined that                                                                    
the problem was the state had  never seen $160 price for oil                                                                    
per barrel.  She thought the  state would be waiting  a long                                                                    
time for a windfall since it  had never seen $160 per barrel                                                                    
oil.  The legislation  reflected  adjustments  in the  lower                                                                    
price  environment scaling  back  how  dramatically the  per                                                                    
barrel credit was changed. The  original version of the bill                                                                    
had a  $5 credit. However,  in the lower  price environment,                                                                    
making  a dramatic  change to  the per  barrel credit  was a                                                                    
significant tax increase. The committee  had chosen to scale                                                                    
the change  back to  reflect a  step-down. A  windfall would                                                                    
result between $130  and $147 (the highest  price per barrel                                                                    
the state had seen).                                                                                                            
2:56:23 PM                                                                                                                    
Representative Wilson asked why the  state was looking for a                                                                    
windfall  versus having  a structure  that worked  no matter                                                                    
the  price. The  committee  was discussing  a tax  structure                                                                    
that many companies built their businesses around.                                                                              
Representative Tarr  offered that it was  suggested that the                                                                    
state move  to a gross  tax - a flat  tax rate based  on the                                                                    
gross  value. However,  it could  be seen  through different                                                                    
presentations that  in the lower price  environment the flat                                                                    
tax did  not work well.  However, a net profit  system could                                                                    
work well in  a low-price environment. She  reported that in                                                                    
the bill,  when oil prices  were below $40, the  minimum tax                                                                    
was 4 percent.  Alaska would only take 4 percent  in low oil                                                                    
price  climates, but  the  only  way to  take  such a  small                                                                    
percentage was  to balance it  by taking more at  higher oil                                                                    
prices. She tried to incorporate  a balance in the bill. She                                                                    
continued that  the state  needed to get  more value  out of                                                                    
the  production tax.  Balance  could be  found  by taking  a                                                                    
lesser  amount at  lower prices  and  a little  bit more  at                                                                    
higher prices.                                                                                                                  
Representative Wilson commented that  she thought Alaska had                                                                    
done well  with what  the oil companies  had been  forced to                                                                    
give the  state. The state's infrastructure  was an example.                                                                    
She suggested  that although  4 percent  sounded like  a low                                                                    
amount, relative to low oil  prices, it was significant. She                                                                    
was trying to understand the idea of a windfall.                                                                                
Representative Tarr  suggested that  Representative Wilson's                                                                    
point might  be one they disagree  on. She was not  sure she                                                                    
could sway  the representative otherwise. She  reported that                                                                    
in terms of  the math some people favored  the "Jay Hammond"                                                                    
one-third,  one-third, one-third  approach. She  argued that                                                                    
if the  target was a 33  percent tax, the state  would never                                                                    
come  close  operating  in  a   4  percent  tax  world.  She                                                                    
suggested that over  time, and what the state  had seen with                                                                    
the historical average over the  previous 30 years, the one-                                                                    
third,  one-third,  one-third  approach had  prevailed.  She                                                                    
indicated that the  way to accomplish the split  was to take                                                                    
a little bit  less at lower prices and a  little bit more at                                                                    
higher prices.                                                                                                                  
Representative Wilson wondered if  there would be a side-by-                                                                    
side comparison  between HB  111 and SB  21. She  thought it                                                                    
was important  to have one.  Co-Chair Foster  responded that                                                                    
he would be open to suggestions.                                                                                                
Representative Wilson  expounded that she wanted  to be able                                                                    
to have  a comparison so  that she  could explain it  to her                                                                    
constituents.   Co-Chair  Foster   agreed   that  the   more                                                                    
information available, the better.                                                                                              
3:00:29 PM                                                                                                                    
Representative  Pruitt argued  that  under  the current  tax                                                                    
structure the state had the best  of both worlds. It had the                                                                    
net at the  top where a larger percentage  tax was collected                                                                    
ensuring a  large amount  of revenue for  the state.  At the                                                                    
bottom, when the  net typically generated zero,  a 4 percent                                                                    
gross  minimum  tax applied.  He  suggested  that even  when                                                                    
companies were losing money, the  state had money coming in.                                                                    
The state  had structured the  tax system so that  the state                                                                    
was always receiving money no matter the price of oil.                                                                          
Representative  Tarr indicated  that  if  the tax  structure                                                                    
worked  in the  way  Representative  Pruitt was  describing,                                                                    
there  would not  be a  problem. She  suggested there  was a                                                                    
significant  amount  of  confusion   about  the  issue.  She                                                                    
clarified that there  was no minimum tax  presently. In some                                                                    
circumstances, the state was currently  paying more than 100                                                                    
percent  of the  cost. Even  though there  was a  "4 percent                                                                    
minimum tax" the  credits were used against the  tax so that                                                                    
the value went  below zero. She thought the  state needed to                                                                    
harden the floor  so that the state had a  4 percent minimum                                                                    
tax. She  reiterated that  at present  there was  no minimum                                                                    
tax  enforced.  In  the  current   legislation  there  is  a                                                                    
hardened floor.                                                                                                                 
Representative Pruitt  commented that it  was going to  be a                                                                    
fascinating week. He indicated  that Representative Tarr was                                                                    
incorrect.  The state  still taxed  the  oil companies  even                                                                    
when they could  move over the net  operating losses (NOL)'s                                                                    
and transfer the  loss. The state still  charged companies a                                                                    
gross tax of 4 percent.                                                                                                         
Co-Chair Foster  urged Representative Tarr to  finish up her                                                                    
presentations.  He  thought  policy calls  and  issues  were                                                                    
being  discussed  and  would   be  debated.  He  wanted  the                                                                    
introduction on the record.                                                                                                     
Vice-Chair  Gara  indicated  he  would  be  distributing  an                                                                    
analysis  done  by  DOR  showing the  tax  rates  the  state                                                                    
received at  various prices.  He agreed  with Representative                                                                    
Tarr that the 4 percent minimum  tax lasted up to $70 or $72                                                                    
per barrel.  The state  received no taxes  up to  $70 barrel                                                                    
for 7 years on GVR oil.                                                                                                         
3:04:19 PM                                                                                                                    
Representative  Tarr clarified  that  there  was no  minimum                                                                    
tax,  as there  was no  hard floor  in current  law. Credits                                                                    
could  be  used to  go  below  the minimum  tax  potentially                                                                    
reducing the  value below zero. There  were several sections                                                                    
of the  bill where the  floor was hardened.  Such provisions                                                                    
of law  would not be  necessary if  it was in  existing law.                                                                    
She was  happy to share  her sources that  substantiated her                                                                    
Representative Tarr drew members'  attention back to the per                                                                    
barrel  credit  handout.  She pointed  out  that  the  paper                                                                    
showed  what  was currently  in  place  and what  was  being                                                                    
proposed  in the  bill. She  would also  be looking  at some                                                                    
additional Excel  spreadsheets (Document: "Oil  Tax Analysis                                                                    
by Rep. Tarr") (copy on file).                                                                                                  
Representative Tarr  looked at per  barrel prices of  $25 to                                                                    
$145 because the lowest per  barrel price the state had seen                                                                    
was  $27  and  the  highest   was  $147.  She  relayed  that                                                                    
committee members  were looking  at the severance  tax which                                                                    
was a combination of  a gross tax and a net  tax. It was one                                                                    
component  of the  overall taxes.  There were  also property                                                                    
taxes paid  to municipalities and corporate  income tax paid                                                                    
to  the state.  However,  the severance  tax was  deductible                                                                    
from the corporate  income tax and the  corporate income tax                                                                    
was deductible from the federal  corporate income tax. There                                                                    
were different places where  there were built-in incentives.                                                                    
Companies could  continue to deduct the  same thing multiple                                                                    
Representative Tarr  pointed to  the lease  expenditure row,                                                                    
the  forth  row down,  showing  lease  expenditures of  $25,                                                                    
$30.88 (average), $40, and $50.  In looking at the different                                                                    
lease  expenditure  amounts  it  helped  to  understand  how                                                                    
behavior  would change  as  the price  of  oil changed.  The                                                                    
overall value  would change.  In the $25  range the  PTV was                                                                    
negative. Once  the 35 percent  tax was applied and  the per                                                                    
barrel  credit of  $8 was  subtracted  the tax  per net  was                                                                    
always  lower  than  the  minimum tax  which  was  $.60  per                                                                    
barrel.  At $35  per  barrel the  minimum  tax would  always                                                                    
equal  $1.  Companies  were losing  monies,  therefore,  the                                                                    
House  Resources Committee  kept the  minimum tax  low at  4                                                                    
percent, but  hardened the  floor to  ensure that  the state                                                                    
would receive a minimum tax even at lower prices.                                                                               
Representative Wilson  clarified that when the  price of oil                                                                    
was at  $25 or $35  per barrel companies were  losing money.                                                                    
Even at the lower prices, the  bill would allow the state to                                                                    
charge  4  percent.  Representative Tarr  responded  in  the                                                                    
affirmative. She  explained that by hardening  the floor the                                                                    
state  would  collect  a  4 percent  minimum  tax  at  lower                                                                    
Representative   Wilson  suggested   that  companies   would                                                                    
experience  an additional  loss  to what  they were  already                                                                    
experiencing   because  of   the   lower   prices  of   oil.                                                                    
Representative  Tarr responded,  "It could  be characterized                                                                    
in that way."                                                                                                                   
3:08:40 PM                                                                                                                    
Representative Tarr moved to page  2 of the spreadsheet. The                                                                    
chart showed that at $45 oil,  the PTV was a positive value.                                                                    
It would be  unlikely for companies to spend  money at lower                                                                    
oil  prices  because  the  PTV   would  be  degraded.  Lease                                                                    
expenditures  trended  downward by  $10  over  the past  few                                                                    
years due to  the price of oil dropping.  She also mentioned                                                                    
a  lag time  when  companies needed  to lay  down  a rig  or                                                                    
people needed  to be laid  off. She concluded that  when oil                                                                    
prices went  down companies did not  immediately respond but                                                                    
would  over  time, hence  the  lag.  For example,  from  the                                                                    
previous year to the current  year there was a $5 difference                                                                    
in lease  expenditures. It reflected companies  scaling back                                                                    
on capital  and operating expenses.  In the $45 range  the 4                                                                    
percent minimum  tax was  higher than the  tax per  net. She                                                                    
suggested that even  when the production tax  was a positive                                                                    
value, $1.44,  the minimum tax  would apply because  the per                                                                    
barrel credit  was a  significant value.  At $55  per barrel                                                                    
the  number [PTV]  stayed  positive  farther out.  Companies                                                                    
could increase  their expenditures a little  and there would                                                                    
still be a  PTV. However, the generous $8  per barrel credit                                                                    
made the  tax per net  a negative value. again,  the minimum                                                                    
tax would  apply. She indicated  that the examples  were the                                                                    
reason  she  chose  $50  per  barrel  to  be  the  point  of                                                                    
demarcation for raising the minimum  tax from 4 percent to 5                                                                    
percent. She reasoned  that the tax of a percent  of the PTV                                                                    
was 12.7 percent with a  4 percent minimum. She relayed that                                                                    
when the minimum tax was raised  to 5 percent (from $1.80 to                                                                    
$2.25) the difference was about  .45. She calculated that by                                                                    
raising  the  minimum  tax  to 5  percent  would  result  in                                                                    
bringing  in   and  additional  amount  of   $70,000,000  in                                                                    
revenues. She reviewed the  formula: Subtracting the royalty                                                                    
share from  500,000 barrels oil  production per  day equaled                                                                    
437,500 barrels per day. She  multiplied 437,500 barrels per                                                                    
day by 365 days per  year to total about 160,000,000 barrels                                                                    
per  year. She  multiplied  160,000,000  times .45  totaling                                                                    
approximately $70,000,000 in additional revenue.                                                                                
Representative  Tarr   explained  that  the   committee  had                                                                    
considered  a   4.5  percent  minimum  tax.   She  suggested                                                                    
dividing the previous number in  half. The committee did not                                                                    
raise  the minimum  tax below  $50 per  barrel. However,  it                                                                    
hardened  the floor  - a  4 percent  minimum tax  below $50.                                                                    
Above  $50  the  committee  raised  the  minimum  tax  to  5                                                                    
percent.  She  pointed  to the  spreadsheet  indicated  that                                                                    
instead of $1.80  per barrel in taxes it would  be $2.25 per                                                                    
barrel  reflecting a  5 percent  minimum tax.  She continued                                                                    
that the 5  percent minimum tax equaled 15.9  percent of the                                                                    
PTV. The overall  change of the effective tax  rate was only                                                                    
a  few percentage  points increasing  12.7 to  15.9 percent.                                                                    
She reiterated  the minimal  percentage difference.  She had                                                                    
asked Mr. Ruggiero if Alaska  would remain competitive if it                                                                    
made a 2 to 3 percent  adjustment to the effective tax rate.                                                                    
He responded  affirmatively. The committee tried  to come up                                                                    
with something reasonable.                                                                                                      
3:14:37 PM                                                                                                                    
Representative  Wilson  was  aware Representative  Tarr  had                                                                    
stated that the hard floor would  go to 5 percent at $50 oil                                                                    
prices.  However, she  asked if  the  4 percent  was a  hard                                                                    
floor and a raise in taxes  under the $50 mark. She wondered                                                                    
if she was accurate.  Representative Tarr responded that she                                                                    
was correct.                                                                                                                    
Representative Wilson asked at  what point the oil companies                                                                    
would stop  laying down rigs  because of  the implementation                                                                    
of  new  taxes.  Representative   Tarr  responded  that,  in                                                                    
looking at the  original slide and why  she reviewed several                                                                    
different  lease expenditure  scenarios,  the overall  price                                                                    
per barrel would have significantly  more influence over oil                                                                    
companies'  decisions  than  the tax  amounts.  She  thought                                                                    
companies would likely  spend less money in  the lower price                                                                    
environments.  She  continued  that companies  would  be  in                                                                    
harvest mode  rather than spending money  on exploration and                                                                    
development without the extra spending dollars.                                                                                 
Representative Wilson  commented that  she had  learned that                                                                    
at $65  per barrel, before the  legislation, companies would                                                                    
decide whether  to continue drilling  or lay down  rigs. She                                                                    
indicated that their decisions  were based on profitability.                                                                    
She wondered  if the $60 to  $65 mark would change  with the                                                                    
passage  of the  legislation. Representative  Tarr responded                                                                    
that  she  would expect  the  companies  would change  their                                                                    
mark.   She  thought   it  was   reflected   in  the   lease                                                                    
expenditures.  In 2016,  the average  lease expenditure  was                                                                    
$30.22.  In 2015,  the amount  was an  additional $5  and in                                                                    
2014,  it  was another  additional  $5.  In Fall  2014  when                                                                    
prices were  low, and it  became apparent they  would remain                                                                    
low  for  a prolonged  period  companies  scaled back.  They                                                                    
began laying  off workers and  slowing down  other activity.                                                                    
It made  sense to her while  that would happen. She  did not                                                                    
think it was reasonable to  expect that companies would take                                                                    
on major projects  if the price per barrel  continued in the                                                                    
$30 and $40 range.                                                                                                              
Representative Wilson  did not  expect companies to  take on                                                                    
more. However, she argued that  the state could tax more but                                                                    
would not gain more if less  oil was being produced. She was                                                                    
concerned that if companies were  looking to have their rigs                                                                    
back in  operation at $60  to $65  based on the  current tax                                                                    
structure, the  price per barrel  might have to  increase to                                                                    
$80 or  $85 with the  proposed change. She  thought incoming                                                                    
royalties  might go  down with  less  production. She  would                                                                    
direct her questions to the oil companies.                                                                                      
3:18:34 PM                                                                                                                    
Vice-Chair Gara  was unclear  about the GVR  oil -  the post                                                                    
2002 production  units. He  asked if  the 4  percent minimum                                                                    
would  apply  to those  fields  in  the  first 7  years.  He                                                                    
reported that under current law  they paid no tax within the                                                                    
first 7  years up  to $70  per barrels.  Representative Tarr                                                                    
relayed  that  the intent  was  to  harden  the floor  at  4                                                                    
percent even for GVR oil.                                                                                                       
Vice-Chair Gara  suggested there would  not be a  7-year tax                                                                    
holiday. Representative  Tarr replied  that the  tax holiday                                                                    
would include  a 20 percent  reduction and a $5  credit. The                                                                    
same circumstance  of "higher of" would  apply. For example,                                                                    
if the 4  percent minimum tax was higher of  the other the 4                                                                    
percent minimum tax  would apply. She would  discuss it more                                                                    
when the committee looked at the reductions.                                                                                    
LISA   WEISSLER,  STAFF,   REPRESENTATIVE  ANDY   JOSEPHSON,                                                                    
reported  that  there  was  a   provision  in  HB  111  that                                                                    
protected the GVR  from the minimum so that  the minimum tax                                                                    
would apply  to the 70  percent or  80 percent that  was not                                                                    
subject to the GVR.                                                                                                             
Vice-Chair  Gara  noted  that  under  current  law  the  GVR                                                                    
fields, what he  called the post 2002 fields  and all future                                                                    
fields,  did not  pay the  minimum tax.  Given the  discount                                                                    
they received, the average GVR  field paid no production tax                                                                    
up  to $70  or $72  per barrel.  He understood  two separate                                                                    
things.  He wanted  to clarify  that a  GVR field  currently                                                                    
received a  7-year tax holiday  from the gross  minimum tax.                                                                    
He wondered  if those  fields, in the  first 7  years, would                                                                    
still have  the holiday from  paying the minimum tax,  or if                                                                    
they would  start paying the  minimum tax in the  first year                                                                    
like every other field.                                                                                                         
3:21:00 PM                                                                                                                    
Representative  Tarr  explained  the  portion  equaling  the                                                                    
original value minus  the deduction of 20  percent would not                                                                    
be subject  to the  minimum tax.  However, the  remaining 80                                                                    
percent would be  subject to the minimum  tax provision. The                                                                    
gross value  reduction would still apply,  but the remaining                                                                    
value would be subject to the minimum tax.                                                                                      
Representative  Tarr explained  that above  $50 per  barrel,                                                                    
the 5 percent  minimum tax kicked in and  the relative value                                                                    
was about $70  million. She suggested the  $70 million would                                                                    
be paid by about 5 potential production companies.                                                                              
Representative Tarr continued to  the spreadsheet on page 3.                                                                    
If  the price  of oil  was  $65 per  barrel companies  would                                                                    
still  be  operating in  the  minimum  tax unless  companies                                                                    
significantly slowed  down activities and  expenditures went                                                                    
to $25. The committee felt that  the minimum tax had to be 5                                                                    
percent rather than 4 percent.  She pointed out that the PTV                                                                    
net  was   positive.  Companies   subtracted  transportation                                                                    
expenses and  lease expenditures. If  oil were to  reach $65                                                                    
per barrel, there would be about  $25 prior to the 5 percent                                                                    
equaling about  $8.44 of profit  per barrel. She  noted that                                                                    
once  an   $8  credit  was   applied  the  value   would  be                                                                    
significantly reduced to $.44 per  barrel or the minimum tax                                                                    
of $2.20 per barrel. The  committee felt that amount was too                                                                    
low  because  they  wanted  more   value  in  the  low-price                                                                    
environment of $50,  $60, $70, or $80  range. The difference                                                                    
would be  $2.75 minus $2.20  which equaled $.55  per barrel.                                                                    
She highlighted  a scenario where  the price per  barrel was                                                                    
$.45  and how  more value  would result  by adding  $.55 per                                                                    
3:24:01 PM                                                                                                                    
Representative Tarr  discussed scenarios at $75  per barrel.                                                                    
She indicated  that at  $75 the minimum  tax would  apply if                                                                    
the lease  expenditures increased  to what  they had  been 2                                                                    
years  prior. She  opined that  the state  could not  have a                                                                    
such  a low  minimum tax  at $75  per barrel.  She advocated                                                                    
raising  the   minimum  tax  to  5   percent  comparing  the                                                                    
difference of $3.25 and $2.60.                                                                                                  
Vice-Chair Gara  spoke to a  concern about just  raising the                                                                    
minimum floor to 5 percent  at higher prices versus going to                                                                    
6 or 7 percent as prices  increased. He surmised that as the                                                                    
price of  oil increased  so did  the industry's  profits. He                                                                    
referred  to  her  analysis  that  at  $55  per  barrel  the                                                                    
effective profits  tax rate was  15.9 percent.  He continued                                                                    
that leaving the minimum tax at  5 percent at $65 per barrel                                                                    
the effective  tax rate  went down to  11.4 percent.  At $75                                                                    
per barrel it  decreased to 9.5 percent. He  wondered if the                                                                    
decreases  were  due  to  the minimum  tax  remaining  at  5                                                                    
Representative  Tarr   answered  in  the   affirmative.  She                                                                    
elaborated that it  was also why the per  barrel credit made                                                                    
a difference.  She relayed that the  consultants advised the                                                                    
state to  move away  from things attached  to the  price per                                                                    
barrel. Depending on which side  of the equation someone was                                                                    
on, the  value would degrade  over time due to  inflation. A                                                                    
way to get  around that was to use a  per barrel credit. The                                                                    
House  Resources  committee  stepped  down  the  per  barrel                                                                    
credit. In  existing law, the  per barrel credit was  $8. In                                                                    
the proposed legislation the per  barrel credit stepped down                                                                    
to $7. She pointed to the  area of the slide that showed the                                                                    
step down from $8 to $7, which  added $1 to the tax per net.                                                                    
She continued  to highlight  areas of  the page  that showed                                                                    
where  the  state  currently  stood   and  pointed  to  some                                                                    
differences. She reiterated the  importance of maintaining a                                                                    
minimum tax that  retained enough value, so  the state would                                                                    
still get some value when the price was around $75.                                                                             
3:27:55 PM                                                                                                                    
Representative Tarr moved  to slide 4. She  reviewed that in                                                                    
the existing law the per barrel  credit was $8 even when the                                                                    
price  per  barrel was  $85  because  of  the GVPP  (it  was                                                                    
reflected as $75 on the  slide). She highlighted percentages                                                                    
on the  chart pertaining to  existing law. She  continued to                                                                    
point  to certain  areas  on the  chart  noting the  changes                                                                    
where the per  barrel credit was scaled back from  $8 to $6.                                                                    
She  pointed to  the effective  tax rate  on the  chart. She                                                                    
restated  that   the  adjustment  was  about   a  couple  of                                                                    
percentage points.  One way to  make things smoother  was to                                                                    
use a  formula. She thought  there was a  significant amount                                                                    
of variability  in the overall  tax rate. She added  that it                                                                    
had to  do with a  company's behavior and their  spending at                                                                    
different  prices. She  did not  feel the  overall effective                                                                    
tax  rate  was  too  high.  In terms  of  a  relative  value                                                                    
currently,  Mr. Alper  stated that  every  dollar change  in                                                                    
price  equaled  $60  million  to the  state.  She  used  the                                                                    
example of  the per barrel  credit being reduced from  $8 to                                                                    
$6,  a  reduction of  $2.  The  reduction, because  the  per                                                                    
barrel credit was applied as  a full dollar deduction, would                                                                    
be equal to $120 million.                                                                                                       
Vice-Chair Gara spoke  to the $75 per barrel  level on slide                                                                    
3. He  noted that the credit  went down by $1.  He expressed                                                                    
his  concern that  at an  oil price  of $50  per barrel  the                                                                    
effective tax rate  was 15.9 percent of profits.  At $65 per                                                                    
barrel the tax  rate was 11.4 percent of profits  and at $75                                                                    
per  barrel the  rate went  down to  9.4 percent  of profits                                                                    
applying the 5 percent minimum  tax. He was aware that there                                                                    
was some  impact of the  $7 per  barrel credit, as  it would                                                                    
change  from  $8  under  current law.  He  asked  about  the                                                                    
effective tax  rate on  profits for  an average  field where                                                                    
the per  barrel credit  was $7.  He wondered  if it  was 9.5                                                                    
percent  or  if there  was  another  adjustment he  was  not                                                                    
factoring in.                                                                                                                   
3:31:00 PM                                                                                                                    
Representative  Tarr commented  that she  thought a  row was                                                                    
missing on slide 3. In  the circumstance brought up by Vice-                                                                    
Chair Gara,  the tax per  net at  $4.94 was higher  than the                                                                    
minimum  tax and,  therefore, would  apply. She  relayed the                                                                    
formula: $4.94 divided by $34.12.                                                                                               
Vice-Chair Gara surmised  it was one-seventh. Representative                                                                    
Tarr answered  that it was  about 14.5 percent.  Her opinion                                                                    
was that  the overall  effective tax  rates were  still very                                                                    
reasonable  and  kept  Alaska in  the  competitive  category                                                                    
relative to other regimes and opportunities for companies.                                                                      
Representative Tarr  advanced to the other  price per barrel                                                                    
examples  on slides  4-7 and  addressed the  35 percent  tax                                                                    
rate recommended  by the state's consultants.  She suggested                                                                    
that a way of balancing the  system was to scale back on the                                                                    
lower end to get some on  the higher end. She thought it was                                                                    
the reason a low minimum tax  such as 4 percent or 5 percent                                                                    
would  be  acceptable.  In  other  words,  the  state  would                                                                    
receive  a   higher  percentage  of  the   value  as  prices                                                                    
increased. Relative to the existing  law, she noted $130 per                                                                    
barrel.  She indicated  that existing  law was  $4, and  she                                                                    
went down to zero. She  emphasized that the windfall portion                                                                    
would come  at higher  prices where  they approached  the 35                                                                    
percent  tax rate.  She relayed  that she  had reviewed  the                                                                    
first part of  the bill: how the state could  get more value                                                                    
for  the  resource  being  severed   at  lower  prices.  She                                                                    
summarized that below  $50 per barrel the  bill hardened the                                                                    
floor to a  true 4 percent minimum tax. The  bill raised the                                                                    
minimum tax to 5 percent between  $50 to $70 per barrel. The                                                                    
bill  adjusted   the  per  barrel  credit   above  $70.  She                                                                    
indicated  that the  committee  substitute  was scaled  back                                                                    
from  the  original bill,  which  she  thought softened  the                                                                    
impact of the  provision. She suggested that  the per barrel                                                                    
credit was  an area  that could be  adjusted because  of the                                                                    
way  it was  applied and  because it  was less  sensitive in                                                                    
certain ways.  She concluded  that she  had reviewed  how to                                                                    
obtain more value at a  lower price environment in which the                                                                    
state was currently operating.                                                                                                  
Co-Chair Seaton  referred to the  original version of  SB 21                                                                    
which  had the  maximum  per  barrel credit  set  at $5  per                                                                    
barrel. He asked if she had  looked at that in the analysis.                                                                    
He suggested that if she  had corresponding graphs, he would                                                                    
like them forwarded to him.                                                                                                     
3:35:08 PM                                                                                                                    
Representative Tarr  responded affirmatively.  She explained                                                                    
that the  way the Senate  configured the bill the  $5 credit                                                                    
applied even  at the highest  of prices. She  recommended an                                                                    
adjustment  to moderate  the system  so that  less would  be                                                                    
taken on the low end and more  on the high end. If the state                                                                    
kept the $5 per barrel credit  at high prices it would never                                                                    
see a windfall. It would eat  away at the value. However, if                                                                    
the credit  was scaled  back to zero  at higher  prices, the                                                                    
effective  tax rate  would reach  closer to  35 percent  and                                                                    
result in windfall profits.                                                                                                     
Co-Chair  Seaton did  not like  characterizing a  35 percent                                                                    
severance tax rate  on profits as a windfall  because it was                                                                    
the tax rate.  He added that the purpose of  a $5 per barrel                                                                    
credit  was   an  adjustment  to  the   Alaska's  Clear  and                                                                    
Equitable Share  (ACES) $25  at $100  per barrel.  A sliding                                                                    
scale  was incorporated  in  the  House Resources  Committee                                                                    
providing a  windfall on the  lower side. He  was interested                                                                    
in seeing the charts she had.                                                                                                   
3:36:48 PM                                                                                                                    
Representative Wilson remarked that  the taxes kept changing                                                                    
so frequently they  started mixing with each  other. She was                                                                    
pretty  sure with  SB 21  and in  discussions regarding  per                                                                    
barrel credits  that there were  other tax credits  given up                                                                    
in exchange.  She did not  believe the legislation  had come                                                                    
over to  the House  and subsequently  changed by  the House.                                                                    
Other  tax   credits  were  changed   as  well.   She  asked                                                                    
Representative Tarr to comment.                                                                                                 
Representative Tarr responded,  "That's true." She continued                                                                    
that  the  ACES  system  relied heavily  on  the  qualifying                                                                    
capital  expenditure (QCE)  credit. There  was criticism  of                                                                    
the  credit because  it was  not linked  to production.  For                                                                    
example, some work  done to a runway on the  North Slope was                                                                    
in question in  terms of whether the type  of work qualified                                                                    
for a capital expenditure credit.  The alternative was a per                                                                    
barrel   credit  linked   to  production   which  was   also                                                                    
criticized. The  criticism stemmed  from not having  a clear                                                                    
way to delineate  whether it would be applied  to oil coming                                                                    
on as new oil or to  oil that would be produced. She thought                                                                    
it was still a point  of contention about the system. People                                                                    
had varying  views on whether  the state should be  giving a                                                                    
credit for oil that was already slated for production.                                                                          
Representative Wilson  commented that there had  also been a                                                                    
lot of  criticism for changing  the oil tax system  so much.                                                                    
She brought  up having reduced or  eliminated small producer                                                                    
credits.  She was  aware of  some trade-offs  that had  been                                                                    
made  prior  to the  legislature  instituting  a per  barrel                                                                    
credit. She  wanted to be  clear what  had been given  up at                                                                    
the  time.  She agreed  with  Representative  Tarr that  the                                                                    
legislature  wanted  better  checks and  balances  regarding                                                                    
where credits  were going and  what the state  was receiving                                                                    
in exchange. She  was certain the state  had eliminated some                                                                    
of the  other credits  that had been  valuable to  the small                                                                    
producers versus the larger producers.                                                                                          
Representative  Tarr  responded   that  the  small  producer                                                                    
credit  was  still  in  place and  was  applicable  to  work                                                                    
commenced by January 1, 2016.  The state also had well lease                                                                    
expenditure  (WLE)  credits  and  exploration  credits.  The                                                                    
important question  to consider  was which ones  worked best                                                                    
and incentivized desirable behavior.  She indicated that the                                                                    
state had  been challenged  in answering that  question. Mr.                                                                    
Alper  would  be  able  to provide  aggregate  data  in  his                                                                    
presentation. For example,  he would be able  to provide the                                                                    
amount spent on  the North Slope or in  Cook Inlet. Further,                                                                    
he  would be  able to  report how  much was  being spent  on                                                                    
projects  in production.  However,  beyond  that, the  state                                                                    
would  not  have  specifics  about  money  spent  on  stages                                                                    
leading to production or on unsuccessful leads.                                                                                 
Representative Tarr  noted that the bill  contained a couple                                                                    
of  provisions   that  would   be  helpful   in  legislators                                                                    
understanding. She suggested that  the consultant brought up                                                                    
the need  for things to  be more  opaque. The state  did not                                                                    
have  access to  all  the information  that  would help  the                                                                    
legislature to  better understand the way  things worked and                                                                    
how  it  could provide  incentives  to  the state's  desired                                                                    
outcomes  such  as  increased  production.  The  bill  would                                                                    
enable   legislators   to   have  access   through   signing                                                                    
confidentiality agreements  about tax information.  It would                                                                    
also require reporting of some  aggregate amounts that would                                                                    
be publicly  available. It  attempted to  differentiate what                                                                    
the public might be interested  in versus what policy makers                                                                    
would be interested  in knowing. From her point  of view, it                                                                    
was not  that the subsidies  or incentives were  100 percent                                                                    
problematic but, given the state's  fiscal situation, it did                                                                    
not make much  sense to spend millions of  dollars on things                                                                    
that did  not lead to production.  She wanted to be  able to                                                                    
get the  answers why certain  investments did not  result in                                                                    
production.  She  suggested that  it  would  be helpful  for                                                                    
legislators to have more information to make decisions.                                                                         
Representative  Tarr also  commented that,  relative to  the                                                                    
different tax  changes, there had been  several requests for                                                                    
stability. In the  volatile industry of oil  stability was a                                                                    
challenge. She thought it would  be best for the legislature                                                                    
to provide something  that could last for 3, 5,  or 7 years.                                                                    
There were  so many things beyond  the legislature's control                                                                    
relative to  the price of  oil. She reflected that  when the                                                                    
legislature  based its  budget  on $60,  $80,  and $100  per                                                                    
barrel  oil   prices  in  FY   15  and  the   price  dropped                                                                    
significantly,  everyone   was  surprised.  She   posed  the                                                                    
question about how the state  was being more strategic about                                                                    
the   dollars  being   invested.  She   relayed  that   some                                                                    
investment changes  were made in  Cook Inlet,  Middle Earth,                                                                    
and  on  the  North  Slope.  She  mentioned  that  having  3                                                                    
separate regimes  within the state was  another complicating                                                                    
factor  to the  state's tax  system. One  of the  things the                                                                    
legislature  would  attempt  to  move  towards  was  how  to                                                                    
address credits. Under the current  system the net operating                                                                    
losses were converted into credits  which could be presented                                                                    
for an exchange of cash.                                                                                                        
Representative Tarr reported  that another problematic issue                                                                    
was that credit certificates could  be used as collateral at                                                                    
a  bank for  financing. The  amendment that  was offered  to                                                                    
allow the  certificates to be  used at a bank  for borrowing                                                                    
money, was offered  at 1:00 A.M. and attached to  a fish tax                                                                    
bill.  During  the amendment  debate  in  committee, it  was                                                                    
reported that the amendment would  only apply in Cook Inlet.                                                                    
However, in  practice, it  applied statewide.  She indicated                                                                    
Bank  of  America  and  ING Company  had  talked  about  how                                                                    
presently  they  were  bridging   loans  from  some  of  the                                                                    
companies.  However, if  the companies  defaulted the  banks                                                                    
became the  lease holders  of the  credits. She  wondered if                                                                    
the  banks would  have a  fire sale.  She thought  the whole                                                                    
system  had  become  too top  heavy.  From  the  committee's                                                                    
perspective there was  not a significant amount  of value in                                                                    
offering  an incentive  that would  not be  honored. If  the                                                                    
state was not going to pay  its obligations or could not pay                                                                    
them in a  timely fashion, what good was it  to have them in                                                                    
statute. She  mentioned there  being concern  about cashable                                                                    
credits  and  whether the  state  should  continue to  offer                                                                    
Representative  Tarr reported  was  also  concern about  the                                                                    
certificates being able  to be used for  bank financing. Mr.                                                                    
Ruggiero had indicated that it  was typical of other regimes                                                                    
around the world  to allow losses to be  carried forward and                                                                    
used as deductions. She suggested that  it was not much of a                                                                    
change for the three  largest producers. They were currently                                                                    
tax payers  in the  State of  Alaska. They  had losses  in a                                                                    
year and likely used them in  the same year they were earned                                                                    
due to having a production  tax liability. The same happened                                                                    
with  corporate income  tax where  companies carried  losses                                                                    
forward and  used them against  their corporate  income tax.                                                                    
She relayed  that the state  was not really making  a change                                                                    
for a  tax payer. In a  circumstance where a loss  had to be                                                                    
carried  forward into  a  second year,  a  change was  being                                                                    
made. The  larger change would  affect the companies  in the                                                                    
exploration  and development  phase of  their work  and were                                                                    
not  currently  tax  payers  to the  State  of  Alaska.  The                                                                    
resources committee took away  cash credits and repealed the                                                                    
portion of  statute that  allowed them to  be used  for bank                                                                    
financing. She indicated that  instead certain carry forward                                                                    
losses were allowed.                                                                                                            
Representative Tarr  pointed to  the handout titled:  "CS HB
111 Carry  Forward Analysis  by Rep.  Tarr" (copy  on file).                                                                    
She explained that during the  third, fifth, or seventh year                                                                    
of  development phase  of work  companies would  be carrying                                                                    
forward losses  and once they  became tax payers  they would                                                                    
use the  losses against production taxes.  She reported that                                                                    
Mr. Ruggiero had relayed that  in some places companies were                                                                    
offered an uplift - interest earned  on a loss. She spoke of                                                                    
having  looked  at  a  couple  of  different  scenarios  and                                                                    
pointed to the  first column. A loss equaled  100 percent of                                                                    
a  loss minus  50 percent  carry forward  with an  8 percent                                                                    
uplift -  slightly below  the uplift  amount in  the current                                                                    
legislation. Column 2 showed a  100 percent loss minus a 100                                                                    
percent  carry   forward  with  10  percent   interest.  The                                                                    
committee preferred  the scenario  in the second  column and                                                                    
an amendment was  offered that brought the bottom  line to a                                                                    
similar amount.                                                                                                                 
Representative Tarr pointed out  that when a company carried                                                                    
forward 50  percent of its  loss for  7 years, the  value at                                                                    
the end  of the  period would equal  about $85.70.  In other                                                                    
words, a company would gain about  85 percent of the loss by                                                                    
carrying them forward. In the  second scenario, if a company                                                                    
allowed 100  percent of the  loss to be carried  forward, by                                                                    
the time  the 7 years  was over,  they would earn  about 200                                                                    
percent  of  the loss.  It  was  the  feeling of  the  House                                                                    
Resources Committee that it could  not obligate the state to                                                                    
such a  significant incentive. She furthered  that a company                                                                    
in exploration  and development that  completed work  to get                                                                    
to  production  (on  average  it   took  7  years  to  reach                                                                    
production) would  become a  producer of  new oil  and would                                                                    
qualify for  the GVR, a  provision associated with  new oil.                                                                    
The gross value  reduction took 20 percent of  the value and                                                                    
the per  barrel credit. By  applying the GVR  provision some                                                                    
of the  value would be  reduced. The committee felt  that if                                                                    
the  carry  forward percentage  was  too  high and  the  GVR                                                                    
provisions were applied, the state  would be subtracting too                                                                    
much  of  the  value  leaving  little  for  the  state.  She                                                                    
reminded  members  that  not only  were  the  carry  forward                                                                    
provisions  applicable   for  7   years,  so  was   the  GVR                                                                    
provision.  In her  opinion, each  provision  should not  be                                                                    
considered without  the other.  She reviewed that  the state                                                                    
would  be providing  carry forward  losses  with a  generous                                                                    
uplift  for 7  years.  Once companies  became producers  GVR                                                                    
provisions   would  apply   and   losses   could  still   be                                                                    
subtracted.  She opined  that  if either  of the  provisions                                                                    
were  too  generous,  at  times  of  high  prices  and  high                                                                    
production,  the  state  would receive  nothing.  The  House                                                                    
Resources  Committee had  been concerned  with striking  the                                                                    
right balance which was the reason  it did not opt for a 100                                                                    
percent carry forward at 10 percent.                                                                                            
Representative  Tarr spoke  about how  to match  up the  two                                                                    
numbers. She  detailed that column  1 needed to  be adjusted                                                                    
to about 57 percent. For example,  if 57 percent of the loss                                                                    
was carried forward  at 8 percent, after 7  years it equaled                                                                    
100  percent of  the value.  She offered  that, as  a policy                                                                    
call,  at the  end of  the 7  years if  companies wanted  to                                                                    
retain  the  value  of  100 percent  of  their  losses,  the                                                                    
committee  could   adjust  the  50  percent   carry  forward                                                                    
slightly  higher. She  wanted to  be more  conservative with                                                                    
that number.  The combination of  the current  provision and                                                                    
the  GVR provisions  which  could be  applied  by a  company                                                                    
becoming  a  new producer  would  quickly  reduce the  value                                                                    
available to the state.                                                                                                         
3:51:36 PM                                                                                                                    
Vice-Chair  Gara  commented  on the  difficulty  of  finding                                                                    
consensus in  a committee.  He wanted to  return to  the tax                                                                    
rate  issue.  He was  aware  Representative  Tarr wanted  to                                                                    
honor what  the proponents  of Alaska's Clear  and Equitable                                                                    
Share (ACES)  and of SB  21 characterized in  the respective                                                                    
legislations.  The representative  had  noted  in ACES  that                                                                    
producers  received their  credits  based on  how much  they                                                                    
spent.   Whereas,  with   SB  21   credits  were   based  on                                                                    
production.  He supposed  the $8  credit had  nothing to  do                                                                    
with  production,   just  price.  He  wondered   if  he  was                                                                    
accurate. Representative Tarr indicated he was correct.                                                                         
Vice-Chair  Gara wanted  that  point made  clear. He  agreed                                                                    
with  Co-Chair Seaton  that 35  percent was  not a  windfall                                                                    
profits range.  He relayed  that all  the taxes  combined in                                                                    
Norway equaled about  78 percent. He thought  a person could                                                                    
find  a different  tax rate  in every  jurisdiction. He  was                                                                    
concerned about the  declining effect of a  profits tax rate                                                                    
in the price range between $50  and $70 per barrel where the                                                                    
price of  oil would likely  stay for the following  10 years                                                                    
according to DOR. He suggested  that beyond the 4 percent or                                                                    
5 percent minimum  tax it would be the greater  of the SB 21                                                                    
profits tax rate or the gross tax.                                                                                              
Co-Chair  Seaton  asked  what   slide  Vice-Chair  Gara  was                                                                    
referring to.                                                                                                                   
Vice-Chair Gara confirmed  he was not referring  to a slide.                                                                    
He  clarified that  he had  a general  question on  credits.                                                                    
Under current  law, producers deducted  35 percent  of costs                                                                    
when  the  profits  tax  range  applied.  He  asked  if  the                                                                    
deduction  remained  in  the  legislation  being  discussed.                                                                    
Representative Tarr  responded that  losses were  treated as                                                                    
loses.  There would  be 100  percent to  work from  carrying                                                                    
forward 50  percent. She explained  that the  difference was                                                                    
when  the  loss was  converted  to  a credit  versus  simply                                                                    
taking deductions, which was much easier to follow.                                                                             
Vice-Chair Gara suggested that in  current law companies pay                                                                    
an effective tax rate of about  12 percent of profits at $90                                                                    
per barrel.  However, companies also  received a  35 percent                                                                    
deduction as if paying a 35  percent tax. He asked if, under                                                                    
HB  111,  it  would  always   be  a  35  percent  deduction.                                                                    
Representative  Tarr  responded   in  the  affirmative.  She                                                                    
explained it  was one of  the things the consultant  spent a                                                                    
significant  amount of  time talking  about  - the  mismatch                                                                    
between   the  effective   tax  rate   and  the   deduction.                                                                    
Essentially, the  value would  be doubled  because companies                                                                    
would be paying  an effective tax rate of 50  percent of the                                                                    
allowable deduction amount.                                                                                                     
Co-Chair  Seaton  asked if  a  company's  expenses were  100                                                                    
percent  deductible. He  suggested  that until  there was  a                                                                    
conversion to a tax credit,  deductions were deducted at 100                                                                    
percent.  He wanted  to clarify  that companies  could write                                                                    
off their deductions  at 100 percent until  they reached the                                                                    
minimum tax. Once a minimum  tax kicked in, deductions would                                                                    
be converted into a tax credit  at which time the 35 percent                                                                    
would  apply.  He  asked  Representative  Tarr  to  comment.                                                                    
Representative Tarr  replied that both people  were correct.                                                                    
A  company   could  carry  forward   its  losses,   but  the                                                                    
conversion to tax credits was at  the rate of 35 percent. It                                                                    
was a  mismatch because the  overall effective tax  rate was                                                                    
much lower.  She relayed  that when SB  21 was  crafted, the                                                                    
two numbers  were supposed to  match each other.  The reason                                                                    
the  net  operating loss  (NOL)  credit  was offered  at  35                                                                    
percent was because the tax  rate was 35 percent. She opined                                                                    
that  the two  things did  not work  well together  when the                                                                    
effective tax rate was never 35 percent.                                                                                        
3:57:47 PM                                                                                                                    
Vice-Chair  Gara  commented  that  he  agreed  there  was  a                                                                    
problem with  being able to  write off 35 percent  of costs.                                                                    
He  thought   he  and   representative  Seaton   were  using                                                                    
different  words. Companies  deducted 100  percent of  their                                                                    
costs and  multiplied it by  35 percent when they  were only                                                                    
paying a 12 or 14  percent tax rate. Representative Tarr had                                                                    
made a  change. He asked  her to  explain the change  in the                                                                    
bill.  Representative  Tarr  replied   that  by  only  using                                                                    
deductions the other issues  were eliminated. Companies took                                                                    
100 percent  of their  deductions to get  to the  value that                                                                    
they worked  from. The bill  would also allow 50  percent of                                                                    
the value  to be carried  forward. The bill did  not require                                                                    
converting   to  credits.   Tax  payers   would  use   their                                                                    
deductions against their production tax liability.                                                                              
3:59:01 PM                                                                                                                    
Vice-Chair Gara  thought the change  was an  improvement. He                                                                    
hoped to  hear from the  consultants about what was  done in                                                                    
other states.  Louisiana let companies  carry forward  for 2                                                                    
years  just for  horizontal  well  expenditures and  nothing                                                                    
Representative  Tarr   responded  that  she  found   it  was                                                                    
difficult to  compare Alaska to  anywhere else.  She learned                                                                    
that  in comparing  Alaska to  another  jurisdiction it  was                                                                    
important  to consider  the producer  share versus  the non-                                                                    
producer share.  The development in Alaska  was occurring on                                                                    
state  lands.  In  states  such   as  Louisiana  and  Texas,                                                                    
development was  more likely to  occur on private  land. She                                                                    
suggested  that the  scenario was  much  different when  the                                                                    
lease expenditure  cost or overall  lease per acre  might be                                                                    
substantially costlier.  The royalty  would be going  to the                                                                    
private land  holder and another  portion would be  going to                                                                    
the  state and  federal government  (combined they  were the                                                                    
non-producer's share).  In Alaska's  case, it  was receiving                                                                    
the severance tax because the  state was the land holder and                                                                    
the lease payments  tended to be lower  than other entities.                                                                    
The state  had a significantly longer  development timeline,                                                                    
which was why the state used  7 years. She spoke of the slow                                                                    
set-up time of a drilling  operation in Alaska in comparison                                                                    
to  other states.  She  thought the  consultant  had a  good                                                                    
suggestion  of  looking from  the  stand  point of  producer                                                                    
share  and  non-producer  share  to  understand  how  Alaska                                                                    
compared. Mr. Ruggiero  told of companies being  able to get                                                                    
100 percent of the value  of their loses. She indicated that                                                                    
there had been  criticism of the current  legislation due to                                                                    
only  50   percent  being  carried  forward.   However,  she                                                                    
highlighted the  GVR provisions in  the bill.  She suggested                                                                    
that if the state wanted  to do something different, it also                                                                    
needed to  look at  the interaction of  the GVR.  She opined                                                                    
that the state  could not give up all the  value by allowing                                                                    
the deductions  to be carried  forward adding value  to them                                                                    
while  also having  the GVR  provisions.  She asserted  that                                                                    
nothing  would  be left.  Mr.  Ruggiero  also recommended  a                                                                    
fundamental shift  to the existing tax  structure to reflect                                                                    
the  overall profit  profile; to  do something  bracketed on                                                                    
the  net.  In that  vein,  he  recommended eliminating  per-                                                                    
barrel credits  and GVR provisions altogether.  Although the                                                                    
House  Resources Committee  did  not get  rid  of either  of                                                                    
them, it started looking at a  tax as the percentage of net.                                                                    
Mr. Ruggiero's  suggested that if  the state had a  true net                                                                    
profits  system,  the  focus  should  be on  the  tax  as  a                                                                    
percentage  of the  production  tax value  -  that was  what                                                                    
happened in a net system.                                                                                                       
4:02:51 PM                                                                                                                    
Representative Pruitt  thought the  committee could  spend a                                                                    
significant  amount of  time discussing  the details  of the                                                                    
bill. He asked  for the number of additional  barrels of oil                                                                    
per day that would result  from the legislation and wondered                                                                    
how many extra people would be put to work.                                                                                     
Representative Tarr  responded that she had  never seen them                                                                    
as  a  component  of  a  tax  bill.  She  relayed  that  the                                                                    
legislature had  not looked  at employee  hiring for  SB 21.                                                                    
However, it  had bench  marked it  against ACES  where there                                                                    
had been an uptick in  investment, the number of individuals                                                                    
working on  the North Slope,  and the number  of operational                                                                    
rigs.  She thought  that staff  from  DOR might  be able  to                                                                    
provide  the answers  to Representative  Pruitt's questions.                                                                    
In terms of  the number of barrels per day,  she worked from                                                                    
the  information   provided  by  DOR.  The   department  had                                                                    
indicated that over  the following 10 years  the state would                                                                    
be  down to  a few  hundred  thousand barrels  per day.  She                                                                    
suggested that it  was difficult for the  department to make                                                                    
estimations  beyond  5  years because  of  the  everchanging                                                                    
environments and  the price  volatility of  the oil  and gas                                                                    
industry. She  mentioned the  $80 price  shift in  the price                                                                    
per barrel in  the last few years. She opined  that it would                                                                    
be  difficult to  make  accurate  estimations. She  reported                                                                    
that  the House  Resources Committee  had moderated  some of                                                                    
the changes in  the bill to avoid causing a  downturn if the                                                                    
price per barrel returned to $30-$40.                                                                                           
Representative Tarr  continued that the committee  felt that                                                                    
hardening  the   floor  was   a  reasonable   approach.  She                                                                    
highlighted that  at the profit  range beginning at  $55 per                                                                    
barrel  [she pointed  to  an unidentified  handout]  4 to  5                                                                    
percent was applied to ensure  the state had more value. She                                                                    
noted that  a change in the  per barrel credit kicked  in at                                                                    
$75. She pointed to page 3  of the "Oil Tax Analysis be Rep.                                                                    
Tarr"  document and  highlighted that  even with  high lease                                                                    
expenditures  the production  tax value  would remain  high.                                                                    
The  committee  wanted to  hit  the  reset button  on  lower                                                                    
prices.  She reported  that during  the SB  21 deliberations                                                                    
the committee  did not look  at what happened below  $60 per                                                                    
barrel  because,  at  the time,  the  possibility  of  price                                                                    
dropping was not a concern.  She thought that if someone had                                                                    
suggested looking  at what would  happen if oil went  to $30                                                                    
per barrel, they would have  been accused of not using their                                                                    
time wisely.  It did not seem  like it was possible  for the                                                                    
price to  drop as  it did. She  continued that  in reviewing                                                                    
the 10-year  price profile  from 2013  and prior,  the price                                                                    
had been between  $60 to $100 except for a  spike to $147 in                                                                    
2008. The price  spike had been very short  in duration. She                                                                    
indicated  that the  committee looked  at the  typical price                                                                    
range  from $80  to $100,  as the  legislature had  done its                                                                    
budgeting based on  $100 per barrel oil.  However, there was                                                                    
a  huge shift  down in  price. She  had spent  a significant                                                                    
amount of  time trying to  understand how the  committee had                                                                    
estimated  so  poorly. In  the  same  year, Texas,  budgeted                                                                    
around $65  per barrel  oil. Someone suggested  that perhaps                                                                    
Texas came closer in its  estimation because more of the oil                                                                    
headquarters were  located there. She acknowledged  that her                                                                    
answer was  not scientific. She  had wondered if  Alaska had                                                                    
missed some information and had not uncovered anything.                                                                         
4:08:05 PM                                                                                                                    
Representative   Pruitt  asked   if  the   plan  would   put                                                                    
additional   oil  in   the  pipeline.   Representative  Tarr                                                                    
responded that she believed so.  She thought the legislation                                                                    
kept Alaska an attractive  place for investment. The state's                                                                    
overall  effective   tax  rates  were  very   reasonable  in                                                                    
comparison to other jurisdictions.  She relayed that the per                                                                    
barrel credits  were retained because it  mattered where the                                                                    
per  barrel   credit  was  applied  in   the  equation.  She                                                                    
suggested that  because it came after  the other deductions,                                                                    
the per  barrel credit - even  scaled back - was  a generous                                                                    
Representative  Tarr   noted  other   attractive  incentives                                                                    
including  changing  the  investment  opportunity  with  the                                                                    
carry-forward losses and leaving  in the GVR provisions. She                                                                    
explained that  retaining a net system  meant that companies                                                                    
could   take  deductions   for   transportation  and   lease                                                                    
expenditures. The companies were  made whole or protected in                                                                    
some ways  because they  had their  deductions prior  to the                                                                    
tax rate being applied. She  believed Alaska would remain an                                                                    
attractive place for development.  She supposed that several                                                                    
things made  Alaska attractive including geology,  access to                                                                    
information, the tax rate, the  local skilled workforce, and                                                                    
the price  per barrel. She  remarked that Alaska  was stable                                                                    
politically (she was not speaking  in terms of the stability                                                                    
of Alaska's  tax system),  unlike other  regimes in  a civil                                                                    
war. Alaska had a good  workforce of people knowledgeable in                                                                    
the  industry  and had  been  working  in the  industry  for                                                                    
decades. She believed that the  modest adjustment in the tax                                                                    
structure provided  the state  more value  in a  lower price                                                                    
environment.  She thought  it  was  something the  committee                                                                    
would  have put  in  place when  looking at  SB  21 had  the                                                                    
committee been thinking  oil would be at $50  per barrel for                                                                    
the long term rather than $90 or $100.                                                                                          
4:10:50 PM                                                                                                                    
Representative  Pruitt noted  that  Representative Tarr  had                                                                    
mentioned  several  times  the  attractive  environment.  He                                                                    
wanted to know  what kind of response she  had received from                                                                    
investors since the  bill was made available  to the public.                                                                    
He  asked  if  she  had received  letters.  He  wondered  if                                                                    
investors had  indicated that  the legislation  would create                                                                    
additional  investment, and  consequently  more  oil in  the                                                                    
pipeline. He wanted to see  something that indicated support                                                                    
from the entities that would  be affected. He wanted to know                                                                    
if  companies thought  the legislation  was more  attractive                                                                    
than what was already in place.                                                                                                 
Representative  Tarr reminded  Representative Pruitt  of the                                                                    
735,000  plus shareholders  that they  represented. She  had                                                                    
heard  from several  constituents that  the legislation  did                                                                    
not go far  enough and that the credits should  be done away                                                                    
with altogether. There were others  that did not want to see                                                                    
any  changes made  to  the  tax system.  She  noted that  in                                                                    
talking about the credits provision  of the bill, 93 percent                                                                    
of the people  she represented responded to  a budget survey                                                                    
in  which  they  advocated   eliminating  the  credits.  She                                                                    
relayed that  during the session  in an earlier pole  by the                                                                    
Senate  Majority it  showed that  65 percent  of about  7000                                                                    
Alaskans that responded wanted to  do away with the credits.                                                                    
She saw  her role as a  member of the board  of directors of                                                                    
the people she represented. She  did not believe the state's                                                                    
goals  were perfectly  aligned with  the  oil industry.  She                                                                    
thought the largest point that  would be discussed had to do                                                                    
with the  loss carry forward  and whether the  right balance                                                                    
was struck with  a 50 percent carry forward  and interest of                                                                    
8 percent. She recommended  looking at the interactions with                                                                    
the GVR provisions  within the first 7  years of production.                                                                    
She  was aware  that with  long lead  times peak  production                                                                    
would  occur in  years 5,  6  and 7.  Once oil  was in  peak                                                                    
production the state needed to  make certain to extract some                                                                    
value  before production  declined. The  state needed  to be                                                                    
thoughtful  about  where  incentives were  offered  and  how                                                                    
generous they were, a balance  the House Resources Committee                                                                    
tried to strike.                                                                                                                
Co-Chair Seaton indicated others had questions as well.                                                                         
Representative Pruitt relayed  that Representative Tarr kept                                                                    
saying that the legislation  made Alaska an attractive place                                                                    
for  investment. He  wanted  to  understand the  explanation                                                                    
about how the bill made  Alaska a more attractive investment                                                                    
place for  him to speak  to his constituents.  He understood                                                                    
the severance  aspect of  the bill  making sure  that Alaska                                                                    
received  its share.  He  wondered  whether the  legislation                                                                    
would make  Alaska more attractive for  investment. In other                                                                    
words, what policy put more oil in the pipeline.                                                                                
Co-Chair  Seaton  stated  that   the  consultants  would  be                                                                    
presenting  to  the  committee  at  which  time  they  could                                                                    
address Representative Pruitt's question.                                                                                       
Representative  Pruitt argued  that the  consultant was  not                                                                    
stating  that  the  legislation made  Alaska  an  attractive                                                                    
place  for   investment.  Co-Chair  Seaton   responded  that                                                                    
Representative  Pruitt  did  not  know because  he  had  not                                                                    
Representative  Pruitt  responded that  Representative  Tarr                                                                    
was saying that it attracted  more investment, which was the                                                                    
reason  he  was  asking  her. Co-Chair  Seaton  would  allow                                                                    
Representative  Tarr   to  answer   Representative  Pruitt's                                                                    
question but  did not want  an argument about  philosophy to                                                                    
Representative  Tarr  responded  that  Alaska  would  be  an                                                                    
attractive  place for  investment. She  claimed that  if she                                                                    
was deciding  where to invest  her dollars she knew  that in                                                                    
Alaska she would  be allowed to carry forward  50 percent of                                                                    
her losses and  would earn 8 percent interest.  She would be                                                                    
able to do  so for 7 years.  At such time that  she became a                                                                    
producer, in addition  to being able to use  her losses, she                                                                    
would  be able  to have  the  GVR provisions  in place  that                                                                    
would  be  a  20  percent  reduction.  She  noted  that  the                                                                    
legislature was  not eliminating the obligation  of what the                                                                    
state did currently  with credits. She brought  up writing a                                                                    
check on one  side of a balance sheet  and deducting against                                                                    
the tax  liability to  the state  on the  other side  of the                                                                    
balance  sheet. The  state would  not be  writing checks  to                                                                    
companies, but rather shifting the  burden to the other side                                                                    
of the balance sheet in the  form of a reduction against the                                                                    
tax liability.  The State  of Alaska  would still  loose the                                                                    
value of the  reductions. The value would  be gone. However,                                                                    
the  state would  no  longer  be paying  a  cash credit  and                                                                    
writing  a check  to a  company  while they  were doing  the                                                                    
work. She  claimed that no  other regime in the  world wrote                                                                    
cash  checks.   She  furthered   that  if   someone  thought                                                                    
eliminating  writing cash  checks  made Alaska  unattractive                                                                    
then  every other  regime was  unattractive as  well. Alaska                                                                    
was  the  only  place  that  had  written  cash  checks  and                                                                    
encouraged using  the credit  certificates as  collateral to                                                                    
borrow against. She remarked that  under the current system,                                                                    
investment in  Alaska had become less  attractive because of                                                                    
the state not  being able to fulfill  its obligations making                                                                    
the  incentive not  worth  having at  all.  She opined  that                                                                    
shifting  the obligation  from writing  checks to  the other                                                                    
side of the  balance sheet as a  deduction against liability                                                                    
made investment more attractive.  She cited similar examples                                                                    
of  the type  of  incentives  offered in  the  bill such  as                                                                    
refinery  credits. She  mentioned  a time  when people  were                                                                    
looking  to  reopen  the refinery  facility  in  Kenai.  She                                                                    
reemphasized that  the state would be  shifting from writing                                                                    
checks  to  companies  to pay  for  their  development.  The                                                                    
companies would have to be  well financed enough to become a                                                                    
producer  at  which time  they  would  be  able to  use  the                                                                    
deductions against  their tax  liability. She  asserted that                                                                    
it would make  Alaska like every other regime  in the world.                                                                    
If Representative  Pruitt thought  that the  provision would                                                                    
make it  unattractive for companies  to invest,  then Alaska                                                                    
was as equally  unattractive as every other  location in the                                                                    
4:18:41 PM                                                                                                                    
Representative Wilson asserted that  Alaska was not like any                                                                    
other regime.  She did not  believe a fair  comparison could                                                                    
be made. She was glad to  hear that the fact the state could                                                                    
not  meet  its obligations  was  viewed  as a  problem.  She                                                                    
believed that  part of  the reason  the issue  was currently                                                                    
being  discussed was  because when  the state  was making  a                                                                    
significant  amount  from oil,  it  spent  it on  government                                                                    
instead of saving it to  pay its obligations. She noted that                                                                    
when  SB 21  was  under consideration  she  had spoken  with                                                                    
subcontractors in  the private  sector about the  effects of                                                                    
Alaska's Clear and Equitable Share  (ACES), as they had been                                                                    
most affected by  the changes the state made to  its oil tax                                                                    
structure.  She  wondered  if any  research  had  been  done                                                                    
regarding  the   effects  HB  111  would   have  on  private                                                                    
businesses. She thought  they would be most  affected by the                                                                    
proposed changes. Representative  Tarr responded positively.                                                                    
She elaborated that  she had been in  contact about changing                                                                    
from a credit to a deduction.                                                                                                   
Representative  Wilson   interrupted  Representative  Tarr's                                                                    
response  to clarify  her question.  She explained  that she                                                                    
was not talking  about oil companies. She  was talking about                                                                    
suppliers  such   as  Flowline  Alaska  in   Fairbanks.  She                                                                    
indicated they were  a supplier that had  contracts in place                                                                    
prior  to the  implementation  of ACES.  She continued  that                                                                    
when  ACES occurred  the  projects did  not  happen. At  the                                                                    
implementation  of  SB 21  many  projects  began again.  She                                                                    
conveyed that  the suppliers  explained what  happened, what                                                                    
they expected to happen, and  what was happening. She wanted                                                                    
to  clarify   which  group  she   was  talking   about.  She                                                                    
reiterated  that   she  was  not   talking  about   the  oil                                                                    
companies. Representative Tarr responded  that she had heard                                                                    
from companies  that they had contracted  their workforce in                                                                    
response  to  low  oil prices,  a  circumstance  beyond  the                                                                    
state's control.  A domino  effect was felt  due to  low oil                                                                    
prices  rather than  the state's  tax policy.  Suppliers and                                                                    
support businesses were affected  as a result. She explained                                                                    
that the reason for the modest  change made in HB 111 was to                                                                    
avoid  imposing  something  that   pushed  too  far  or  had                                                                    
unintended consequences.                                                                                                        
4:21:39 PM                                                                                                                    
Representative Wilson responded that in  the 7 years she had                                                                    
been  in office  the  legislature had  taken up  legislation                                                                    
having to do  with oil taxes every year.  She suggested that                                                                    
the  legislature either  had not  gotten  things correct  or                                                                    
could not admit  it was right. She surmised that  it was the                                                                    
state's  budgeting  that landed  the  state  in its  current                                                                    
fiscal situation. She thought  the legislature was trying to                                                                    
re-coop its mistakes  from the oil companies.  She wanted to                                                                    
see real  numbers to be  able to make an  informed decision.                                                                    
She did  not think  it was  fair to  compare the  fields, as                                                                    
they varied  significantly because of location,  the type of                                                                    
oil,  and  other factors.  She  mentioned  some fields  were                                                                    
modest. She wondered about other  presentations in the House                                                                    
Resources  Committee. She  was happy  to listen  to previous                                                                    
presentations for the information.                                                                                              
Co-Chair  Seaton  added  that  the charts  showed  the  low,                                                                    
average,  higher,  and  high  costs  representative  of  the                                                                    
distance from fields and the different kinds of oil.                                                                            
Representative  Wilson  did   not  believe  the  information                                                                    
revealed  the effects.  She  was trying  to  figure out  the                                                                    
effects  on the  low  and high  ends  and whether  companies                                                                    
would go forward with projects.                                                                                                 
Representative Tarr continued to  explain (working from page                                                                    
4  of the  spreadsheet packet).  She looked  at 4  different                                                                    
scenarios for  the lease expenditures because  she wanted to                                                                    
understand  the companies'  different  behaviors. The  lease                                                                    
expenditures  reflected   increased  capital   or  operating                                                                    
expenditures.  She  suggested  that  a  company  earlier  in                                                                    
development  would  be  on  the   higher  end  of  spending.                                                                    
Whereas, some of the other  companies that were in the phase                                                                    
of production would not be spending  as much. In the oil tax                                                                    
analysis handout, she used the  average lease expenditure of                                                                    
$30.88. However, some were below,  and some were above which                                                                    
prompted her to look at  lease expenditures of $25, $40, and                                                                    
$50. There  was a big  difference in the  equation depending                                                                    
on how  much was being  spent. She  did not make  changes to                                                                    
the  transportation  line.  She   spoke  of  the  Smith  Bay                                                                    
development.  She  noted  that   even  in  a  higher  priced                                                                    
environment,  if a  company's lease  expenditures were  high                                                                    
and transportation  costs were pricey,  certain developments                                                                    
would not  make sense  until the price  of oil  reached well                                                                    
over  $100. The  economics would  not make  sense. She  used                                                                    
Point  Thomson as  an example.  One of  the things  that was                                                                    
costly in  the project  was the  pipeline which  was located                                                                    
close to the Trans-Alaska  Pipeline System (TAPS). The Smith                                                                    
Bay  project  was 124  miles  away  from the  existing  TAPS                                                                    
infrastructure.  A pipeline  of  over 100  miles long  would                                                                    
have to  be built for oil  to reach TAPS. She  asserted that                                                                    
the  transportation  costs  would   be  phenomenal.  Such  a                                                                    
development would not  occur without the price  of oil being                                                                    
high enough  for the transportations  costs to  be deducted.                                                                    
She went  up to $145 per  barrel in her handout  because the                                                                    
legislature did not look at  the high price environment when                                                                    
Alaska's Clear  and Equitable  Share (ACES)  was considered,                                                                    
or at the  low-price environment when SB  21 was considered.                                                                    
She  wanted to  look at  the  entire breadth  of prices  the                                                                    
state had seen. The range she  had looked at was $25 to $145                                                                    
per   barrel.  She   also  looked   at  4   different  lease                                                                    
expenditure scenarios. She had not  spent much time with Mr.                                                                    
Alper and his  staff doing the same equation  because it was                                                                    
something  she  wanted to  understand.  However,  he had  an                                                                    
analyst  that  did  life  cycle modeling.  She  had  done  a                                                                    
presentation  for  the  House Resources  Committee  using  a                                                                    
smaller scale  model of a  development that  produced 50,000                                                                    
barrels per  day and another  that was a 200,000  barrel per                                                                    
day development. She interjected  that the overall volume of                                                                    
production influenced  spending habits. The  modeling showed                                                                    
what happened  in the development  stage and  the production                                                                    
stage  and  the relative  impacts  of  both. She  hoped  the                                                                    
analyst would have an opportunity  to bring her presentation                                                                    
to the House Finance Committee.                                                                                                 
Representative  Wilson   was  looking  for  the   number  of                                                                    
additional  barrels of  oil that  would be  produced through                                                                    
the different  processes. There  were expectations  when the                                                                    
legislature took  up SB 21.  She suggested that a  column be                                                                    
added to Representative Tarr's handout.                                                                                         
4:28:07 PM                                                                                                                    
Vice-Chair Gara  had only heard  one oil company,  a company                                                                    
in the  Cook Inlet, claim  that Alaska's tax system  was too                                                                    
generous. He  wondered if Cook  Inlet had been  addressed in                                                                    
the  bill.   Representative  Tarr  responded  that   it  was                                                                    
addressed in a reinstated working  group. The group had been                                                                    
a feature of  the original HB 247. Currently,  there was not                                                                    
much oil production in Cook  Inlet, a circumstance which had                                                                    
the potential to  change. The bill contained  a place holder                                                                    
tax  of $1  per barrel.  She added  that there  was a  weird                                                                    
interaction  on the  tax on  gas  based on  SB 138  [Capital                                                                    
Budget legislation  passed in 2016]  so that after  2022 the                                                                    
tax  on  gas became  a  gross  tax.  The working  group  was                                                                    
included in the bill to get  ahead of the 2022 deadline. She                                                                    
also wanted to avoid a big  surprise to any of the operators                                                                    
there. As  a Southcentral legislator, she  had a significant                                                                    
amount of  concerns about  a stable supply  of gas.  She had                                                                    
found  a pamphlet  in  some old  files  that contained  some                                                                    
contingency planning.  It had  been only  a few  years prior                                                                    
that  there had  been talks  of importing  natural gas.  The                                                                    
working group was  a means to allow  for more thoughtfulness                                                                    
in the area.                                                                                                                    
4:30:08 PM                                                                                                                    
Representative  Ortiz  had   a  question  regarding  accrued                                                                    
credits  that  would  become   losses  and  carried  forward                                                                    
against  future obligations.  He  asked what  happen to  the                                                                    
credits or losses when a  larger company took over a smaller                                                                    
company  under  current  law.  He  wondered  what  would  be                                                                    
different  under HB  111. Representative  Tarr replied  that                                                                    
currently the value of the  carry forward losses would go to                                                                    
the new  owner. She thought  that it would not  change under                                                                    
the  proposed  legislation.   She  provided  a  hypothetical                                                                    
scenario where if a company did  3 or 4 years of exploration                                                                    
work and  another company took  over the value of  the carry                                                                    
forward   losses  would   be  a   part  of   the  commercial                                                                    
Co-Chair  Seaton   asked  if  there   were  any   claw  back                                                                    
provisions  in  the  bill  for  companies  that  sold  their                                                                    
assets, including credits.  Representative Tarr responded in                                                                    
the negative.  It only applied  to a  commercial transaction                                                                    
between a willing seller and a willing buyer.                                                                                   
Co-Chair  Seaton commented  that it  sounded like  the state                                                                    
was investing money  while someone else was  making money by                                                                    
selling   their  operation,   receiving  the   credits,  and                                                                    
receiving the profits. The state  did not receive it and the                                                                    
new buyer did  not receive anything because  they paid money                                                                    
for the leases.  He thought the committee would  look at the                                                                    
issue further.                                                                                                                  
Representative   Guttenberg  asked   if  Middle   Earth  was                                                                    
included in the legislation.                                                                                                    
Representative  Tarr  responded  that Middle  Earth  credits                                                                    
remained  in  place  except for  entirely  doing  away  with                                                                    
cashable credits.  The Middle Earth credits  would no longer                                                                    
be cashable, but would be  transferable to another producer.                                                                    
Ms.  Weissler added  that two  of the  credits would  remain                                                                    
cashable.  The  net  operating loss  credits  would  not  be                                                                    
cashable   but   the   well-lease   expenditure   and   well                                                                    
exploration credits would be subject  to cash. She explained                                                                    
that there were  provisions in the bill that  included a cap                                                                    
of  $35  million per  company  and  companies that  produced                                                                    
15,000 barrels per day as opposed to 50,000.                                                                                    
Representative Guttenberg reported  that at the subcommittee                                                                    
level  he  had  recommended  keeping some  of  the  industry                                                                    
credits. The  Legislative Finance Division  had rationalized                                                                    
that  there   was  no  transparency   -  the   numbers  were                                                                    
aggregated  figures between  producers. In  other words,  it                                                                    
was  not possible  to  know what  credit  resulted in  added                                                                    
production. He elaborated that a  company might take credits                                                                    
and see no additional production  and someone else might not                                                                    
take any  credits but see significant  increased production.                                                                    
He  asked  Representative Tarr  to  speak  to the  issue  of                                                                    
transparency  and how  other tax  regimes  around the  world                                                                    
dealt with it.                                                                                                                  
Representative  Tarr responded  that there  were 3  ways the                                                                    
House Resources  Committee approached it based  on what kind                                                                    
of information  the state wanted.  At the  recommendation of                                                                    
the  consultant,  language  was  inserted  for  a  new  pre-                                                                    
approval process.  The consultant talked about  how, in many                                                                    
regimes around the  world, he had to go  before a government                                                                    
entity  prior  to  money  being   spent  to  allow  for  the                                                                    
sovereign  to scrutinize  the anticipated  expenditures. She                                                                    
elaborated  that even  if  they were  converted  to a  carry                                                                    
forward loss, it  was a loss of revenue to  the state when a                                                                    
company became a producer and  tax payer. She suggested that                                                                    
there was still an investment on  the part of the state. She                                                                    
clarified  that the  committee did  not envision  a line-by-                                                                    
line  review of  each lease  expenditure like  an audit,  as                                                                    
there had been  some criticism from industry.  The state had                                                                    
not envisioned  something that would be  extremely detailed.                                                                    
Instead, it  would be a  chance for the state  to understand                                                                    
the possible  investment opportunities.  It would  also help                                                                    
with  a timeline  for  development.  She suggested  thinking                                                                    
about every dollar being precious  and the state offering an                                                                    
opportunity for  the losses to  be carried forward  and used                                                                    
against  tax liability.  She asked  if  members thought  the                                                                    
state should pick  up a portion of the  costs resulting from                                                                    
companies with  poor management that  allowed slippage  in a                                                                    
schedule for  instance. Alternatively, the state  could have                                                                    
an opportunity to scrutinize  the circumstances and indicate                                                                    
the increased  cost. The idea was  for the state to  have an                                                                    
early stage opportunity to look  at development, get a sense                                                                    
of  the work  schedule, and  have an  understanding that  it                                                                    
would be a well thought out project.                                                                                            
Representative Tarr continued.  She indicated that currently                                                                    
there was  a plan of  development and a plan  of production.                                                                    
However,  both  were  too  far   along  in  the  process  to                                                                    
accomplish   what  the   committee  hoped.   The  consultant                                                                    
provided suggestions  about adding clarifying  language. The                                                                    
committee  left  the  bill purposefully  vague  because  the                                                                    
regulators at the Department of  Natural Resources (DNR), in                                                                    
consultation   with  the   industry   folks  providing   the                                                                    
information,  would be  best suited  to make  the decisions.                                                                    
She thought  that leaving the language  somewhat vague would                                                                    
allow the regulatory process  to occur without micromanaging                                                                    
the type  of information the  state would receive.  It would                                                                    
allow  regulators  and  DNR  to  work  through  the  process                                                                    
together.  She relayed  that  anytime  regulations went  out                                                                    
there  was a  public comment  period. She  imagined industry                                                                    
folks would way in. It  seemed the process would provide the                                                                    
best work  product. She remarked  that she did not  have any                                                                    
personal attachment  as to how  that was define  in statute.                                                                    
She  was amenable  to a  clearer  definition. The  committee                                                                    
looked at the opportunities that  existed in the current the                                                                    
way work  was done. She  relayed that a plan  of development                                                                    
was not  done until  something was  unitized, which  was far                                                                    
along  in the  work. She  suggested the  state wanted  to be                                                                    
more engaged in the early  part. She suggested that the plan                                                                    
of approval  was one way  in which  the state could  be more                                                                    
engaged. A  second means was  through a provision  worked on                                                                    
in HB 247 in the prior year.                                                                                                    
Representative  Tarr reiterated  her  affection for  delving                                                                    
into details.  One of  the things she  was trying  to figure                                                                    
out was  how to  better understand  the overall  tax system.                                                                    
She looked at numbers including  the over $100 million spent                                                                    
on  things  in production  and  the  other $100  million  on                                                                    
things not in  production. She wanted to  understand why the                                                                    
state had  spent $100 million  and more on credits  that had                                                                    
not lead to  production. From her point of view,  it was not                                                                    
a good use  of state dollars. The committee  worked with the                                                                    
Alaska Oil and Gas Association  (AOGA) to get their input on                                                                    
an amendment,  Amendment 45 to  HB 247. She  elaborated that                                                                    
through  a confidentiality  agreement the  state would  have                                                                    
access to  some information. However, the  legislature would                                                                    
not  be  able  to  leave the  room  with  information,  take                                                                    
photos, or  write down  any information.  Criminal penalties                                                                    
would be imposed in doing  so. She also relayed that because                                                                    
the  information  was  privileged  tax  information  members                                                                    
would be subject  to a background check  and finger printing                                                                    
by the Department of Revenue,  as they were federal Internal                                                                    
Revenue Service requirements. If  legislators wanted to have                                                                    
some access to certain information  they would be subject to                                                                    
the same  procedures. She thought  it was  quite restrictive                                                                    
in nature and  she thought it was like giving  up a person's                                                                    
first-born child.  She understood  from the  companies' view                                                                    
point  why the  information was  so sensitive  and why  they                                                                    
would be  very careful.  She thought  there might  be people                                                                    
who  would  not be  able  to  keep information  confidential                                                                    
after seeing  it. She thought  those individuals  should not                                                                    
sign  confidentiality  agreements  or  have  access  to  the                                                                    
information.   She  would   approach   it   as  a   learning                                                                    
opportunity. She thought knowledge  was very powerful and if                                                                    
legislators  were able  to answer  some of  their unanswered                                                                    
questions  they might  do a  better job  of deciding  how to                                                                    
regulate the issue.                                                                                                             
4:42:44 PM                                                                                                                    
Representative Tarr continued  that Representative Josephson                                                                    
had a  bill, HB 99  [legislation introduced in 2017  - Short                                                                    
Title: OIL  & GAS TAX  CREDIT REPORTING] that  would require                                                                    
public   reporting   of   aggregate  credit   amounts.   The                                                                    
information would  not be broken  down by  company. However,                                                                    
public reporting would be available.  Alaskans would be able                                                                    
to weigh  in on  state dollars being  spent. She  thought in                                                                    
going forward with a fiscal  plan Alaskans might be asked to                                                                    
contribute  to the  state's fiscal  future  and more  stable                                                                    
budgeting. She thought it was  very appropriate for Alaskans                                                                    
to know where state dollars  were being spent. The resources                                                                    
committee   had  approached   the   transparency  need   for                                                                    
information   in  three   ways:   preapproval,  access   for                                                                    
legislators, and publicly reported transparency provisions.                                                                     
4:43:56 PM                                                                                                                    
Representative Guttenberg  wanted to target  credits related                                                                    
to  getting  production  online  instead  of  funding  major                                                                    
maintenance or other  things on projects that  might be done                                                                    
anyway. The  state did  not know  and that  was problematic.                                                                    
Representative Tarr agreed with Representative Guttenberg.                                                                      
Co-Chair Seaton  commented that most  of the  charts showing                                                                    
the economics of SB 21 were  based on oil priced between $80                                                                    
to $120  per barrel.  He noted  only one  chart encompassing                                                                    
$60  pricing,  the  lowest presented.  Everything  else  was                                                                    
based  on  prices   of  $80  to  $100.   He  mentioned  that                                                                    
Chesapeake Energy  had a probability  of 80 percent  (P80) -                                                                    
the price  would range from  $50 to  $70 per barrel  for the                                                                    
following  10  years.  No  one paid  any  attention  to  the                                                                    
published P80.  Alaska's companies  would not  divulge their                                                                    
P80  number. He  asked if  there  was anything  in her  bill                                                                    
regarding reinvestment in Alaska.                                                                                               
Representative  Tarr  responded  that  there  was  not.  She                                                                    
reported  that under  ACES  to  earn a  credit  there was  a                                                                    
requirement  that   dollars  be  invested  in   Alaska.  The                                                                    
requirement went  away in  SB 21. She  restated prior  to SB
21. She  explained that  under current  law a  company doing                                                                    
work  in Alaska  as  well  as elsewhere  might  have a  loss                                                                    
earning a  credit. That  credit could  essentially subsidize                                                                    
work outside  of Alaska. She suggested  that the legislature                                                                    
might want to  revisit the policy call. She  added that some                                                                    
Alaska  hire   provisions  were   incorporated  in   HB  247                                                                    
[Legislation    passed    in    2016    -    Short    Title:                                                                    
TAX;CREDITS;INTEREST;REFUNDS;O  and  G].  It  outlined  that                                                                    
there would  be priority  given to  companies with  a higher                                                                    
Alaska  hire  percentage.  She  thought  feedback  would  be                                                                    
helpful, as there  were possibly some challenges  to how the                                                                    
policy was implemented.                                                                                                         
4:47:08 PM                                                                                                                    
Co-Chair Seaton  asked if there  were any provisions  in the                                                                    
bill linking the  percentage of credit a  company would earn                                                                    
to  the  percentage  of  royalty   it  paid  to  the  state.                                                                    
Representative Tarr  responded in the negative.  She thought                                                                    
his point  was something that  should also be  considered by                                                                    
the  legislature.  She  reported   that  Caelus  Energy  had                                                                    
royalty  relief  on  a  couple of  their  projects.  It  was                                                                    
expected   that    their   application   would    be   under                                                                    
reconsideration soon. In addition  to other things that kept                                                                    
Alaska  attractive  in  a low-price  environment,  companies                                                                    
could come  to the state  and request royalty  relief. There                                                                    
were  many articles  in the  Anchorage Daily  News that  had                                                                    
reported on the issue.                                                                                                          
Co-Chair  Seaton  clarified  that  he was  talking  about  a                                                                    
little  something different.  He  provided an  example of  a                                                                    
private royalty  on private land.  He wondered if  the state                                                                    
would  pay  full  deductibility  and  full  credits  if  the                                                                    
development  occurred  in  an area  that  did  not  generate                                                                    
royalties  or offshore  under  HB  111. Representative  Tarr                                                                    
responded affirmatively.  She explained that all  fell under                                                                    
the net profit system. The  royalty was not considered under                                                                    
that system.                                                                                                                    
4:49:08 PM                                                                                                                    
Representative Kawasaki  returned to the question  about the                                                                    
preapproval process in Section 20  and 21. He wondered if it                                                                    
would allow the department to deny  a request if there was a                                                                    
process in place.                                                                                                               
Representative  Tarr  indicated  that  it  was  not  clearly                                                                    
defined  in statute  whether there  would be  a denial.  She                                                                    
indicated  that the  committee had  gone  around and  around                                                                    
trying to determine the best  way to approach the issue. The                                                                    
committee concluded that  the people best suited  to make an                                                                    
evaluation   would  be   the  resource   managers  and   the                                                                    
companies.  She  suggested if  it  was  determined that  the                                                                    
department should not  be allowed to deny  expenses, then it                                                                    
should be expressly outlined in  statute. She used the Smith                                                                    
Bay development  as an  example of a  project very  far away                                                                    
from existing  infrastructure and would be  extremely costly                                                                    
to develop. The development of  the project was estimated at                                                                    
$10  billion. The  state would  allow the  project to  carry                                                                    
forward 50  percent of  the losses,  earn the  interest, and                                                                    
deduct it once  becoming a tax payer in addition  to the GVR                                                                    
provisions. She suggested that in  such a circumstance where                                                                    
a  good  portion  of  the  value was  lost  in  a  low-price                                                                    
environment  the state  might not  think it  was reasonable.                                                                    
She  thought the  state  needed to  determine  the level  of                                                                    
scrutiny necessary.  The state  needed to  make sure  not to                                                                    
over-obligate itself. She pointed  to the United Kingdom and                                                                    
Norway as  examples. She reported that  virtually everything                                                                    
was   found  online   such   as   lease  expenses,   capital                                                                    
expenditures,   personnel  costs,   losses,  joint   venture                                                                    
agreements,  and   planned  activities.  There   were  other                                                                    
jurisdictions  where details  were being  reported publicly.                                                                    
The  folks from  development companies  had to  go to  their                                                                    
board of  directors to make  the case why dollars  should be                                                                    
invested in  Alaska rather  than other  places. They  had to                                                                    
provide details  and certain information  to their  board to                                                                    
obtain approval  for their  own capital  spend. In  turn, it                                                                    
was the same  kind of information the  committee hoped would                                                                    
be shared with the state.                                                                                                       
Representative Tarr suggested that  the state could do other                                                                    
things. She noted that  in the governor's State-of-the-State                                                                    
address he  talked about  building gravel  roads and  of the                                                                    
changing climate limiting the number  of days ice roads were                                                                    
available. Currently,  people were talking about  putting in                                                                    
permanent gravel roads.  It would change the  amount of time                                                                    
the work  would be  able to  be done in  a year.  She argued                                                                    
that by  having better information the  state could possibly                                                                    
make the  circumstances more  attractive for  companies. She                                                                    
did  not want  to approach  things in  such a  way that  the                                                                    
anticipated  outcome would  be  negative.  She thought  more                                                                    
information was  a good thing  rather than a bad  thing. She                                                                    
believed  that  it  would  allow   parties  to  work  better                                                                    
Representative Kawasaki  agreed that  the state  needed more                                                                    
information.  He  thought   the  state's  regulators  needed                                                                    
information.  He expressed  a concern  that the  state would                                                                    
have an  opportunity to  say no.  He also  argued that  if a                                                                    
regulator did not want oil  and gas development in a certain                                                                    
region they could potentially deny  a company the ability to                                                                    
receive credits making  it a political issue.  He would have                                                                    
to  hear  more about  the  preapproval  process and  how  it                                                                    
worked in practice.                                                                                                             
Vice-Chair Gara  commented on having once  tried to increase                                                                    
a $.05  per barrel surcharge  by $.01  and was told  that it                                                                    
was excessive.  He mentioned the  1 percent increase  from 4                                                                    
percent to  5 percent.  He asked  if she  had looked  at the                                                                    
interplay  between that  and  what a  company  could get  in                                                                    
royalty  relief.  He  explained that  royalty  relief  could                                                                    
bring  a company's  16 percent  or  12.5 percent  down to  3                                                                    
percent or  5 percent.  Therefore, a company  could get  a 7                                                                    
percent to  11 percent reduction  in the royalty  by showing                                                                    
that   without  royalty   relief  a   field  would   not  be                                                                    
economical. He  asked if  what he  described came  into play                                                                    
when deciding on a 1 percent tax change.                                                                                        
Representative  Tarr responded,  "Yes."  She  added that  in                                                                    
total  all the  other  provisions made  any new  development                                                                    
attractive  including   the  GVR  and  the   royalty  relief                                                                    
provisions.  She furthered  that  because the  opportunities                                                                    
existed and because companies had no complaints nothing was                                                                     
changed regarding that option.                                                                                                  
Co-Chair Foster concluded by providing the agenda for the                                                                       
following day.                                                                                                                  
HB 111 was HEARD and HELD in committee for further                                                                              
4:56:20 PM                                                                                                                    
The meeting was adjourned at 4:56 p.m.