Legislature(2017 - 2018)BARNES 124
01/26/2018 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| HB288 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 288 | TELECONFERENCED | |
HB 288-OIL AND GAS PRODUCTION TAX
1:06:13 PM
CO-CHAIR TARR announced that the only order of business would be
HOUSE BILL NO. 288, "An Act relating to the minimum tax imposed
on oil and gas produced from leases or properties that include
land north of 68 degrees North latitude; and providing for an
effective date."
CO-CHAIR TARR provided the following information related to the
previous hearing of HB 288 on 1/22/18: a corrected slide
entitled, "Other Possible Considerations," and a new slide
entitled, "Taxable Barrels Plus Royalty Barrels Value."
1:09:43 PM
KEN ALPER, Director, Tax Division, Department of Revenue,
provided a PowerPoint presentation entitled, "Analysis of HB 288
Increase to Gross Minimum Tax" dated 1/16/18. He informed the
committee the definitions of Alaska's four major oil and gas
revenue sources are as follows (slide 2):
· property tax: ad valorem tax on the value of oil and gas
property, pipelines, equipment, and facilities, most of
which is shared with local government where the assets are
located and which garners approximately $100 million per
year
· royalty: landowner's share of taxes, generally 12.5
percent, and one quarter of which must go to the corpus of
the Alaska Permanent Fund
· production tax: profits-based tax that garners most
conflict and is based on various complicated calculations
· corporate income tax: collected on remaining profits after
production tax for oil and gas taxpayers at a typical
effective rate of 7 percent
MR. ALPER continued to slide 3, which illustrated the state's
oil and gas revenue from fiscal years 2012-2017 (FY 12-17) and
the average price of Alaska North Slope oil for the same time
period. He pointed out although the average price of oil was
the same in 2013 and 2014, a lower production tax rate caused a
reduction in the tax revenue. All four revenue sources have
declined, with the most reduction to production tax revenue,
which is based on profits.
1:14:29 PM
REPRESENTATIVE PARISH asked for a further explanation of
corporate income tax.
MR. ALPER explained corporate income tax is based on estimated
taxes which are tied to previous years; therefore, in 2015
companies paid large estimates based on past profits thus at the
end of the year the state refunded overpaid taxes. Also, in
error, some revenue from corporate taxes was not deposited to
the Constitutional Budget Reserve Fund (CBRF), and corrections
were made, resulting in a negative tax flow in FY 16 and FY 17.
REPRESENTATIVE RAUSCHER noted slide 3 does not include the
amount of the deposits to CBRF and asked for the amount not
included.
MR. ALPER said generally deposits to CBRF are payments on audits
and range from $100 million to $125 million; however, in FY 17,
the amount was almost $400 million due to [tax] settlements.
REPRESENTATIVE TALERICO surmised the difference in revenue
between FY 13 and FY 14 - shown on slide 3 - was due to a
decline in production.
MR. ALPER advised the decline was due to less production, an
increase in spending by the companies, and on 1/1/14 the tax
system converted from Alaska's Clear and Equitable Share (ACES)
[passed in the Twenty-Fifth Alaska State Legislature] to Senate
Bill 21 (the More Alaska Production Act) [passed in the Twenty-
Eighth Alaska State Legislature], which assesses a lower tax
rate and thereby reduced revenue.
MR. ALPER reviewed previous tax credit reforms within House Bill
247 [passed in the Twenty-Ninth Alaska State Legislature] as
follows: phased out Cook Inlet tax credits; reduced Middle
Earth [land in Alaska south of 68 degrees north latitude and
outside of Cook Inlet] tax credits; extended the Cook Inlet gas
tax cap and added a $1 per barrel of oil tax that garners
approximately $5 million per year from production in Cook Inlet;
added sunset provision to Gross Value Reduction (GVR) for new
North Slope oil production; annual cap on per-company, per-year
cash credit payments; resident hire priority; limited
transparency with an annual report to reveal companies that
receive cash for credits; interest rate change for better
reporting; technical cleanup and repeal of obsolete language for
clarity; regulation package proposed and adopted effective
1/1/17.
REPRESENTATIVE PARISH returned attention to slide 3 and asked
Mr. Alper to explain the decrease in royalty from 2012 to 2017.
1:22:08 PM
MR. ALPER advised royalty revenue is a function of gross value,
not of net value; gross value is the market price of oil minus
the cost of getting it to market, which is around $10. When the
price of oil dropped from $110 per barrel to $40 per barrel,
companies' profits dropped by 90 percent, but the gross value of
oil only dropped by two-thirds, thus slide 3 illustrates the
reduction in the wellhead value of the oil.
REPRESENTATIVE PARISH inquired as to when DOR expects recovery
in the value of the royalty.
MR. ALPER said the official forecast indicates a small recovery
in production tax revenue and royalties in FY 18 and FY 19 - an
additional $200 million to $300 million - if there is an
increase in the price of oil to approximately $60 per barrel.
REPRESENTATIVE PARISH turned attention to slide 4 and asked
about the impact of the 80-90 percent credits granted prior to
the passage of House Bill 247.
1:23:43 PM
MR. ALPER clarified operating loss credits were intended to be
35-45 percent of a loss, which was valid when a company was
spending for a future field not yet in production, and was
designed to align with the marginal tax rate paid by producers
[that are bringing in profits]. Although not intentional, under
certain circumstances, when a company was in production, but was
operating at a loss due to low prices, its new oil production
was eligible for gross value reduction and that lowered the
rate; for example, instead of $10 million loss getting a 35
percent credit of $3.5 million, the gross value reduction turned
the loss into a $30 million paper loss, resulting in a tax
credit of $10.5 million. Mr. Alper stated this effect of
previous legislation was inadvertent and was corrected
prospectively in House Bill 247.
REPRESENTATIVE PARISH further asked whether the credits were to
be assessed against future taxes.
MR. ALPER said the credits were cashable certificates and
posited this was not wise public policy.
1:26:24 PM
MR. ALPER reviewed previous tax credit reforms within House Bill
111 [passed in the Thirtieth Alaska State Legislature] as
follows: ends most cashable tax credits for losses or other
activities; repealed net operating loss (NOL) or carried-forward
annual loss credit statute; replaced NOL credits with new system
of carried-forward lease expenditures. The new system is based
on the idea of cost recovery after production begins, and
established a ringfence to prevent certain losses, and maximized
taxpayer flexibility on use; if unused, lease expenditures lose
value after ten years to protect against "downlift" (slide 5).
1:29:13 PM
REPRESENTATIVE RAUSCHER asked when the division expects to see
changes resulting from House Bill 111.
MR. ALPER said the effective date of House Bill 111 was [1/1/18]
and none of the new credits will be claimed prior to the taxes
that are filed in March 2019; therefore, a company losing money
during construction in 2018, and beginning production in 2019,
will start using credits in 2019 and gave he an example. Mr.
Alper continued with the features of House Bill 111: aligned
tax interest rates to a compromised level; credits can now be
carried back in time and used against a prior year tax liability
or can be sold, limited by [payments owned to] CBRF after an
audit assessment, and he gave an example of funds owed after
settlement of tariff rate litigation; conditional exploration
credits granted at time of application to ensure a company's
place in the queue; seismic work in Middle Earth no longer
eligible after 2017; exploration credits in Middle Earth can be
used to offset corporate income tax; delayed repeal of the tax
credit fund after all credits are purchased; established
legislative working group to work on continuing oil tax issues
such as incentives for future development (slide 6).
REPRESENTATIVE PARISH inquired as to the value of the cashable
tax credits that may be sold.
MR. ALPER was unable to estimate because sales of tax credits
are free market transactions. Furthermore, since the state
stopped paying the tax credits, they are now on the secondary
market, but the market is limited, and the price is low.
Provisions in House Bill 111 seek to open the secondary market
and major purchases of tax credits may take place. He estimated
there are approximately $800 million worth of tax credits in the
hands of industry awaiting purchase; however, bids may be low.
1:36:11 PM
REPRESENTATIVE BIRCH questioned whether discounting tax credits
is common practice in other tax regimes.
MR. ALPER advised Alaska's [entire] concept of cash for tax
credits is extraordinarily rare in the world; faced with limited
funds and pressure from industry, the state seeks an amicable
way to remove the credits from the state's liabilities.
Although current legislation has limited the burden of this
liability, $900 million in outstanding credits is certain; the
goal of forthcoming legislation is to offer discounts equal to
the state's cost of the interest it would pay in order to sell
bonds and pay the tax credit liability.
CO-CHAIR TARR asked for clarification on the amount of the total
outstanding tax credits.
MR. ALPER explained the biggest component of the tax credits
will be 2017 operating loss credits; House Bill 111 provides
that one-half of 2017 eligible operating loss credits are
eligible for cash and one-half are no longer eligible. Thus,
there are upcoming partial operating loss credits that could be
sold or used to offset taxes; also expected are credits claimed
by the Interior Gas Utility, refinery credits, and a few other
entities.
CO-CHAIR TARR referred to the forthcoming legislation and asked
whether the state would pay full value for the tax credits [by
issuing bonds].
1:40:35 PM
MR. ALPER cautioned the forthcoming legislation is being drafted
and is very complex. He remarked:
Imagine ... your company is holding $100 million worth
of tax, tax credits. If you look at the formula ...
[DOR] can calculate what your share of that
appropriation would be for the next five years. Let's
say you stand to make $30 million in FY 19, [$30
million] in FY 20, [$20 million] in FY 21 and [$20
million] in FY 22, ... what we would do is take that
cash flow and discount it at that discount rate ... so
[DOR] would back that out to a present value at the
discount rate and offer a lump sum payment to buy all
of the tax credits at that lump sum.
MR. ALPER concluded the company would receive less than face
value and the state would gain some value to use to pay the
interest on the money it borrowed to pay the credits.
REPRESENTATIVE PARISH surmised the foregoing solution would
protect industry and asked for the amount of the current
interest that is due on the outstanding tax credits.
MR. ALPER advised tax credit obligations do not bear interest
but are subject to appropriation and can be sold or used against
tax liability.
REPRESENTATIVE PARISH questioned how, without knowledge of the
market value, the state can ensure it will fulfil its
responsibility to its citizens.
MR. ALPER suggested the forthcoming legislation is a better way
to deal with the tax credit problem than the status quo.
Further, to benefit the state and industry, the issue needs to
be resolved without having to appropriate hundreds of millions
of dollars the state does not have. He returned attention to
the presentation and stressed oil and gas tax legislation is
often complex; however, HB 288 seeks to accomplish one goal
which is to raise the minimum tax - known as the floor - from 4
percent to 7 percent when the average price of oil for the year
is greater than $25 per barrel (slide 7). He explained how the
minimum tax works: the production tax is based on a calculation
of net profits known as production tax value (PTV) [as
illustrated on slide 8]. He pointed out produced oil has at
least two owners: landowners who earn royalty and the producer
who profits, and only the taxable share factors in the
calculation of PTV. Mr. Alper explained gross value at the
point of production (GVPP) is market price less the cost of
transportation. From GVPP is subtracted lease expenditures -
the costs of operating the field, and capital costs - and the
remainder is PTV. The final calculation uses the higher of
either PTV multiplied by a 35 percent tax rate minus the per
barrel credit, or GVPP multiplied by a 4 percent minimum tax
rate. [HB 288] would raise the minimum tax rate from 4 percent
to 7 percent. Slide 9 was a chart of tax increases based on a
range of oil prices.
1:48:28 PM
CO-CHAIR TARR, as an aside, pointed out differences between
slide 9 and information presented at the hearing of HB 288 on
1/22/18.
MR. ALPER said companies reacted to lower oil prices not only by
doing less but by cutting costs, which lowered the breakeven
price on a barrel of oil. In fact, as shown on slide 9,
industry efficiencies have lowered the costs on transportation
and lease expenditures on an average barrel of legacy oil from
approximately $50 to approximately $37. Using $60 as an
example, he further explained the calculation to determine PTV
and the subsequent tax calculation that is based on PTV: PTV is
taxed at 35 percent, and after subtracting an $8 per barrel
credit, the production tax is $0.17; however, when a minimum tax
of 4 percent is assessed, the tax at $60 per barrel oil would be
$2.01. Mr. Alper concluded at lower prices industry pays the
minimum tax and at around $65 per barrel and above, industry
pays the net tax. Also shown on slide 9 was the effect of
proposed HB 288, which is to raise the minimum tax to 7 percent,
which at $60 per barrel oil would be $3.51. Another aspect of
increasing the minimum from 4 percent to 7 percent is that the
industry will pay a gross tax until oil prices reach
approximately $72 per barrel. Further, the impact of the bill
is a function of price and he provided the increases in taxes
derived from 170 million taxable barrels at a range of oil
prices (slide 9). He pointed out the effect of HB 288 to
increase tax revenue stops when oil prices reach $80 per barrel
and above.
MR. ALPER, in response to Representative Rauscher's question as
to the effect [of HB 288 on production tax today], said there
would be an increase of $0.54 per taxable barrel at $70 per
barrel oil. In further response to Representative Rauscher, he
said the $91 million shown on slide 9 is not current revenue,
but additional revenue from production tax at an oil price of
$70.
1:54:46 PM
REPRESENTATIVE BIRCH observed royalty tax share is included in
total revenue on slide 3 and opined a true illustration of oil
and gas revenue to the state would include its 12.5 percent
royalty share at the different prices shown on slide 9.
MR. ALPER said there is no royalty share on a taxable barrel of
oil; further, DOR has not analyzed the effect of the bill on the
total state take from all the aggregated tax revenue and he
offered to do so.
REPRESENTATIVE BIRCH said he was interested in the offered
information. He opined anything that attracts investment to
increase production and generate royalty at 12.5 percent is a
large and significant component. He stressed the importance of
inviting investment and encouraging production which will have
more of an impact on state revenues [than would HB 288].
CO-CHAIR TARR observed slide 9 indicates the impact of changing
the percentage [of tax revenue] regardless of what happens to
[levels of] production.
REPRESENTATIVE BIRCH advised at $40 [per barrel of oil], 12.5
percent of 170 million barrels would result in $850 million in
royalty, which increases to $1.5 billion at [$70 per barrel].
He restated royalty share is a significant amount of revenue and
deserving of the legislature's focus.
MR. ALPER recalled royalty collected in 2012 was $2.9 billion
when oil price was $110 per barrel. He reminded the committee
three-quarters of royalty is available for the state to spend
and one-quarter is deposited to the Alaska Permanent Fund.
REPRESENTATIVE PARISH asked how the forecast revenue shown on
slide 9 would change with GVR oil.
1:59:55 PM
MR. ALPER said line 2, identified by GVPP, would be reduced by
20 percent thus at $60 oil, PTV would be $13 instead of
[$23.35]. Further, the minimum tax does not apply to GVR
eligible oil; in fact, the tax on GVR eligible oil does not
apply until the price of oil approaches $70 per barrel. He
directed attention to slide 10, which was a graph of forecast FY
20 production tax revenue at net, a 4 percent minimum, and a 7
percent minimum as proposed in HB 288. Mr. Alper, speaking from
his experience as the director of the Tax Division, informed the
committee auditors at the tax division have a difficult task and
he described several features of Alaska's complex oil and gas
tax law. However, [should HB 288 become law] at almost all
circumstances, industry would pay a zero tax on GVR eligible oil
and 7 percent tax on legacy oil. He urged for a simple
solution: eliminate other taxes and instigate a 7 percent gross
tax.
CO-CHAIR TARR pointed out the increase brought by HB 288 would
primarily affect legacy oil.
MR. ALPER restated the actual effect of HB 288, for the most
part, is that industry would pay a 7 percent gross tax. He
turned attention to slide 12 and said further issues for
consideration are related to oil profitability at different
prices, such as:
· current 4 percent minimum tax is applicable at $25 per
barrel oil as is the proposed increase to 7 percent
· the average breakeven point was reduced to $37 for FY 19 as
a result of industry cutting cost
· a producer may survive a tax increase when oil prices are
$70 per barrel but not when oil prices are $30 per barrel
thus the price at which the minimum tax applies may need
to change
· the $25 per barrel price was set in 2006
· raising the minimum tax would increase the breakeven price
of a typical field by about $1 per barrel
· oil profitability estimates are up dramatically since last
spring: increased production and reduced spending,
production tax forecast increased $40 million, tax credit
increased $150 million
MR. ALPER continued to slide 13 and restated oil profitability
estimates are up from earlier forecasts due to additional
production and reduced spending, which has added $2.1 billion in
industry divisible profits; however, the production tax share of
$2.1 billion is $40 million and the statutory tax credit
appropriation increased by $150 million.
REPRESENTATIVE TALERICO asked whether DOR has an amended Revenue
Forecast Fall 2017.
MR. ALPER said a Revenue Forecast: Preliminary Fall 2017
[10/25/17] was issued for the [Thirtieth Alaska State
Legislature Fourth Special Session 10/23/17-11/21/17]. He
acknowledged there were minor changes from the preliminary
forecast to the Revenue Forecast Revenue Sources Book (RSB) Fall
2017 [12/31/17], but the big changes were from Revenue Forecast:
Spring 2017 [4/14/17]. In further response to Representative
Talerico, he agreed there was a change in the production tax,
not from the tax calculation, but due to one-time events.
2:11:03 PM
REPRESENTATIVE PARISH returned attention to slide 13 and asked
when industry made the investments that resulted in increased
production of $1 billion.
MR. ALPER advised industry has been continually making
investments since the '70s and has made considerable efforts to
slow production decline and to increase volume.
CO-CHAIR JOSEPHSON asked whether an increase in oil price is
factored into the increased production value of $1 billion
(slide 13).
MR. ALPER said no. The spring forecast indicated $60 oil price
thus the value is based on a lower price assumption and
dramatically larger volumes. In further response to Co-Chair
Josephson, he clarified the increase in oil price over the last
12-18 months is not reflected. He explained:
What [DOR is] illustrating to do this was the
estimated aggregated profit that's subject to the 35
percent tax because that's the calculation that feeds
into the tax credit statutory formula. That number
has been adjusted upward by $2.1 billion and almost
none of it - in fact it's a negative impact - is
related to the price because the spring forecast was
based on $60 oil and the fall forecast on ... $56 oil.
... The reduction in company spending of $1.1 billion
is dramatic ... and that's nothing that the state did
per se, [the industry] simply spent a billion dollars
less than they thought they were going to and by the
nature of a profits tax, what you don't spend ends up
getting added to your profits.
CO-CHAIR JOSEPHSON asked for the amount of federal income tax
assessed on the industry.
MR. ALPER said the federal income tax rate until 12/31/17 was 35
percent of profits after deductions, including state taxes; as
of 1/1/18, the federal income tax rate is 21 percent.
CO-CHAIR JOSEPHSON said at an oil price of $70 per barrel, HB
288 would generate approximately $200 million more to the state,
but questioned whether the increase is fair and affordable by
industry. He said he was unsure how to value $2.1 billion in
divisible profits.
MR. ALPER said "... I'm not quite sure how to answer that and
the, the key is going back to the slide I had a couple of
minutes ago: this all changes dramatically if the price goes
back down to [$50 or $40], or something like that."
REPRESENTATIVE PARISH returned attention to slide 13 and asked
for an estimate on how much of the $1.1 billion in reduced
spending is reduced investment.
2:16:03 PM
MR. ALPER observed the price dynamics of the oil industry are
complex; during periods of high demand subcontractors received
premium prices for services but as the demand subsided,
subcontractors also reduced their costs, "so how much of it is
getting the same amount of work done for less money and how much
of it is doing less work, it's some combination of the two and I
don't know that I could answer definitively." Slide 14 referred
to the period of time from 1977 to April 2006, when the Alaska
oil and gas tax system was a gross tax and was tied to a value
similar to GVPP known as the economic limit factor (ELF)
[enabling legislation passed in the Tenth Alaska State
Legislature and modified in 2005], which was subject to a
multiplier that varied from field to field. Mr. Alper said the
formula to determine the tax was "exotic" and based on the
profitability of each field. Over time, the tax rate declined -
because average production declined in individual fields - from
nearly 12 percent in 1995 to 6.7 percent in 2006. He pointed
out in those years Alaska's oil tax revenue was garnered from a
gross tax system, and for the last three years, the existing tax
system has functioned as a gross tax of 4 percent of North Slope
production.
REPRESENTATIVE DRUMMOND asked whether the tax rate changed each
year.
MR. ALPER clarified there was no change in the tax rate, except
in 1989 one of the factors in the calculation was modified. He
further explained the ELF system used a formula with exponents
tied to factors related to production from each field to set a
tax rate; although tax revenue was trending down, there were
increases between 2004-2006 due to a one-time time event. In
further response to Representative Drummond he explained trend
downward was due to the decline in the average production per
well which is lowered as new wells are drilled in each field,
even if the level of production is maintained.
REPRESENTATIVE PARISH inquired as to industry profits during the
period of time a gross tax system was in effect.
2:20:38 PM
MR. ALPER said industry profits depended on the price of oil and
other factors; during that time period DOR did not have access
to industry cost data because the tax was based on gross income.
He opined the oil industry made larger profits when the price of
oil was higher, regardless of the state tax rate. Mr. Alper
acknowledged the issue of tax stability is a valid concern by
industry and slide 15 listed the seven changes that have been
made to Alaska's production tax within thirteen years; industry
will testify that it is hard to invest when taxes are unknown.
In 2005, by executive order, former Governor Frank Murkowski
aggregated the Prudhoe Bay satellite fields for ELF
calculations, and the net effect was a $150 million tax increase
to the state. Subsequent litigation was resolved in December
2016, when the Alaska Supreme Court upheld the former governor's
action. Mr. Alper described the other changes that were made by
the legislature and noted the high revenue collected in 2008-
2012 has somewhat sustained the state budget. Tax regime
changes were as follows (slide 15):
1. 2005: Prudhoe Bay satellite fields aggregated
2. 2006: Petroleum Production Tax (PPT) [passed in
the Twenty-Fourth Alaska State Legislature] taxed net
profits
3. 2007: ACES corrected revenue shortfalls and
instituted an aggressive progressivity measure
4. 2010: Cook Inlet Recovery Act "CIRA" [passed in
the Twenty-Sixth Alaska State Legislature] increased
natural gas supply from Cook Inlet to Southcentral and
the Interior
5. 2013: Senate Bill 21 eliminated the progressivity
measure, replaced capital credit with per barrel
credit, and lowered tax for new oil by GVR provisions
6. 2016: House Bill 247 tax credit reform
7. 2017: House Bill 111 tax credit reform
MR. ALPER turned attention to how a minimum tax change impacts
new fields under development or to be developed. With the
current tax regime, a company can carry forward its spending to
develop a new field and reduce its future taxes once oil is
produced. Provisions within House Bill 111 allow a company to
only use carry-forward [expenses] sufficient to reduce its taxes
down to the minimum tax, with the exception of the time period
affected by GVR, when taxes can be zero; however, after the GVR
time period of three to seven years, a company cannot reduce its
taxes below the minimum tax. For example, if a company spent
billions to develop a major new oilfield, after production
begins, the company would pay the minimum tax no matter the
price of oil because the past spending will reduce its taxes.
Thus, raising the minimum tax from 4 percent to 7 percent would
impact field economics and thereby impact decisions on whether
to invest in new fields. In addition, if the higher minimum tax
causes a company to take too long to use its lease expenditures,
it would not be able to recapture 100 percent of its investment
in the field due to downlift (slide 16).
2:29:17 PM
REPRESENTATIVE RAUSCHER expressed concern about the current
recession in Alaska and projects that have been lost, noting new
fields may not come into production before the tax credits
apply. He questioned whether HB 288 creates risk at a time the
state seeks investment and production.
MR. ALPER said he would not express an opinion on risk and his
intent is to present facts and figures; however, there is
concern about how minimum tax changes affect a new field.
Although not a major change, the bill would change industry
rates of return by a fraction of a percent, which would impact
some companies.
REPRESENTATIVE TALERICO surmised a loss of value occurs when a
project is being developed over seven or eight years and [the
tax rate is reduced] by GVR, after production begins the
project's lease expenditures begin to lose value.
MR. ALPER said yes and posed the example of a company that
invests $1 billion before first production; subsequently after
production and making profits, the company would want to use
$200 million per year over five years to get the tax rate down
to the minimum tax. By raising the minimum tax from 4 percent
to 7 percent, the company may only need to use $100 million per
year to get to the minimum, and the lease expenditures may reach
maturity at ten years and lose value, before the company has
used them.
CO-CHAIR TARR remarked:
... for purposes of that ten-year calculation, for
Department of Revenue purposes for that "day one,"
it's when you go into production, so it's a full ten
years once the ... project is into production that
those, you know, that each of those ten years you can
use your losses against any taxes and then it would be
in the following year where the downlift would start.
MR. ALPER clarified the timeline is ten years from the date the
cost was incurred; in fact, if the money was spent in the five
years before first production, the "year one" expenditures are
already five years old, and by year six of production, will
begin to lose value if not used.
2:34:38 PM
CO-CHAIR JOSEPHSON expressed his understanding the ten-year or
seven-year period of downlift does not commence until the time
of production and asked for further clarification. He
recognized Mr. Alper's concerns that a higher minimum tax may
reduce economic viability for a new explorer and that the bill
may create an inability to recapture the cost of development
because of downlift; however, he returned attention to [slide 7
of a PowerPoint presentation entitled, "House Bill 288, Fairness
in Oil Taxes," undated, that was provided during the hearing of
HB 288 on 1/22/18] and pointed out at $60 per barrel oil PTV is
approximately $20 and the gross tax is approximately $2. In
addition, PTV is further reduced by state and federal income
taxes. He acknowledged royalty paid to the state is not
reflected, and royalty is directly related to levels of
production, but industry take is approximately $18 with $2 to
the state as production tax.
MR. ALPER returned attention to slide 9, which illustrated
updated estimates of production tax, and pointed out state and
federal income tax will be based on approximately $21, although
at an oil price of $40 per barrel, PTV is $3.35, which would
leave only $2 after the payment of production tax; in fact, the
payment of "a 12 percent gross royalty might actually turn that
company negative."
REPRESENTATIVE BIRCH said slide 17 summarized his concerns
regarding HB 288. He referred to potential developments in the
Arctic National Wildlife Refuge (ANWR) and the National
Petroleum Reserve-Alaska (NPR-A) and restated that a minimum tax
increase could reduce the viability of future projects and
stressed the veracity of the two other bullet points on slide
17. He cautioned the statements on the slide are masterful
understatements of the impact of a 75 percent tax increase,
particularly at a time the state needs to encourage the
investment and exploration that are essential for new
production.
MR. ALPER said the most important point on slide 17 is to
understand the tax. He suggested at an oil price of $100 per
barrel, one would believe Alaska's tax system is reasonably
high; in fact, at high oil prices, the state garners the minimum
tax from new fields because the system has replaced credits with
"carry forwards" during the early years. He remarked:
... so, it's no longer ... just a low-price
conversation. So yes, it's a 75 percent increase,
it's a 75 [percent] increase above a sort of
synthetically low tax because we're allowing them to
buy it down to the minimum tax through the recapture.
There are regimes around the world, frankly, that
allow companies to pay zero during their cost recovery
period. ... Alaska chose not to go that way, we
chose to insist on the minimum tax, we're now
discussing what should that minimum tax be.
2:41:06 PM
REPRESENTATIVE PARISH pointed out the language of the bill calls
for an increase from 1 percent to 2 percent although, from the
information presented on slide 17, it can be said the increase
to the effective tax rate is 101 percent; he urged for plain
language in the explanation of the bill.
MR. ALPER stated his testimony represents various points of view
on the bill, and from industry's point of view the tax rate is a
75 percent increase to production tax, which is approximately
one-quarter of industry's obligation to the state; he advised
both are legitimate views and urged the committee to understand
both definitions.
REPRESENTATIVE PARISH returned attention to slide 14, noting the
average gross tax ranged from approximately 12 percent [in 1995]
to approximately 7 percent [in 2006]. He questioned why a 7
percent gross tax was "intolerably low" in 2006, but an
[effective tax rate of 7 percent] is "impossibly high" in 2018.
CO-CHAIR TARR passed the gavel to Co-Chair Josephson.
MR. ALPER recalled the 4 percent minimum was in statute for
eight years without application until the price of oil dropped;
however, in the fall of 2014, the minimum tax became applicable.
Proposed changes to the minimum tax on oil and gas production
tax is one of many issues that arose out of the state's fiscal
crisis.
REPRESENTATIVE TALERICO stated his understanding that at 4
percent, each percentage point added is 25 percent, which is
shown very appropriately [on slide 17].
CO-CHAIR JOSEPHSON passed the gavel back to Co-Chair Tarr.
2:46:13 PM
REPRESENTATIVE DRUMMOND asked what Mr. Alper meant by a
synthetically low tax.
MR. ALPER explained a company producing oil in a high price
environment would pay a high tax on its profits; however, in
order to credit the company for the billions of dollars it spent
prior to production, the tax system will allow the company to
use the amount of its investment to reduce its taxes to the
minimum tax. He said, "In the context of just that one year, it
is an artificially low tax you're paying - it's reasonable
because we are paying you back in some way for that past
investment and we are doing it at a later date than we would
have under the previous law ... the compensation you're getting
for no longer having [cashable tax credits paid] is that reduced
tax rate during your early years of production."
CO-CHAIR TARR said from the state's perspective, taxes that are
reduced to a 7 percent minimum protects the state's interest.
MR. ALPER turned to HB 288's impact specifically on new fields
and directed attention to the bill's fiscal note [identifier:
HB288-DOR-TAX-1-20-18] that estimates increased revenues of
approximately $230,000,000. This estimate is calculated on
expected oil prices and expected current legacy production;
however, the fiscal note does not incorporate [slides 16-18]
which are related to new fields. For example, if a new field
begins production in FY 24-FY 25, the producer will pay the
minimum tax - the minimum tax is proposed by HB 288 to increase
- and increases to the minimum would change the producer's cash
flow and may change decision-making. Continuing with issues for
new fields, slide 18 illustrated a life cycle analysis for a
hypothetical new field. The model proposed lifetime production
of 750 million barrels - from a project that required $10
billion in capital costs - and 120,000 barrels per day peak
production was used to show the effect of the proposed increased
minimum tax. Over the life of the model field, at $60 per
barrel oil, production tax would be increased by $375 million
and at $80 per barrel oil production tax would be increased by
less than $200 million. He cautioned that the internal rate of
return is an important consideration to investors: the internal
rate of return would erode by one- to two-tenths of 1 percent
over the life of the project. Further, the breakeven price
would increase by $1 per barrel, which the company would use to
determine a go, or a no-go decision.
2:52:17 PM
CO-CHAIR TARR suggested the committee review the information
presented on slide 18 as it would relate to smaller near-term
development; she pointed out the difficulty of assessing [the
impact of revenues from] a development that will not see
production in ten or twelve years on state finances with a near-
term problem.
MR. ALPER added that [the impact of the bill] on a near-term
field also differs in that most of the development was
accomplished during the previous tax system, which provided cash
credits; near-term fields would not be as affected by downlift
when production begins. However, later projects would be
affected by the time limit on lease expenditures. In further
response to Co-Chair Tarr, he confirmed because of the change
brought about by House Bill 111, spending post-1/1/18 is
affected.
CO-CHAIR TARR advised the committee must consider the factor of
the various timelines of projects.
REPRESENTATIVE BIRCH asked whether the governor supports the
proposed legislation.
MR. ALPER said the governor has not taken a position on the bill
and it is not expected that he will do so.
CO-CHAIR JOSEPHSON returned attention to new exploration and
asked whether the governor's forthcoming legislation, which
proposes to sell bonds to pay owed cash credits, would satisfy
DOR's concerns about carry-forward losses [that are delayed by
an increase to the] minimum tax.
2:56:10 PM
MR. ALPER explained the carry-forward statutes are clear but
appropriations to pay the credits are uncertain and that affects
the economic status of the industry. The goal of the
forthcoming legislation is to eliminate the industry's
uncertainty by taking away the risk that the state will not pay
in a timely manner.
[HB 288 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB288 ver A 1.16.18.PDF |
HRES 1/22/2018 1:00:00 PM HRES 1/26/2018 1:00:00 PM HRES 1/29/2018 1:00:00 PM HRES 3/30/2018 1:00:00 PM HRES 4/2/2018 1:00:00 PM HRES 4/13/2018 1:00:00 PM HRES 4/14/2018 2:00:00 PM HRES 4/16/2018 1:00:00 PM |
HB 288 |
| HB288 Fiscal Note DOR-TAX 1.20.18.pdf |
HRES 1/22/2018 1:00:00 PM HRES 1/26/2018 1:00:00 PM HRES 1/29/2018 1:00:00 PM HRES 3/30/2018 1:00:00 PM HRES 4/2/2018 1:00:00 PM HRES 4/13/2018 1:00:00 PM HRES 4/14/2018 2:00:00 PM HRES 4/16/2018 1:00:00 PM |
HB 288 |
| HB288 Sponsor Statement 1.21.18.pdf |
HRES 1/22/2018 1:00:00 PM HRES 1/26/2018 1:00:00 PM HRES 1/29/2018 1:00:00 PM HRES 3/30/2018 1:00:00 PM HRES 4/2/2018 1:00:00 PM HRES 4/13/2018 1:00:00 PM HRES 4/14/2018 2:00:00 PM HRES 4/16/2018 1:00:00 PM |
HB 288 |
| HB288 Sectional Analysis 1.21.18.pdf |
HRES 1/22/2018 1:00:00 PM HRES 1/26/2018 1:00:00 PM HRES 1/29/2018 1:00:00 PM HRES 3/30/2018 1:00:00 PM HRES 4/2/2018 1:00:00 PM HRES 4/13/2018 1:00:00 PM HRES 4/14/2018 2:00:00 PM HRES 4/16/2018 1:00:00 PM |
HB 288 |
| HB288 DOR Tax Presentation HRES 1-26-18.pdf |
HRES 1/26/2018 1:00:00 PM HRES 4/2/2018 1:00:00 PM |
HB 288 |
| HB288 Updated House Resources Sponsor Presentation 1.25.18.pdf |
HRES 1/26/2018 1:00:00 PM |
HB 288 |