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