Legislature(2009 - 2010)BARNES 124
02/24/2010 01:15 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB217 | |
| HJR40 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 217 | TELECONFERENCED | |
| *+ | HJR 40 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 217-TAX ON GAS FOR IN STATE MANUFACTURING
1:20:01 PM
CO-CHAIR JOHNSON announced that the first order of business is
HOUSE BILL NO. 217, "An Act relating to the tax applicable to
the production of natural gas used in the state as fuel or
feedstock in producing a manufactured end product." [Before the
committee was the proposed committee substitute for HB 217,
labeled 26-LS0816\R, Bullock, 2/1/10 ("Version R").]
1:20:23 PM
REPRESENTATIVE NEUMAN reminded members that his intent as
sponsor of HB 217 is to expand manufacturing in the state, and
this provision can be found on page 10 of Version R. He
stressed that HB 217 is also a jobs creation bill. Three [oil]
companies pay 90 percent of the state's expenses, he pointed
out, and this bill is one of several in committee that seek to
create an environment in the state in which industry and
hundreds of companies can thrive. The bill would go a long way
in helping to provide for an anchor tenant for an in-state gas
pipeline, a project that might not happen otherwise. An in-
state gas pipeline would benefit the entire state because it
would support development, such as the Donlin Creek Gold Mine
that would provide 2,000 family-sustaining jobs. Alaska does
not have the time to continue delaying this project, he opined,
given the state's current dependence on only three companies.
1:22:31 PM
REPRESENTATIVE NEUMAN noted that today he is providing several
amendments as requested previously by committee members. One of
those amendments expands on the meaning of manufacturing.
REPRESENTATIVE P. WILSON moved the adoption of Amendment [2],
labeled 26-LS0816\R.4, Bullock, 2/23/10, written as follows
[original punctuation provided]:
Page 10, line 4, following "product":
Insert "; in this paragraph, "manufacturing
process" does not include cooling gas for the purpose
of storing or shipping the gas as a liquid"
CO-CHAIR JOHNSON objected for discussion purposes.
1:23:13 PM
REPRESENTATIVE NEUMAN explained that the language added by
Amendment 2 would ensure that the export of liquid natural gas
(LNG) is not included as a manufacturing process, given that the
cooling and compressing of gas is the method used for moving
gas. The bill is meant to deal with manufacturing which is a
molecular change. However, the Department of Law does not want
to define manufacturing in statute and has some conceptual
amendments to Amendment 2 that it would like to offer.
1:24:24 PM
REPRESENTATIVE TUCK asked whether another definition of
manufacturing had previously been moved forward. In response to
Co-Chair Johnson, he said he remembers a different amendment
that did the same thing.
REPRESENTATIVE NEUMAN replied that perhaps Representative Tuck
is referring to one of the Department of Revenue's suggested
amendments to Amendment 2.
CO-CHAIR JOHNSON pointed out that HB 217 was amended once
before. [Amendment 1 to the original version of HB 217, labeled
26-LS0816\A.1, Bullock, 4/13/09, adopted on 4/13/09.]
1:26:27 PM
DAN STICKEL, Petroleum Economist, Tax Division-Economic Research
Group, Department of Revenue (DOR), stated that the department
had informed the sponsor that a clear definition of
manufacturing was needed before the bill could be supported by
the administration. Work was done within the Department of
Revenue, along with the Department of Law and the Department of
Natural Resources, to come up with a suggested definition for
manufacturing under HB 217, and perhaps this is what
Representative Tuck is speaking to. To protect against certain
unintended consequences, the Department of Revenue recommends
that the list of exclusions from the manufacturing definition in
Amendment 2 be expanded to include gas processing, gas
treatment, dehydration, fractionation, compression, or
liquefaction.
REPRESENTATIVE NEUMAN responded that he is working toward a gas-
to-liquids, or Fisher-Tropsch process, which takes methane apart
at the molecular level and reconnects the chains of waxes to
create different transportation fuel components. He said he is
concerned as to whether that would be considered gas processing
or fractionation of molecules; therefore, he would like to know
if that would be the case.
1:28:31 PM
REPRESENTATIVE SEATON surmised the department's fear is that if
certain things like compression and conditioning are not
excluded, an unintended consequence could be that a gas
conditioning plant is suddenly considered manufacturing and all
the gas transmitted down a pipeline, whether for import or
export, could then qualify for this proposed lower tax rate.
MR. STICKEL answered that this is exactly the situation the
department is trying to protect against by having this longer
list of exclusions from manufacturing. In response to Co-Chair
Johnson, he stated that Amendment 2 does not currently include
the Department of Revenue's suggestions.
1:31:23 PM
REPRESENTATIVE P. WILSON pointed out that Amendment 2 does not
define manufacturing; rather, it states what is excluded from
consideration as manufacturing. She said she understands what
is being accomplished by Amendment 2 should more exclusions need
to be added to it.
REPRESENTATIVE NEUMAN related his understanding that the
administration's suggested amendment to Amendment 2 would not
interfere with a gas-to-liquids processing plant. He further
understood that the administration supports the gas-to-liquids
concept to create more jobs. He said he therefore does not have
a problem with the proposed amendment to Amendment 2.
The committee took an at-ease from 1:32 p.m. to 1:37 p.m.
1:37:55 PM
CO-CHAIR JOHNSON removed his objection to Amendment 2.
REPRESENTATIVE P. WILSON withdrew Amendment 2. There being no
objection, Amendment 2 was no longer before the committee.
REPRESENTATIVE P. WILSON moved the adoption of Conceptual
Amendment 3, dated 2/23/10, written as follows [original
punctuation provided]:
"manufacturing" means chemically converting gas or
components of gas, or chemically combining gas or
components of gas with other substances, to form
valuable compounds; "manufacturing" does not include
gas processing, gas treatment, dehydration,
fractionation, compression, or liquefaction.
CO-CHAIR JOHNSON objected for discussion purposes.
1:38:46 PM
REPRESENTATIVE NEUMAN read Conceptual Amendment 3 to members and
offered his belief that the intent of the amendment is to ensure
that LNG export is not considered manufacturing, but a gas-to-
liquids process like Fisher-Tropsch is considered manufacturing.
CO-CHAIR JOHNSON inquired whether Conceptual Amendment 3
addresses the administration's concerns and whether the
administration is comfortable with this language.
MR. STICKEL offered his understanding that this definition was
necessary before the administration could support the bill.
Since this particular definition was developed within the
Department of Revenue and the Department of Natural Resources in
coordination with the Department of Law, the administration is
comfortable that it would allow a gas-to-liquids facility or a
petrochemicals facility, such as the Agrium facility, to qualify
under the manufacturing definition, but the sale of natural gas
for a major pipeline or LNG facility would not qualify.
1:40:48 PM
REPRESENTATIVE GUTTENBERG inquired whether a chemist was
involved in drafting the language for Conceptual Amendment 3 to
ensure that all possible processes were addressed.
MR. STICKEL responded that a number of people were involved but
he does not know their chemistry backgrounds.
CO-CHAIR JOHNSON inquired whether the administration would
support this legislation with Conceptual Amendment 3 in place.
MR. STICKEL replied that with this amendment in place the
administration could support this bill.
CO-CHAIR JOHNSON withdrew his objection. There being no further
objections, Conceptual Amendment 3 was passed.
1:42:12 PM
REPRESENTATIVE P. WILSON moved the adoption of Amendment 4,
labeled 26-LS0816\R.3, Bullock, 2/23/10, written as follows
[original punctuation provided]:
Page 3, lines 26 - 27:
Delete "return is due under AS 43.55.030(a) for
the calendar year for which the election is made"
Insert "installment payment of estimated tax is
due under AS 43.55.020(a) for the month in which the
election is made. The election applies to the
production of gas in each month for which the election
is made"
CO-CHAIR JOHNSON objected for discussion purposes.
1:42:23 PM
REPRESENTATIVE NEUMAN deferred to Mr. Stickel for an explanation
of the amendment.
MR. STICKEL explained that Amendment 4, as presented, would
allow for the producer to take the election for the preferential
tax treatment - or not - at the time the producer makes its
monthly estimated payment. Under this amendment, the producer
could make an election to either take the 17.7 cent tax rate or
to include the natural gas along with the rest of its production
and could make that election on a monthly basis. However,
Alaska's Clear and Equitable Share (ACES) tax is calculated on
an annual basis, so there is a potential that when the producer
files its annual tax return the state could owe interest for
overpayments for the monthly estimated payments depending upon
the elections that the producer took on a monthly basis. He
said the department is flagging this as a concern because it was
unknown whether that was the intent of this amendment. The
department has some recommended language that would remedy this
potential.
1:43:57 PM
REPRESENTATIVE P. WILSON surmised the department would like to
have this amendment but would like to have it worded differently
while meaning the same thing.
MR. STICKEL answered that that would better address the intent
of this amendment. A way to remedy that particular situation
would be to have the producer make the election for which tax
rate would apply to its manufacturing gas at the time the first
estimated payment is made and then have that election apply for
the entire year, given the tax is levied on a calendar year
basis.
1:45:04 PM
CO-CHAIR JOHNSON said he does not see a way to change the
language of Amendment 4 to make this happen.
REPRESENTATIVE NEUMAN said his problem with the department's
suggestion is learning about it right now. He reminded members
that the reason for this part of the bill is because of concerns
expressed by committee members that the current rates being paid
by people for home heating and electrical generation could
increase because of the way credits are done.
CO-CHAIR JOHNSON asked whether just not adopting Amendment 4
would address the problem.
MR. STICKEL responded he believes that without the amendment a
producer could make estimated payments based on either taking
the election or not taking the election.
REPRESENTATIVE P. WILSON directed attention to page 3 of Version
R, line 25, and suggested that after election the words "either
monthly or annually" be inserted.
1:47:38 PM
MR. STICKEL, in response to Co-Chair Johnson, noted that this is
not necessarily a showstopper; it is just one issue the
department wanted to bring to the committee's attention because
of the potential to game the system. One possible change if
members wanted to make the election annual would be to have the
election made at the time the first monthly installment payment
of estimated tax is due under AS 43.55.020(a) for the calendar
year for which the election is made. Thus, at the end of
February when a producer makes its first estimated payment,
which is for the January production, the producer would choose
whether to make this election and that would then hold for the
entire calendar year.
MR. STICKEL, in response to Representative P. Wilson, stated
that the department's suggested amendment would be made at the
same place as Amendment 4, but the inserted language would
instead be "first monthly installment payment of estimated tax
is due under AS 43.55.020(a) for the calendar year for which the
election is made".
1:49:28 PM
REPRESENTATIVE TUCK inquired what would happen if the producer
waited until June or July to make that election rather than
making it in February, or would the department's suggested
amendment require that the election always be made in February.
MR. STICKEL replied that under the language he just read, the
election would be made at the time the producer makes its first
estimate.
1:50:31 PM
REPRESENTATIVE GUTTENBERG posed a scenario in which a gas
producer produces 10 billion cubic feet (Bcf) but only uses 2
Bcf for manufacturing. He asked whether the producer could take
this credit, which might be the lower of all the possible
credits that the producer can take, and apply it to all of its
product.
REPRESENTATIVE NEUMAN answered that it is not credits that are
being talked about here, but a reduction in production taxes.
1:51:30 PM
REPRESENTATIVE GUTTENBERG asked whether a reduction of credits
could be taken across everything that a producer produces.
MR. STICKEL provided a history of where this election comes
from. The department was working with the sponsor on some of
the questions that were raised by the committee to look at what
the possible impact on a producer's tax liability would be from
the lower tax rate of 17.7 cents per thousand cubic feet (Mcf).
It was found in the original bill that rolling the manufacturing
gas into a producer's existing portfolio of oil and gas would,
in most cases, lower the producer's tax liability. However,
there were some situations where the producer's tax liability
would actually increase, and that is why the election language
came to be. The last thing wanted is to raise a producer's tax
liability because the producer started selling gas to a
manufacturing facility. The election allows the producer "to
take the lower of" on the tax.
1:52:56 PM
REPRESENTATIVE SEATON remarked that the statement about not
wanting it for the month because it could game the system and
require the state to pay interest exemplifies his problem with
the structure. The only time he sees this as being valuable is
when there can be a modeling of the figures, something which he
requested but has not yet received. The state would be
providing 55-65 percent of the investment in the field through
credits and the taking off of production tax and progressivity
percentages, but the state would receive back in tax almost zero
or 5 percent because this would allow the producers to elect at
the end. The state would not even recover its expenses and that
is his problem with this, he opined. This is a small gaming of
the system that is a big gaming component. While he understands
that the intent of HB 217 and Amendment 4 is to stimulate gas-
to-liquids (GTLs), which he favors, he fears it will cost the
state big-time if the election is tied to when the election is
made and not to the time the gas is produced and applied against
the producer's oil taxes.
1:55:49 PM
CO-CHAIR JOHNSON understood that skirts what is being talked
about with Amendment 4. However, it is the concept of the
overall bill that Representative Seaton has a problem with as
much as this particular amendment, he said interrogatively.
REPRESENTATIVE SEATON responded that it is, but the discussion
is about when the election is taken. If the talk in this
amendment is about the difference between monthly and annual,
then his discussion is for later. If the talk in this amendment
is about allowing the election to be taken annually when the
producer chooses rather than at the start of development, then
it is on point now. For example, at the time that development
starts at Point Thomson the producer would decide to pay the 5
percent tax for gas to be used in manufacturing and would not
take off 60 percent from its oil taxes.
1:56:47 PM
CO-CHAIR JOHNSON surmised that Representative Seaton is more
comfortable with the monthly language.
REPRESENTATIVE SEATON noted that such an amendment is not before
the committee, but the amendment that would allow the election
to be made at a calendar year is what creates the obstacle
because it allows a producer to make the election when it is
best for its bottom line instead of the start of drilling, and
this is where he has a problem. It is an election timing issue,
but he is willing to let it go and come back to it later.
1:57:57 PM
CO-CHAIR JOHNSON said he understands where Representative Seaton
is coming from, but once the gas is manufactured and producers
are electing to do this, the state already has the manufacturing
and that is a commercial deal between the two entities that
would best play into whoever deals with that and he can see
where both would justify.
REPRESENTATIVE NEUMAN argued that nobody is gaming anyone and
such comments are inappropriate. The first nine pages of the
bill were written by the Department of Revenue, Department of
Natural Resources, and Department of Law to make sure the state
does not get gamed. He said he has no objection to Mr.
Stickel's suggested amendment to Amendment 4.
1:59:54 PM
REPRESENTATIVE TUCK posed a scenario in which a producer elects
the Alaska Gasline Inducement Act (AGIA) method for the
production tax credit and progressivity and that this is done at
the time of first payment, but later in the year the producer
begins providing feedstock for manufacturing. He asked whether
the producer would be able to take advantage of this bill
proposal.
MR. STICKEL deferred to Mr. Gary Rogers.
GARY ROGERS, Oil & Gas Revenue Specialist, Tax Division-
Administration, Department of Revenue (DOR), answered that the
producer certainly would because the tax calculation that is
going to be reported on the producer's annual return is an
annual calculation. The producer may not know at the beginning
of the year that it will be producing and selling gas to be used
for manufacturing in the state, but at the end of the year that
will be known. Perhaps the election should be made at the
earliest possible time that the taxpayer knows when it is going
to have gas used in state. The Department of Revenue's concern
is that a taxpayer could intentionally overpay its monthly
estimates and the state would not know that until sometime after
March 31 of the following year when the taxpayer files its
annual return. The state would then have limited time to
determine that there was overpayment and the taxpayer would be
earning interest on all those monthly installments for the whole
year. There may be a better way to wordsmith this, he added.
2:03:15 PM
CO-CHAIR JOHNSON inquired whether Mr. Rogers thinks it would be
sound business practice to overpay taxes with the expectation of
getting interest.
MR. ROGERS replied no, but the potential is there.
CO-CHAIR JOHNSON asked whether Mr. Rogers believes the companies
the state is dealing with participate in good business
practices; he then added that Mr. Rogers did not have to answer.
2:03:48 PM
REPRESENTATIVE SEATON inquired whether the election for gas
utilized for manufacturing in state is a proportional amount of
the total gas.
CO-CHAIR JOHNSON answered if it is not proportional, it should
be. He surmised it would be a small portion of the exploration
tax credits that Representative Seaton is talking about, given
that current law says it must be under 0.5 Bcf per day and not
all of the gas would be going to manufacturing.
REPRESENTATIVE NEUMAN stated that if 4.0 Bcf per day was going
to manufacturing to create more jobs in the state he would be
happy because right now there is nothing. Something is better
than nothing and that is what he is trying to make happen. He
said he is confused because this is the administration's
language and the administration keeps amending its own language.
CO-CHAIR JOHNSON shared Representative Neuman's frustration.
2:05:51 PM
REPRESENTATIVE SEATON reiterated his question as to whether it
would be only the proportion of a taxpayer's gas that is used
for manufacturing, heating, or power generation.
MR. STICKEL responded yes, the department's understanding of
this legislation is that the election would apply only to that
gas which qualifies under the definition of manufacturing.
2:06:35 PM
CO-CHAIR JOHNSON asked whether the sponsor is comfortable with
adopting the administration's suggested language.
REPRESENTATIVE NEUMAN replied that he comfortable with the
conceptual amendment that is being offered by the administration
through Mr. Stickel.
CO-CHAIR JOHNSON removed his objection to Amendment 4.
REPRESENTATIVE P. WILSON withdrew Amendment 4. There being no
objection, Amendment 4 was no longer before the committee.
2:07:22 PM
REPRESENTATIVE P. WILSON moved the adoption of Conceptual
Amendment 5, written as follows [original punctuation provided]:
Page 3, lines 26 - 27:
Delete "return is due under AS 43.33.030(a) for
the calendar year for which the election is made"
Insert:
"first monthly installment payment of estimated tax is
due under AS 43.55.020(a) for the calendar year for
which the election is made."
CO-CHAIR JOHNSON asked whether Conceptual Amendment 5 addresses
Mr. Stickel's concerns.
MR. STICKEL answered yes, this amendment would take care of the
issue of a taxpayer potentially overpaying to receive a refund
with interest at the end of the year.
There being no objection, Conceptual Amendment 5 was passed.
The bill was now before the committee.
2:08:14 PM
REPRESENTATIVE SEATON said he had previously asked for an
analysis [which he did not receive] that looks at a 1.5-2.0 Bcf
per day in-state manufacturing usage to see what it would look
like economically for the state with this later election. He
said that would probably preclude exporting the gas through
Canada because he does not think the state has enough gas to
build both a 1.5 Bcf in-state gasline and a 4 Bcf out-of-state
gasline. This would therefore mean that all of the gas produced
would be produced under this tax regime, whether it is for
heating, electrical generation, or manufacturing; yet, when
drilling for the gas the producers would be able to write off
the taxes on the oil value 25 percent production tax and the
progressivity. This would dig the state into a big hole for its
future economics and he does not believe this has been fully
considered.
2:10:26 PM
CO-CHAIR JOHNSON said he believes the state will be in bigger
trouble than anything this bill would allow if the state's only
gasline is a 2.0 Bcf line to Southcentral Alaska with all the
spurs because the other line is not practical. At least this
way the state will have a manufacturing base and a heating base
in Southcentral if the big pipeline is not built. While he
shares Representative Seaton's concern about the future
economics of the state, he is not comfortable resting the
economics totally on the big pipeline. This is a step in
generating the jobs for Alaska to become a more self-sufficient
state rather than an oil province. If it gets to the point that
the big pipeline is out of the question, then the legislators in
place at that time can address that. In the meantime, this is a
signal that the state is open for business and wants anchor
tenants, and for that reason he will be supporting HB 217.
2:12:01 PM
REPRESENTATIVE NEUMAN stated that a 4.5 Bcf per day gasline
through Canada would provide only 30-50 long-term legacy jobs.
However, an in-state gasline of up to 1.0 Bcf per day would
create thousands of long-term legacy jobs. This is an
opportunity to have a tremendous amount of jobs and payroll for
Alaskans as opposed to a smaller amount that will never replace
the oil going down the Trans-Alaska Pipeline System. The state
needs to diversify and have hundreds of companies paying
corporate taxes rather than just the three companies that are
currently paying 90 percent of the state's bills. Where would
the state be if one of these three companies left and the state
has not taken the opportunity to use its resources to create
jobs for Alaskans?
2:14:05 PM
REPRESENTATIVE SEATON asked whether the sponsor or the
Department of Revenue has done the analysis or has the
information that he previously requested.
MR. STICKEL responded that the department is in the process of
doing some more sophisticated and detailed analysis of gas-to-
liquids and has been working with Representative Seaton's office
in this regard, but the analysis is not yet completed. The
department did look at some hypothetical scenarios as to what
the effects would be on an existing producer that starts selling
gas for manufacturing that qualified under HB 217. It was found
that, generally speaking, at higher oil prices and lower gas
prices it would be advantageous to a producer to have that
manufacturing gas taxed under the existing statute. At lower
oil prices or higher gas prices, it would generally be more
advantageous for the producer to pay the 17.7 cents rate.
Beyond that information, the department does not have anything
to release at this time.
REPRESENTATIVE SEATON said the question he is getting at is the
state's participation in a development through the production
tax and progressivity offsets and then the switching to the
lower tax rate. However, he continued, it does not sound like
that analysis is available yet.
2:16:25 PM
CO-CHAIR JOHNSON, in response to Representative Edgmon, stated
that the next committee of referral is the House Finance
Committee. He added that it is his inclination to move the
bill, but he must insist that the sponsor get these questions
answered before HB 217 is heard in the House Finance Committee.
2:17:44 PM
REPRESENTATIVE P. WILSON moved to report Version R of HB 217,
labeled 26-LS0816\R, Bullock, 2/8/10, as amended, out of
committee with individual recommendations and the accompanying
fiscal notes.
REPRESENTATIVE SEATON objected.
A roll call vote was taken. Representatives P. Wilson, Olson,
Edgmon, Tuck, Neuman, and Johnson voted in favor of HB 217.
Representatives Seaton and Kawasaki voted against it.
Therefore, CSHB 217(RES) was reported out of the House Resources
Standing Committee by a vote of 6-2.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR 40 v.R.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| Changes to HJR 40.R.doc.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 Letter of Support MOA.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| CSHJR 40 v.E.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 - Sponsor Statement.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 zero Fiscal Note.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| CSHB 217.R amendment R.3.pdf |
HRES 2/24/2010 1:15:00 PM |
HB 217 |
| CSHB 217.R amendment R.4.pdf |
HRES 2/24/2010 1:15:00 PM |
HB 217 |
| HJR 40 Letter of Support Springer.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 Letter of Support TI.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 Letter of Support Webb.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 Info 2.12.10.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |
| HJR 40 N Star Ltr 2.23.10.pdf |
HRES 2/24/2010 1:15:00 PM |
HJR 40 |