Legislature(2015 - 2016)BARNES 124
02/03/2016 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 247 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G
1:02:38 PM
CO-CHAIR NAGEAK announced that the only order of business is
HOUSE BILL NO. 247, "An Act relating to confidential information
status and public record status of information in the possession
of the Department of Revenue; relating to interest applicable to
delinquent tax; relating to disclosure of oil and gas production
tax credit information; relating to refunds for the gas storage
facility tax credit, the liquefied natural gas storage facility
tax credit, and the qualified in-state oil refinery
infrastructure expenditures tax credit; relating to the minimum
tax for certain oil and gas production; relating to the minimum
tax calculation for monthly installment payments of estimated
tax; relating to interest on monthly installment payments of
estimated tax; relating to limitations for the application of
tax credits; relating to oil and gas production tax credits for
certain losses and expenditures; relating to limitations for
nontransferable oil and gas production tax credits based on oil
production and the alternative tax credit for oil and gas
exploration; relating to purchase of tax credit certificates
from the oil and gas tax credit fund; relating to a minimum for
gross value at the point of production; relating to lease
expenditures and tax credits for municipal entities; adding a
definition for "qualified capital expenditure"; adding a
definition for "outstanding liability to the state"; repealing
oil and gas exploration incentive credits; repealing the
limitation on the application of credits against tax liability
for lease expenditures incurred before January 1, 2011;
repealing provisions related to the monthly installment payments
for estimated tax for oil and gas produced before January 1,
2014; repealing the oil and gas production tax credit for
qualified capital expenditures and certain well expenditures;
repealing the calculation for certain lease expenditures
applicable before January 1, 2011; making conforming amendments;
and providing for an effective date."
1:03:12 PM
RANDALL HOFFBECK, Commissioner, Department of Revenue (DOR), on
behalf of the governor, explained that Governor Walker's New
Sustainable Alaska Plan has three major components to it: 1)
earnings - the use of the state's existing wealth, which are
primarily earnings from the permanent fund but also from other
investments as well; 2) reductions in spending; and 3) increases
in revenues, the majority of them being an increase in rates to
existing taxes, as well as a personal income tax. The bill hits
in two places: 1) it reduces the sizes of the credits that the
state pays out, so it is a cut in expenditures of about $400
million, and 2) it has a component that raises the minimum tax
on producing properties from 4 percent to 5 percent. The
increase in minimum tax, as well as hardening the floor, would
result in about $100 million in new revenue.
COMMISSIONER HOFFBECK walked the committee through events
between when the budget was signed last year to today. He said
the governor's line-item veto of a portion of the budget
actually limited the amount of credits that the state could pay
in fiscal year (FY) 2016 to $500 million instead of the more
open-ended language that was in the original budget. That had a
bit of a ripple effect through the oil and gas industry,
particularly as it related to the smaller companies that were
exploring and developing the fields. Essentially, the folks
that had loaned money against the credits refused to loan,
saying they were uncertain that these credits would now be paid.
They pulled back and this created a liquidity crisis within
these smaller developers. So, [the administration] spent the
first few months putting that package back together, assuring
those that were loaning the money that in fact the state would
pay the credits; that there would be some timing changes, but
the credits would still all be paid.
1:06:20 PM
COMMISSIONER HOFFBECK explained that it then set off a whole
series of meetings with the industry representatives and with
folks in the financial community to get their feel for what
would be a package that would work going forward. It was the
opinion of the administration, which he thought was very valid,
that the state just couldn't afford the level of credits that it
was paying. That was not a critique on whether it was a good
idea to have credits in the first place, but just simply that
the size of the credit program didn't match the state's ability
to pay the credits any more. "We worked diligently with these
companies and with the financial community," he said, "and came
up with a plan that we thought would resolve the majority of the
issues." Senator Giessel also held a series of workshops
throughout the summer and [the administration] testified at
three of them and [Senator Giessel's work group] came up with a
plan. Today Mr. Alper will present [the administration's] idea
of what the comparison is between the plans. Commissioner
Hoffbeck said he thinks the results are fairly similar, although
[the administration] feels a bit more urgency in the timing of
what needs to be done and when. It was a collaborative effort
and as many issues as possible were addressed. There are still
going to be areas where certain companies have a different idea
of what the best solution is, he continued, and he expects that
those companies will be happy to express that. Commissioner
Hoffbeck offered his appreciation for the openness that the
companies had in meeting with [the administration] and walking
[the administration] through the significant pinch points in
this issue. It was good government, it was very participatory,
and the discussions were open book rather than people posturing
for positions.
1:08:24 PM
REPRESENTATIVE HAWKER stated it all began with the $200 million
veto of last year. He inquired whether he is correct that the
governor has made absolute assurance to industry that those
credits that were vetoed will be honored.
COMMISSIONER HOFFBECK replied correct.
REPRESENTATIVE HAWKER inquired whether he has missed something
because he has not seen an appropriation request in the budgets
that were submitted by the governor. Yesterday was the deadline
to produce the supplemental appropriation for FY 2016 and he has
not seen a request for that funding.
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
on behalf of the governor, responded that HB 247 contains a
fiscal note [Identifier: HB247-DOR-OGTCF-1-27-16] that includes
an appropriation to the Oil and Gas Tax Credit Fund in the
amount of about $926 million. Of that, it supplements the
approximately $73 million that is in the governor's operating
budget for FY 2017 to make the $1 billion of what [the
administration] is calling "transition appropriation" to kind of
carry the existing program, including any overhanging credits,
through to the effective date of the proposed legislation.
REPRESENTATIVE HAWKER asked which fiscal note that might be.
MR. ALPER answered that two fiscal notes were written. One of
them is Tax Division which talks about the implementation of the
bill. The other one is called "fund caps" in its title
[Identifier: HB247-DOR-OGTCF-1-27-16] and it shows a relatively
large upfront cost and that is the one that incorporates the
reductions in expenditures in the out years.
REPRESENTATIVE HAWKER said the fiscal notes that he has taken
off the internet have apparently been superseded.
MR. ALPER replied he noticed on BASIS this morning when looking
over this bill the documents in question are in the document
area but not in the fiscal notes section.
REPRESENTATIVE HAWKER maintained it is not a fiscal note and
presumed there is a new fiscal note then.
1:11:23 PM
MR. ALPER began his PowerPoint introduction of HB 247, "Oil and
Gas Tax Credit Reform HB247." Turning to slide 2, "Bill Title,"
he apologized for the title containing 273 words, but said a lot
of different pieces of statute are touched upon in the bill and
it does a lot of things within the broader tax credit universe.
Moving to slide 3, "Suggested Informal Short Title," he said he
hopes to informally refer to the bill as "An Act reforming oil
and gas tax credits and strengthening the minimum oil and gas
production tax."
MR. ALPER drew attention to slide 4, "Work Done Since Last
Session." Reiterating some of the recent history stated by
Commissioner Hoffbeck, he said the governor's line-item veto
capped FY 2016 spending at $500 million. That $500 million has
not yet been spent. The total credits claimed and refunded to
date in FY 2016 is about $472-$475 million and a number of
credits are in process. "There isn't going to be that much
actual delay in the actual buying back of tax credits before we
get to what happens in the current budget cycle," he continued.
Hopefully the liquidity crisis has been resolved and will
continue to stay resolved. The three presentations that [the
administration] made to Senator Giessel's working group as well
as a presentation that many committee members were at in Kenai
in June are all on BASIS. The legislation before the committee
has been developed gradually over the last six to seven months.
1:13:21 PM
REPRESENTATIVE SEATON recalled that when the estimate of $700
million was being considered last year there was discussion of
statutory requirement that 10 percent of production tax be paid,
which was about $91 million. However, the governor obviously
arrived at $500 million. He asked what amount the statutory
requirement is anticipated to be for this coming fiscal year.
MR. ALPER responded that the formula in AS 43.55.028(c) is tied
to the price of oil. It would be 15 percent of production taxes
before the application of any credits. If the price of oil is
expected to be below $60, which it is, then the answer is $73.4
million. That comports with what the governor put in the
operating budget for FY 2017.
1:14:29 PM
MR. ALPER resumed his presentation, turning to slides 5-11 to
review the history of oil and gas production tax credits.
Addressing slide 5 he said the "modern" world of oil and gas tax
credits began in 2003 with the Alternative Credit for
Exploration [AS 43.55.025], which was a percentage of qualified
expenditures and it could be taken against what was then a
gross-based tax known as the Economic Limit Factor (ELF). The
bulk of the credit system was put in place with the Petroleum
Production Tax (PPT). The PPT bill was the switch to the net
profits-based tax and that is where credits were started to be
seen for operating losses, credits for capital expenditures, and
so forth. The PPT bill also included the Cook Inlet tax caps,
the maximum taxes that Cook Inlet producers currently enjoy. It
also added the possibility of the state repurchasing credits.
Prior to that the credits had to be held and used against the
tax liability. The PPT system was modified and expanded upon
with the passage of Alaska's Clear and Equitable Share (ACES)
bill in a fall 2007 special session. Credit wise, the most
interesting point in ACES was that the repurchase provision was
made open ended - there were no more caps on it - and it set up
a specific fund to which the legislature appropriates money
every year and from which the Department of Revenue (DOR)
repurchases tax credits. Many of the credits were expanded upon
or added in 2010 with Representative Hawker's bill, the Cook
Inlet Recovery Act, House Bill 280, and some companion
legislation in the other body. To encourage additional
exploration and development in Cook Inlet, House Bill 280 added,
among other things, the 40 percent Well Lease Expenditure
Credit, as well as a bunch of other more subtle and technical
treatment issues as to how credits were calculated. That bill
has led certainly to a lot of activity and in many ways the
pushing back of the concerns about supply anxiety that were
driving the conversation at that moment in history. In 2012 the
legislature passed the Frontier Basin bill, which added a lot of
new benefits, new credits in the previously underdeveloped areas
of the state in the Interior. This bill was in some ways
modeled after the Cook Inlet Recovery Act. Senate Bill 21 was
passed in 2013. Primarily an oil tax overhaul, Senate Bill 21
on the North Slope eliminated the "spending credits," the 20
percent capital credit, and replaced it with what is now known
as the Per-Taxable-Barrel Credit, the sliding-scale credit tied
to production.
1:16:54 PM
REPRESENTATIVE HAWKER returned to his earlier question about the
fiscal note [Identifier: HB247-DOR-OGTCF-1-27-16]. He expressed
his concern about living up to the promises made to producers to
whom the State of Alaska owes $200 million. That is an
unconditional obligation at this point, he said. The
legislature could retroactively repeal that if it chooses. He
inquired whether this is really the intention of [the
administration]. He observed from the fiscal note that the
appropriation that Mr. Alper said contains that money is
contingent upon passage of a version of this bill. He inquired
whether this a "hostage provision" and that those producer tax
credits will not be paid if the legislature does not pass a
version of the bill for [the administration].
COMMISSIONER HOFFBECK answered "no, those are liabilities of the
state that will be honored." If this particular package doesn't
pass, then some modification will be needed in order to have the
appropriation to pay the credits.
MR. ALPER added that the tax credit is a two-step process. When
a company does the desired activity and submits the application,
the company earns a credit certification, which is a paper
asset. That asset is subject to the statute and does not change
regardless of what's in any budget. The repurchasing of those
certificates is the fact that's limited by the appropriation.
Should nothing happen other than last year's veto, there will be
about $200 million of outstanding certificates that are owned by
companies and that have not yet been purchased by the state.
"And what we're looking at," he said, "is providing the means to
repurchase those certificates."
1:19:01 PM
MR. ALPER resumed his discussion of the history of oil and gas
production tax credits. Moving to slide 6 he noted that credits
were done to encourage or incentivize a desired behavior. The
state wanted companies to come in and make investments that they
weren't otherwise making. There was anxiety about declining
production, desire to diversify the oil field, and in Cook Inlet
to create some supply certainty. Later on the credits were
built in to the net profits tax system. What does that really
mean? A certain minimum amount of credits is anticipated just
because it is known that a certain amount of money, say, is
going to be spent or certain number of oil is produced, so a
relatively high tax rate was established that was offset by a
robust credit system and that all got built into an expected
revenue. However, as credits got added over time they were
layered with each other. "We" started getting the same behavior
receiving multiple credits and some unanticipated circumstances,
and very high levels of state support at times. He reiterated
that credits can either be used against tax liability, meaning
subtracted from a company's tax bill if it owes taxes, and if
not, then the credits can be cashed out and repurchased by the
state subject to appropriation. A provision in current law says
that large producers, those producing more than 50,000 barrels a
day, are not eligible to get cash for their credits, to have
their credits repurchased. In those cases, a company without a
tax liability would have to carry its credits forward into a
future tax year and then use them against the company's taxes.
1:20:28 PM
REPRESENTATIVE HERRON asked what the current balance is in
regard to the original $700 million credit balance that the
governor reduced to $500 million.
MR. ALPER replied that currently the amount in the tax credit
fund is $25 or $28 million. The $500 million was transferred
into the fund early in the fiscal year and the last time he
checked the state had repurchased approximately $472 million,
leaving around $28 million left in the fund for the rest of FY
2016. He added that there is an inherent "front-loadedness" in
the fiscal year for repurchasing tax credits. This is because
most of the applications come with the tax filings of the major
oil producers and the smaller oil companies. The due date for
the production tax is the end of March [for] the previous
calendar year. The state has a statutory obligation to issue
certificates in 120 days. So, for the most part the credit
certificates are given in July and many of them get turned
around the next day to request repurchase. It may take several
weeks to get the bank accounts worked out and transfer the
money, but by the end of August or into September usually two-
thirds of the year's credit money has already been spent.
REPRESENTATIVE HERRON surmised the tax credit situation would be
self-correcting given the current oil price situation; he
therefore inquired why this legislation is needed.
COMMISSIONER HOFFBECK responded that a transition is being seen
within the credit package. When oil prices are low, capital is
constrained and less actual work is being done that can be
claimed, but more losses are seen in companies and so a growth
is seen in the Net Operating Loss Credits. The hope was that it
would self-correct, but it didn't; essentially the credits have
moved more towards the net operating loss side of the ledger.
1:23:15 PM
MR. ALPER continued with addressing the history of oil and gas
production tax credits. Displaying slide 7 he delineated the
major credits on the books right now. He explained that the
focus is on the first three credits listed on slide 7 because
the fourth and fifth credits will at least partially sunset in
the near future. Under the Net Operating Loss Credit [AS
43.55.023(b)], the state pays companies back for a percentage of
their losses; it varies by time period and area of the state.
That credit is notably stackable, meaning that credit can be
earned as well as one of the other credits, and that is where
some of these very large rates of state participation have come
in. The Per-Taxable Barrel Credit [AS 43.55.024(i & j) is the
North Slope Production Credit added by Senate Bill 21. This
credit ranges between $0 and $8 for legacy oil and is a flat $5
for new oil. It can only be used against tax liability, so is
one of the so-called "use-it-or-lose-it" credits. The Capital
or Well Lease Expenditure Credit [AS 43.55.023(a) and (l)], the
20-40 percent credit, does not exist on the North Slope. In
other areas of the state these are credits based on company
qualified expenditures. They are generally refunded and can be
stacked with the Net Operating Loss Credit. The Exploration
Credit [AS 43.55.025(var)] can be used in place of the Capital
Credit if a company qualifies. These credits are a little bit
larger, have a little bit different rules, and they have data
submission requirements for the Department of Natural Resources.
Most of these credits are expiring this July, although certain
ones have been extended in the Interior areas that are known as
the Frontier or Middle Earth areas.
1:24:41 PM
REPRESENTATIVE HAWKER questioned Mr. Alper's characterization of
AS 43.55.024(i) and (j) as a credit. He maintained that that
element operates as a component of establishing the base tax
rate. The result of that element is not a credit that is taken
against the payment of a tax, but is part of the calculus of
developing the tax rate at which a company pays. That item was
put into the legislation specifically to create a progressive
effective tax rate. He said he is therefore curious as to why
it is being characterized as a credit along with these other
elements which have a completely different economic operation.
MR. ALPER answered, "We agree wholeheartedly with your
characterization of the Per-Barrel Credit, it is very much a
component of the tax system." Had that not existed it is likely
the legislature would have come around to a lower tax rate. The
same can also be said about the 20 percent Capital Credit in the
ACES era, which was primarily a major offset that lowered the
tax rate and was built in. He continued:
For accounting purposes, for reporting purposes, we
consider it a credit, it is described in statute as a
credit. But, in all of our reporting we refer to it
clearly as a credit used against liability, which has
a different character and ... really a different
series of policy decisions that we're looking at as
opposed to those credits that are refunded by the
state.
1:26:16 PM
REPRESENTATIVE HAWKER said his question was not answered. He
asked why it is being characterized in this document and in this
public report and before this legislature as a credit,
comparable with the same economic character as the others.
MR. ALPER replied:
We are listing comprehensively in this slide all of
the different credits. As we get deeper into the
proposal and the bill itself you will see that we're
not intending to do anything to that credit. We're
aware of it ... it is called a credit in statute and
we are trying to comprehensively describe all the
credits that are in statute.
REPRESENTATIVE HAWKER said his recall is that it is
characterized as a gross value reduction.
MR. ALPER responded that the statutes can be looked at later on
to define it at the appropriate time.
REPRESENTATIVE HAWKER maintained that [AS 43.55.024(i & j)]
operates completely different than every one of these other true
credits being considered. He said it is critical to understand
that difference.
MR. ALPER replied:
That credit in a very low price environment is unusual
in that it is truly a use-it-or-lose-it credit or
deduction, whatever we choose to call it. In fiscal
year 16, where prices are expected to be very low for
the entirety of the year, only $28 million worth of
that credit are going to be used. Basically that's
the amount of subtraction the companies can take
before they bump up against the minimum tax and then
they lose the rest of it. In a year with higher oil
prices we could see five, six, seven, over a billion
dollars in that offset. But ... that offset tends to
decrease to zero in a low price environment, it is not
a major component of the credit cost to the state ...
in this low price era.
1:28:03 PM
MR. ALPER returned to slide 7, stating that the Small Producer
Credit [AS 43.55.024(c)], a component of the PPT bill, provides
up to $12 million off of a company's taxes if it meets certain
small production criteria. Per statute, applicants will no
longer be accepted after May 2016. However, it is what is
called a slow sunset - once a company is inside the small
producer credit regime, it could receive the credit for up to
nine years. Consequently the state will be paying at least some
Small Producer Credits until about 2024.
MR. ALPER displayed slide 8 noting that through 2015, depending
on what is counted, $7.4 billion has been spent on credits or
taken in credits against liability, which gets to what
Representative Hawker said earlier. Of that number, $4.3
billion were credits against liability on the North Slope which,
for the most part, are offsets to the tax regime - either the
Per-Taxable Barrel Credit in Senate Bill 21 or the 20 percent
Capital Credit in ACES - and [DOR] does characterize those very
differently than the other roughly $3 billion worth of refunded
credits. On the North Slope, $2.1 billion was refunded in
credits; these were from the new producers and explorers that
were developing new fields. Outside the North Slope there was
about $1 billion in credits. Of that, only about $100 million
was used against liability; that's largely because there isn't
very much tax liability in Cook Inlet because of the tax caps
that were put in place in the PPT bill. He said [DOR] has
attempted to calculate that through the end of 2013, and
somewhere between $500 and $800 million is the value of those
tax caps, the tax reductions in statute. In addition, there has
been $900 million in refunded credits through end of FY 2015 and
the great bulk of that has been in the last three or four years,
since the Cook Inlet credit regime was opened up and a lot more
activity was drawn into the inlet.
1:29:56 PM
REPRESENTATIVE HAWKER observed on slide 8 the subheading, "FY
2007 thru 2015, $7.4 Billion in Credits." He said legislation
passed by the legislature has resulted in $7.4 billion in tax
credits. He asked how much the state has collected from the oil
and gas industry during this same time period of 2007 to 2015.
MR. ALPER answered he thinks the production tax number is a year
old through 2014 and the number he has in his head is $27
billion. Corporate income tax and the royalty would need to be
added to that, so it is probably a number in the neighborhood of
$40 billion.
1:30:44 PM
MR. ALPER resumed his presentation, drawing attention to slide 9
and explaining that the graph shows the regional breakdown of
the refunded tax credits, the approximately $3 billion in
historic refunded credits between the North Slope and the non-
North Slope area. Tax credits have been claimed for the Middle
Earth, or Interior, areas of the state. However, because these
are so few, [DOR] is not able to discuss them without violating
taxpayer confidentiality. So, [DOR] has commingled them with
the Cook Inlet and called it non-North Slope, but the figure is
almost entirely Cook Inlet with a small amount of the Interior
exploration work that has been ongoing. An increase in the
relative share of Cook Inlet credits can be seen, with it now
being greater than 50 percent over the last couple of years.
1:31:35 PM
REPRESENTATIVE SEATON said [the legislature] established a
system to stimulate, which has successfully stimulated
exploration. He expressed his concern on what the Net Present
Value is to the state and whether over the lifespan of the
fields it is projected that the state is going to have to
institute an income tax or a sales tax to generate revenue to
pay more because there will be a Net Present Value loss from
some of these very big tax credits that have been given. He
requested that when tax credits, and the value of those tax
credits, are being talked about that it be in relationship to
the Net Present Value to the state of the entire 30-year life of
a field. When the state invests the money and when it gets the
payback and whether at the end of a 30-year lifespan, depending
on different prices, whether in the future the state is actually
having to tax citizens individually to pay for some of these
investments that are being encouraged. He said he wants to
ensure that the legislature looks at this holistically.
MR. ALPER responded that over the last several years more field
lifecycle modeling is being seen, such as that from [the
consulting firm] enalytica. Professor Goldsmith did some
lifecycle modeling in some of his analysis and the DOR Tax
Division has been trying to replicate that and would like very
much to bring some sort of field examples. Some of it was
discussed before this committee last spring when potential
development of the Arctic National Wildlife Refuge (ANWR) was
talked about. There was a lot of credit cost in the upfront
part and then the revenue comes later. It's important to have a
conversation about the time value of money and whether the state
actually sees its money back at the backend when it is spending
a lot of money in the upfront. It is an important conversation
and [the administration] looks forward to talking about it more
later on in the session.
1:34:00 PM
MR. ALPER moved to slide 10 and continued discussing the history
of oil and gas production tax credits. He said that, setting
aside the large credits used against liability that were a core
component of the tax system, the state has paid and refunded
about $3 billion in credits through the end of FY 2015. In
looking at that number, so much of the line-item specific
information is confidential that [DOR] cannot talk about
specific products. [The department] has tried its best to put
it in a format where order of magnitude can be discussed. Of
that $3 billion a bit less than $1.5 billion went to six North
Slope projects that are currently in production, fields that
were in development and are now producing. About $650 million
went to 13 other [North Slope] projects, some of which are
expected to be produced and some of which were exploration or
pre-development projects that never came to fruition. On the
non-North Slope or Cook Inlet plus area, it has been about
50:50. There are six projects that are in production that
received about $450 million in credits and eight other projects
that do not yet have any production, although it is expected
that the bulk of those will eventually produce oil or gas.
1:35:07 PM
REPRESENTATIVE HAWKER noted that when the $650 and $450 million
are added together, the state under current statutes has given a
little over $1 billion to companies that have had no production,
no contribution to the state apparently. He asked whether Mr.
Alper thinks that was a good idea.
MR. ALPER replied he doesn't know that he wants to answer a flat
yes or no to that question, it was part of a large policy
direction. [The state] is paying companies essentially on
activity and without necessarily a guarantee; the bulk of the
money is turning into production. He said he thinks this
analysis might be easier to do in a few years when it can be
seen what really does lead to production; for example, analyzing
how many dollars per barrel in increased production did the
state spend. [The department] has struggled with trying to do
that analysis and has been unable to come up with any meaningful
results to say how much the state is really spending and how
much new activity has it led to. It's a big question mark; it's
hard to know exactly what would have happened if these credits
didn't exist.
1:36:14 PM
REPRESENTATIVE HAWKER said these credits resulted from a policy
call in the legislature, a contentions policy call actually,
from folks who said that the State of Alaska really needed to
provide substantial funding and put explorers on equal footing
with the larger companies that were having significant
production. That was an argument made on the floor and made in
this committee. Some legislators agreed with it, some didn't.
He said he is "wondering if we are really starting to question
whether the state aught be supporting non-producing entities or
whether we should only be supporting producing entities." He
requested that the answer to his question be in the context of
the bill that [DOR] indicates in its fiscal is contingent and
wrapped up in this, which is the new Alaska Industrial
Development and Export Authority (AIDEA) bill that says a big
part of getting rid of all these credits is replacing them with
a loan system that only companies with proven reserves will be
receiving. He asked whether the administration has made a
policy call that the state is not going to support non-producers
and will only be supporting those that have already proven up
their reserves in the future.
COMMISSIONER HOFFBECK answered:
No, it isn't. Because we left the Net Operating Loss
Credit in place we are still supporting exploration
activities and pre-development activities. ... Not at
the level that we have in the past, but we would still
be supporting at a 25 or 35 percent level, depending
whether you're in Cook Inlet or on the North Slope.
REPRESENTATIVE HAWKER concluded it is adjusting the levels.
COMMISSIONER HOFFBECK replied right. He continued:
That Net Operating Loss Credit is one of the more
difficult ones for us to control as far as ... what
the value of that credit is. But it's one that became
very clear in our discussions ... with the companies
over the summer that that was the critical credit ...
in the picnic basket of credits.
1:38:31 PM
REPRESENTATIVE JOSEPHSON assumed that part of the reason it is
hard to gauge the efficacy of the credits now is because there
are all these variables that are difficult to fit into any
calculus, such as finding more oil or gas than was thought might
be, or price that is out of one's control.
MR. ALPER responded:
Yes, absolutely. We simply can't know what would have
happened in the negative, if we weren't doing these things.
Frankly, some of the larger projects that are currently in
production on the North Slope were in the pre-development
or development process prior to the passage of the PPT bill
in 2006, yet were, by the nature of their projects,
eligible for a certain amount of credits. So it's hard to
say what maintained them, what stopped them from being
stopped, what encouraged them to develop more. It's a
very, very difficult analysis to do. And if I could say
one more word on Operating Loss Credits ... to follow what
Commissioner Hoffbeck said. The Operating Loss Credit is
in many ways, especially on the North Slope, a playing
field leveler. It's a net profits tax, which means if
you're an incumbent producer, if you have a tax liability,
and you spend one more dollar, you've reduced your taxable
net profits by that dollar and you're saving 35 cents on
your taxes. The Net Operating Loss Credit creates a
mechanism for the state to let a newcomer, a new producer,
someone exploring or developing a field that doesn't yet
have any income, to get that same 35-cent benefit without
having a tax liability. So, in some ways it's about
equity, it's about making our resources available to not
just the major incumbent producers but to the newcomers
that are trying to enter ... into the oil field.
1:40:19 PM
REPRESENTATIVE HERRON requested an explanation as to why HB 247
would not actually discourage explorers when what is wanted is
to gain explorers.
MR. ALPER answered:
We're not encouraging or discouraging explorers - the
exploration credits are scheduled to sunset this
summer. We're simply not addressing that, we're
allowing that to happen. But, the Exploration Credit
numbers pre-date the passage of [Senate Bill] 21, and
it actually created unusual circumstances where the
state has been paying up to 45 percent of certain
costs on the North Slope. That's in many ways an
unsustainable number. With those credits going away,
the North Slope exploration credit support would be
through the Operating Loss Credit at the 35 percent
level.
1:41:23 PM
REPRESENTATIVE TARR, in regard to the aforementioned credits,
surmised the Mustang Project would be in the $1.45 billion
category of a project that has come online, and then there are
the other companies that went out of business. She inquired
whether the state has learned from this experience to evaluate a
tipping point for whether a company is too small or too under-
resourced and therefore unlikely to have success. She further
inquired whether more specificity should be delineated on the
Net Operating Loss Credits or whether, as currently being
broadly applied, it is working in the way that it should.
MR. ALPER replied:
One of the things we contemplated as we developed this
legislation was some sort of pre-approval or a filter
process. Industry didn't like it very much. We were
uncomfortable with it ourselves that we don't
necessarily want to be picking winners and losers....
It ended up not surviving to the final version of this
legislation. In the absence of that it's very hard.
These are laws of general applicability, if you do the
desired activity, you earn the thing. Regarding your
point on Mustang, I can't comment obviously on a
specific company. But what we are trying to do with
the changes proposed in this bill to a certain extent
is help control who's getting cash versus what
company's we feel are more able to hold on to their
credit certificates until that future point where they
might have tax liability they could use them against.
COMMISSIONER HOFFBECK added:
The fact that we're actually removing some of these
credits that can be stacked, which could actually
result in sometimes 75-80 percent of the cost being
borne by the state, is now going to be 25 or 35
percent. I think that will self-correct some of those
issues as well because, if somebody has 75 percent of
their own money in the game, I think ... they're more
likely to be better capitalized before they come in.
1:43:33 PM
REPRESENTATIVE HAWKER noted that Mr. Alper brought up a really
important distinction: the pre- and post- Senate Bill 21 tax
regimes. The pre-Senate Bill 21 tax regime had very generous
Qualified Capital Expenditure (QCE) Credits. That went away in
2013 and the cumulative numbers on the slides do not distinguish
between pre- and post-Senate Bill 21. He continued:
I don't know that it is appropriate for us to be
making a judgement call or pass judgement on our tax
regime system when we're looking at a blended set of
numbers here. I don't know that you can accurately,
truly say ... how the current system is working based
on a blend of two very different tax systems.
Something you might want to think about ... as you
present this bill [is] finding ways to distinguish
those for us.... Let's talk about our current regime
and let's not blend it with an old regime that we have
substantially modified and already made substantial
reductions in credits.
MR. ALPER responded "yes, we would like to try to parse that out
by time period and we've tried in some preliminary documents."
He clarified that during the ACES era prior to the passage of
Senate Bill 21, the state's general level of support for North
Slope activity was around 45 percent. That was the then 25
percent Operating Loss Credit stacked with the 20 percent
Qualified Capital Expenditure Credit. With the passage of
Senate Bill 21 the number was reduced from 45 percent to 35
percent, which is the new increased Operating Loss Credit with
the elimination of the QCE. However, an asterisk on that is
that there was a temporary measure where the Operating Loss
Credit was bumped to 45 percent for calendar years 2014 and
2015, the first two years after the implementation of the
effective date of [Senate Bill] 21. So, really, the state's
level of support for North Slope activities has remained
constant through the ACES era and to today, and it's only
beginning in January 2016 where a drop-off in those relative
numbers will be seen.
REPRESENTATIVE HAWKER remarked that Mr. Alper's response made
his point.
1:45:45 PM
REPRESENTATIVE SEATON said:
I am somewhat troubled by the idea of a net operating
loss being considered as being equity between non-
producers and producers when a net operating loss used
to be 25 percent based on the base rate and then we
introduced a 35 percent rate with a gross dollar per
barrel reduction; but when you go to net operating
loss, that doesn't count, so ... expenditures get
offset at 35 percent. So now we have a 35 percent and
... my concern is that when we first did PPT and ACES
and Pedro van Meurs was helping us design this ... the
statement was generally very adamant that we didn't
want to have over 20 percent tax credit because our
liability would be huge if we were in a downturn like
we are now and we are committing to huge amounts of
tax credits based on investment totally unrelated to
our income. And so now we find ourselves in exactly
that situation of having large amounts of credits that
are based on investment supporting big international
oil companies ... to over a third of their
expenditures and having very little revenue. I am
trying to figure out ... other than just testimony
from industry saying they like 35 percent of their
expenses being written off or carried forward at state
expense, how are we justifying 35 percent net
operating loss credit.
MR. ALPER answered that this bill, and Governor Walker's wish,
is to not address the core components of the underlying tax
system - the tax rate, the operating loss, the gross value
reduction, for example. Allowing that Representative Seaton
raises an interesting point, he noted that in the PPT and ACES
era the Operating Loss Credit was tied to the base tax rate, but
yet the base tax rate often increased because of the additive
feature of progressivity. So, in effect, the state's support
for the non-producers tended to be less than, or equal to, the
support for the majors because now the Per-Barrel-Credit is a
subtractive feature. Really, the state is providing a higher
level of support for the non-producers, the newcomers, than it
is for the major base producers, so Representative Seaton's
observation is correct.
1:48:34 PM
MR. ALPER drew attention to slide 11 to conclude his discussion
of the history of oil and gas production tax credits. Regarding
this year's money, he reiterated that of the $500 million that
was authorized [for credit repurchases for FY 2016], about $472
million has already been paid. Of that, about $200 million was
for the North Slope and $272 million for the Cook Inlet area.
That is a little less than 60 percent non-North Slope, which
comports with the 2015 data so a trend is now had. The numbers
that have gone out the door are almost entirely 2014 Net
Operating Loss Credits. He clarified that "Cook Inlet drilling"
means the QCE and the Well Lease Expenditure credits. In some
cases, he noted, the companies apply for those quarterly rather
than waiting until the end of the year. It is still expected
that there will be $700 million in total demand with the rest of
it being partial 2015 credits and other things that don't need
to be officially spent on or authorized until next July, until
120 days after the next tax payment year.
1:49:39 PM
MR. ALPER next addressed slides 12-13, "History of Minimum
Production Tax 'Floor,'" explaining that during the gross tax
era there was a minimum "cents per barrel" tax. In 2005, which
was the last full year of ELF, it was 60-80 cents with an
adjustment tied to the American Petroleum Institute (API)
specific gravity measurement. The more valuable oil was
essentially taxed at the higher level. With the PPT bill the
legislature introduced a Gross Minimum Tax as a potential
security blanket against the Net Profits Tax. It was 4 percent
of the Gross Value with a sliding scale down tied to the price
of oil that's an annual average price of oil, and if the price
is over $25 it's a 4 percent gross tax. However, under the PPT
and ACES era, that floor could be pierced by many of the
credits, including the 20 percent QCE Credit. So, if ACES was
the law today, the state would be receiving zero rather than
some version of the minimum tax that it is getting today.
MR. ALPER turned to slide 13, pointing out that under Senate
Bill 21 the floor was strengthened because it specifically says
the [North Slope] Per-Taxable-Barrel Credit cannot reduce the
tax liability below the floor. The legacy fields, the older oil
fields, specifically are paying at the floor level. However,
several other credits could reduce payments below that. These
credits are the Net Operating Loss Credit, the Small Producer
Credit, various exploration credits, and the Per-Taxable-Barrel
Credit for so-called "new" oil, which is oil eligible for the
Gross Value Reduction (GVR) and that $5 a barrel credit could
reduce payments all the way to zero. The minimum tax was really
never broadly triggered or used until late in 2014 when [DOR]
started seeing monthly payment estimates coming in at the floor
level. Throughout 2015 nearly all the production tax receipts
have been based on the minimum tax, the 4 percent gross.
1:51:44 PM
MR. ALPER moved to slide 14, "Major Bill Themes," to outline the
six broad themes in the bill, with the first theme being that
the state's annual cash outlay needs to be reduced. It is a
sheer necessity, he said, because the state does not have the
money or the budget to be able to support half a billion dollars
in spending. He pointed out that $500 million in tax credits is
10 percent of the $5 billion general fund (GF), and when looking
to broadly cut the budget and make a sustainable Alaska the tax
credits need to be cut as part of a broader package. Theme two,
the Net Operating Loss Credit needs to be protected in some form
because it is something of a playing field leveler. Theme
three, repurchases need to be limited. Some new rules would be
put in place as to who gets repurchased versus who might be
required to hold their credits until they had a tax liability.
Theme four, the minimum tax would be strengthened to ensure the
state truly is getting the 4 percent. Theme five, the bill
would allow more transparency and ability to talk about some
specifics in public without violating taxpayer confidentiality.
Theme six, credits that have been earned to date, and through
any transition period, would be honored and paid. Whatever the
effective date of the final legislation, it would be ensured
that there is enough money to pay off all those credits.
1:53:02 PM
REPRESENTATIVE JOSEPHSON, in regard to limiting repurchases,
offered his understanding that the principle feature is "this
question of local hire." He asked whether there will also be
"pre-screening of the rocks in the ground and ... the quality of
the investment."
MR. ALPER confirmed that local hire is one of the provisions.
Another, he continued, is an annual cap under which [the state]
would not purchase more than $25 million per company per year.
Possibly more important is a cap on the size of the company.
The bill includes language that says a multi-national company
with global revenue in excess of $10 billion per year would hold
its credits on its own books and then use those credits in the
future to offset taxes when its field comes into production.
1:53:59 PM
REPRESENTATIVE HAWKER commented that the themes are really the
intent behind the bill. He asked whether an analysis has been
done of projected consequences to the industry from
substantially raising the taxes and the effect of that on future
investment, production, and revenue to the state should the bill
pass unchanged.
MR. ALPER replied that there is no specific analysis because it
is very hard to predict. The legislation would touch many
different sectors in many different ways. The expectation is
that most of the projects that are ongoing would continue to
happen. A couple of future projects that might be a little bit
marginal might not happen if they suddenly go from getting two-
thirds state money to 25 percent money. But it is felt that
enough is going to continue to happen that supply won't be a
problem and that there will be a level of oil and gas activity
that is commensurate with [the state's] ability to afford it.
If something requires two-thirds state money to happen, he said
it is appropriate at some point to have the conversation that
maybe that shouldn't happen, that perhaps that activity should
be able to stand on its own merits a little bit more.
1:55:49 PM
REPRESENTATIVE HERRON asked what the state's take will be if the
bill passes.
MR. ALPER responded the state has gotten into a system of paying
several hundred million dollars per year in refunded tax
credits. No one really contemplated that until fairly recently
because the state was receiving $3, $4, sometimes over $6
billion a year in the production tax. The production tax
revenue has now reached $100 million or $200 million a year; yet
the credit liability is roughly the same, maybe slightly
smaller, and suddenly it is said that something is out of
balance. So, the first thing [the state] would get is one step
closer to a balanced budget. The governor proposed $500 million
in cuts in his FY 2017 budget; $400 million of them are in this
bill. [The state] would get perhaps a bit more certainty that
the projects that are going forward are on a sound financial
footing that are more likely to be resulting in meaningful
production. [The state] would also get a bit of production of
its minimum tax. "We put in a 4 percent minimum tax," Mr. Alper
said, "but I don't think there was full understanding at all
levels of government as to what did and didn't penetrate that
tax." The senate committee recommended that things be done to
ensure [the state] really does get 4 percent of the gross.
"Right now, because of some unusual factors, we are not actually
getting a full 4 percent of the gross and we're trying to bump
that up, and in a second conversation increase it to 5 percent,"
he said. "So guaranteeing ourselves at least a minimum level of
annual revenue even in times of a shortfall in the industry."
1:57:50 PM
REPRESENTATIVE HERRON requested he be given some insight on the
administration's policy discussion that led up to the
introduction and who participated.
COMMISSIONER HOFFBECK answered that it was various people at
various times. Explaining that the policy decision that led up
to this was two-fold, he said:
One is the fact that, quite frankly, the size of the
pie that we have to support all of the things that
we're spending money on was not large enough to
support everything anymore. And so ... we had to pull
back and we're pulling back on essentially everything
... or most things. This was ... one of the outflows
that quite frankly is not a core government service
... it had to be balanced against education, life,
health, safety, roads, those kind of things. ... It
was considered an area where ... it was prudent for
the state to pull back on in this particular area.
We're not pulling all the way out, but we just simply
can't afford the level of support ... that we're doing
right now. ... The second component ... was just that.
We do recognize, however, that some level of support
was necessary and so ... we tried to balance that by
leaving ... a fairly substantial level of support
still in the bill, but just ... quite a bit less than
it was before. And so ... it was a recognition we
couldn't afford it and secondly that we've needed to
continue some level of support but ... at a lower
level.
REPRESENTATIVE HERRON requested the commissioner to name names
as to who participated in the discussions that led up to the
bill's introduction.
COMMISSIONER HOFFBECK replied it would have been largely revenue
staff. Mr. Alper, himself, the governor, and the chief of staff
were probably the four that had the most input into it, but that
was all based on information that the four of them received
through extensive meetings with industry, the investment
community, and the work that Senator Giessel did with her
committee.
2:00:32 PM
REPRESENTATIVE HAWKER said there is a difference between the
question that Representative Herron asked and the question that
he had asked. Representative Herron's question was, "What's the
state's revenue side of this?" The answer was largely "we're
doing what we need to do to balance our budget and that's what
our priority in doing this is." Representative Hawker said his
question was the other side, "What is the consequence of making
this decision and literally at this point in time arguably
taking another half billion dollars a year or more out of an
industry in this state that is not making money today in this
state at these prices?" He related that in a meeting today with
a senior person from one of the major producers he was told that
the company is losing $3 million a day continuing to operate in
Alaska. He asked whether he is correct in recalling that Mr.
Hoffbeck or Mr. Alper earlier stated that no one has worked on
modeling identifying the consequences of this legislation on the
individual players and that members are to take it on faith that
major tax increases can be assessed on entities that are losing
money in this state today and there is not going to be a
negative consequence.
COMMISSIONER HOFFBECK responded that the Institute of Social &
Economic Research (ISER) has been contracted to look at the
impacts of all of the decisions being made here. There is not a
single lever in this entire budget, he said, that doesn't have
consequences. An analysis is being done, but the recognition is
that there just simply isn't a way to balance a $4 billion
budget deficit without some collateral consequences in the
economy. Regarding Representative Hawker's earlier point about
the difference between credits that are embedded in the tax
system, which is a tax issue, and the credits that are really in
place to try to incentivize certain activities, Commissioner
Hoffbeck said that taking away money that [the state] is giving
somebody is a little different than taxing somebody, taking
money out that [the state] did not first provide to them in the
first place. "And so I do see a little bit of a distinction
between this $400 million ... being characterized as a tax
increase," he said. "I really do see it as a credit reduction."
2:03:07 PM
REPRESENTATIVE HAWKER charged that the people who will be most
profoundly affected by taking away these credits are the small
companies that don't have revenue in Alaska. The questions he
is asking are: "What will be the consequences? Will we be
driving those small companies out of state? Will we make Alaska
a state that is not attractive?" He said an article in today's
Alaska Public Media reports the head of BlueCrest Energy Inc. as
stating that the company probably won't develop the natural gas
in the Cosmopolitan prospect [in Cook Inlet] if the legislature
makes big changes to Alaska's tax credit program. That is the
kind of consequence he would like to know about, he said.
Taking away credits is going to affect one cohort of the state's
investors in one way; the tax rate itself is going to affect
those larger players, those larger producers that are
contributing all the money that is ultimately being
redistributed here today. Representative Hawker agreed there is
definitely a difference between the two, but argued that at the
end of the day the consequences on the relevant cohort must be
looked at. It cannot be said that taking away this credit is
not going to affect the big producers. Maybe it won't; but
likewise, jacking up the tax rate on production is not going to
have any effect on a non-producing entity; however, it has to be
asked whether that entity will ever be willing to go into
production if the tax rate is raised.
2:04:56 PM
REPRESENTATIVE TARR related that ConocoPhillips had $393 million
in profit for its Alaska operation for third quarter [2015].
So, she continued, at least one company is still making some
money. She shared that in talks she's had with producers about
changing the credits in Cook Inlet, even these producers said
that the credits have met their intended purpose of spurring gas
development in the inlet to prevent the possibility of a gas
shortage. That has now largely been accomplished and the
producers know it is time for change, although there is interest
in keeping some in place. She asked how that experience can be
used to better assess whether credits had their intended purpose
for development in the way that was wanted.
COMMISSIONER HOFFBECK replied that he thinks this is a good
point. When the credits really grew in the 2010 era, it was a
market looking for gas and there was a real need to incentivize
activity. Currently in the Cook Inlet, however, there is gas in
search of a market. So, that dynamic has changed, and that begs
the question, then, of whether that level of support is needed
at this point in time. That level of support had some impact
when it was needed. Does that level of support need to be
continued? The question now is whether there is a different
level of credit support that allows a more steady state going
forward. A lot of it will be something that only time will tell
whether in fact this is the right rate as well. "We've had a
tremendous number of discussions with these particular players
in Cook Inlet to get their impact ... on the credit before we
proposed the credit reforms," he said.
2:07:23 PM
CO-CHAIR TALERICO asked when the ISER report will be available.
COMMISSIONER HOFFBECK responded it was supposed to have already
been receive, and he has been told that it should be available
in a couple of weeks.
2:07:49 PM
REPRESENTATIVE SEATON noted that oftentimes individual things
are looked at and given credit for the outcomes; for example,
pre-production on the North Slope that was already going forward
before the tax system there was changed. It is being assumed,
he continued, that credits were what drove the financial or the
exploration in Cook Inlet. However, at this same time the
Regulatory Commission of Alaska (RCA) changed its position from
a barely breakeven amount of $2.50-$3.00 per thousand cubic feet
(MCF) gas to $6-$8 per MCF, now allowing people to make money on
the gas they were selling. It is hard to incentivize somebody
with credits if their product isn't going to be profitable. So,
which of the two - the credits or a profitable product - drove
the investment? A balance needs to be looked at. Alaska has
some of the highest priced gas in the nation right now at about
$7.50 where it is sold in the Cook Inlet Basin. People can make
money on it. The Henry Hub is about $2.80. There is a huge
difference in the profitability of the gas and no one is giving
any relationship to the profitability of the gas and saying that
all the exploration was done not because a company could make a
profit on its product, but because the state gave the company a
subsidy. "I'm very concerned," Representative Seaton said,
"that as we go forward with these credits we ought to say what
they really are. They are subsidies to these companies and
subsidies to the product ... so it's not just credits, and so I
think that we should consider that term as well as we talk about
these things."
REPRESENTATIVE SEATON turned to slide 14 and added that he is
very concerned about the second theme, "Protect Net Operating
Loss credits as a playing field leveler between legacy producers
and newcomers". He stated:
I'm very concerned that if we say "oh we got to go to
35 percent of everybody's expenditures to level the
playing field even if we're losing money on all of
those credits that are being paid." We need to
actually look at the amount of the credit we're paying
and see if it makes sense in the full term for what
we're getting, not for just saying "oh, we're going to
be a referee between legacy producers and new
producers and we're going to give everybody a big
subsidy or a big write-off against their expenses."
And so I hope that as we go through this we also think
of what's the state's liability in here as well.
2:11:11 PM
REPRESENTATIVE HAWKER returned [Representative Tarr's] earlier
statement that ConocoPhillips' year-to-date third quarter
earnings show the company as having earned money in Alaska.
REPRESENTATIVE SEATON clarified it was third quarter 2015; the
fourth quarter report is not yet out.
REPRESENTATIVE HAWKER stated ConocoPhillips will be reporting
its earnings tomorrow, not today.
MR. ALPER said his expectation is that the fourth quarter
results will be weaker given the price of oil was in the fifties
throughout the bulk of the third quarter and is now in the
thirties and has hit the twenties. He added he is sure that
that has had an impact on ConocoPhillips.
REPRESENTATIVE HAWKER stated that is his point. It is important
to be talking accurately and about the right time frame, and
looking at the right statistics as these analyses are made. To
say that an entity is making a profit today may not be accurate
and he won't know until they report tomorrow.
MR. ALPER added that the administration does not want to
eliminate the tax credit program. Rather, the conversation the
administration is trying to have before this committee and as
the session progresses is, "What is the appropriate level of
support that we should continue to give to the industry - both
the mature and the new-coming industry - given our fiscal
realities? Are there adjustments that deserve to be made based
upon lessons learned in the last 10 years and the changes in the
price of oil?" He noted he "would not want to characterize this
... as an upheaval or as an elimination of a program, it's an
evolution of a program."
2:13:03 PM
MR. ALPER reviewed slides 15-16, "Recommendations of Senate
Working Group," relating that after last year's session Senator
Giessel put together a working group of several members of the
other body, as well as some industry and local government input.
The group put together a comprehensive and impressive report.
In addition to highlighting the work done by the eight or nine
hearings and characterizing the needs of the various sectors,
the [December 2015] report makes six recommendations. He said
the administration's bill is trying to meet, for the most part,
the recommendations made by that working group.
2:13:41 PM
REPRESENTATIVE JOSEPHSON recounted that when he asked Mr. Alper
about the limited repurchases on slide 14 and mentioned local
hire, that Mr. Alper had answered there would be limit of $25
million per company. He further recounted that Mr. Alper talked
about treating the big companies less like small domestic
companies and more like what they are. He asked whether HB 247
has some sort of pre-screening element to it because in regard
to the imposition of new revenue it would be wonderful if he
could explain to a constituent that "the state's geologists have
looked at this and this thing is a great prospect, it's worth
investing 35 cents in."
MR. ALPER recognized that Representative Josephson sat in on
several of the fall working group meetings and that in these
meetings there was talk about the possibility of a pre-screening
process. However, he continued, that did not survive to the
final version of the bill and so there is no application
process. The earning of the credits remains open-ended. Right
now the only restriction on getting cash from the state is
whether a company produces 50,000 barrels or more in Alaska.
Every company, whether the world's fourth largest oil company or
a mom and pop working out of their truck, can get cash for their
credits. [The bill proposes that] large companies with revenues
in excess of $10 billion would earn credit certificates, but
would hold them and use them against future tax liability. The
$25 million is the fork in that road, the alternative program
put in place for the smaller companies who can cash in $25
million per year with the idea that if their projects are larger
it might take several years to work through the credits.
2:15:41 PM
MR. ALPER, resuming his presentation, clarified that slides 15-
16 are a paraphrasing of the six recommendations in Senator
Giessel's report, not a literal interpretation, and are [the
administration's] sense of what was in the working group's final
report. In regard to the first recommendation of gradual
implementation and not forcing this on the industry too quickly,
he said $1 billion would be put into a transition fund for
existing and future liability; there would be no attempt to go
backwards with these changes.
2:16:15 PM
REPRESENTATIVE HAWKER charged that Mr. Alper was very selective
about what he had chosen from Senator Giessel's report. For
example, the report says to protect the stability of the Cook
Inlet supply and that encouraging North Slope production to come
online will be critical for the fiscal health of the state. In
regard to "gradual implementation," he argued that the words in
Senator Giessel's report state "a deliberate, methodical and
graduated approach that still honors commitments currently being
made under existing law would be a reasoned strategy." He said
he doesn't think that "a deliberate, methodical and graduated
approach" translates to a "'gradual implementation' of your
concepts here."
MR. ALPER replied:
PowerPoints are inherently a little bit compressed;
there was no attempt to mischaracterize any point that
was in there. The idea that I believe the senator
made, and her staff and her team and what we're trying
to honor here, is that we want to honor what has been
earned to date, what is earned through the effective
date of this bill, and make sure that ... we're not
pulling the rug out from anybody who's mid-process.
The rules are going to change at a future date after
the end of this session at which point the way, and
the rate, and the rules under which we're paying
people back will hopefully change. Likewise, in
considering the impacts on different sectors ... there
were six recommendations in the report and you could
certainly deconstruct what was actually said in the
six recommendations.
2:17:56 PM
MR. ALPER resumed his discussion of the recommendations on slide
15, stating that [the administration] feels it is honoring the
second recommendation to maintain future cash support for
Operating Loss Credits. All the different sectors of the
economy benefit from that Operating Loss Credit and [the
administration] wants to ensure that the state doesn't
completely back away from providing cash support for industry
activities. Mr. Alper noted that the third issue on slide 15 is
not in the bill, but said it is an important idea given there
have been some high profile bankruptcies. Unfortunately, there
may be others, he continued, and if that occurs oftentimes the
secured lenders in the big banks in the East Coast tend to get
paid before the local vendors providing local procurement.
Although not in the bill, [the administration] would like to
find a mechanism to better protect Alaska's folks because it is
important.
2:18:48 PM
MR. ALPER reviewed the fourth recommendation on slide 16 that
the minimum [production] tax "floor" be protected, reiterating
that Operating Loss Credits have been able to penetrate that
[floor] and reduce payments. He said that a newly precisely
worded section in the bill would do exactly what is recommended
to protect that flow. The bill would also increase the rate to
5 percent, which is not in the senator's recommendations. He
addressed the fifth recommendation in regard to protecting the
Frontier Basin tax breaks. He noted that exploration tax
credits for the Interior parts of the state for the newly
developing areas have already been extended in current law to a
sunset of 2022. He said [the administration] intends to honor
that and keep that going, which means that exploration work in
the developing areas in the Interior will continue to receive
state support up to 65 percent of their cost. That is
important, these are areas that have no current production, but
[the administration] believes there's tremendous potential and
wants to continue on some of these projects that are in the very
early stages of their development.
2:19:48 PM
MR. ALPER addressed the sixth recommendation that reporting
requirements be enhanced, noting that it is awkward to sit
before the committee and be unable to name names and talk about
specific projects and specific dollar amounts. He continued:
It would be easier to have these conversations if we
could explain who's done what and how much money
they've got. We don't want to talk about how much of
taxes someone pays or how much they're spending, how
much money they make. But if someone's receiving
state cash benefit, we feel just as we report how much
we pay on chairs or people's salaries, we should be
able to talk about specific companies and how much
money they earn in state refundable tax credits.
2:20:57 PM
MR. ALPER turned to slides 17-22, "Summary of Major Bill
Provisions." He advised that a printed sectional analysis is
available [on the table] outside the committee room. Rather
than going through the analysis by order of the sections as they
occur in the bill, he said he will present a "thematic" analysis
by type of issue and type of proposed change that would be made.
He began with the bill's proposed changes in the area of
exploration credits [slide 17], explaining that the "Jack up
Rig" credits expire July 2016, as do most of the AS 43.55.025
credits for the North Slope and for Cook Inlet. However, they
have been extended for the Middle Earth area, the Interior area,
until 2022. The administration's policy is to do nothing - to
let these things expire, but to keep the Middle Earth credits
and let the North Slope and Cook Inlet credits go away.
MR. ALPER noted there are a couple of other older exploration
credit statutes on the books that have not been used in many
years [AS 38.05.180(i) and AS 41.90]. Out of concern that they
might be resurrected with the loss of the alternative credit for
exploration, the bill would preemptively repeal them to prevent
any unforeseen credits that are not currently being used to come
up out of the woodwork. He said the Department of Natural
Resources (DNR) has also been involved in the development of HB
247, having made several presentations to Senator Giessel's
working group last fall. One of DNR's concerns is the loss of
information. Through the exploration credit program, DNR gets a
lot of specific data, such as seismic data and down hole data,
and DNR is able to use that data for its own planning and
strategizing and deciding what areas to lease in the future.
Some of that data becomes public after a certain number of years
and can be used by other companies. [The administration] would
like to respect and protect that benefit and attach those DNR
data reporting requirements [in AS 43.55.025] to the AS
43.55.023(b) credit, the Net Operating Loss Credit, which is the
largest credit that will remain after the change.
2:23:19 PM
MR. ALPER moved to slide 18 to discuss the bill's provisions in
the area of Cook Inlet Drilling Credits. Recognizing that this
might be the most controversial provision, he explained that it
would repeal AS 43.55.023(a) [and AS 43.55.023(l)], the
Qualified Capital Expenditure" and the Well Lease Expenditure
Credit for Cook Inlet. He said:
Those are the credits that are typically stacked with
an Operating Loss Credit, which leads to the very
large numbers - the 50, 60 percent state support on
the spending based credits. Senate Bill 21 repealed
the comparable credits on the North Slope, so in some
ways we're extending [Senate Bill] 21's tax treatment
to other areas of the state. Another interesting
feature of current law, and it's awkward to talk
about, but because we have these spending based
credits commingled with a tax cap for the hard maximum
tax, you have circumstances where a profitable company
producing oil and gas in Cook Inlet could be paying
zero taxes but still receiving relatively large state
tax credit payments based upon their activity drilling
wells, what effectively becomes a large negative tax.
By repealing these credits we would be eliminating
that and saying ... through 2022 you'll continue to
... pay zero but we're not paying you credits if
you're not paying taxes. There is an understanding
that before the Cook Inlet tax caps repeal in 2022 the
legislature is going to need to address the underlying
Cook Inlet tax regime. It's something of a hybrid, it
draws together pieces of ACES and [Senate Bill] 21.
It's probably not stable, but it doesn't matter for
the next five or six years because of the existence of
those tax caps.
2:24:42 PM
REPRESENTATIVE HAWKER pointed out that he is "the father of
those tax credits" and added that brownout and blackout drills
in Southcentral Alaska were stopped because "we were successful
in achieving what we wanted to accomplish." This committee saw
that it accomplished something good and there is always that
need for a feedback loop to evaluate it. That's why Senate Bill
138 [passed in 2014 by the Twenty-Eighth Alaska State
Legislature] included a requirement that a comprehensive review
be performed in, he believed, January 2017 of the Cook Inlet
Basin tax system to provide a deliberate, rational, and analyzed
basis for making changes. However, HB 247 would repeal those
credits and would repeal them this year. He asked what the
consequence will be on his community and what will be done when
there is no heat and no lights in his town in the middle of
winter. Maintaining that HB 247 would repeal what solved his
community's problem, he further asked what analysis and
evaluation has been done to show that repealing these credits
will not hurt his community.
COMMISSIONER HOFFBECK replied that in [the administration's]
discussions with industry right now there really is a dynamic
within Cook Inlet of gas looking for a market. The work that
was done was successful. So, it begs the question of whether
this level of credits needs to be maintained at this point in
time in the life of those fields. The goal was accomplished,
there is a reliable supply of gas in Cook Inlet right now. That
will last for a while. It may be the case that in four to ten
years from now there might be a need to re-incentivize. But,
given the budget restrictions that are had right now, the
question is whether it is prudent to maintain those credits when
there is currently a gas supply available.
2:27:16 PM
REPRESENTATIVE HAWKER stated that Commissioner Hoffbeck is
answering his question with a question. He said the legislature
saw this coming and agrees that it is time to re-evaluate this.
Under the previous administration, he recalled, DOR asked that
it be given until January 1, 2017, to do a true evaluation and
analysis so a fact-based decision could be made. While
anecdotally in talks with industry it is being said there is gas
out there, one of the major players in the Cosmopolitan
development said on February 1 that it likely will not develop
the natural gas in Cosmopolitan if the legislature makes changes
to the tax credit program. He asked who else will not develop
and reiterated his question about what DOR has done to evaluate
this.
COMMISSIONER HOFFBECK responded that this kind of runs into that
wall about who he can talk about specifically. However, what he
can say is that [DOR] is still in ongoing conversations with
these companies about what it is going to take to get them to
the finish line.
REPRESENTATIVE HAWKER remarked, "But you'd like us to pass this
bill and pull the rug out from under them before they get to the
finish line."
COMMISSIONER HOFFBECK answered "I expect that ... they will
provide you with information and we can engage in a further
conversation as that information is provided."
2:29:04 PM
MR. ALPER offered his belief that the field in question has
several years' worth of gas supply for Cook Inlet potentially
that has been discovered, that is known. He continued:
Should we find ourselves in a crisis situation years
down the road, it is not as terrifying to bring that
on because we know that it's there. The provisions
and the benefits in the bill that you carried five
years ago have done great things towards giving supply
certainty to your constituents, no question.... That
supply is known and now it is just a matter of getting
it ... "behind pipe," getting the wells drilled, which
is a lot different than going out and finding it.
REPRESENTATIVE HAWKER said every petroleum engineer he knows
says that nothing actually counts until it's on the surface and
pumping. Once trying to develop it, all kinds of challenges and
complications in getting it out of the ground can be discovered.
For example, the Badami Oil Field has some of the greatest
potential in the state but it's one of the hardest to develop
because of being unable to get anything out of the structure.
He said he is not willing to risk his community's energy
security on comments here to just "'trust us, we're going to get
there,'" and reiterated that he doesn't like the idea of pulling
the rug out from under them now. He said he is only asking that
he be given a competent, quality analysis that shows that his
community's security will be retained, rather than just the
"trust me" in this bill.
COMMISSIONER HOFFBECK replied, "Some of that we just simply
can't provide the committee."
REPRESENTATIVE HAWKER said he understands.
2:30:56 PM
REPRESENTATIVE TARR commented that she feels uncomfortable with
the idea that her responsibility is to a company rather than to
the people she represents. She said that based on some of the
comments that have been made she needs to say on the record that
she hopes those individual [companies] will come testify before
the committee to give a full picture of their development plans
and their reaction as to how those plans may be changed or
altered going forward. She reiterated that her responsibility
is to the people she represents and their many needs going
forward, not the individual companies, and the committee must
balance all of those needs.
2:31:48 PM
REPRESENTATIVE SEATON, regarding the Cook Inlet drilling
credits, noted that one of the fields being talked about is in
his district. He stated that subsidizing an operation with
money from state coffers for gas that has no market unless it is
exported may be of value to the company, but seems to be
something that [the committee] needs to consider. That is
another part of this mixture of things of what [the state] can
afford to subsidize, give credits for, when there are no taxes
being paid on that for an export market. While he is interested
in listening to the arguments on this side, he said he wants to
put it on the marketability of that gas.
MR. ALPER, following up on Representative Seaton's statements,
stated that the credits in question in Cook Inlet were intended
for issues of gas security, but they were not limited to just
gas development and exploration work. A lot of that money has
been spent on companies that were looking for an increase in oil
production from Cook Inlet, which is great because there is no
problem with more oil - it is jobs, revenue, and export - but it
is not quite the matter of life and death for the people of
Southcentral as gas supply issues are. A large amount of these
Cook Inlet credits have, frankly, been spent on oil development
projects.
2:33:37 PM
MR. ALPER turned to slide 19 to discuss the bill's provisions in
the area of repurchase limits. He noted that the current
restriction [AS 43.55.028(e)(4)] says companies with more than
50,000 barrels a day must hold their certificates until they
have future production. Those limitations would be expanded
under HB 247 to say a company with global annual revenue greater
than $10 billion per year will hold its note. In other words, a
company with an economy that is larger than the State of Alaska
probably doesn't need the state's cash money and can support a
project on its own balance sheet. The bill would also
reinstitute the 2006/2007 PPT-era repurchase cap of $25 million
per company per year. An Alaska hire provision would also be
included, an idea that the governor himself came up with. The
idea, for example, is that if a company has $10 million in
credit repurchase coming to it and has 70 percent Alaska hire,
the state would give the company $7 million, 70 percent of its
credit based on its Alaska hire percentage, and the company
would carry forward the rest of the credit until it had a tax
liability.
2:34:39 PM
REPRESENTATIVE HERRON inquired as to where else in the world
this is done.
MR. ALPER responded he does not have an answer, but that he is
not so sure there is that many places in the world where they
are giving refundable cash credits for oil and gas development;
so it is a fairly narrow universe to compare to.
2:35:07 PM
REPRESENTATIVE HAWKER asked what the purpose is of a
government's tax revenue system.
COMMISSIONER HOFFBECK answered it is to collect taxes for
revenue for state operations.
REPRESENTATIVE HAWKER inquired whether the purpose of the tax
system is to enact social policy.
COMMISSIONER HOFFBECK replied that, in his opinion, no.
2:35:40 PM
MR. ALPER returned to slide 19 and addressed the last proposed
change in regard to repurchase limits, stating that a company
would have 10 years to use its carried-forward loss credits. If
a company does not come into production and have a meaningful
tax liability within 10 years, then those credits would start to
expire.
MR. ALPER moved to slide 20 to address the bill's provisions in
the area related to removing exceptions and loopholes. He
explained that as [DOR] started processing credits it found that
there are a couple of features in existing law that can inflate
a Net Operating Loss Credit to larger than what it might be
intended to be. For example, it was found that a company with
an operating loss that is a new producer eligible for the Gross
Value Reduction is able to use the GVR as a subtraction
mechanism from its taxable profits intended to reduce taxes, but
a company at a loss is able to use that GVR to increase the size
of its operating loss on paper and then the Operating Loss
Credit is tied to that adjusted number, which has led to
situations where [the state] is literally paying a company more
than 100 percent of its loss through refundable credits. That
was a surprise that DOR took through the legal system and found
that in fact that is a literal interpretation of what the
statute says and the hope is to fix that. Another exception or
loophole has to do with a municipal utility. When a utility
owns gas production and is burning the gas in its own turbines
and supplying its own customers, it is not a taxable event.
However, if the utility has a little bit of surplus production
that it sells to a third party, a literal interpretation of the
law says the utility can take that tiny amount of revenue that
comes from selling 1 or 2 percent of its production and offset
all of the utility's expenses against it for the purpose of
calculating certain credits and certain benefits. That is one
of those things where the lawyers say that is what [the statute]
says, but [DOR] doesn't think that is what it is supposed to say
and would like to get that cleaned up.
2:37:39 PM
REPRESENTATIVE SEATON requested Mr. Alper to explain the Gross
Value Reduction (GVR), noting that sometimes it is called a
credit or it becomes a credit. He asked whether it is really
just a credit and being applied in different ways.
MR. ALPER replied he does not consider the Gross Value Reduction
a credit per se because it is a subtraction from taxable value.
It is an awkward calculation. He explained that during hearings
in 2013 on Senate Bill 21 the assumption was an oil price of
$100 per barrel. At $100 the oil in question results in roughly
$50 a barrel in taxable profits. It was then said that a
benefit would be given to companies for any oil that met the
criteria for being new oil. So a mechanism was set up to turn
that $50 into $30 - that for the purposes of the tax system only
$30 of that profit would be taxed and the state would therefore
effectively collect less taxes. Mr. Alper posed a scenario in
which a company loses $10 [per barrel] because it's drilling new
wells and spending more than it's earning, or it's losing money
because the price of oil has collapsed and now the company no
longer has profits. Under normal circumstances, he explained,
that $10 loss would result in an Operating Loss Credit. Last
year that was 45 percent, so in the aforementioned scenario [the
state] would pay that company $4.50 for every barrel produced in
which it had a $10 loss. However, implementation of the Gross
Value Reduction turns that negative $10 into a negative $30 on
paper - the company gets to subtract what should be a profit
reducer for tax purposes to become a loss increaser. So 45
percent of a $30 loss is $13.50 and now [the state] is paying
that company $13.50 a barrel on that barrel that the company
actually lost $10 producing. So, no, [DOR] doesn't consider it
a credit; the term would be a value offset.
2:39:53 PM
REPRESENTATIVE SEATON inquired whether there would be any
distinction if it was said that the state is going to give 20
percent credit on the value of the oil produced.
MR. ALPER responded that during the several years prior to
Senate Bill 21 different variations of oil tax reform bills were
working their way through the legislature, and there was an
attempt to find a mechanism to give benefits to new oil. It's a
technically complicated conversation because expenditures tend
to be commingled and there are de-coupling issues, so tying it
to a percentage of gross value was sort of the cleanest
mathematical means of doing it. He said he supposed it could be
a credit, but the credit would have to be tied to the gross
value of the production, not the net, because it's hard to
separate out net value from field to field. There are different
ways to do it, he continued. The governor supports the
existence of a specific benefit for new oil. If the committee
wished to try to re-address that and find a different way to do
it, he would be happy to put together some ideas.
2:41:08 PM
REPRESENTATIVE SEATON commented that it seems like it is a 20
percent credit on the gross value of the oil and it's applied as
a credit since it is taken off through the calculations. He
could be misunderstanding this, he allowed, and that is why he
is trying to find out why this isn't just considered a 20
percent credit on the gross value.
MR. ALPER answered that in a loss situation, in many ways it
could be. But how to characterize it as a credit in a situation
where the producer in question is profitable? He continued:
By subtracting a percentage of gross value from a net
profit number, there's a multiplier in place ... it
depends on the ratio of their costs to the value of
the oil. Colloquially, we say a 20 percent gross
value reduction is roughly equivalent to a 40 percent
reduction in net value. That's not actually true
today, that was true a few years ago when prices were
higher. But, it was intended to, round numbers, cut
the company's taxes in half. In today's world it's
greater than that because the new oil is able to pay
at the zero level and the old oil is paying at the
minimum tax level, so it's an infinite cut of their
taxes - it cuts all of their taxes.
2:42:43 PM
MR. ALPER moved to slide 21 to address the bill's provisions in
the area related to strengthening the minimum tax, the floor.
Under HB 247, a company would actually have to pay the minimum
tax, he said, which in current statute is 4 percent at current
prices. A company would not be able use an Operating Loss
Credit or a Small Producer Credit or an Exploration Credit to
offset the minimum tax. The minimum tax would be a minimum and
if a company has credits that it has earned in excess of that
and they can be carried forward, then the company would carry
them into the next year. He qualified that the next point he
will address is awkward and hard to say without violating
confidentiality. In DOR's two-page credit estimate report from
the Revenue Sources Book, he said that one or more of the major
producers will show a net operating loss for 2015. What does
that mean? The way the law is written, that company or
companies will be able to turn their loss into a 45 percent
Operating Loss Credit and beginning in January use that credit
to offset their minimum tax payments all the way down to zero
until such time, presuming prices stay low in 2016, that they're
able to work through their operating loss credit and use it all
up. This will be seen on the credit forecast as a North Slope
credits used against tax liability in the AS.43.55.023 category.
"We feel that the major producers should be paying at the
minimum tax," he said, "that that's what the minimum tax is for
and by implementing this we're going to say 'no, in fact the 4
percent is true and you carry it forward into the next year when
there are higher profits and therefore higher tax liability and
you could use it.'" He pointed out that this is the one
provision of the bill that [the administration] is requesting be
made retroactive to January 1, 2016, because of the specific
situation just outlined.
MR. ALPER addressed the second bill provision on slide 21,
explaining that the other expansion of the floor is to so-called
"new" oil. The GVR-eligible new oil can go to zero and [the
administration] wants to make that oil pay at the 4 percent
level as well. Moving to the third provision related to
strengthening the minimum tax, he said the Per-Taxable-Barrel
Credits can sort of migrate from month to month under current
law. There are months in which the credits get cut off and are
unused because the minimum tax gets in the way, they can only
subtract so much. What [DOR] found specifically in calendar
year 2014 where there was a lot of volatility in the price of
oil - from over $100 in January and down into much lower numbers
at the end of the year - companies were able to move their per-
barrel credits around when the true-up happened at the end of
the year and large refunds to certain companies were written at
the end of calendar year 2014 that were not expected. The bill
makes a change that would turn the Per-Taxable-Barrel Credit
into more of a true monthly calculation. Turning to the fourth
provision, Mr. Alper said the bill would increase the minimum
tax rate itself from 4 percent [at prices above $25] to 5
percent.
2:45:42 PM
REPRESENTATIVE JOSEPHSON, regarding the migrating Per-Taxable-
Barrel Credit, inquired whether migrating means, in effect, it
can be carried forward to a different month but within the same
year and the industry could wait for a more profitable month.
MR. ALPER replied the production tax is an annual tax, not a
monthly tax. It is a very long, precise, and convoluted section
of law that talks about how a company makes monthly estimated
tax payments. Then there is what is called true-up where the
company pays its taxes at the end of the year and commingles it
all. It is not so much carrying it forward. When a company
does the combined calculation as opposed to the 12 separate
calculations, it ends up being able to use more of those per-
barrel credits that it wasn't able to use in a month-by-month
basis.
2:46:44 PM
REPRESENTATIVE HAWKER requested Mr. Alper to clarify what he is
talking about when talking about Per-Taxable-Barrel Credits.
MR. ALPER responded:
Per-Taxable-Barrel Credit ... is ... what
[Representative Hawker] said earlier in the
presentation was not really a credit but an offset but
a component of the tax. This is the subtraction
mechanism in [Senate Bill] 21 for North Slope
production that says here's this 35 percent tax and
then you get a reduction in that tax of between $0 and
$8 per barrel, which is tied to the price of oil.
That per-barrel credit is based on the price of oil in
that month so that it varies from month to month.
However, in those months were it might be at the
highest level, $8 a barrel, those are the months when
the prices are very low and if the prices are low
enough the companies don't get to use the full $8
because the minimum tax payment gets in the way. They
can only use them until it gets cut off and
essentially foregone at the minimum tax. What happens
though at annual true-up if there is volatility and
higher value in earlier months, the foregone credits
from one month could be used to offset taxes
effectively from another month.
2:47:53 PM
REPRESENTATIVE HAWKER responded:
You hit exactly my point here and thank you for
clarifying that these ... Per-Taxable-Barrel Credits
are really the GVR, the Gross Value Reduction that
we're talking about here.
MR. ALPER answered:
No, Representative Hawker, the GVR is the new-oil-
specific subtraction mechanism to reduce the
production tax value for what's called new oil fields
that they pay the 35 percent on a smaller number. The
Per-Barrel Credit is calculated after the 35 percent
tax and it's subtracted from tax liability; it's the
production-based tax.
2:48:26 PM
REPRESENTATIVE HAWKER offered his appreciation for the clarity.
He recalled that the House Resources Standing Committee had days
of testimony on this exact issue and it was a policy call of
this committee and the legislature that the desire was to
average these things because when "you try to isolate them on a
monthly basis you do get anomalous results that are really not
intended in that we want to look at business on its annual cycle
rather than saying 'okay this month you made a bunch and we're
going to take every bit of it, next month you get a loss, we're
not going to give you much value for that, and we're going to
effectively increase our government take by taxing you on these
spikes.'" It was a policy call of this committee and the
legislature not to do that. [The administration] is asking [the
committee and legislature] to take a complete reversal in policy
direction.
MR. ALPER offered two observations. First, when the tax reform
effort of 2013 took place the conversation before the House
Resources Standing Committee and every committee were on a range
of oil prices between $80 and roughly $120. He continued:
I don't personally believe that adequate consideration
was given to what happens outside that range and we're
finding realities that were unanticipated. We did not
know what would happen; technical features of the law
that are acting in unpredictable and unknown ways and
we're trying to react to those. Secondly, I would say
... when we got to the end of 2014 we thought the
taxes were collected. We projected at the time about
$525 million in production tax revenue; a combination
of a few months of high prices and a few months of low
prices. We were frankly surprised at when the tax
returns came in at the end of March to learn that we
owed close to $150 million in refunds based on the
feature that we're talking about in this provision
right here, the ability to move some credits around
within the year. And in a time of great fiscal
shortfall that was $150 million that we didn't think
we wanted to spend but we had to per the law the way
it was written.
REPRESENTATIVE HAWKER responded:
I agree. You're looking to make a new policy call
here that is going to take some selling to convince us
that the decisions we made - at least to me - the
decisions we made previously which I will disagree
with you that I do believe we did an adequate
diligence in our process in this committee and in the
legislature.... If that is your allegation that we
had an inadequate process here, I think we need to
have a conversation in the public about that.
2:51:10 PM
MR. ALPER resumed his presentation, moving to slide 22 to review
the other provisions in HB 247. Regarding the bill's provision
for interest rate reform, he noted that all versions of Senate
Bill 21 had an interest rate reform section and all previous
versions had compound interest. However, a late technical
amendment to that section in the final committee, the House
Finance Committee, led to the scenario where [the state] now
only collects simple interest on underpayments and assessments
when [DOR] audits and says a company owes more money. That's a
technical correction that needs to be made, he said, as [the
administration] believes it was the intent of the body to have
compound interest because every version of the bill had it. The
late technical amendment in the House Finance Committee didn't
discuss that change, so the bill would clean that up. He
continued:
More importantly and more material, we're looking to
increase the interest rate. Right now the interest
rate on underpaid taxes is 3 percent above the federal
discount rate. This quarter it's 4 percent. It was
11 percent under the previous law; that was most
likely too high. The thinking we have inside the
administration is presuming that we are soon or
eventually going to be in one way or another spending
the state's savings, spending earnings from the
permanent fund, partially, to help fund government,
every dollar that we don't get in taxes because
someone didn't pay them is a dollar we have to take
out of savings. And when we finally do get paid,
because we've audited that taxpayer, we want to be
paid back for our opportunity costs, for what we
would've earned on that dollar had it stayed in
savings over the intervening years. So we want the
interest rate for tax delinquency tied roughly to the
expected rate of return for the permanent fund, which
is around 7 percent.
2:52:48 PM
MR. ALPER continued on slide 22, saying the bill proposes
another major change - the confidentiality waiver. "We
just want to name the companies," he said, "and how much
they've received in state repurchased credits."
MR. ALPER addressed the bill's proposed technical change
related to transportation costs. He said:
Suddenly in an era of very low prices we are seeing,
especially in those more remote fields that have
higher tariffs, we have transportation costs that in a
moment in time might exceed the market value. We
could have gross value at the point of production of
less than zero. That's unprecedented circumstance.
We don't know how that will be implemented, so we just
want to clean that up and want to specify in the gross
value at the point of production statutes that it
can't be brought below zero.
MR. ALPER discussed the last provision on slide 22 in
regard to credit certificates. He said:
And, finally, right now if you have earned a credit
and you owe ... any state tax - it could be a fish tax
or a tobacco tax - we could offset that tax against
your credit. However, if you have other obligations
to the state, for example a royalty or a lease payment
or some other judgement, we can't necessarily do that.
We want to loosen that up and say before we give you
cash for your credits we want to offset any obligation
that you might have to the state. And that's a
technical change that's made and there's a bunch of
conforming language throughout the bill that makes
that change.
2:54:10 PM
CO-CHAIR NAGEAK stated that the administration will continue its
presentation on HB 247 at the next meeting. He said the
committee needs to be deliberate and ask questions in regard to
addressing these challenges. The administration, committee,
industry, and others need to work together to make sure the
future is clear during these times of harsh finance and find
something that will work.
[HB 247 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB247 ver A.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM HRES 2/22/2016 1:00:00 PM HRES 3/7/2016 1:00:00 PM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HB247 Sponsor Statement.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM |
HB 247 |
| HB247 Sectional Analysis.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM HRES 2/22/2016 1:00:00 PM HRES 3/7/2016 1:00:00 PM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HB247 Fiscal Note - FUNDCAP-OIL & GAS TAX CREDIT FUND-2-1-16.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM HRES 2/22/2016 1:00:00 PM HRES 3/7/2016 1:00:00 PM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HB247 Fiscal Note - DOR-TAX-2-1-16.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM HRES 2/22/2016 1:00:00 PM HRES 3/7/2016 1:00:00 PM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HB 247 Production Tax Credits FY07-FY25 Excel Table_Figure 8-4_Fall 15 RSB.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM HRES 2/22/2016 1:00:00 PM HRES 3/7/2016 1:00:00 PM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HB 247 Oil Credit Bill - Key Features 2-2-16.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/5/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM HRES 2/12/2016 1:00:00 PM HRES 2/22/2016 1:00:00 PM HRES 3/7/2016 1:00:00 PM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HB247 Fiscal Note #1-DNR-DOG-01-11-16.pdf |
HRES 2/3/2016 1:00:00 PM HRES 2/10/2016 1:00:00 PM |
HB 247 |
| HB 247 - HSE RES DOR 1st Presentation- OG Credit Reform Bill 2-2-16.pdf |
HRES 2/3/2016 1:00:00 PM |
HB 247 |