Legislature(2015 - 2016)BARNES 124
03/08/2016 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
1:04:41 PM
CO-CHAIR NAGEAK announced that the only order of business would
be 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."
1:04:49 PM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
on behalf of the governor, continued the sectional analysis of
HB 247 that he had begun on 2/12/16 entitled, "Sectional
Analysis, HB 247, Governor's Oil and Gas Tax Credit Reform Bill,
January 22, 2016." [In that presentation Mr. Alper reviewed
Sections 1-18.]
MR. ALPER brought attention to Section 18, explaining that it
relates to the concern where a producer is in production and
enjoys a Gross value reduction (GVR), but is in an operating
loss and can use that GVR to increase the size of the producer's
Net operating loss credit. He recalled that DOR, as well as the
legislature's consultant, Janak Mayer of enalytica, previously
provided slides showing how that calculation could lead to an
operating loss credit significantly higher than 35 percent and
possibly in certain circumstances in excess of 100 percent. He
further recalled that Mr. Foley of Caelus Energy Alaska, LLC,
testified that this would impact his company. Caelus, he
continued, is the sort of company that one could imagine getting
this sort of condition - a smaller producer that might be
operating at a loss because of a low price environment, but
because it is producing new oil that production would use the
gross value reduction, which could be used to increase the size
of an operating loss. He drew attention to the language in
Section 18 of the bill that would handle the problem: "For the
purpose of a credit under this subsection, any reduction under
AS 43.55.160(f) or (g) [the GVR] is added back to the
calculation of production tax values for that calendar year
under AS 43.55.160 for the determination of a carried-forward
annual loss." In other words, Mr. Alper explained, the GVR is a
benefit if it is about reducing a company's taxes, but in a
circumstance of an operating loss the GVR effectively gets added
back and the tax is calculated as if the GVR did not exist. The
intent of this provision is to resolve what DOR and Mr. Mayer
believe is an unanticipated consequence of how the GVR
interfaces with an operating loss at low prices.
1:07:51 PM
CO-CHAIR TALERICO inquired as to how significant of an impact
this would be to [a company].
MR. ALPER replied that the smaller producers with the smaller
volumes are the producers who would generally benefit from this,
so it is not a $100 million line item because there is not that
much tax in play. For example, a company with an operating loss
of $10 million under normal circumstances might enjoy an
operating loss credit of $3.5 million. With the interplay of
the GVR that could be turned into a loss of $30 million and an
operating loss credit of $11 million; so, in that circumstance,
the GVR increases the size of the credit by $7-$8 million. The
high end of the dollar value attached to this provision could be
two or three times that.
1:08:49 PM
REPRESENTATIVE SEATON asked whether this would also be the case
for developing a field of 750 million barrels as modeled by DOR.
MR. ALPER responded that plausibly, yes, there could be a much
larger number. What would have to happen is that the large
field would get developed and then be operated at loss. While
that would be an awkward circumstance it certainly could happen,
especially in an individual year. A company making an
investment that size is not going to be anticipating losses, but
that size field would be 100,000 barrels a day or roughly 35
million barrels year. Those 35 million barrels with a 20
percent gross value reduction, or a 30 percent GVR in the case
of a high royalty field, could be a fairly substantial increase.
He therefore concluded that he might need to revise what he said
to Representative Talerico in the context of a big field
operating at a loss.
1:10:16 PM
REPRESENTATIVE TARR, given that a 750 million barrel field would
take several years to get to production, questioned whether a
single year isolated in that multi-year project would be that
dramatically different. Although, she continued, that has been
seen when looking at the last few years. She requested Mr.
Alper to speak to how a company might adjust its activity to
reflect a scenario like today where there was a very rapid
decline in price in a very short amount of time, but the company
still decided to go forward with that sizeable development.
MR. ALPER answered that he thinks the more likely circumstance
is that the price happens after the field is done and in
production. So, the investment would have been made, the
company is in production, and suddenly there is a major price
collapse. He did a quick calculation: 35 million barrels a
year at a gross value of $40 per barrel would equal a total
gross value of $1.5 billion; 20 percent of $1.5 billion is $300
million. If that $300 million is used to increase the size of
an operating loss it could increase the operating loss credit by
35 percent of that, or about another $105 million. He said he
will provide the committee with a written calculation of this
scenario since this calculation was off the top of his head.
REPRESENTATIVE SEATON requested Mr. Alper to also provide the
committee with a calculation on the 16 percent royalty, which
would be the 30 percent GVR.
MR. ALPER agreed to do so and said he will provide the analysis
in the same format as was previously presented to the committee
that describes the calculation in Section 18.
1:12:52 PM
REPRESENTATIVE JOSEPHSON noted Point Thomson was constructed
rapidly, going from tundra to fully developed field in a two or
three years, and is entitled to the GVR. He inquired whether
that would be a situation that might be problematic.
MR. ALPER responded yes, in theory. The owners of Point Thomson
for the most part have other business operations on the North
Slope, he said, so they have other production. Any losses from
Point Thomson would be offset potentially by profits from other
parts of the field. Their other production is legacy production
that does not enjoy the gross value reduction, so the amount of
GVR they would be receiving is relatively minor in the context
of their overall production profile, which is different from a
company like Caelus that has all of its production in the GVR
category.
1:14:00 PM
MR. ALPER returned to his sectional analysis. He explained that
Section 19 would harden the floor - the credits in AS 43.55.023
could not reduce tax liability below the minimum tax. It is
primarily the operating loss credit that is being talked about
here, because other provisions in the bill look at repeal of the
capital credit and the well lease expenditure credit. This is
the circumstance that would primarily refer to a major producer
that is not eligible to get cash for its operating loss credits
and so that credit is carried forward into the next year. In a
scenario of two consecutive years of low prices where there is a
loss after one year, like what is happening now, then beginning
in January of the second year a company would typically be
paying 4 percent of its gross value as a monthly tax payment,
but that could be offset by an operating loss credit. The
change proposed by Section 19 would force that company to
continue to carry forward its operating loss credit into some
future month or some future year where the prices had
sufficiently recovered to where the company could use the credit
to offset taxes but not go below the minimum tax. For as long
as things stayed at the floor level the company would have to
continue to carry forward that credit. Section 19 also proposes
to put an expiration on certain operating loss credits, such
that if this were to happen and then a company cannot use up its
credits within 10 years, the credits would be truly foregone.
The net operating loss credits would go away after 10 years if
the company was not able to use them.
1:15:47 PM
REPRESENTATIVE TARR, regarding the proposed 10-year sunset,
asked what would happen if during that time period other changes
were made to taxes that affected that company's operations. She
further asked whether those would be separated and "in the bank"
for the company regardless of other tax changes.
MR. ALPER answered that it is important to go back to the issue
of what is a credit. When a company earns a credit, applies for
the credit, and gets awarded the credit by the Department of
Revenue, it shows up in the form of a credit certificate. The
credit certificate is an asset, a thing that the company has
physical possession of that it will use to either turn in for
cash or use against its taxes. So, the answer to the question
is no, the subsequent changes would not affect the existence of
the company's certificate, the company would hold it until such
time as it had a tax liability and use it. The other option
that any company has is to sell the certificate. If the company
does not owe any taxes it can sell that certificate to a company
that does owe taxes. While a company selling a certificate
generally gets less than 100 cents on the dollar, it is able to
get value for its credit certificate.
1:17:32 PM
MR. ALPER resumed his sectional analysis. He said Section 20
works with Section 19 and would create the statutory language to
establish that there is a 10-year sunset on the existence of
certain credits.
REPRESENTATIVE JOHNSON posed a scenario in which a company sells
its credit certificate in year nine and eleven months. He
inquired whether the person purchasing the certificate would
have one month to cash the certificate, or would have ten years
from that point to cash it.
MR. ALPER replied that 10 years is the life span of the
certificate itself. So, if the certificate is sold after nine-
plus years the buyer would only have a limited period of time.
Ideally at that point the person buying the certificate is
someone who has an active tax liability at that moment.
REPRESENTATIVE JOHNSON said he wants to be clear that the
certificate expirations could not be stacked.
MR. ALPER responded that the intent of the proposed change is to
have that flow with the life of the certificate itself.
1:18:35 PM
MR. ALPER continued his sectional analysis. He specified that
Section 21 is conforming language related to Section 40 which
would repeal the qualified capital expenditure (QCE) credit in
AS 43.55.023(a). Due to that proposed change, lots of
conforming language is needed where other parts of existing law
refer to different sections in .023, especially (a). Section 21
itself does not really matter; this section of the bill has to
do with conditions under which credits can be transferred. [The
language in AS 43.55.023(e)] states, "Subject to the limitations
set out in (a) - (d) of this section ...." He said "(a) - (d)"
would be changed to read "(b) - (d)" because (a) is no longer
going to exist. Thus, it is a conforming change that reflects
the repeal of (a) elsewhere in the bill.
MR. ALPER said Section 22 is new statute, is important, and is
language that DOR developed with the Department of Natural
Resources (DNR). He explained that existing exploration credit
statutes require certain data to be provided to [DNR] as a
condition of receiving those credits. Generally, this data can
be made public after 10 years and most is seismic data, but also
some downhole wellbore-type information. One of DNR's concerns
with the impending sunset of the exploration credits, many of
which are going away this July regardless of HB 247, is that DNR
will not be able to get that data and make it public any longer.
That data is used by DNR as a marketing strategy for selling
leases in Alaska's oil patch. Section 22 says that a recipient
of the remaining credits that exist in law, the net operating
loss credit primarily, would be required to provide its
comparable geological data to DNR so that the data can then be
made public 10 years later.
1:20:57 PM
REPRESENTATIVE JOSEPHSON asked whether the thought is that if
the owner of the data did not use it to some benefit within a
decade it might as well be made into transparent public data.
MR. ALPER answered that in general the data was bought in part
with a state resource, the credit money, and therefore the
thinking was that the state gets something tangible in return.
The sharing of the data with DNR for DNR's internal confidential
purposes is part of general statute and that is not going
anywhere. What is specific here is that that data becomes
public in 10 years and DNR can share it. He said he was
previously concerned this might lead to too much data, such that
new computers would be required to be able to deal with it.
However, in a conversation with DNR a day or so ago he learned
that for the most part DNR is already getting the data. What
would be changed is the terms and conditions under which it
could be shared and made public.
1:22:05 PM
MR. ALPER turned back to his sectional analysis, noting that
changes for the hardening of the tax floor are made in various
places in the bill because the floor is being hardened versus
multiple credits. Section 23 would make a change to the small
producer credit in AS 43.55.024(g). This credit can be received
by producers that make less than a certain volume of oil or gas
and this credit maxes out at $12 million. This credit can
currently be used on the North Slope to reduce tax liability
below the minimum tax all the way down to zero. The proposed
change in Section 23 would force small producers to pay at the 4
percent level and not be able to use that credit to go below.
MR. ALPER specified that Section 24 is another floor hardening
provision that describes the $5 per-taxable-barrel credit under
AS 43.55.024(i), which is the analog to the sliding scale
credit. The sliding scale credit of $0-$8 is for legacy oil,
the old fields that are paying the minimum tax. The so-called
new oil that gets the $5 per-taxable-barrel credit can be used
by a company to go below the minimum tax. Section 24 would
change that so new producers would also have to pay at the
minimum tax level regardless of the price of oil.
MR. ALPER noted that Section 25 [would amend AS 43.55.025]
relating to exploration credits, to the extent that these
credits still remain. If on the North Slope those credits could
not be used to bring the tax payments below the minimum tax of 4
percent of the gross. Sections 23, 24, and 25 are of identical
structure and would just specifically change three different
credits to say that the credits cannot be used to go below that
4 percent floor level.
1:24:31 PM
REPRESENTATIVE JOSEPHSON, regarding Section 24, understood it is
not DOR's position that this falls under the arguably
inadvertent category. In other words, it was understood by the
committees in 2013 that along with the privilege of the GVR
there would be yet another privilege attached to it where the
tax could drop beneath the 4 percent floor.
MR. ALPER replied yes, absolutely. He said he remembers the
hearings before the House Resources Standing Committee. The
language evolved, but when the sliding scale credit was
introduced in the final committee substitute, because AS
43.55.024(i) had also previously been a $5 credit (i) very
explicitly said it could not be used to go below zero. And (j)
said it could not be used to go below the minimum tax
calculation, the reference to AS 43.55.011(f) which is the
minimum tax on North Slope oil. This was very much intentional.
1:25:45 PM
MR. ALPER recommenced his sectional analysis. He said Section
26 proposes several changes that talk about limitations and
being able to use credit certificates. This is not about
earning the credits, the credits are going to be earned, the
work is going to be done, and the company is going to have these
certificates. The follow up here is whether the company can use
them open-endedly to get cash. For a company in the category of
50,000 barrels or more, the answer is currently yes, it is an
open-ended ability. Section 26 would add several different
limitations to that. [Currently], if a company owes taxes to
the state it cannot get paid the credits. First the company
must use the credits to pay its taxes or DOR will pay them for
the company by holding back the credits sufficient to pay the
tax liability owed by the company. The intention here and
elsewhere in the bill is to expand upon that to say if a company
owes other obligations to the state - such as a royalty, lease
payment, or a fine - the state would be able to use a tax credit
payment to pay that off. The first part of Section 26 [would
amend AS 43.55.028(e)(2)] to conform to that intended change.
The language, "the applicant does not have an outstanding
liability to the state", would be amended by deleting the words,
"for unpaid delinquent taxes under this title", thus broadening
it to all unpaid liabilities to the state. This change is small
and conforming, but meaningful.
1:28:47 PM
The committee took a brief at-ease.
1:29:11 PM
CORRI FEIGE, Director, Central Office, Division of Oil & Gas,
Department of Natural Resources (DNR), addressed Section 22 in
regard to the addition of the data coming into DNR and when the
existing tax credit programs expire. She said DNR did some in-
house due diligence on that and determined that it would not
create extra volume of data for the department. Something that
DNR would like members to be aware of because it will be
material, is that this would now be taking production data,
development data, and making that data public, as opposed to
just the exploration data. That is one key difference going
forward. However, in terms of the volume of data, the division
currently does receive all of the production data and
development data, but it is just not made public at this time.
This language proposes to change that, and that data would now
become public as well as any exploration data.
1:30:37 PM
REPRESENTATIVE SEATON understood Ms. Feige to be saying it is
not the same data of well or seismic exploration, but additional
data for a company's current operations, as on page 18, line 9,
of the bill.
MS. FEIGE clarified that currently under the tax credit programs
the division receives exploration, well, and seismic data.
Moving this language into the new legislation would allow DNR to
continue to receive the exploration, seismic, and well data when
the tax credit programs expire, and that data will continue to
go public. What will be new is that any seismic data that is
acquired within an existing producing unit, any production well
data acquired within a producing unit, would also now become
public. Under current statute the unit data that is collected
is considered development or production data, not exploration
data, and that information as well as the seismic data is
currently held confidential into perpetuity. The division
receives that data under other statute and under the lease and
permit requirements.
REPRESENTATIVE SEATON asked Mr. Alper whether the intent of
Section 22 is to make it be all future production data, not just
the seismic or well data that was the basis of the credits.
MR. ALPER responded that his understanding of the intent was to
replicate the data that the division is currently receiving that
it would not be able to receive simply because those exploration
credits are sunsetting. He said he is not personally aware of
the net being broadened into additional data. He deferred to
the Department of Law to provide clarification.
MARY HUNTER GRAMLING, Assistant Attorney General, Natural
Resources Section, Civil Division (Juneau), Department of Law
(DOL), drew attention to page 18 of the bill, lines [3-4], which
state, "A producer or explorer shall comply with the notice and
information provision requirements in AS 43.55.025(f)(2) ...."
She explained that (f)(2) currently applies only to explorers
seeking credit under that section. This would move those
requirements to explorers or producers seeking a net operating
loss credit, in effect, so it would potentially broaden that.
She offered her belief that the administration would be willing
to work to narrow that if that is the intent of the committee.
1:34:17 PM
REPRESENTATIVE JOHNSON understood that this is an existing unit
and the state would get additional information. He asked why
that would need to be made public unless the state was trying to
sell a unit out from under someone.
MR. ALPER answered he is not personally familiar with what DNR
has previously received in exploration credits. He offered his
understanding that what Ms. Gramling said is that because the
language is being moved from the exploration credits section,
which is quite explicit to only being new areas at the fringes,
and attaching the requirement to the data to the operating loss
credit, it is in effect putting those requirements on anything
that earns the operating loss credit, which would then include
the stuff inside the units. He said he does not know what the
public purpose in making those things public in 10 years is and
suggested that it might be an inadvertent byproduct of trying to
make this change of trying to protect DNR's interest of
continuing to get the exploration and seismic data for DNR's
planning purposes. The expectation is those activities with the
sunset of the exploration credit will still be seeking operating
loss credits, so the hook to continue to get that data for those
expenses has to be somehow attached to the operating loss
credit. It is not the administration's desire to get that data
from these other things, it sounds like it is an inadvertent
byproduct of the way the bill was written.
REPRESENTATIVE JOHNSON said his concern is the part about making
it public and what purpose it serves unless it is to remarket
the unit to someone else. His concern is about the kind of
confidence that would be instilled in people trying to buy
leases from the state, so he would like to revisit this.
MR. ALPER agreed and reiterated that that is not the
administration's intent. A lot of the seismic data received by
DNR is not necessarily shot inside someone's unit boundaries, he
continued. The department has an excellent network of data that
goes all over the North Slope; DNR uses that data to market the
unleased areas of the state. Obviously no one is in a position
to lease something that is already leased. However, if the
state has information that is inside somebody's line it might
help lure someone to buy a lease on the other side of the line.
REPRESENTATIVE JOHNSON remarked that if he is feeling a little
paranoid then he cannot imagine what the industry is feeling.
He stated for the record that it is not the intention to do this
as part of the public record, but is more than likely an
oversight in the drafting of this legislation.
MR. ALPER agreed and said the intent of Section 22 is to
preserve the information that DNR currently gets from explorers
and find a mechanism for DNR to obtain data with the expectation
the exploration credits themselves are sunsetting. Anything
beyond that is an inadvertent byproduct of the drafting.
1:38:09 PM
REPRESENTATIVE TARR observed that page 18, line 8, of the bill
states that the Department of Natural Resources "may" publish
this information. She surmised this leaves it up to DNR to
describe whether that information would be made public after the
10-year period.
MR. ALPER replied that that is his understanding, but requested
that Ms. Feige be able to answer the question.
MS. FEIGE responded that up to this point the department and the
division have exercised the ability to make that exploration
data public. Whether there is potential for commercial harm is
always considered. For example, if a company has well data and
there is unleased lake acreage on one side or adjacent to a
block, the company can request an extended period of
confidentiality on exploration well data to preserve its
commercial interest. In many cases the division has granted
those extensions. However, there is no ability to request
extended confidentiality for seismic data acquired under the
credit programs. Typically seen are very broad surveys run over
very large regional areas. Also, brokers could have much older
vintages of data in areas and those areas will often overlap.
She said she does not know of a situation where the seismic data
has been set aside and not considered for being made public,
unless it is on private lands or some other aspect that removes
it from the division's ability to make it public. The division
is only now in the process of publishing and making available to
the public the very first releases of seismic data under those
credit programs. That data was collected in 2004 and 2005.
REPRESENTATIVE TARR understood that because the credits go away
this provision would provide a mechanism to get the information.
The division, however, would have the ability to control what
information is released.
MS. FEIGE answered correct. The division would have to work
with DOR in making sure that DNR could put together a list of
projects that will have data that comes available. That becomes
more problematic when talking about development data and the in-
unit data because of the confidentiality associated with even
claiming a tax credit. So, as mentioned by Mr. Alper, the
division would have to work together with DOR to ensure that
only the exploration data is captured and meeting the intent of
the data release as it is defined in the current exploration
credit programs.
1:42:20 PM
REPRESENTATIVE JOSEPHSON noted that Section 22 is an entirely
new section. He understood Ms. Feige to be saying that DNR
currently has some discretion, it writes the regulations and
reaches some sort of agreement with the producers. He recalled
Ms. Feige stating that the division works with the producers
wanting an extension of confidentiality. He inquired whether
this is how Ms. Feige sees this provision working as well.
MS. FEIGE replied no. She explained that presently the division
would receive a request from an explorer; for example, an
explorer that drilled an exploration well. Only the exploration
well data qualifies for an extension of the confidentiality
period. At present, well data is held confidential for a period
of two years. If the explorer feels there would be potential
commercial harm to itself or some other factor where the
explorer would be harmed by the release of that exploration well
data, the explorer can, under statute, apply to the division to
have an additional 24 months of confidentiality placed on that
well data. The division sees that fairly routinely, for example
a lot of the Native corporations would like their well data on
their lands held confidential. Where exploration seismic data
is concerned, that data cannot be extended under the credit
programs and it is released at the end of the 10-year period.
1:44:12 PM
REPRESENTATIVE SEATON requested that DNR, DOR, and DOL work
together to develop and submit a narrowed version of Section 22
to just simply extend the current data and disclosures.
CO-CHAIR NAGEAK asked Mr. Alper whether this can be done.
MR. ALPER requested an at-ease so he could check with DOL.
1:44:47 PM
The committee took a brief at-ease.
1:45:14 PM
MR. ALPER responded that a narrowed version can be done, but
confirmation with the governor's office is needed before an
amendment can be proposed, which is the nature of the amendment
process. He said he presumes the ability would be given.
REPRESENTATIVE TARR, in regard to what the state gets for the
credits, said this changes the value in her mind and she would
like to better understand that piece of it. She surmised that
this information can be used for further development or leasing
work, so a monetary value could be assigned to that.
MS. FEIGE answered that the division has done a "back of the
envelope" estimation of what it would cost the state to acquire
the seismic data that up to this point has been received through
credit programs. She elaborated that it was a high level
planning number and was presented during Senator Giessel's 2015
tax credit working group presentations. She agreed to provide
the committee with the numbers calculated for that acquisition
value for both the North Slope and the Cook Inlet.
1:46:58 PM
CO-CHAIR NAGEAK asked that members submit their requests in
writing to the committee co-chairs so that the co-chairs can
then share the information with every committee member.
1:47:16 PM
MR. ALPER returned to his sectional analysis and continued his
review of Section 26. He specified that this section is the
limitations on the state purchasing credits under AS
43.55.028(e). He drew attention to page 19, lines 15-17, of the
bill which state: "(4) the applicant's average daily production
of oil and gas taxable under AS 43.55.011(e) during the calendar
year preceding the calendar year in which the application is
made was not more than 50,000 BTU equivalent barrels". He said
this is the large producer exception [in current law], under
which a producer of this size cannot get cash for its credits
and must instead roll its credits forward and use them against
future liability.
MR. ALPER said Section 26 would add two other restrictions, the
first proposed restriction being in paragraph (5) which provides
that if a company's revenue from its overall oil and gas
business worldwide during the previous calendar year was greater
than $10 billion, the company would not be eligible to get cash
for its credits. The company would have to hold its credit
certificates on its books until the future date when it has a
tax liability and then use the certificates to offset its taxes.
He noted that companies of this size are comparable in size to
Alaska's major producers that are unable to get cash for their
credits anymore and must save them until they have a tax
liability. The second proposed restriction is in paragraph (6)
which establishes a limit on credit repurchases of $25 million
per company per year. That would be the cap on how much cash
money the state would pay every year to each company, regardless
of how much the company had in possession in tax certificates;
the rest the company would either sell to a third party or carry
forward and use in the next year. Mr. Alper noted that in
regard to the 10-year sunset there is a first in/first out
provision so that the older credits would be able to be used up
first so as not to get sunset, and the new ones coming in later
would keep the clock rolling further into the future.
1:49:47 PM
REPRESENTATIVE TARR recalled that discussion has occurred on the
idea of additional restrictions on who is eligible for the
credits and perhaps making it phased to final investment
decision, or something like that. She asked whether Section 26
is the appropriate place for fitting in something like this.
MR. ALPER replied that to a certain extent it is the other half
of the equation of possible restrictions on who can earn a
credit tied to current status of having a plan of development or
some sort of pre-approval process (which was discussed
internally but did not get into the bill) that the Department of
Revenue would apply for a company getting a project approved
before it could earn a credit. That would be on the half of
earning the certificate, he advised. The changes made by
Section 26 are relatively silent on who is earning the credit;
they are relevant to when the company has the credit and how the
company would get cash for it. He said he thinks the two are
important factors in a broader reform effort potentially, but
they are opposite sides of the same coin.
1:51:12 PM
REPRESENTATIVE JOSEPHSON observed that page 19, line 11, of the
bill would delete the language "for unpaid delinquent taxes
under this title". He inquired whether this is a solution in
search of a problem and whether this is happening a lot. He
said he assumes that if royalty is due on January 1 or March 31
it gets paid, so he wonders what is being dealt with here.
MR. ALPER responded that this is not something that was an
historic problem. It is being witnessed in the environment of
bankruptcies in the industry, where if a company is having
severe cash flow problems and potentially heading towards
bankruptcy it might not make that royalty payment or that annual
lease payment, or the company might have a fine that it is not
paying. But yet the company might just from the timing of
things have the expectation of receiving a tax credit payment
from state. Should the company receive that payment in whole it
is up to the company's discretion, or if the company is in
bankruptcy it is the court's discretion, as to where that money
might go and it might never make it back to the company's
obligations to the state. Generally there will be a secured
creditor or someone in position in front of the state. Several
interlinked provisions in HB 247 speak to this outstanding
liability to the state. The intent is to ensure the state is
made whole before the credit leaves the state system and is paid
to the company. Mr. Alper recounted that there has been
pushback that this could be interpreted too broadly, that it
could be used to hold back a credit certificate for someone who
is a legitimate protestor or in a legitimate appeals process
against a tax assessment. He said DOR is prepared to talk about
and consider that point, but that is not why the department
wrote this. The department wrote this not for the reputable
companies that are continuing to go about their business and
paying everything that they owe, but for those who are more at
the margins to protect the state's interest.
REPRESENTATIVE JOSEPHSON asked whether there is some quick
appeasement that could be offered where there is a statutory
section that talks about legitimately disputed royalty or tax.
MR. ALPER answered that the language that is amended throughout
the bill takes the sections that say "outstanding liability to
the state for unpaid delinquent taxes", a well understood
concept, and gets rid of the words "for unpaid taxes". So, it
leaves the words "outstanding liability to the state" and then
Section 39 adds a new definition of "outstanding liability to
the state" after the definition section inside the broader
revenue statutes. What Representative Josephson is speaking to
would require some sort of tightening or limitation on that
definition and that is where the fix would be if there is a need
for a fix or a need for some additional certainty that this
provision would not be overused.
1:54:39 PM
MR. ALPER, responding to Representative Johnson, read Section 39
aloud: "'outstanding liability to the state' means an amount of
tax, interest, penalty, fee, rental, royalty, or other charge
for which the state has issued a demand for payment that has not
been paid when due and, if contested, has not been finally
resolved against the state." He allowed that this could be
interpreted to include a regular tax assessment that may be in
the appeals process. He said that if the committee's intent was
to not include that sort of thing, then in his opinion that is
the portion of the sentence the committee would look to amend.
1:55:26 PM
REPRESENTATIVE TARR inquired whether DOR would consider
something that is in an appeals process as being an unpaid
liability rather than in appeals status.
MR. ALPER replied that the decision would be made by the appeals
group that looks to these things. To him, a demand for payment
that has not been paid and is being contested almost perfectly
defines what DOR's tax assessment process looks like. At the
end of an audit, DOR will say to Company X that it owes $5
million and Company X will say it does not, and then it goes to
appeals. That is a demand for payment which has not been paid
and is being contested. So, as he reads this definition, that
appeals process would fall under this expanded definition.
1:56:20 PM
REPRESENTATIVE HERRON asked whether this new proposed definition
is only for Title 43 or is broader than that.
MR. ALPER responded that under current law any tax owed under
Title 43 can already be used to offset the credit. The language
proposed to be deleted, "for unpaid delinquent taxes under this
title", refers to all of Title 43. Getting rid of this language
would broaden it to all chapters. The main chapter is 38, which
is where the royalty and DNR-type payments come in.
1:57:09 PM
MR. ALPER returned to his sectional analysis. Section 27, he
said, would add another restriction on the ability to repurchase
credits, so it would be AS 43.55.028(j). It would scale the
buyback of a credit certificate to Alaska hire such that the
percentage of the certificate purchased by the department could
not exceed the percentage of the applicant's workforce in the
state. The workforce would include resident workers by the
company as well as its contractors. The portion not paid back
would be carried forward and used against the company's tax
liability. For example, a company with 70 percent Alaska hire
and a certificate of $10 million would be given $7 million by
DOR and the other $3 million would be carried forward and used
against future taxes.
1:58:12 PM
REPRESENTATIVE TARR noted her support for the concept of Alaska
hire. She posed a circumstance where the technical expertise of
a skilled worker is needed, but such an individual is not
available in the Alaska workforce. She asked how a company
would be able to address that.
MR. ALPER answered that there is no such waiver provision in the
bill as written. It would likely be technically complicated to
do, but it certainly could be written. In practical terms the
company being described by Representative Tarr might have 95
percent Alaska hire or less if it had to bring up a team of
special project experts from Outside. That is a consideration,
he allowed, but the reality is that hopefully those numbers will
not get to the number where it is a severe burden on the
payback. If people limited their out of state hiring to where
they absolutely have to, hopefully they would be getting 90
percent or more on their money. He pointed out that it is not
taking the money from anyone, that money remains in the
certificate and gets rolled forward and used against tax
liability. When the inevitable constitutional challenge occurs,
DOR is hoping that it is not taking cash from anybody's pocket,
it is just changing the way in which it is being given to them.
REPRESENTATIVE TARR commented she wanted to understand this
provision better given there is concern over whether there would
be a challenge.
1:59:59 PM
REPRESENTATIVE SEATON, regarding Section 27, surmised that it
would still be a transferable credit that could be sold to
another company for that company to apply to its tax liability.
MR. ALPER replied he expects it would be sellable and the buyer
would be able to cash it in. He deferred to Ms. Gramling to
further answer the question.
MS. GRAMLING offered her understanding that the credit not
purchased by the state under this provision would still be a
transferrable tax credit certificate. By not purchasing 100
percent of the credit, the state might be actually helping the
market for these certificates. A distinguishing factor of this
provision compared to other tax credit limitations that may have
tried local hire in the past is that here the repurchase of
credits is not integral to the calculation of the tax, the
company earns the credit amount. So, this provision is limiting
how the state invests its money. An important distinction here
is that the credit certificate is still available for future use
if the company had a tax liability, and if the company could
sell the remaining portion to another company that had a tax
liability then that other company could apply it against its tax
liability. Transferable tax credits if they are sold can only
be used against tax liability, the person buying it cannot then
ask the state to purchase it.
2:02:21 PM
REPRESENTATIVE JOSEPHSON inquired whether it is true for all
transferrable credits that they must be used against liability
in every instance in Alaska statutes.
MS. GRAMLING responded she is unsure about film tax credits
which were purchasable by the state, but production tax credits
that are transferable can either be used against tax liability
by a company that buys them or by the company that earned them.
If the company that earned them does not transfer them to
another producer and does not have tax liability, then that is
when the company is applying to the state for repurchase.
REPRESENTATIVE JOSEPHSON asked whether the purchaser of the tax
credit [certificate] would be obligated to do local hiring.
MS. GRAMLING answered no, under existing law a person purchasing
a credit from another producer cannot then apply to the state to
repurchase that credit; it would have to be used against the
person's tax liability. That would remain unchanged.
REPRESENTATIVE JOSEPHSON understood that a company could sell
off part of the credit.
MS. GRAMLING replied correct.
REPRESENTATIVE JOSEPHSON surmised that this entire endeavor
could be undermined by a company saying, "Well, all we can do is
85 percent, we'll just sell the other 15 and we'll collect ...
90 cents on the dollar and we don't have to do this local hire."
MS. GRAMLING responded that basically the credit still has
value, it is just whether or not the state would be repurchasing
it. The local hire provision would kick in when the state
repurchases a credit.
2:04:31 PM
REPRESENTATIVE SEATON remarked that trying to promote local hire
has always been problematic. While a little complex, he
continued, it seems like this is probably the first legal way
for the state to take out of the treasury and pay on the
percentage of local hire but still not take away the tax
credits. The credits would still be available to the company to
sell to someone else that does have a tax liability. He said
he is interested in hearing more comments from industry and that
it could be off the record.
2:06:13 PM
CO-CHAIR TALERICO commented that the state got wrapped around
axle in the 1970's when building the Trans-Alaska Pipeline
System. He said he sees these tax credits being connected to
just doing the business of the oil industry, which is the same
thing being done when building the pipeline. He recalled the
state knowing it was as "right as rain" until it got to the
[U.S. Supreme Court] and the court disagreed. Therefore he has
huge questions about putting any type of Alaska hire preference
in the bill because of the legal challenges, and added that it
is an obviously glaring issue to him.
MR. ALPER agreed with Co-Chair Talerico that it would inevitably
be challenged. However, he said, the decision before the body
is whether the state wants to fight that fight right now. In
regard to Ms. Gramling's statements, he clarified that any
company can get cash for the credits it earns, except for the
three major producers or the new restrictions that would be
added. A tax credit that is purchased can only be used to
offset tax liability - a bought credit cannot be cashed in.
2:07:54 PM
MR. ALPER resumed his sectional analysis. He pointed out that
Sections 28, 29, and 30 are all conforming. By repealing the
qualified capital expenditure credit in AS 43.55.023(a), and in
some places the well lease expenditure credit in AS
43.55.023(l), conforming language is needed. Other sections
that refer to those credits or to those sections need to be
modified slightly to get rid of the (a) and (l) subsections so
there is not stray language in statute. Section 28 refers to
the provisions for being able to assign a tax credit to a third
party, a power that was added to statute about three years ago
that enables DOR to pay the money directly back to banks in
certain circumstances. Section 29 refers to the annual
statement, the tax return that everyone has to pay in March
based on the previous calendar year. Clarifying language is in
there to say there is no longer going to be a qualified capital
expenditure credit. As is being seen in other legislation this
session, attorneys do not want to embed the definition inside a
substantive piece of legislation. If a term needs to be defined
it should be sitting out in a definition section. Right now
within AS 43.55.023(a), within the qualified capital expenditure
credit section of statute, there is an existing definition for
what a qualified capital expenditure is. So, when repealing
.023(a), when repealing the credit, also being repealed is the
definition of what is a qualified capital expenditure. However,
there is value to having a definition of qualified capital
expenditure, a definition is needed for other purposes, and
therefore Section 38 would add a definition of qualified capital
expenditure. It is not a new definition, it is the same
definition syntactically as what is currently in .023(a), it is
just being moved into the general definition section inside the
production tax statutes. Section 29 repoints this term,
"qualified capital expenditures," to the new definition rather
than to the old definition that is being repealed.
2:10:25 PM
MR. ALPER noted that Section 31 is substantive and was defined
and modeled in his previous presentation. Section 31 would
provide that the gross value at the point of production cannot
be less than zero. That is in the section that is really about
tariffs and allows deductions for transportation to allude to
this thing called gross value at the point of production, which
is really wellhead value. It is the value of the oil or gas
minus the cost of getting it to the point of sale, therefore it
is the value at the point at which it was produced. The point
of production for oil is defined as basically Pump Station 1, at
the input to the Trans-Alaska Pipeline System in the North
Slope. Mr. Alper reminded members that DOR provided a specific
example of a very high tariff field, or remote field, or field
that for whatever reason has a higher tariff than the value of
the oil itself. The department considered the possibility that
in a period of extended low prices Point Thomson could plausibly
have a wellhead value of less than zero, and Section 31 would
say that it must be rounded up to zero at the field level so
that negative number cannot be used to offset positive values
elsewhere on the North Slope for taxation purposes.
2:11:46 PM
MR. ALPER moved to Section 32 and recalled that during the 2007
debates on Alaska's Clear and Equitable Share (ACES) [House Bill
2001, Twenty-Fifth Alaska State Legislature] there was a
provision of the ACES tax called the standard deduction. The
standard deduction was a limitation on lease expenditure
inflation. More or less, a cap was put on how much a company
could charge for operating expenditures based on what it had
charged the previous year. This created a little bit of
certainty because of some anxiety within a critical mass of the
legislative body at the time that there would be unchecked
inflation and deductible lease expenditures that might erode
whatever benefits the state was getting from a switch to a net
profits tax. This standard deduction provision passed by a
single vote as an amendment in both bodies. As a provision of
law it did create certain restrictions on deductible lease
expenditures with a built-in three-year sunset. Beginning with
2010 that old law was no longer in effect and there have been no
limitations on deductibility, but those sections still survive
in statute. The repealer section of HB 247 repeals a bunch of
old statute that is no longer needed and Section 32 conforms to
that. It would get rid of a sentence that says, "Except as
provided in (j) and (k) of this section," and then continues on
with the rest of the substantive language. Since allowable
lease expenditures are what is being talked about, this
correction for the old standard deduction limitation is no
longer needed and the limitation can now be ignored and safely
deleted. So Section 32 is conforming to that change.
2:13:30 PM
MR. ALPER noted that Sections 33-36 are much the same as 28-30.
They are conforming to the elimination of the qualified capital
expenditure credit or, in most cases more precisely, conforming
to the moving of the definition of qualified capital expenditure
from where it used to live inside the credit itself and to the
new definition section that is being added in Section 38 of the
bill. Drawing attention paragraph (18) on page 24, line 11, of
the bill he explained that these are the existing restrictions
on deductions, things that are not considered allowable
deductions for purposes of taxation. Paragraph (18) talks about
what is known in the industry as the "30-cent haircut provision"
that says the first 30 cents per barrel of capital expenditures
cannot be counted because it in some ways is a proxy for routine
maintenance. The words "as defined in AS 43.55.023" are being
deleted from paragraph (18) because the definition has been
moved and is no longer in that location. This is the sort of
conforming changes seen in Sections 33-36 that do not in any way
change the substance of the purpose of the underlying bill and
the law as it is being implemented; it just re-corrects to the
idea that qualified capital expenditures themselves are being
defined in a different part of law.
2:15:24 PM
MR. ALPER pointed out that Section 37 is the one he modeled when
talking about the municipal utility that has its own gas and
what happens if the municipal utility is selling a small portion
of that gas to a third party. It in some ways is an advertent
language in existing law that says if a utility sells 1 percent
of its gas and has a relatively small amount of revenue from
that, the utility could, as interpreted, offset all of its costs
against the small amount of the revenue and create what could
potentially be very large operating losses for a utility that
operates as a break-even nonprofit. Section 37 would correct
that. Current law [AS 43.55.895(b)] states, "A municipal entity
subject to taxation because of this section is eligible for all
tax credits under this chapter to the same extent as any other
producer." Section 37 would change this language to make it be
proportionate to the utility's production that is taxable. For
example, if only 2 percent of a utility's production is taxable,
the utility would get 2 percent of its credits. This would
ensure that the municipal utility does not get credits that are
out of scale with the amount of production that the utility is
actually selling, given that only the production that the
utility sells is subject to the tax. The production that is not
sold and burned in the utility's turbines is not taxable.
MR. ALPER reminded members that Section 38 is the new definition
of qualified capital expenditure. He explained that this
lengthy definition refers back to the Internal Revenue Service
(IRS) code because when talking about capital in the federal tax
code it is depreciable that is being talked about. It is
treated for tax purposes different than an operating expense
because its cost is taken over multiple years. The State of
Alaska does not use that type of tax treatment, the state does
not depreciate inside the production tax. The state does
however piggyback on those IRS definitions to be able to define
capital expenditure, and that is what this language is. It is
not new language, it looks new because it is in a new section,
but it is actually copied almost word for word from another
definition that is in another portion of the law that is being
repealed because of another change made by this bill.
MR. ALPER said Section 39 is a new definition of "outstanding
liability to the state." This is relevant to the ability to
hold back credits if the company owes a royalty or other payment
to the state. Those conforming changes being made in multiple
other portions of the bill are conformed with here through this
new definition of what exactly is an outstanding liability to
the state. As discussed earlier by the committee, there might
be a desire to narrow that somewhat so that a legitimate in-
process appeal would not fall within the definition.
2:18:39 PM
REPRESENTATIVE TARR, because the qualified capital expenditure
(QCE) credit is going away, asked whether the definition in
Section 38 would limit what a company could claim as its capital
expenditures for purposes of transportation cost, capital
expenses, and operating expenses. She further asked where that
definition would be applied.
MR. ALPER answered that multiple other places in statute refer
to qualified capital expenditures for other than credit
purposes. Generally those are referenced in the conforming
statute where it says operating and capital expenditures and
those definitions must be referred to. Because there will be no
qualified capital expenditure credit there will not be much of a
substantive cash definition between the two anymore. One
exception would be the "30-cent haircut" provision on page 24 of
the bill that says the first 30 cents per barrel of capital
expenditures is not deductible under current law; that was part
of the production profits tax (PPT) negotiations in 2006.
REPRESENTATIVE TARR understood that this particular QCE goes
away but this particular definition for purposes of this bill
would be applied to that section and would limit what can be
considered for the cost that that 30 cents is applied to.
MR. ALPER replied correct. Any place in statute where the term
qualified capital expenditures is used would now be defined by
this new definition in Section 38. The definition is no
different, just the location. The only place it would have a
dollar value impact with the repeal of the QCE credit would be
this 30-cent haircut section. There may be others, he said, but
he cannot think of them off the top of his head.
2:20:28 PM
MR. ALPER continued his sectional analysis. He said Section 40
is a long repealer section, some being cleanup language. He
recalled referring in his other testimony to some of the old
applicability language that comes from Senate Bill 21 [passed in
2013, Twenty-Eighth Alaska State Legislature] that said "part A
refers to oil produced before 2014 and part B refers to oil
produced after." Since it is now after 2014 the old language
referring to the before is no longer needed. He brought
attention to the actual language in Section 40 that begins on
page 27 of the bill: "AS 38.05.180(i); AS 41.09.010, 41.09.020,
41.09.030, 41.09.090; AS 43.20.053(j)(4); AS 43.55.011(m),
43.55.020(a)(1), 43.55.020(a)(2), 43.55.023(a), 43.55.023(l),
43.55.023(n), AS 43.55.023(o), 43.55.028(i), 43.55.075(d)(1),
43.55.165(j), and 43.55.165(k) are repealed." He explained that
the statutes in Title 38 and Title 41 refer to the older DNR
exploration credit that has not been used in many decades that
[the administration] is looking to repeal proactively while now
allowing DOR's exploration credits to sunset. They no longer
have any value and are not being used.
MS. GRAMLING, at Mr. Alper's request, discussed the next two
statutes that would be repealed under Section 40. She explained
that AS 43.20.053(j)(4) is the definition of unpaid delinquent
tax. This statute would no longer be necessary because the bill
broadens that requirement to outstanding liability to the state.
She offered her belief that AS 43.55.011(m) is a now-out-of-date
tax treatment for Cook Inlet that has not been applicable since
2011 or 2010.
MR. ALPER stated that AS 43.55.020 in general is the monthly
installment payment section for how to do that calculation prior
to 2014 before the changes in Senate Bill 21 took effect. So it
would be repealing language that refers to older production that
is no longer relevant. He explained that AS 43.55.023(a) is the
qualified capital expenditure credit and AS 43.55.023(l) is the
well lease expenditure credit south of 68 degrees latitude.
Since these statutes are the credits themselves, they are the
most essential repealers to the bill itself.
MS. GRAMLING related that AS 43.55.023(n) is a conforming repeal
to the repeal in (l) of the well lease expenditure credit. She
said AS 43.55.023(o) is the actual definition of qualified
capital expenditure, but explained that the definition is still
needed in existing law. Instead of leaving (o) when qualified
capital expenditure is not referenced in .023 anymore, it is
being moved to the definition section in the chapter generally.
The actual language in that definition is unchanged; the
subsections have changed a little due to drafting requirements,
but the substance of the definition is unchanged. She offered
her belief that the AS 43.55.028(i) repealer is a definition
related to the repeal of the QCE credit. This section says the
qualified capital expenditure has the meaning given in AS
43.55.023, but that definition is no longer needed since it is
being taken out of .023 and moved to the general definitions
section. She offered her belief that the repeal in AS
43.55.075(d)(1) is also just a definition change. She lastly
noted that repeal of AS 4.55.165(j) and (k) is the standard
deduction, which is language that is no longer applicable.
2:26:20 PM
MR. ALPER stated that Section [41] is the applicability section.
As these changes are made, he explained, it must be ensured that
regardless of the effective date the things that are already in
existence can continue to be in existence. For example, the
bill is only making the changes applicable to production after
the effective date. So, if a company does the work before the
effective date, even if the company applies for the credit after
the effective date, the company still earns the credit because
the work was done before the effective date. Section 41
clarifies that the effective date has to do with the work, not
with the application. Also, in the event of the 10-year sunset,
10 years from what? For the purpose of determining the last
calendar year that a credit can be used, it provides that
existing credit certificates would start their clock at the
effective date of the bill, whereas new credit certificates get
10 years from when they are issued.
2:27:45 PM
REPRESENTATIVE JOSEPHSON recalled that Senator Giessel's [2015]
working group recommended there be some sort of a lag time so
the rug would not be pulled out. In regard to getting credit
for the work, he asked what "work" means and further asked what
would happen if a company is half-way done with a project.
MR. ALPER explained by using an example of the repeal of the
qualified capital expenditure credit, which HB 247 proposes to
sunset on July 1, 2016. A company might be in the midst of a
project and would be able to define and say that this is the
money it spent and the work it did before July 1 and it will
qualify, but the other work might not. What is protected by
Section 41 is that many producers do not actually apply for the
credit immediately. They might keep all their paperwork and
wait until their year's books are finished and come in in March
2017 to pay and claim a net operating loss credit and file their
taxes in general for that year. Even though they are not
applying for that credit, so long as they are showing the
activities earning the capital credit were done before the
effective date, they would still qualify.
2:29:36 PM
MR. ALPER recommenced his sectional analysis. He specified that
Sections 42 and 43 are transition language, something that is
seen in a lot of bills. These sections provide that while
working toward getting the bill implemented, DOR and DNR would
be empowered to draft regulations to clarify and implement the
changes made by the bill. Oftentimes the regulation process on
a complicated piece of legislation can take up to a year.
Should those regulations come into being some months later they
could be made retroactive to the effective date of the bill so
that there are no gaps in coverage and no lack of clarity as to
what the law is during the period of transition.
MR. ALPER said Sections 44 and 45 are the effective dates. He
recalled that industry testimony brought substantial attention
to Section 44, which is the retroactive applicability of Section
17 of the bill, the only retroactive section. Section 17 would
limit the ability to use certain credits to go below the floor.
The main change is that the companies would pay the minimum tax
for all of calendar year 2016. The other change in Section 17
(c) has to do with the migrating of credits from month to month
that was modeled and explained during an earlier hearing. That
provision would likely not be relevant for this current calendar
year because the price of oil is not expected to go above $80 to
where there would be months at the minimum tax and months above
the minimum tax. Should that happen during this year then the
retroactive application of Section 17 would limit the ability of
those credits to be migrated. In January and February of this
year some companies earned, but were unable to use, the $8 per-
taxable-barrel credit. Should the price of oil spike to $120
this fall, those unused credits from now, per current law, would
be used to offset taxes on oil produced in November and
December. However, that would not be the case if Section 17 (c)
is made retroactive.
2:32:13 PM
REPRESENTATIVE HERRON inquired whether it would not be just as
well to have Sections 44 and 46 and January 1, 2017.
MR. ALPER answered that that is a choice of the committee. To
delay the effective date of the bill would affect the dollar
value; additional dollars' worth of credits would be spent by
the state in the intervening period. There are pros and cons to
that. A case could be made that it would provide a certain
amount of certainty or at least transitional certainty for works
in progress from the industry. Section 44 is a tax section; it
is the calculation that is being talked about. The one push
back he has received from his own staff is to avoid making tax
sections effective in the middle of the year because it makes
for very complicated calculations. The rest of the bill that
talks about the ability to use credits and when an activity
might get cut off does not matter quite so much and can take
effect in the middle of the year because it is tied to a
specific activity, to a receipt. Thus, if the retroactivity in
Section 44 is unpalatable, [DOR] would ask that it be moved to
January 1 of a different year.
2:33:49 PM
MR. ALPER returned to his sectional analysis. He said certain
of the sections that are more transitional language and about
doing the paperwork related to implementing the bill would be
effective immediately. It is the transitional language and the
one retroactive effective date that is being talked about in
Section 44.
MR. ALPER concluded his sectional analysis by pointing out that
Section 46 is the main effective date. The great bulk of the
provisions and changes made in the bill would take effect on
July 1, 2016, which is the beginning of fiscal year (FY) 2017.
This way, all credits earned in the next fiscal year would be
under the new regime.
2:34:30 PM
REPRESENTATIVE JOSEPHSON asked whether Mr. Alper was referring
to Section 44 when he stated that if the legislature and this
committee did not adopt the retroactivity, DOR would prefer a
January 1 date.
MR. ALPER replied that Section 44 is the retroactivity of
Section 17. Section 17 would sort of codify all of the floor
hardening provisions in general. It discusses how certain
things would not be able to be used below the floor, the
physical mechanics of that calculation below the floor. The
floor calculation, the tax calculation, is inherently annual,
and therefore it would make for a very complex tax form if the
changes were to be done mid-year. So, if January 1, 2016, was
not desirable, he would ask that it be made January 1 of a
different year.
REPRESENTATIVE JOSEPHSON commented that as cumbersome as it
would be there are tens of millions of dollars at issue.
MR. ALPER responded yes, if talking about the ability to use an
operating loss credit to go below the minimum tax. He said his
fear is that it would take a lot of conforming language because
it is currently written and described as an annual calculation.
For example, if the hardening of the floor were to occur on July
1, the so-called minimum tax would have to be somehow calculated
for the first six months of the year, allow it to be offset down
to zero, but separate it somehow from the minimum tax obligation
for the second six months of the year. While it could certainly
be done, 2007 being an example of it happening before, it is a
heavy lift. He agreed there probably are dollars in it, but
said it would put something of a burden on the staff.
2:36:45 PM
MR. ALPER turned to the two fiscal notes for HB 247, one being
identified as DOR-TAX, Department of Revenue, and the other as
DOR-OGTCF, Fund Capitalization. He explained that the fiscal
notes are in many ways complimentary to each other, adding up to
the value of the bill as far as the state's bottom-line fiscal
picture. The DOR-TAX fiscal note estimates that the bill would
bring in approximately $100 million in additional revenue for
the first two years, declining to $50 million beginning in FY
2019. The reason for that is that the bill has two different
components for raising revenue. One component is the increase
of the minimum tax from 4 percent to 5 percent. The other is
the hardening of the floor, the restriction on being able to use
credits to go below the minimum tax. The main beneficiary of
that second $50 million in the hardening of the floor really is
in the operating loss credit. Certain major producers, at least
one, had an operating loss in 2015 and may have operating losses
in 2016. Those companies will be able to use their loss credits
to reduce their payments below the minimum tax all the way to
zero in the year after they earn those credits. For the first
two years DOR sees this as being a condition. After those two
years, DOR projects the price of oil to be high enough, although
not rosy, that the major producers will at least be breaking
even or making money. Therefore DOR does not see any cash value
to the state in that particular floor hardening provision.
However, DOR does foresee being underneath the minimum tax
paradigm for the next four or five years throughout the term of
this fiscal note. That is why the $50 million revenue goes out
to the end of the fiscal note in FY 2022. The second $50
million, the floor hardening, would only be of value for the
first two years and so that is the drop-off in the value. The
other important provision in the DOR-TAX fiscal note is the
cost. The department is anticipating a cost to implement the
changes in the bill - a relatively substantial reprogramming of
a lot of different formulas in a lot of different provisions in
DOR's revenue online and tax revenue management system. A firm
estimate from the contractor is not yet in hand, but the number
of $1.5 million was put as something of a placeholder. The hope
is that should this bill move, and before it makes it to the end
of its process, DOR will be able to put a more precise number in
there for the cost of implementing.
2:40:11 PM
REPRESENTATIVE HERRON observed that the first line of analysis
on page 2 of the DOR-TAX fiscal note states that the legislation
is an attempt to "reduce the cost of Alaska's current program of
providing direct tax credit rebates and other advantages to oil
and gas companies." He asked what "other advantages to oil and
gas companies" means.
MR. ALPER answered that that is a broad term. It is talking
about things that could be used to reduce a tax liability. The
first half of the sentence is talking about tax rebates and the
second half is talking about lower taxes. Because HB 247 would
harden the floor and because in some cases it would increase the
taxes that certain companies would pay, the advantage that the
bill would cut back on is the advantage of being able to go
below the minimum tax to zero. The companies would no longer
receive that advantage because the floor would be hardened and
the companies would be forced to pay at a higher rate.
REPRESENTATIVE HERRON observed that page 2 of the DOR-TAX fiscal
note outlines several goals of the legislation, one of which is
to strengthen the minimum tax and prevent abuses to the system.
He requested Mr. Alper to identify those abuses.
MR. ALPER replied that the term was used to refer to what DOR
perceives as inadvertent mechanisms where operating losses can
be larger than the actual loss to where a credit can be claimed
for a very high percentage of a loss because of the interplay of
the gross value reduction (GVR) and the net operating loss
credit. Another inadvertent loophole in statute is the
municipal utility section where a company is selling a small
amount of gas and getting a very large credit based on all of
the utility's expenditures. There is no pejorative intended in
abuse, it is simply that people are able to use the system in a
way beyond which was originally intended.
REPRESENTATIVE HERRON asked whether the last word "loopholes" on
page 2 of the DOR-TAX fiscal note is the loopholes that Mr.
Alper is referring to.
MR. ALPER responded, "Yes, absolutely."
2:42:57 PM
REPRESENTATIVE JOSEPHSON said it strikes him that there is one
enormous carrot in HB 247, which is that the governor under law
is within his right to pay 10 percent per year indefinitely,
albeit at some point retiring the credits. The administration
is signaling that it wants to capitalize these credits at almost
$1 billion, thereby providing stability and predictability for
both sides. In effect it signals a weighing of this right to
veto any more than, for example, $73 million this year. He
asked whether he is reading this right.
MR. ALPER answered that Representative Josephson is right. He
pointed out that the fiscal note for the $900 million in
capitalization is labeled DOR-OGTCF, Fund Capitalization. He
explained that the statutory obligation, which is 10 or 15
percent at very low prices, is actually 15 percent of the
revenue collected under the production tax system, which per
DOR's current forecast is about $73 million. This is the number
the governor put in his operating budget and is what the state
is more or less obligated to buy. Although the tax credit
system is somewhat open-ended, people could earn $1-$10 billion
worth of credits potentially. Last year DOR showed a scenario
where one project could earn $3 billion in credits in a
relatively short period of time. The actual limitation on
buying them is tied to this language in AS 43.55.028(b) and (c)
that says 15 percent of the revenue collected - $73 million.
The governor's intent is to reduce the state's annual spend by a
substantial amount, to a number that is thought sustainable and
affordable. However, it is not wanted to do this in such a way
that would pull the rug out from anybody, that all of the
credits that are earned from last year up through the effective
date are made whole. The intent of the DOR-OGTCF fiscal note is
to provide that number. Although $926.575 million looks like a
particularly precise number, it is simply the difference between
the 15 percent figure in the operating budget and $1 billion.
The intent is to put $1 billion into credit repurchase.
2:45:31 PM
MR. ALPER addressed the fiscal note identified as DOR-OGTCF,
Fund Capitalization. He noted that originally all of these
numbers were in a single fiscal note. But, per the advice of
the Office of Management & Budget, they were split into two
fiscal notes because the fund capitalization is really a
separate appropriation that would be somehow attached to this
bill that would move almost $1 billion into the oil and gas tax
credit fund. Included in the governor's [FY 2017] request is
the $73.425 million, and the columns for later years depict the
expected reduction in tax credit spend that are tied up in this
bill, meaning how much less it is thought the state would pay
should HB 247 pass. That number is somewhat fungible because as
the future gets closer a lot more is known about what companies
are spending and DOR is basing these numbers on its forecasted
credit spending in these future years minus about $50 million.
It is assumed that the state is still going to be paying about
$50 million in refunded credits. The department will continue
to refine these numbers each year.
2:46:55 PM
REPRESENTATIVE HERRON drew attention to the paragraph on page 2
of the Fund Capitalization fiscal note regarding FY 2016 that
talks about the $200 million credit liability expected at the
end of the fiscal year. Observing that the fiscal note was
written on February 1, 2016, he asked whether that $200 million
is real, given it was heard in testimony before the committee
that it is unlikely that $200 million would be called upon.
MR. ALPER replied there are credit applications that DOR has in
hand that could bring the state closer to $700 million. To
date, DOR has issued about $475 million in credits. Everything
that has been asked for has been bought back, which is
essentially all of them, although there might be one or two in
process right now. There is a tremendous frontloading in the
fiscal year, he explained, with the great bulk of the credit
applications coming in in March when the companies file their
taxes because the great bulk are for operating loss credits.
The department tends to issue the credits about four months
later in July and then they are paid out early in the fiscal
year. The exception to that is some of the drilling credits in
Cook Inlet, the specific credits that HB 247 looks to repeal.
Because those do not require an operating loss, they do not
require an end of year tax true-up to apply for them. So,
certain companies based on their own cash flow needs or on their
own housekeeping might apply for their qualified capital
expenditure credit or well lease expenditure credits quarterly.
The department has not been issuing those credits simply because
it was known that those were the ones there would not be money
for; DOR is choosing to hold them until receiving the operating
loss credits at the end of the year. So, through its own
activity, DOR is forcing that $200 million to get rolled forward
into FY 2017.
2:49:24 PM
MR. ALPER concluded his discussion of the two fiscal notes. One
reduces spending and capitalizes the fund, he noted, and the
other raises a bit of extra revenue through strengthening and
increasing the minimum tax. Should a revised version of the
bill move to the next committee, DOR would like to take a fine-
tooth comb to the fiscal not as per the committee's request at
an earlier hearing. The bill would benefit from having a full
page spreadsheet of all the bill's provisions lined out with
each one having its own cost parsed out. He said the department
is prepared to do that level of analysis for the 15-18 separate
provisions in the bill when it is in the next committee.
However, he added, DOR is comfortable with the numbers it is
presenting to this committee - the bill would raise about $100
million in the short term and save $400 million in the short
term, although FY 2017 is a hard one because of the structure of
the fiscal note. Fiscal year 2018 would save $325 million.
2:51:01 PM
REPRESENTATIVE TARR observed the DOR-OGTCF fiscal note includes
$200 million for the Alaska Industrial Development and Export
Authority (AIDEA). She asked how DOR sees that as functioning
within HB 247. She offered her understanding that [HB 246] is
separate from the credit program and would provide a pot of
money that is available for loans to do work that has not
previously been part of a company's portfolio.
MR. ALPER confirmed that this is correct, and advised that the
reference to [HB 246] and the $200 million was in this fiscal
note for informational purposes. He said the fiscal note before
the committee was written by DOR at the same time as the fund
capitalization fiscal note for HB 246, although AIDEA will be
the primary testifier on HB 246. When HB 246 comes before the
committee, members will see another fund capitalization fiscal
note containing $200 million.
2:52:14 PM
REPRESENTATIVE SEATON noted that DOR has circulated several
other documents to committee members, one document being Pedro
van Meurs' update. He drew attention to the speculation in that
update for an oil price of $60 for the next two decades. He
offered his hope that as the committee goes forward it will look
at different analyses of the potential price.
MR. ALPER drew attention to a spreadsheet that DOR provided to
members yesterday ["Production Tax Credits Detail FY 2007 to FY
2025, Table 8-4: Detail on Historical Production Tax Credits
and Forecast]. He explained that this spreadsheet was put
together per the request of the co-chairs' staff and summarizes
all of the oil and gas tax credits that currently exist in
statute, how they work, what statute they come from, what their
history is, whether they have any built-in sunsets, and what
parts of the state they are used for. At the bottom of the
spreadsheet is a section saying how [the administration] is
proposing to change the different provisions.
[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 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 - 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 |
| 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 |
| 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 |
| 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 |
| HSE RES HB247 DOR Fiscal Details and Scenario Modeling (Part 2a) 2-26-16.pdf |
HRES 2/27/2016 10:00:00 AM 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 |
| HSE RES - 2.24.16 HB 247 2nd Presentation- fiscal details part 1a.pdf |
HRES 2/25/2016 8:30:00 AM HRES 3/7/2016 6:00:00 PM HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HSE RES 3.8.16 Dept. of Revenue - Summary of State Royalty, Tax and Credits throughout Alaska Lands.xlsx |
HRES 3/8/2016 1:00:00 PM |
HB 247 |
| HSE RES 3.8.16 AS 43 55 Credits Table with HB 247 changes.xlsx |
HRES 3/8/2016 1:00:00 PM |
HB 247 |