Legislature(2013 - 2014)
02/25/2013 02:07 PM House RES
| Audio | Topic |
|---|---|
| Start | |
| HB72 | |
| HB99 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 72-OIL AND GAS PRODUCTION TAX
2:07:25 PM
CO-CHAIR FEIGE announced that the first order of business is
HOUSE BILL NO. 72, "An Act relating to appropriations from taxes
paid under the Alaska Net Income Tax Act; relating to the oil
and gas production tax rate; relating to gas used in the state;
relating to monthly installment payments of the oil and gas
production tax; relating to oil and gas production tax credits
for certain losses and expenditures; relating to oil and gas
production tax credit certificates; relating to nontransferable
tax credits based on production; relating to the oil and gas tax
credit fund; relating to annual statements by producers and
explorers; relating to the determination of annual oil and gas
production tax values including adjustments based on a
percentage of gross value at the point of production from
certain leases or properties; making conforming amendments; and
providing for an effective date."
2:07:34 PM
SCOTT GOLDSMITH, Director, Institute of Social and Economic
Research (ISER), University of Alaska Anchorage (UAA), declared
that he was testifying as an individual, and not as a
representative of UAA. He presented a PowerPoint, "Petroleum:
Jobs and Revenues." [Included in members' packets.] He stated
that the basis for a prosperous economy was good jobs and
sufficient public revenue to support the public goods and
services that are desired.
2:08:53 PM
DR. GOLDSMITH pointed to slide 4, "The Alaska Economy Runs on
$$$ From Outside," and stated that the resources primarily came
from money outside Alaska, as the Alaska economy was small and
did not have a lot of capability to generate its own capital.
He noted that revenue was generated from the sale of Alaska
natural resources, including fish and oil, tourist spending,
federal spending, and the increasing number of retirees in
Alaska. Moving on to slide 5, he reported that once those
revenue dollars were circulating in the economy and supporting
the local businesses, banks, restaurants, and hospitals, the
economy would grow.
2:10:21 PM
DR. GOLDSMITH introduced slide 6, "What is the Impact on Jobs
and Revenues from a Cut in Petroleum Taxes." He declared that
state revenues from currently anticipated production would fall
as a result of a cut in the oil taxes, while budget cuts would
reduce public and private jobs. He opined that an increase in
petroleum industry investment would generate private jobs. If
there were increased production, there would be an increase to
the associated state revenue, which would then increase public
and private jobs.
2:11:20 PM
DR. GOLDSMITH offered to walk through the analysis, comparing
the loss of jobs and revenue to the state from a reduction in
oil tax, with the gain of revenue and jobs from any increased
oil activity generated by increased investments as a result of
lower tax rates, slide 7.
2:12:01 PM
DR. GOLDSMITH declared that his description of what might
happen, based on a reasonable set of assumptions, was not a
prediction, slide 8, as he did not have the data to make a
prophecy.
2:12:42 PM
REPRESENTATIVE P. WILSON asked if the loss and gain would be
balanced, with a short lull.
DR. GOLDSMITH replied that it would not.
2:13:10 PM
DR. GOLDSMITH referred to slide 9, "What Happens to Investment
When taxes Cut $1 Billion?" He noted that, although it was not
a guarantee for oil industry investment if oil taxes were cut,
as an economist, his general sense was that incentives did
matter and if incentives were improved then investment would go
up. He offered his belief that it seemed to be a reasonable
assumption that a cut in oil tax rates would increase oil
investment in Alaska. He suggested that leverage was a way to
deal with this uncertainty. If taxes were cut by $1, there
would be some leverage which would result in some of that money
being invested in Alaska. He opined that the reduction in tax
revenue could result in an investment in Alaska.
2:16:06 PM
DR. GOLDSMITH posed an analysis for which the leverage rate was
1, such that for every $1 billion of tax revenue reduced, there
would be $1 billion of new investment by the oil industry. In
response to Co-Chair Saddler, he said that this was just an
initial analysis on this basis.
DR. GOLDSMITH explained that it was more difficult to do a
prediction as opposed to a general description, as it was
difficult to know what would be the characteristics of the new
investment for timing and oil production. He moved on to slide
10, "Oil Development & Production: Each Project Unique," which
depicted a time profile for the production of many of the North
Slope fields since 1980. He pointed out how different and
unique each development had been.
2:17:56 PM
DR. GOLDSMITH directed attention to slide 11, "Jobs to
Production Relationship," and stated that there was not a simple
relationship between the number of jobs in the oil and gas
industry and the amount of production. The graphic on slide 11
demonstrated that, since 1980, the production per oil and gas
worker had decreased from more than 250 barrels per day to
currently less than 50 barrels per day. He noted that it was
very difficult to capture this relationship from a simple
metric.
2:18:57 PM
DR. GOLDSMITH continued with slide 12, "How Does the State Spend
its Money?" and stated that it was impossible for him to know
the impact on the state budget should the state lose $1 billion
in revenue. He expressed that he did not know where the cuts
would be, as those decisions were made by the governor and the
legislature. He offered to review the impact of cuts in either
the operating or the capital budgets, as well as the impact for
additional revenue from the production of oil and gas.
2:20:06 PM
DR. GOLDSMITH shared slide 13, "Hypothetical $1 Billion Field."
He posed that a hypothetical field was developed for $1 billion.
It was not based on any particular field, but included the
current costs from a $1 billion investment. The field output
peaked at 18,000 barrels each day in its fifth, sixth, and
seventh years of production, with a subsequent tapering off at
an annual decline rate of 10 percent. The graph depicted the
time profile of production and revenues that would be generated
by this field. He stated that it was assumed to have a $20 tax
per barrel for taxes and royalties, which was about half what
the state collected per barrel in 2011. The assumption was for
a marginal field that was relatively costly.
2:22:21 PM
DR. GOLDSMITH, in response to Co-Chair Saddler, said that the
assumption was for a cost of $1 billion to develop the field,
while the cost for operation had not yet been discussed.
2:22:39 PM
DR. GOLDSMITH addressed slide 14, "New Field: Direct Jobs," and
stated his assumption for employment of 500 oil and gas workers
for each of four years. He explained that this correlated to an
earlier study of the North Star field, which he updated based on
an adjustment to the cost of doing business in upstream oil and
gas activities. He noted that the cost of development had gone
up dramatically since the late 1990s. He declared that his
assumption was for investing $1 billion and getting 2000 man
years of employment, an equivalent to 2 man years of employment
per $1 million of expenditure, which he opined was a
conservative assumption for the direct employment impact.
2:24:22 PM
DR. GOLDSMITH introduced slide 15, "New Field: Direct Jobs," and
offered his assumptions for operations, which were also drawn
from the aforementioned North Star Field study. He opined that
the operations employment was relatively modest, and continued
for 25 years. He reported that the total production, slide 16,
"25 Year Cumulative Totals," was 72 million barrels at $20 per
barrel, with total revenue of $1.445 billion and direct oil
patch jobs associated with development and production of 4,349
man years.
2:26:03 PM
DR. GOLDSMITH indicated slide 17, "Hypothetical Field: Make Room
on Graph for Other Jobs." He noted that this generated
employment directly in the oil patch, as well as other areas.
He offered slide 18, "Petroleum Job Pyramid: The Economic
Multiplier," which portrayed the multiplier effect of any direct
activity, the secondary jobs. He drew attention to the inverted
pyramid of employment, with the oil and gas employee at the
bottom of the pyramid, and the field and development
maintenance, the suppliers, and the consumer businesses each
accommodating an increasingly larger tier above the oil
employee. He directed attention to a list of jobs that would be
associated with each tier to illustrate the breadth of the
multiplier effect. He reported that the average annual wage for
an oil and gas worker was $147,000, which was the highest for
any industry in Alaska and which supported many consumer
businesses.
2:29:06 PM
DR. GOLDSMITH reported on a recent McDowell & Associates report
"Petroleum Multiplier," slide 19, which supported the idea that
the multiplier pyramid was quite tall, as the numbers for direct
employment were almost 4,000, with an impact to more than 40,000
other jobs. One way to measure this was to take the ratio of
4000 direct jobs, divided into the grand total of direct and
indirect jobs, 45,000, for a ratio of about 10. This was one
measure of the economic multiplier. If you included other
intermediate employment impacts and support services in the
multiplier, the ratio would change. He chose to work with a
multiplier of 2.4, as it reflected the total number of jobs
divided by the oil and gas industry and other support services,
without the total number of direct and induced services.
REPRESENTATIVE TUCK asked about a previously reported multiplier
of 19.1.
DR. GOLDSMITH, in response, explained that those were employment
multipliers, although there were at least two other categories
of multipliers, an income multiplier based on wages and
salaries, and a sales multiplier based on total sales activity
in an economy as a result of an initial investment. He offered
his belief that the 19.1 multiplier could be the sales
multiplier as it would be larger. He stated that the multiplier
for oil and gas tended to be quite large because of the
intermediate goods and technical services required during the
field development, beyond that of the actual workers in the
field. He noted that he was using a smaller measure of the
multiplier for this analysis.
2:33:20 PM
CO-CHAIR SADDLER asked to clarify the implication and importance
of the multiplier effect.
DR. GOLDSMITH, in response, stated that the larger the
multiplier the larger the number of times the dollars circulate
through the economy before they leak out. The more times a
dollar circulated through the economy, the more jobs, income,
and business opportunities were created for Alaskans. He
offered an example for winning an out of state lottery, which
would bring a large sum of money into Alaska to be spent in the
state, generating income for other businesses. He pointed out
that the longer this money stayed in the state, the more
economic activity it generated for Alaska, hence the higher
multiplier was better for the economy.
REPRESENTATIVE TUCK asked if the current example was for an
employment multiplier.
DR. GOLDSMITH expressed his agreement.
REPRESENTATIVE TUCK asked if this assumed all the employees to
be Alaska residents.
DR. GOLDSMITH replied that this assumption had not yet been
determined, as he had only declared the number of jobs created.
2:36:05 PM
DR. GOLDSMITH returned attention to slide 20, "New Field: Total
Oil Patch Jobs," which added the multiplier jobs to the earlier
graph depicted on slide 17. As the assumed multiplier was 2.4,
this would add an additional 1.4 jobs to the already determined
oil patch jobs somewhere else in the economy. He pointed out
that this multiplier would create an additional 6,088 jobs, for
a total of 10,437 jobs. He reminded that the hypothesis had
included tax revenue of $20 per barrel, which would also
generate additional jobs and spending. He suggested that these
jobs would be included in operating and capital budgets, slide
22, "State Spending Bang per Buck & Multipliers." He referenced
his earlier assumption that translated into two jobs per $1
million of spending, which was not much bang for the buck
compared to the spending by state governments on operations. He
reported that a state government could hire 12 full time jobs
for $1 million, which was a bigger bang for the buck. He
pointed out that the job multiplier would be smaller than with
the oil and gas industry however, as there was not the necessary
support personnel for state operations workers to do their jobs.
He noted that, as the average state employee was not making
$147,000 similar to the average oil and gas employee, the state
employee would not support as many other jobs in the multiplier.
CO-CHAIR SADDLER asked for an explanation to the formula for the
operations and capital multipliers.
DR. GOLDSMITH replied that the denominator in the operations
formula was the bang for the buck, which in this case was 12
state government jobs per $1 million spent. As the multiplier
was 1.66, this would result in an additional 8 jobs in the
private sector, for a total of 20 jobs, which would become the
numerator in the equation.
2:42:02 PM
REPRESENTATIVE SEATON asked for clarification regarding the
multiplier effect from the average oil and gas salary of
$147,000.
DR. GOLDSMITH, in response, explained that the oil and gas
industry would directly hire 2 people at $147,000 apiece for
each $1 million invested, with the remainder being spent on
goods and services from other businesses. The employees of
these other businesses would be reflected in the multiplier.
REPRESENTATIVE SEATON, referring to the $1 million investment,
asked if it represented 12 jobs at $80,000 each, with almost
nothing else spent on goods and services.
DR. GOLDSMITH stated that this equation was "pretty specific to
people." In response to Representative Tuck, he directed
attention to slide 23, "Bang per Buck & Multipliers," which
summarized his earlier comments. This slide compared the
assumptions to the creation of jobs from the spending of $1
million within state government operations, capital spending,
and the oil and gas industry. Directing attention to the
operations spending, he noted that the $1 million investment
would directly hire 12 people in state government, and the
multiplier would generate an additional 8 jobs in the private
sector. He noted that $1 million spent on the capital budget
would generate 4 jobs, with 3 additional jobs created by the
economic multiplier. In the oil and gas industry, this same
investment would generate 2 jobs, with an additional 2.8 jobs by
the multiplier. He reminded the committee that he had taken a
conservative approach for the oil and gas multiplier, although
he opined that it was most likely a higher figure.
[Due to technical difficulties, the recording was interrupted
and testimony was momentarily suspended.]
2:51:13 PM
REPRESENTATIVE TUCK referred to slide 22, and asked to clarify
the difference between the oil and gas multiplier and the state
job multipliers for state operations and capital expenditures.
DR. GOLDSMITH, in response, stated that the assumption for the
number of workers that could be hired by the operating budget of
$1 million was 12 state workers, whereas the hiring for the same
capital budget would be 4 workers in the private sector. He
stated that these assumptions had been researched in an earlier
ISER report entitled "The Citizens Guide to the Budget." For
the total number of jobs created by either operations or
capital, it was necessary to use the economic multipliers, which
were 1.66 for operations and 1.75 for capital. He pointed out
that these assumptions were also based on the aforementioned
ISER report. He explained that the use of the multipliers would
determine that the total number of jobs created in operations
would be 20 jobs, and for the capital budget there would be 7
jobs created.
2:53:08 PM
REPRESENTATIVE TUCK asked to clarify that the total jobs created
by the state operations investment was 20 jobs, with 12 being
state jobs.
2:53:41 PM
DR. GOLDSMITH summarized slide 23, stating that $1 million spent
on the state operating budget would bring 20 jobs, on the
capital budget would bring 7 jobs, and on the oil industry would
bring about 5 jobs.
REPRESENTATIVE SEATON asked to clarify that the $1 million spent
in the oil and gas industry would reduce the taxes by $1
million.
DR. GOLDSMITH replied that he would address that momentarily.
2:54:45 PM
DR. GOLDSMITH addressed slide 24, "New Field Total Jobs
including Public Capital Spending," which depicted the annual
addition of jobs, to the aforementioned slide 20, due to public
spending of the revenues generated by the additional production.
He shared his assumption for slide 24 that the additional public
spending would go into the capital budget. Initially, as there
was no production, there was no public revenue or spending;
however, over time, that increased significantly. If those jobs
were accumulated over a period of 25 years, there would be an
additional 10,000 jobs for a total of more than 20,000 jobs. He
allowed that the additional public revenue could be spent on the
operating budget, instead, which would reflect a different
pattern for job creation, slide 25, "New Field Total Jobs
including Public Operations Spending." He stated that, as the
multiplier for state government was very large, there would be a
significant increase to the number of jobs.
2:56:35 PM
REPRESENTATIVE TUCK reviewed the slides for development of a $1
billion oil field, daily production in barrels, and revenues per
year, asking if that was revenue to the industry.
DR. GOLDSMITH replied that it depicted revenues of $20 per
barrel to the state.
REPRESENTATIVE TUCK continued his review, and pointed to the
slide depicting the correlation of production to employment in
the oil industry. He asked for clarification to slide 25.
DR. GOLDSMITH, in response, explained that this last graph
showed what could be done with the $1.5 billion in public
revenue generated by the 74 million barrels of additional oil in
this hypothetical field. He offered that it would create a lot
of jobs if the revenue was spent through the operating budget,
though not as many jobs if spent through the capital budget.
2:58:22 PM
REPRESENTATIVE P. WILSON asked to clarify where the revenue
originated.
DR. GOLDSMITH, in response, stated that the $1.5 billion was
revenue to the state from the taxes and royalties that would be
collected from the production of 74 million additional barrels
of oil.
REPRESENTATIVE P. WILSON asked to clarify, as this was not
referring to present conditions, what was being referenced.
DR. GOLDSMITH, in response, explained that this was a
hypothetical case demonstrating the effects for employment and
additional state revenue, if additional industry investment
occurred that generated additional production.
REPRESENTATIVE P. WILSON asked to clarify that this was a
hypothesis for the results from a reduction of tax to the oil
companies, that it would create more oil production.
DR. GOLDSMITH, in response, stated that this was what could
potentially happen, although it was not a prediction as he did
not have the data for the necessary leverage. He acknowledged
that it was a narrative with conservative assumptions for the
generation of employment and revenue.
REPRESENTATIVE P. WILSON asked if this included the use of the
correct levers.
DR. GOLDSMITH expressed his agreement, offering to show the
results.
DR. GOLDSMITH offered his belief that slide 26, "Cumulative Jobs
Generated," would summarize the answer for Representative
Wilson. He stated that the graph displayed three cases in which
the state tax was reduced by $1 billion, with an assumption that
this would generate new employment and new petroleum revenues.
The first case reflected the $1 billion tax revenue loss to the
state from the capital budget, a loss of 7,000 jobs. However,
as the oil industry generated additional employment and revenue,
which was collected by the state, this was spent on the capital
budget in subsequent years. Over 25 years, this would generate
a cumulative employment of 20,554 jobs, with a loss of 7,000
jobs.
3:03:31 PM
DR. GOLDSMITH, in response to Representative Saddler, stated
that this was 20,554 man years over the 25 year period, the life
of the hypothetical oil field. He expressed an assumption that
the 7,000 jobs were lost immediately.
3:04:01 PM
REPRESENTATIVE SEATON opined that this assumption was all based
on the idea of leverage, that the reduction of taxes would
increase the investment in Alaska, whereas an increase in taxes
would lead to investment elsewhere. He pointed out that, when
taxes had been increased, investments had increased, and jobs
had increased. He noted that the circumstances had allowed this
to happen. He shared that other consultants had testified that
it would be necessary to have a new 20,000 barrel per day field
every year from 2017 onward just to break even with the
stipulations under proposed HB 72. He questioned how both of
these hypotheses worked in conjunction.
DR. GOLDSMITH replied that would not work if you believed that
an increase to taxes would also increase investment activity.
REPRESENTATIVE SEATON said that was what had happened [under
ACES].
DR. GOLDSMITH replied that he was referencing the trade-off
currently under discussion which was that reduced state revenues
from lower tax rates would increase employment. He suggested
looking ahead for the industry response, which could be fairly
significant. He stated that his assumptions, although
conservative, indicated that the response could be quite
significant. He expressed agreement that it was unclear whether
there was any leverage, and noted that his depictions were
merely a projection of what the response might look like.
3:07:38 PM
DR. GOLDSMITH moved to slide 27, "Cumulative Revenues Generated
(Million 2012 $)," which depicted the same trade-off regarding
state revenues with a leverage assumption of one to one, a $1
billion reduction in revenue with a $1 billion increase in
investment. He pointed out that the cumulative increase was
more than a $1 billion return.
3:08:16 PM
DR. GOLDSMITH moved on to slide 28, "Job Growth Since 2001," and
shared that the government generated additional jobs. He
pointed out that much of the job growth had been due to
increases in government spending in the last 10 years.
3:09:18 PM
DR. GOLDSMITH turned to slide 29, "Progress Toward Fiscal
Diversification," and stated that the past 40 years had
demonstrated that there had not been a lot of progress for non-
petroleum revenue. He reported that the dependence on petroleum
revenue to the general fund, over 90 percent, was the highest it
had ever been. He pointed out that a lot of the remaining 10
percent of revenue also relied on the oil industry. He surmised
that the petroleum industry contributed closer to 94 percent of
the Alaska economy.
3:10:25 PM
DR. GOLDSMITH discussed slide 30, "Non-Residents" and shared the
list of high percentage non-resident worker share in many
industries other than oil and gas, including construction,
seafood processing and state government.
3:10:55 PM
DR. GOLDSMITH returned attention to slide 31, "Jobs Sensitivity
to Leverage," and explained that leverage at higher levels had a
greater positive effect on jobs.
3:12:40 PM
DR. GOLDSMITH referred to slides 32 - 34, "Revenues: Sensitivity
to Leverage," and stated that the higher levels of leverage
created more reinvestment, and in turn, greater revenue.
3:13:11 PM
DR. GOLDSMITH moved on to slide 35, "State Fiscal Plan," which
depicted the revenue and expenditure forecast for the state
through 2023. He pointed out that the expenditure forecast was
based on an annual growth rate of 4 percent, although the
general fund revenue was not keeping up with the expenditures.
He noted that the shortfalls could be accommodated for a while,
as Alaska had a substantial bank account.
3:14:12 PM
DR. GOLDSMITH continued on with slide 36, "Looking Beyond 10
Years," which depicted the use of cash reserves to fund the
budget in the next 10 years. He pointed out that the projection
after 10 years became direr without an alternative source of
revenue to fund the increasing gap with expenditures. He
declared that spending would have to come in line with actual
revenues. He projected slide 37, "Move Towards Sustainability,"
which portrayed the expenditure of the money the state had in
the bank for about 10 years, with a subsequent crash as the
spending of the state revenue represented jobs, and this would
be a crash in employment, as well. He offered his belief that a
reduction in the current oil tax rate would reduce the current
revenue but would generate additional revenue from additional
production in the future, and could smooth out the projection
for non-sustainable state spending and state employment. He
noted that the state would need to reduce current spending in
response to current tax revenues, and not increase spending
until there was an increase to tax revenues.
3:17:39 PM
DR. GOLDSMITH indicated slide 38, "Continuous Spending for 25
Years: Jobs," which demonstrated that a strategy to reduce the
current oil tax rate for an extended period would lead to an
extended period of new oil industry investment. This, in turn,
would lead to additional employment in future years for both oil
industry and the state related jobs. He opined that this, as an
alternative strategy, could offer more employment in the not too
distant future, whereas maintaining the current operating budget
would keep a static level of employment.
3:19:49 PM
DR. GOLDSMITH shared slide 39, "Continuous Spending for 25
Years: Revenue," and offered his belief that petroleum revenue
would be greater in the long term with a reduction in current
oil taxes than the petroleum revenue lost, although this was
dependent on the amount of leverage for future investment. He
ended the PowerPoint presentation by displaying slide 26,
"Cumulative Jobs Generated," and opined that this was the most
demonstrative graphic in support of his hypothesis.
3:20:30 PM
REPRESENTATIVE TUCK asked to clarify that slide 26 was for man
years.
DR. GOLDSMITH, in response to Representative Tuck, explained
that slide 36, "Looking Beyond 10 Years," depicted the cost in
billions.
3:21:28 PM
CO-CHAIR SADDLER asked for a better explanation to slide 26,
"Cumulative Jobs Generated."
DR. GOLDSMITH explained that "capital for capital" signified a
cut to the current state budget, and when oil revenue increased
from additional production in the future, it was spent on the
capital budget.
CO-CHAIR SADDLER asked if the time frame was important.
DR. GOLDSMITH, in response, opined that it was important to know
that. He directed attention to the bar graph titled "Capital
For Operating" on slide 26, which reflected a $1 billion cut
from the capital budget with the hope for additional oil
industry investment. If that investment generated production,
and then additional tax revenue, this would happen in 5 or 10
years. He stated that this additional revenue would be needed
to support the operating budget, as the state savings could have
been exhausted. He reported that this reflected a cut in
today's capital dollars, with support for operating dollars in
the future, which he opined to be the biggest bang for the buck.
He offered his belief that the first cuts are to the capital
budget as budgets get tight.
CO-CHAIR FEIGE asked about the effect on the overall Alaska
economy, and not just on state government.
DR. GOLDSMITH replied that many of the additional jobs would be
in the private sector.
CO-CHAIR FEIGE asked to clarify that the bar graph represented
all of the Alaska economy.
DR. GOLDSMITH agreed.
3:24:34 PM
REPRESENTATIVE TARR, addressing slide 40, "Non-Petroleum
Strategies for Continuing Economic Prosperity," questioned
whether there was a formula or a model for a percentage of
diversification to the economy to relieve the heavy reliance on
oil and gas revenue and give the state economy more stability.
DR. GOLDSMITH replied that he did not know what would be the
optimal mix, comparing this to diversifying a portfolio. He
noted that there was still substantial funding from the federal
government, although Alaska would continue to be dependent on
oil revenue for a long time. He declared that there had not
been much progress in the strategies to create non-petroleum
revenue, and that proper management of this would maintain a
prosperous economy for at least another generation. He noted
that this was the opposite of a diversification strategy,
therefore, it was necessary to keep an eye on this investment.
3:27:24 PM
CO-CHAIR FEIGE requested that the committee members submit any
additional questions to Dr. Goldsmith.
[HB 72 was held over.]
| Document Name | Date/Time | Subjects |
|---|