Legislature(2013 - 2014)

02/25/2013 02:07 PM RES


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

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