Legislature(2017 - 2018)SENATE FINANCE 532

05/04/2017 09:00 AM FINANCE

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09:09:54 AM Start
09:10:19 AM HB111
09:10:19 AM Presentation: Department of Revenue Analysis of Hb 111
10:48:21 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR HOUSE BILL NO. 111(FIN)(efd fld)                                                                                       
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     relating  to carried-forward  lease expenditures  based                                                                    
     on losses  and limiting those lease  expenditures to an                                                                    
     amount  equal  to  the  gross value  at  the  point  of                                                                    
     production of  oil and gas  produced from the  lease or                                                                    
     property  where  the  lease expenditure  was  incurred;                                                                    
     relating to  information concerning tax  credits, lease                                                                    
     expenditures, and  oil and gas  taxes; relating  to the                                                                    
     disclosure of that information  to the public; relating                                                                    
     to an  adjustment in  the gross value  at the  point of                                                                    
     production;  and  relating  to  a  legislative  working                                                                    
9:10:19 AM                                                                                                                    
^PRESENTATION: DEPARTMENT OF REVENUE ANALYSIS OF HB 111                                                                       
9:10:19 AM                                                                                                                    
Co-Chair MacKinnon requested that  the presentation start on                                                                    
slide 10.                                                                                                                       
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
introduced  himself.  He  apologized   for  the  absence  of                                                                    
Commissioner  Randall  Hoffbeck,  and indicated  that  Chief                                                                    
Economist Dan  Stickel could speak  to the fiscal  notes. He                                                                    
continued that in addition to  tax credit history, the first                                                                    
9 slides  of the  presentation continued information  on the                                                                    
current  balance of  credits  owed. He  would  refer to  the                                                                    
slides if necessary during the presentation.                                                                                    
Mr. Alper discussed the presentation  "SCS CSHB 111(RES)\C -                                                                    
Oil and Gas  Production Tax Credits - Analysis  of the Bill"                                                                    
(copy on  file). He  referenced slide  7, informing  that it                                                                    
contained a table  (that had been disseminated  via memo the                                                                    
previous week),  that showed new information  required by HB
247 [oil and gas tax  policy legislation passed in 2016] and                                                                    
listed what companies had received in cash credits in 2016.                                                                     
Mr. Alper  showed slide 10,  "Specific Provisions  of Senate                                                                    
Resources  Bill."  He  considered   the  effects  of  Senate                                                                    
Resources Committee Substitute for HB 111.                                                                                      
Mr.  Alper   referenced  slide  11,  "Elimination   of  Cash                                                                    
Credits-North Slope NOL":                                                                                                       
     Eliminates  the  "Carried  Forward Annual  Loss"  (NOL)                                                                    
     credit by repealing AS 43.55.023(b)                                                                                        
     • Instead of losses turning into cashable credits, the                                                                     
     excess expenditures are carried forward to be used in                                                                      
     a future year to offset revenue                                                                                            
          o When used, only enough is used to reduce                                                                            
          liability to the equivalent of the minimum tax.                                                                       
          The rest carry forward                                                                                                
          o Issue of interaction with GVR / multiplier                                                                          
     • Value that's carried forward receives an "uplift" or                                                                     
     interest of 10% compounding for up to 7 years (only                                                                        
     for companies without production)                                                                                          
          o 10% compound interest for 7 years roughly                                                                           
          doubles value                                                                                                         
          o Would like clarification on when the uplift                                                                         
     * red text indicates technical concerns being                                                                              
Mr. Alper indicated that the  red text on the slides denoted                                                                    
technical concerns,  which had been previously  discussed by                                                                    
himself  and Co-Chair  MacKinnon  and  staff. He  understood                                                                    
that the concerns  were being resolved by  the committee and                                                                    
did not materially  impact the dollar value of  the bill. He                                                                    
stressed  the importance  of working  through the  technical                                                                    
language of the  bill so that the committee's  will could be                                                                    
carried forward with the bill.                                                                                                  
9:12:56 AM                                                                                                                    
Mr. Alper  continued discussing slide  11. He  detailed that                                                                    
the  North  Slope "Carried  Forward  Annual  Loss" [or,  net                                                                    
operating loss]  (NOL) credit was  a 36 percent  credit, the                                                                    
Middle  Earth NOL  was a  15 percent  credit in  the current                                                                    
year, and the Cook Inlet NOL  was at 15 percent but would be                                                                    
gone the  following year. The major  point of the NOL  was a                                                                    
loss carry-forward to use against future taxes.                                                                                 
Mr. Alper  referred to remarks pertaining  to carry-forwards                                                                    
losing value,  and indicated that  the only amount  used was                                                                    
that which was  required to bring the value down  to pay the                                                                    
minimum  tax. He  indicated that  previous  versions of  the                                                                    
bill would  have brought  the value down  to zero,  and then                                                                    
still  the minimum  tax would  be required.  He thought  the                                                                    
current  bill was  clearly  written to  say  that one  could                                                                    
carry forward to only the minimum tax level.                                                                                    
Mr. Alper highlighted  a technical issue of the  repeal of a                                                                    
section of  the bill  that included  the NOL  credit. Within                                                                    
the bill  section, there was  language that fixed  a problem                                                                    
within  the  integration of  the  NOL  and the  gross  value                                                                    
reduction  (GVR).  He  explained   that  the  GVR  could  be                                                                    
substracted from  a producer's loss, thereby  increasing the                                                                    
size of  a tax  credit and creating  an opportunity  for tax                                                                    
credits in excess  of 100 percent of a loss.  He thought the                                                                    
issue was an error from the  original language of SB 21 [oil                                                                    
and gas tax legislation that passed in 2013].                                                                                   
Mr.  Alper  discussed  uplift,  which  he  described  as  an                                                                    
interest  payment   from  the   state  to  the   company  in                                                                    
possession of  the losses, generally used  to compensate the                                                                    
company for the  time-value of money. He used  an example of                                                                    
a company that  had $1 million in losses it  was able to use                                                                    
two  years  later,  while  earning  10  percent  compounding                                                                    
interest per  year on the  losses. The uplift would  be used                                                                    
to  offset future  taxes.  He mentioned  the  "rule of  72,"                                                                    
which would almost double the value of a carry-forward.                                                                         
9:16:44 AM                                                                                                                    
Co-Chair   MacKinnon  asked   if  there   was  a   different                                                                    
percentage  to  consider that  would  keep  a company  whole                                                                    
versus doubling the value of the carry-forward.                                                                                 
Mr.  Alper   thought  the  question  of   "whole"  was  very                                                                    
subjective, and  that there were  many potential  metrics to                                                                    
use. He thought  the time-value of money could  be viewed as                                                                    
interest  or  inflation value,  or  viewed  as the  cost  of                                                                    
Co-Chair  MacKinnon  asked  if the  administration  had  the                                                                    
definition of  what "whole" was,  when the  state previously                                                                    
promised to pay tax credits  but was not currently doing so.                                                                    
She   wondered  if   there  was   a   percentage  that   the                                                                    
administration  was  supportive  of, in  aid  of  describing                                                                    
Mr.  Alper answered  in the  negative, and  stated that  the                                                                    
administration recognized  the industry hardship  created as                                                                    
a  result of  not paying  tax  credits. He  stated that  the                                                                    
administration would like to find  a complete solution to be                                                                    
able to  pay off  the tax  credits in  the current  year. He                                                                    
thought  there  were  technical   questions  that  could  be                                                                    
discussed at a  later time; such as the  effective tax rate.                                                                    
He  discussed the  effective tax  rate of  SB 21,  which was                                                                    
substantially  lower than  the 35  percent calculated  rate.                                                                    
The carry-forwards were already  valued at 35 percent, which                                                                    
he  thought could  be considered  as a  built-in uplift.  He                                                                    
opined that  there was  probably not  a need  for additional                                                                    
interest because of the difference  between the value of the                                                                    
carry-forwards  against taxes  versus  the actual  effective                                                                    
tax rate paid by the companies.                                                                                                 
9:18:52 AM                                                                                                                    
Senator  von   Imhof  referred   to  the   technical  issues                                                                    
highlighted   in   red  on   the   slide.   She  asked   (if                                                                    
hypothetically there  was no  uplift) how  the NOL  would be                                                                    
utilized with  the GVR. She  wondered how it  might preserve                                                                    
an NOL going forward if a GVR was taken first.                                                                                  
Mr. Alper  explained that  the issues  were not  related. He                                                                    
used  the example  of a  company that  lost $20  million the                                                                    
previous year, but had production  from a new field that had                                                                    
a  gross value  of $100  million.  He explained  that a  GVR                                                                    
functioned when 20 percent of  the gross was subtracted from                                                                    
the net;  which was a provision  that was added in  SB 21 in                                                                    
order  to  lower taxes.  With  $100  million in  profits,  a                                                                    
company would only pay taxes  on $70 million to $80 million.                                                                    
For tax  calculation purposes, the  company's loss  would be                                                                    
$40 million,  which was  comprised of  the $20  million loss                                                                    
and an additional subtracted 20  percent. He summarized that                                                                    
35 percent  of the  $40 million loss  would be  $14 million,                                                                    
and  the company's  credit  became 70  percent  of the  loss                                                                    
instead  of 35  percent. He  explained that  the inadvertent                                                                    
outcome had  not been  contemplated when  oil was  at higher                                                                    
prices, and no  one had questioned what would  happen when a                                                                    
producer was losing  money. He stated that there  had been a                                                                    
technical fix the previous session.                                                                                             
Mr.  Alper  continued  to  speak   to  Senator  von  Imhof's                                                                    
question.  He   believed  the  way  the   bill  was  written                                                                    
satisfied the previous committee  chair's intent that carry-                                                                    
forward credits  were not wasted.  He shared that  under the                                                                    
House version  of the bill,  a company with $100  million in                                                                    
profit  could use  $100 million  in carry-forwards  to bring                                                                    
the  net to  zero,  and  still pay  the  minimum tax.  After                                                                    
changes to the Senate version  of HB 111, the carry-forwards                                                                    
would not  be used faster than  what it would take  to get a                                                                    
company to the minimum tax floor.                                                                                               
9:22:13 AM                                                                                                                    
Mr.  Alper showed  slide 12,  "Elimination of  Cash Credits-                                                                    
Middle Earth":                                                                                                                  
     Middle  Earth credits  were generally  cut  in half  by                                                                    
     • Currently  has a  15% NOL. This  can be  stacked with                                                                    
     either a 10% Qualified  Capital Expenditure, a 20% Well                                                                    
     Lease Expenditure, or (through  2021) a 40% Exploration                                                                    
     •  Bill  deletes the  NOL  outright,  so state  support                                                                    
     decreases from 25%-55% to 10%-40%                                                                                          
     •  Remaining  QCE  (023(a)) and  WLE  (023(l))  credits                                                                    
     continue to be earned  and turned into certificates, as                                                                    
     do (through 2021) exploration credits                                                                                      
     •  Due   to  time  language  and   fund  repeal,  these                                                                    
     certificates  would no  longer  be  cashable and  could                                                                    
     only be  either held to  use against liability  or sold                                                                    
     •  No uplift  or carry  forward, which  are limited  to                                                                    
     North Slope losses                                                                                                         
Mr. Alper explained  that Middle Earth credits  were not the                                                                    
primary  focus  of  the  bill, but  were  affected  by  some                                                                    
changes being made.  The bill would delete  the Middle Earth                                                                    
NOL credit completely. A company  doing work in Middle Earth                                                                    
(areas not in  Cook Inlet or the North Slope)  would get any                                                                    
one of the  three credits on the slide, but  not in addition                                                                    
to  the 15  percent NOL  credit. He  qualified that  overall                                                                    
state support was decreasing.                                                                                                   
9:24:33 AM                                                                                                                    
Mr. Alper discussed slide 13,  "Elimination of Cash Credits-                                                                    
Credit Fund":                                                                                                                   
     Eliminate the tax  credit fund by repealing  most of AS                                                                    
     •This has  much broader impact than  simply eliminating                                                                    
     the NOL credit                                                                                                             
          oNew Middle Earth credits are no longer cashable                                                                      
          o Credits still outstanding after 1/1/18 would                                                                        
          require specific appropriation to DOR for any                                                                         
          o The "corporate income tax" credits (LNG                                                                             
          Storage, Refinery) remain cashable by specific                                                                        
          appropriation until they sunset                                                                                       
          o Repeals per-company "cap" language from HB247                                                                       
     One lesson of the 2006-2007 period was that running a                                                                      
     cashable credit program without a fund is cumbersome                                                                       
Mr. Alper explained that the  tax credit fund was the method                                                                    
by  which  the  legislature  appropriated  money  which  the                                                                    
Department of Revenue (DOR) used  to pay off tax credits. He                                                                    
informed  that there  needed to  be a  method to  ensure the                                                                    
remaining cashable credits were  cashed, which would require                                                                    
specific appropriation, and was  how it was originally done.                                                                    
He  discussed  the  history of  payment  for  cash  credits.                                                                    
Section 6 of  the bill created a new mechanism  by which the                                                                    
legislature  could directly  appropriate  money to  purchase                                                                    
"corporate  income  tax" credits  until  the  sunset in  the                                                                    
following three or four years.                                                                                                  
Mr.  Alper discussed  the last  bullet on  the slide,  which                                                                    
referred to the  $70 million per-company cap;  and the split                                                                    
by which  the first  $35 million was  at full  value, beyond                                                                    
which  the  company would  have  to  take  75 cents  on  the                                                                    
dollar. He  understood the desire  to repeal the  tax credit                                                                    
fund, but  recommended that the  repeal be delayed  a couple                                                                    
of years to clear the books.                                                                                                    
9:27:49 AM                                                                                                                    
Co-Chair  MacKinnon  asked  if   the  administration  had  a                                                                    
position  on the  tax credits  for the  refinery and  liquid                                                                    
natural gas (LNG) storage facilities.                                                                                           
Mr. Alper answered  in the negative, and  did not personally                                                                    
have a position  on the matter. He thought  the credits were                                                                    
an important  tool that were put  in place for a  reason. He                                                                    
observed  that the  LNG storage  facility  had credits  that                                                                    
were continuously pushed  back a year. The  project had been                                                                    
somewhat  delayed,  and  the  state  was  hopeful  that  the                                                                    
Interior Gas  Utility would buy  the large tank to  earn the                                                                    
credit. The  credit was modelled  on the credit used  in the                                                                    
Kenai  to  build  the  successful  Cook  Inlet  Natural  Gas                                                                    
Storage Alaska  (CINGSA) gas storage facility.  He hoped for                                                                    
a similar successful project to  help with utility prices in                                                                    
the Interior.                                                                                                                   
Mr. Alper  discussed the refinery  credit, which  was short-                                                                    
term and used  by companies. He thought the  downside to the                                                                    
state was  somewhat capped; since  there was a limit  on the                                                                    
number of users,  time frame, and dollar  amount. He thought                                                                    
it was an aspect of the  system that the state should see to                                                                    
fruition and hope for positive  results. He used the example                                                                    
of  PetroStar's  asphalt  facility,  which  was  a  tangible                                                                    
example  of the  refinery  credit. It  was  argued that  the                                                                    
facility made  road-building in the  state cheaper,  and the                                                                    
tax credit system was responsible in part.                                                                                      
Co-Chair MacKinnon  asked if the administration  was picking                                                                    
winners and losers with the tax credits.                                                                                        
Mr.  Alper  stated that  the  statutes  were written  fairly                                                                    
broadly, and any refinery would  be eligible for the credit.                                                                    
He  stated   that  there  had   been  legislation   in  2012                                                                    
pertaining  to   the  Interior   Gas  Utility   LNG  storage                                                                    
facility, but had affected other utilities.                                                                                     
Co-Chair  MacKinnon asked  if it  was fair  to say  that the                                                                    
administration  prioritized  the  refinery credit,  the  LNG                                                                    
credit, and the  storage facility credit because  it was not                                                                    
making a suggestion that they were repealed.                                                                                    
Mr.  Alper stated  that the  administration had  not made  a                                                                    
suggestion to  repeal any particular credit.  He thought the                                                                    
particular  credits  were  somewhat  encumbered  within  the                                                                    
existing  system because  of the  calendar. The  NOL credits                                                                    
earned by most companies were  (for the most part) issued in                                                                    
the month  of July because  of statutory language.  He noted                                                                    
that credits against the corporate  income tax tended not to                                                                    
get  claimed until  October, when  corporate income  tax was                                                                    
claimed.  If the  state  was short  on  cash, those  credits                                                                    
missed out  on the funds  because of the  first-in first-out                                                                    
regulatory  language. He  furthered  that because  companies                                                                    
were not currently eligible to  get tax credit certificates,                                                                    
they  were left  in a  sort of  limbo. He  recounted working                                                                    
with a  taxpayer on the  issue earlier  in the year.  If the                                                                    
credits  were  going to  remain,  he  suggested making  them                                                                    
certifiable, so  the credits could  be treated  more equally                                                                    
with other credits. He did  not think the administration was                                                                    
showing  favoritism,  but  rather  he was  pointing  out  an                                                                    
existing inequality in the system.                                                                                              
Co-Chair  MacKinnon  believed  that the  administration  had                                                                    
been on the record as not supporting cashable credits.                                                                          
9:32:14 AM                                                                                                                    
Vice-Chair  Bishop suggested  that  the  gas storage  credit                                                                    
(the CINGSA credit) was limited to one project.                                                                                 
Mr. Alper concurred.                                                                                                            
Vice-Chair Bishop asked if the credit could go away.                                                                            
Ms.   Alper  stated   that  there   had  been   an  internal                                                                    
conversation with  Senate staff on the  matter during debate                                                                    
on  HB  247. He  elaborated  that  there was  a  "claw-back"                                                                    
provision that  stated if the  project went out  of business                                                                    
within a  certain number of  years, there was  an obligation                                                                    
to pay back  a certain portion of the credit.  He thought it                                                                    
would be wise  to keep the credit on the  books until it was                                                                    
past the provision deadline. He  thought that other than the                                                                    
provision it was possible to repeal the credit.                                                                                 
Vice-Chair  Bishop  asked  about the  LNG  storage  facility                                                                    
credit, and whether it was for one storage tank project.                                                                        
Mr. Alper recalled that the  credit was broadened from being                                                                    
targeted from  specifically at the Interior  Gas Utility. He                                                                    
thought it was  broadened but there was  an expectation that                                                                    
it  was for  the company  that got  there first.  He thought                                                                    
there  was an  expectation  that  it would  be  used by  the                                                                    
Fairbanks utility.                                                                                                              
Senator  Micciche asked  about  a project  in Glenallen.  He                                                                    
thought that  sometimes credits were  used to  encourage the                                                                    
economics  of  a  project  that  was  unlikely  to  ever  be                                                                    
uneconomical.  He thought  Mr. Alper  had asserted  that the                                                                    
storage facility  credit was for  one project, but  had also                                                                    
mentioned another possible project in Glenallen.                                                                                
Mr. Alper  relayed that the  matter had been debated  in the                                                                    
House Resources Committee in 2012  when the legislation that                                                                    
created the  credit was being  considered. He  recalled that                                                                    
the legislator  representing the  Glenallen area  had wanted                                                                    
to broaden the language so  the Glenallen project would also                                                                    
be eligible to receive the  credit. He had recalled that the                                                                    
credit  was  available  for  more   than  one  project,  and                                                                    
appreciated Vice-Chair  Bishop's clarification.  He restated                                                                    
that the  credit was only  for a single project,  but either                                                                    
potential project  could receive  it. The  Fairbanks project                                                                    
was  much farther  along and  therefore far  more likely  to                                                                    
claim the  credit. He added  that realistically the  size of                                                                    
the credits  ($15 million)  was more suited  to the  size of                                                                    
tank that a  Fairbanks utility would get  versus the smaller                                                                    
tanks that a small-town utility would need.                                                                                     
Co-Chair  MacKinnon  asked  if  it was  fair  that  the  gas                                                                    
storage being discussed was closed  to new project entrants,                                                                    
and projects had to begin  operations before 2016 to qualify                                                                    
for the CINGSA credit.                                                                                                          
Mr.  Alper  answered in  the  affirmative,  and stated  that                                                                    
CINGSA was perceived to be  a successful project. He thought                                                                    
the   project  had   done   great   things  for   seasonable                                                                    
availability  in  the Cook  Inlet.  He  continued that  Cook                                                                    
Inlet was the only area that  used native natural gas, so it                                                                    
was the only  place that could plausibly  use an underground                                                                    
storage  facility. The  intent of  the credit  (part of  the                                                                    
Cook Inlet Recovery Act in  2010) was to create the seasonal                                                                    
stability. He  did not think  there was a broader  intent to                                                                    
include  other   locations,  because   it  was   not  needed                                                                    
elsewhere.  The  law  had  been written  tightly  so  as  to                                                                    
preclude  unintended   uses.  He  thought  if   it  was  the                                                                    
legislature's desire  to make  more credits  for underground                                                                    
gas storage,  there could  be additional  dialogue; however,                                                                    
he could not envision a need for it anywhere in the state.                                                                      
9:36:59 AM                                                                                                                    
Vice-Chair Bishop  thought the  CINGSA storage  facility was                                                                    
interesting, as  more gas was  found when drilling  was done                                                                    
for the tanks.                                                                                                                  
Senator Micciche  thought many people had  claimed ownership                                                                    
of  the gas.  He recalled  Mr. Alper  had stated  CINGSA was                                                                    
related to  Cook Inlet,  and wanted to  clarify that  all of                                                                    
the natural gas  being used in the state  (including the LNG                                                                    
being used  in the Interior  energy project) came  from Cook                                                                    
Inlet and took advantage of the CINGA supply benefits.                                                                          
Mr.  Alper  concurred,  and  stated  that  because  the  gas                                                                    
originated  in  Cook Inlet,  it  would  naturally be  stored                                                                    
there.  He   explained  that  an  underground   gas  storage                                                                    
facility was for  the most part an empty gas  field that was                                                                    
being reinjected. He  restated Vice-Chair Bishop's reference                                                                    
to the  gas that  was found during  the CINGSA  project, and                                                                    
the open  question as to who  owned the gas. He  stated that                                                                    
the administration did not have a position on the matter.                                                                       
Co-Chair MacKinnon stated that an  LNG credit referred to in                                                                    
the Revenue Resource  Book was available to  anywhere in the                                                                    
state, and thought the legislature  could consider a repeal.                                                                    
The credit stipulated operations must begin before 2020.                                                                        
Mr.  Alper  stated  that  the  Cook  Inlet  underground  gas                                                                    
storage  facility was  a successful  project that  satisfied                                                                    
the mission for which it was created.                                                                                           
9:39:52 AM                                                                                                                    
Mr.  Alper turned  to  slide 14,  "Expanded  Ability to  Use                                                                    
Credits- Explorers":                                                                                                            
     Exploration  credits can  be used  to offset  Corporate                                                                    
     Income Taxes in addition to Production Tax                                                                                 
     •Limited  to company-earned  credits and  the company's                                                                    
     own taxes.  Although not  explicit in  language, intent                                                                    
     is to  not have  credits be  transferable to  other CIT                                                                    
     •As written, potentially impacts  about $200 million in                                                                    
     current and  pending applications, plus any  new Middle                                                                    
     Earth exploration credits earned through 2021                                                                              
     •Most explorers  are not Alaska CIT  taxpayers, so this                                                                    
     change would not be a material issue for them                                                                              
     •Provides  for  separate   specific  appropriations  to                                                                    
     purchase  remaining Corporate  Income Tax  (gas storage                                                                    
     and refinery) credits before they sunset                                                                                   
Mr. Alper  relayed that the  provisions listed on  the slide                                                                    
were   added  in   part  to   compensate  for   the  limited                                                                    
availability  of cash,  to the  governor's  vetoes, and  the                                                                    
expectation   that  there   might  no   longer  be   funding                                                                    
available. He indicated that there  was a lot of highlighted                                                                    
red  areas of  text on  the slide,  as there  had been  some                                                                    
uncertainty when initially reading  the bill. After spending                                                                    
time  with Co-Chair  MacKinnon's office,  the administration                                                                    
was relieved to understand the intent of the bill.                                                                              
Mr. Alper  continued discussing the  points on slide  14. He                                                                    
used an  example of an  explorer that  had a credit  with no                                                                    
access to cash or payment  of production tax. If the company                                                                    
was  a  corporate  income  tax   payer,  it  could  use  the                                                                    
exploration credit  to offset its own  corporate income tax.                                                                    
He noted that the exploration  credits had already sunset in                                                                    
the North Slope  and in Cook Inlet; and  the issue pertained                                                                    
to Middle Earth.                                                                                                                
Mr. Alper  elaborated that many  of the explorers  doing the                                                                    
work  in   the  Middle  Earth  area   were  regional  Native                                                                    
corporations  such   as  Doyon  and  Ahtna,   which  were  C                                                                    
corporations  that could  be corporate  income taxpayers  by                                                                    
meeting   certain  definitions.   He   continued  that   the                                                                    
corporations  could   use  exploration  credits   to  offset                                                                    
liability. He  thought it  was not  entirely clear  (but was                                                                    
somewhat clear  by omission  in the  bill) that  the credits                                                                    
were  not transferrable.  It was  not possible  to sell  the                                                                    
exploration  credits  to  another  company  to  use  against                                                                    
corporate  income tax.  He thought  there  had been  initial                                                                    
concern that  the credits  could spread  to outside  the oil                                                                    
and gas industry.                                                                                                               
Mr.  Alper continued  discussing  corporate  income tax.  He                                                                    
thought  that as  it was  written, the  language would  also                                                                    
apply to  the roughly $200  million in existing  and pending                                                                    
applications  or   certificates  for   exploration  credits,                                                                    
mostly from  the North  Slope and  Cook Inlet.  The existing                                                                    
certificates would  not be  usable against  corporate income                                                                    
tax. He expected to see  a clarification in the next version                                                                    
of the  bill. He  thought many of  the smaller  companies in                                                                    
question were  not corporate income taxpayers,  so there was                                                                    
a limited  scope to  the change  being proposed.  He thought                                                                    
the  real   impact  would  be  to   provide  an  alternative                                                                    
mechanism  for  the  regional  Native  corporations  in  the                                                                    
Interior  to  be  able to  monetize  their  own  exploration                                                                    
Mr. Alper  pointed out that  the section addressed  on slide                                                                    
14 provided for a  separate appropriation (after elimination                                                                    
of the tax  credit fund) to pay off  the remaining corporate                                                                    
income tax credits before the sunset in 2023.                                                                                   
9:43:30 AM                                                                                                                    
Co-Chair  MacKinnon referred  to  the second  bullet on  the                                                                    
slide, which  referred to a  potential impact to  about $200                                                                    
million in  current and pending  applications. She  asked if                                                                    
the new  fiscal note  reflected an updated  understanding of                                                                    
the  intention  of  the Senate  Resource  Committee  in  the                                                                    
Committee Substitute (CS).                                                                                                      
Mr.  Alper stated  that the  $200 million  was inclusive  of                                                                    
$150 million  in pending applications, and  $50 million that                                                                    
was already  in company hands.  He stated that  the baseline                                                                    
assumption was assuming the demand  for the credits was paid                                                                    
in the first year. He  referred to the Revenue Sources Book,                                                                    
which showed  over $1 billion  in expected  credit purchases                                                                    
in FY  18, in which the  $200 million was included.  Some of                                                                    
the obligation  would be pushed  in to the future,  but none                                                                    
of the assumptions of the bill would be changed.                                                                                
Co-Chair MacKinnon  asked for clarification that  the fiscal                                                                    
note did not contain the $200 million of potential impact.                                                                      
Mr. Alper answered in the negative.                                                                                             
Senator von  Imhof considered the  second and  third bullets                                                                    
on the  slide. She asked if  the credit would every  be used                                                                    
because most companies did not pay corporate income tax.                                                                        
Mr. Alper  responded that the  companies that would  own the                                                                    
$200 million in current  and pending tax credit applications                                                                    
were  generally either  not corporate  income taxpayers,  or                                                                    
had certificates  that were assigned to  third parties (such                                                                    
as a bank). He stated  that the administration did not model                                                                    
based on any  assumption that there would be  changes to the                                                                    
circumstances around the $200 million listed on the slide.                                                                      
9:46:03 AM                                                                                                                    
Co-Chair MacKinnon  thought there had  been misunderstanding                                                                    
that suggested  that Alaska Native corporations  did not pay                                                                    
corporate  income  tax.  She  referred  to  emails  she  had                                                                    
received.  She asked  Mr. Alper  to elucidate  what entities                                                                    
paid corporate income tax, who did not, and why.                                                                                
Mr. Alper pointed out that  corporate income tax was not his                                                                    
area of expertise.  He stated that corporate  income tax was                                                                    
very similar  to federal corporate income  tax. He discussed                                                                    
the   difference   between    "C"   corporations   and   "S"                                                                    
corporations,   and  informed   that  C   corporations  were                                                                    
shareholder-based,  and the  earnings were  retained by  the                                                                    
entity. The earnings  of an S corporation  passed through to                                                                    
the owners, and therefore it did  not have to pay income tax                                                                    
in  Alaska. He  qualified that  S corporations  had to  have                                                                    
less than 100 shareholders.  He noted that Alaska's regional                                                                    
Native corporations were traditional  C corporations. If the                                                                    
corporations were  profitable and had a  tax liability, they                                                                    
paid  taxes.  He pointed  out  that  he  could reveal  if  a                                                                    
certain corporation  paid taxes, because it  would reveal if                                                                    
that  entity  was  profitable,   which  would  constitute  a                                                                    
violation of taxpayer confidentiality.                                                                                          
Co-Chair MacKinnon  summarized that the succinct  answer was                                                                    
that  Alaska Native  corporations were  C corporations,  and                                                                    
did pay income tax at  the appropriate calculation just like                                                                    
every other corporate tax payer.                                                                                                
Mr. Alper  concurred, and  offered to  send a  sector report                                                                    
for the member's information.                                                                                                   
9:49:14 AM                                                                                                                    
Vice-Chair  Bishop asked  about the  shareholder limitations                                                                    
for S corporations.                                                                                                             
Mr.  ALper  felt  he  was  venturing to  the  limit  of  his                                                                    
expertise on the  matter. He believed that to  qualify as an                                                                    
S  corporation,  a  company  had  to  have  fewer  than  100                                                                    
Co-Chair  MacKinnon  referred  to  the  aforementioned  $200                                                                    
million in current and pending  applications, and asked what                                                                    
portion  was  available for  cash  credits  that were  being                                                                    
Mr. Alper stated that all  of the credits were existing, and                                                                    
were based on  work that was done before  the effective date                                                                    
of any legislation being considered,  and would thereby fall                                                                    
into the preexisting system. He  thought it was important to                                                                    
know that  there was  $477 million in  credits that  were in                                                                    
company hands on  January 1, 2017; and the  credits were the                                                                    
next  set  that  would  be paid.  Whatever  the  legislature                                                                    
appropriated  in  the current  year,  it  would be  paid  to                                                                    
credits  on a  pro rata  share  basis. If  $200 million  was                                                                    
appropriated, everyone would get paid  about 15 cents on the                                                                    
dollar.  The   next  $477  million  that   was  appropriated                                                                    
(whether it  took one year  or five  years) would go  to the                                                                    
credit-holders.  He detailed  that within  the total,  about                                                                    
$50  million was  for exploration  credits.  The other  $150                                                                    
million was  part of  the set of  credits that  were pending                                                                    
and under review,  and would be issued in 2017  and would be                                                                    
cashable before the effective date of the bill.                                                                                 
Co-Chair  MacKinnon  thought  the description  sounded  like                                                                    
bankruptcy court.                                                                                                               
9:51:28 AM                                                                                                                    
Mr.  Alper  showed  slide  15,   "Expanded  Ability  to  Use                                                                    
Credits-Past Liability":                                                                                                        
     Allows  credits   to  be  used  to   offset  older  tax                                                                    
     •Language appears  three times, in  Sec. 7 (use  of 023                                                                    
     credits), 9  (use of transferred certificates),  and 13                                                                    
     (transferred exploration certificates)                                                                                     
     •Most older / amended  liabilities result from an audit                                                                    
     or other  "administrative proceeding;" these  taxes are                                                                    
     generally paid  to the CBRF  so if credits can  be used                                                                    
     to offset it means less deposits into the CBRF                                                                             
     •This is the only context  in which a credit or similar                                                                    
     benefit is allowed to offset  penalties or interest (as                                                                    
     opposed to the tax)                                                                                                        
     •Could be  used to  offset conservation  surcharges (AS                                                                    
     43.55.200-300)    or    private   royalty    tax    (AS                                                                    
     •Purchased 023  credits can  currently offset  only 20%                                                                    
     of  a current  year  tax liability.  When used  against                                                                    
     past years,  this is superseded,  allowing use  all the                                                                    
     way to the minimum tax floor                                                                                               
Mr. Alper  stated that the  slide showed a new  provision of                                                                    
the bill  which allowed  for a  company to  purchase others'                                                                    
tax  credits certificates  to offset  a  tax liability  that                                                                    
came from a  period of time earlier than  the credit itself.                                                                    
It was  not currently  allowed in statute,  and DOR  had put                                                                    
out  an advisory  bulletin in  late 2016  (advisory bulletin                                                                    
16-01) that had asserted  the prohibition. He explained that                                                                    
the  concept  of  "administrative proceeding"  was  language                                                                    
from Article 9,  Section 17 of the  Alaska Constitution, and                                                                    
stated  that any  revenue resulting  from an  administrative                                                                    
proceeding relating to resources  would get deposited in the                                                                    
Constitutional  Budget  Reserve  (CBR). He  added  that  the                                                                    
initial  funding  that  created  the  CBR  came  from  large                                                                    
royalty lawsuits the state settled  with the industry in the                                                                    
Mr.  Alper continued  to  speak to  slide  15. He  discussed                                                                    
audit assessments, and relayed  that the department had just                                                                    
completed an older  round of audits with  $193 million worth                                                                    
of  total assessments.  He  informed  that potentially,  the                                                                    
money could be  paid with purchased tax  credits. He thought                                                                    
the legal  status was somewhat unclear,  and referenced case                                                                    
law (Hickel vs.  Halford, 1994). It was  unclear whether the                                                                    
administrative  proceeding was  triggered when  the tax  was                                                                    
paid or  assessed. It was  possible for companies  to divert                                                                    
money from the  CBR by purchasing tax credits  to offset old                                                                    
Mr.   Alper  discussed   the   policy   choice  around   the                                                                    
allowability   of  using   credits  to   pay  interest   and                                                                    
penalties. He informed  that the way the  bill was currently                                                                    
written, purchased  credits could  also be used  backward in                                                                    
time to  offset penalties  and interest  in addition  to the                                                                    
additional tax  found to be  due through  the administrative                                                                    
Mr. Alper  highlighted the  fourth bullet  in red,  which he                                                                    
did  not  think   had  been  the  intent   of  the  previous                                                                    
committee. He  detailed that the conservation  surcharge was                                                                    
a nickel-per-barrel  tax that went towards  the spill clean-                                                                    
up  and  recovery  program.  He thought  there  would  be  a                                                                    
forthcoming  version  of the  bill  that  would address  the                                                                    
technical concern highlighted in the fourth bullet.                                                                             
9:56:14 AM                                                                                                                    
Mr. Alper spoke to slide 16, "Changes to Minimum Tax":                                                                          
     •With  NOL credits  converted to  carry-forwards, those                                                                    
     carry-forwards  cannot be  used to  reduce taxes  below                                                                    
     the minimum tax. Hardens floor at very low prices                                                                          
     •Most  credits can  be used  below the  minimum tax  to                                                                    
     zero  per existing  statutes, but  are  limited if  the                                                                    
     taxpayer  is  also  using .024(j)  (sliding  scale  per                                                                    
     barrel) credits                                                                                                            
     •Senate  Resources  HB111  specifically  exempts  those                                                                    
     other  credits that  are  currently  not cashable  (GVR                                                                    
     per-barrel credit in .024(i)  and small producer credit                                                                    
     in .024(c)) to be used  below the minimum tax, to zero.                                                                    
     This supersedes direction in advisory bulletin 2017-01                                                                     
     •Other  credits  are  still  limited  by  the  advisory                                                                    
     bulletin,  although  exploration credits  used  against                                                                    
     corporate income tax can also reduce liability to zero                                                                     
Mr.  Alper  recounted that  the  issue  of hardness  of  the                                                                    
minimum floor had  been hotly debated the  previous year. He                                                                    
qualified that "hard"  meant what could be done  to reduce a                                                                    
tax payment  below the minimum  tax, and  in what way  was a                                                                    
taxpayer held to  pay the minimum tax. He referred  to a DOR                                                                    
advisory   bulletin  (2017-01)   with  regulatory   language                                                                    
pertaining to  an interaction with sliding  scale per-barrel                                                                    
credits. He  discussed the  specific floor  hardening within                                                                    
the  bill, which  was only  truly relevant  at prices  below                                                                    
about $40/per barrel (bbl). He  explained that the provision                                                                    
would protect  a certain amount  of revenue to the  state at                                                                    
lower  oil   prices.  He  added  that   most  credits  could                                                                    
currently be  used below  the floor,  with the  exception of                                                                    
when the  credits were interreacting with  sliding scale per                                                                    
barrel credits.                                                                                                                 
Mr. Alper  continued, noting a  couple of exemptions  in the                                                                    
bill that specified  certain credits not be  hardened to the                                                                    
floor. The exemptions resulted in  small negative numbers on                                                                    
the fiscal  note, which  were reflective  of a  reduction in                                                                    
revenue from certain provisions in the bill.                                                                                    
Mr.  Alper discussed  slide  17,  "Other Exploration  Credit                                                                    
     •Exploration credits  sunset on  7/1/16 for  both North                                                                    
     Slope  and  Cook  Inlet.  Credit  had  been  previously                                                                    
     extended  for  the rest  of  the  state "middle  earth"                                                                    
     through 1/1/22                                                                                                             
     •New  timetable to  issue  exploration  credits to  120                                                                    
     days  after receipt  of application  and data.  This is                                                                    
     not tied  to a specific  tax filing deadline,  which is                                                                    
     the way  the 120  day deadline in  the .023  credits is                                                                    
     •Require  clarification  that   the  required  data  is                                                                    
     submitted to  DNR. Also, they typically  take well more                                                                    
     than  120  days  to process  especially  seismic  data.                                                                    
     Unclear intent in this circumstance                                                                                        
Mr. Alper  referred to frustration  that DOR had  not turned                                                                    
around  exploration  credits  quickly enough.  He  explained                                                                    
that most  other actions  had a fixed  timetable, so  it was                                                                    
almost inevitable  to exploration credits would  lag without                                                                    
a timetable.  He detailed  that there was  some issue  as to                                                                    
how the  new timetable  for exploration credits  proposed in                                                                    
the bill would interact with  the required provision of some                                                                    
data  to the  Department  of Natural  Resources. He  thought                                                                    
that  conceptually  the  addition  of  a  timetable  to  the                                                                    
exploration credits  was not problematic to  the department,                                                                    
but did not want to put undue  burdens on DOR or DNR to rush                                                                    
the processing of a sizable data set.                                                                                           
10:01:12 AM                                                                                                                   
Senator von  Imhof referred to  the third bullet,  which was                                                                    
in red. She  thought the 120-day limit  was specifically for                                                                    
seismic credits.                                                                                                                
Mr. Alper stated that there  was a lot of technical language                                                                    
in the bill, and thought that  if the intent of the bill was                                                                    
only to  put the  timetable on the  seismic credits,  he had                                                                    
not  been  fully aware.  He  stated  that there  were  other                                                                    
exploration  drilling  activities  taking  place  in  Middle                                                                    
Earth. If the  intent was for the timetable to  not apply to                                                                    
the other activities, he was happy for the clarification.                                                                       
Co-Chair  MacKinnon  stated  that  there may  be  a  120-day                                                                    
timetable consideration on another credit as well.                                                                              
Mr. Alper asked Co-Chair MacKinnon  if it was the intent for                                                                    
the timetable to apply to drilling exploration credits.                                                                         
Co-Chair MacKinnon  stated that the language  would come out                                                                    
in a new committee substitute (CS).                                                                                             
Mr. Alper  apologized for his  lack of understanding  of the                                                                    
nuances of the current version bill.                                                                                            
Co-Chair  MacKinnon clarified  that  the committee  expected                                                                    
Mr. Alper to  speak to the current version of  the bill, and                                                                    
the current  version only had  a timetable for  seismic data                                                                    
exploration credits.                                                                                                            
Mr. Alper moved to slide 18, "Use of Carry Forwards":                                                                           
     Senate Resources version of HB111 provides a partial                                                                       
     or limited "Ringfence" of uplifted value                                                                                   
     • The actual carried forward loss can be used to                                                                           
     offset any taxable production tax income, at any time                                                                      
          o So the value could potentially be used without                                                                      
          the project in question being brought into                                                                            
     • Use of the interest portion, or uplift, has                                                                              
     additional limitations                                                                                                     
          o Company must have North Slope production                                                                            
          o Company must have some lease interest in the                                                                        
          property where the expenses were originally                                                                           
          o Commercial production must have begun on the                                                                        
          lease or property where the expenditure was                                                                           
Mr.  Alper discussed  a hypothetical  situation  in which  a                                                                    
company that  had backlog of  a lot of  loss carry-forwards,                                                                    
and then struggled with a  failing project. He thought there                                                                    
could  be  a scenario  under  which  the producer  sold  the                                                                    
project,  but  in  essence  was  selling  the  carry-forward                                                                    
losses  that another  company could  use to  offset its  own                                                                    
legacy production from existing  fields; thereby costing the                                                                    
state a lot  of potential tax revenue. He  thought there was                                                                    
a  partial  solution  in  the  bill. He  had  put  the  word                                                                    
"production" in red on the  second bullet, as there was some                                                                    
a   technical  consideration   as  to   the  definition   of                                                                    
"production."  He  thought  there  might  be  a  forthcoming                                                                    
change to align the definitions.                                                                                                
Mr. Alper  continued discussing slide  18, and  pondered the                                                                    
issue  of whether  there  was  a limitation  on  the use  of                                                                    
carry-forwards.   The  applicable   sections  of   the  bill                                                                    
addressed  how  the  limitation was  different  between  the                                                                    
principal and the  interest, as well as how  much surety was                                                                    
the state getting  that any field would  actually be brought                                                                    
into  production   before  the  state  gave   it  value.  He                                                                    
referenced Section 21 and Section 22 in the bill.                                                                               
10:05:38 AM                                                                                                                   
Co-Chair MacKinnon had heard Mr.  Alper refer to 'uplift' as                                                                    
interest, and  understood it was  one way to  define keeping                                                                    
an  entity's  value  whole. She  referenced  inflation,  and                                                                    
wondered about an accurate definition of uplift.                                                                                
Mr. Alper  stated that  uplift was  an excess  of inflation,                                                                    
and DOR's  modelling for all economic  forecasting assumed a                                                                    
baseline inflation rate of about  2.25 percent per year. The                                                                    
uplift  provided in  HB  111  was 10  percent  per year.  He                                                                    
understood  that  the  uplift  provision  was  in  order  to                                                                    
compensate  the  companies  for   the  time-value  of  money                                                                    
(expected investment returns,  opportunity cost, or weighted                                                                    
average cost  of capital). He  informed that  most companies                                                                    
spending money on large oil  field were borrowing funds, and                                                                    
would  be compensated  by uplift  for the  cost of  carrying                                                                    
forward  the debt  into a  future year.  Currently the  bill                                                                    
provided for  10 percent  for up to  seven years,  and there                                                                    
were many different inflation rates to consider.                                                                                
Co-Chair MacKinnon  observed that Mr. Alper  had stated that                                                                    
instead  of  the 10  percent  stipulated  in the  bill,  the                                                                    
administration  considered  2.25  percent to  be  inflation-                                                                    
Mr. Alper agreed.                                                                                                               
10:07:53 AM                                                                                                                   
Mr. Alper explained slide 19, "Interest Rate Changes":                                                                          
     • Removes  zero interest provisions that  were added in                                                                    
     HB247, and restores oil and  gas production to the SB21                                                                    
     rate (3%  + fed)  although with compound  interest, and                                                                    
     makes this change for all taxes                                                                                            
     • Current federal discount rate  is 1.5%; interest rate                                                                    
     is  8.5% compounding  (4.5%  simple  for other  taxes).                                                                    
     Senate Resources  HB111 would make it  4.5% compounding                                                                    
     for all                                                                                                                    
     o We  testified in  2016 that  interest rate  should at                                                                    
     least  match  the  expected   Permanent  Fund  rate  of                                                                    
     return,  which  is  the state's  opportunity  cost  for                                                                    
     unpaid taxes                                                                                                               
    o That is currently about 7%, or roughly 5.5% + fed                                                                         
Mr. Alper  informed that  the slide had  nothing to  do with                                                                    
uplift, but rather with the  interest rate paid by taxpayers                                                                    
to  the state  tax division  when there  was delinquent  tax                                                                    
found by an audit. He thought  it was important to know that                                                                    
the  provision dealt  with  a two-way  interest  rate. If  a                                                                    
company overpaid,  it would be  paid back with  interest. If                                                                    
the audit  was challenged  and the  company won  against the                                                                    
state,  the state  would pay  back the  funds with  the same                                                                    
rate of interest.                                                                                                               
Mr. Alper recalled  that Alaska used to have a  very high 11                                                                    
percent  compounding  interest  rate related  to  delinquent                                                                    
taxes.   He  believed   that  SB   21   bill  language   had                                                                    
inadvertently removed  the compounding  provision in  a late                                                                    
amendment, resulting in a 4.5  percent simple interest. With                                                                    
the passage of  HB 247 in the  previous legislative session,                                                                    
the oil  and gas production tax  was carved out from  all of                                                                    
the underlying interest language,  and specified an interest                                                                    
rate of 7 percent. The  interest rate would remain for three                                                                    
years and then revert to  zero. He understood the intent was                                                                    
the  extended timeframe  on completion  of audits.  If there                                                                    
was an  appeal or long  court proceeding, there would  be no                                                                    
interest in the outlying years.                                                                                                 
Mr. Alper stated  that the bill would get rid  of the 3-year                                                                    
interest sunset. The bill would  also re-align all the taxes                                                                    
so that  the oil  and gas  production tax  would not  have a                                                                    
separate  interest regime  from all  other taxes.  He shared                                                                    
that the  administration believed that the  interest rate on                                                                    
delinquent   taxes  should   roughly  reflect   the  state's                                                                    
opportunity cost, since  the state was most  likely going to                                                                    
be  using  invested  savings   to  fund  ongoing  government                                                                    
operations. Conceptually the  administration approved of the                                                                    
structure of aligning  all the taxes and getting  rid of the                                                                    
10:11:56 AM                                                                                                                   
Senator  von Imhof  asked if  Mr. Alper  was suggesting  all                                                                    
industries  in Alaska  should be  at the  same tax  rate for                                                                    
interest on delinquent taxes.                                                                                                   
Mr. Alper  stated that it had  been so until 2016,  and only                                                                    
since the passage  of HB 247 was oil and  gas separated from                                                                    
other taxes.                                                                                                                    
Senator  von Imhof  asked  if Mr.  Alper  could repeat  what                                                                    
other  industries were  paying  for  interest on  delinquent                                                                    
income taxes.                                                                                                                   
Mr. Alper  shared that other  industries were  paying simple                                                                    
interest at the  "SB 21 rate," which was 3  percent plus the                                                                    
fed,  to  equal  about  4.5  percent.  He  stated  that  all                                                                    
industries,  with   the  exception   of  the  oil   and  gas                                                                    
production  tax,  were  paying  4.5  percent  non-compounded                                                                    
Senator von Imhof asked if  the administration felt that all                                                                    
industries should be paying 7 percent.                                                                                          
Mr.  Alper stated  that  before SB  21  (through 2013),  all                                                                    
industries were paying 11 percent,  and then the tax was cut                                                                    
to 4.5 percent. He thought  he right amount was somewhere in                                                                    
the middle, probably at 7 percent.                                                                                              
Co-Chair MacKinnon  challenged Mr.  Alper on the  concept of                                                                    
opportunity cost. She  asked if he could convey  the rate of                                                                    
return  on  the CBR.  She  asserted  that he  had  conflated                                                                    
drawing from  the savings  accounts with  opportunity costs;                                                                    
while  the  savings  accounts  were  not  drawing  what  the                                                                    
Permanent   Fund  was.   She  thought   it  was   an  unfair                                                                    
Mr. Alper stated that Co-Chair  MacKinnon was correct in the                                                                    
assertion  that the  CBR had  been the  primary draw  on the                                                                    
state's savings as it balanced  the budget during shortfalls                                                                    
for the past few years. Previously  a portion of the CBR had                                                                    
been  invested  similarly to  the  Permanent  Fund, and  the                                                                    
weighted average returns were closer to 5 percent.                                                                              
DAN STICKEL,  CHIEF ECONOMIST, ECONOMIC RESEARCH  GROUP, TAX                                                                    
DIVISION,  DEPARTMENT OF  REVENUE,  stated that  as of  fall                                                                    
2016, the long-term expected rate  of return for the CBR was                                                                    
2.89 percent.                                                                                                                   
Co-Chair  MacKinnon  emphasized   that  the  Permanent  Fund                                                                    
corpus  was  protected by  the  constitution  of the  state,                                                                    
which was very different than  opportunity cost for rates of                                                                    
return  on  any other  asset  the  state  had. She  did  not                                                                    
disagree that interest could be  somewhere in the realm that                                                                    
Mr.  Alper had  suggested. She  thought that  Mr. Alper  was                                                                    
leaving   state  residents   with   an  exceptionally   high                                                                    
expectation.  She  thought  any   such  increase  should  be                                                                    
applied to all industry taxpayers.                                                                                              
Mr. Alper  agreed that the  same interest rate  should apply                                                                    
to all  taxpayers. He did  not see a broader  public purpose                                                                    
in  carving out  one tax  type from  others. He  thought the                                                                    
conversation was  illustrative of  what the state  was being                                                                    
paid for delinquent  taxes versus what it was  paying as the                                                                    
rate of uplift; and thought the  case could be made to align                                                                    
the two.  He stated that the  way the bill was  written, the                                                                    
state was getting 4.5 percent  interest on delinquent taxes,                                                                    
but was paying 10 percent.                                                                                                      
Co-Chair  MacKinnon  thought  Mr.  Alper  had  made  a  fair                                                                    
10:16:33 AM                                                                                                                   
Mr.  Alper read  slide 20,  "Fiscal Analysis."  He asked  if                                                                    
committee members had any  questions concerning the previous                                                                    
sections of the presentation.                                                                                                   
Co-Chair  MacKinnon  clarified  that  there  were  different                                                                    
fiscal  notes, and  the committee  was considering  the bill                                                                    
that left the Senate  Resources Committee. She informed that                                                                    
the Tax Division of DOR  had issued an advisory opinion that                                                                    
circumvented  state  statute  and inserted  regulation  that                                                                    
defined how to move forward;  which was a subject of ongoing                                                                    
discussion  and  affected  the  composition  of  the  fiscal                                                                    
Mr.  Alper  referred  to  the  passage of  SB  21,  and  the                                                                    
subsequent regulatory  process. He referred to  an amendment                                                                    
that  hardened the  floor to  the  sliding scale  per-barrel                                                                    
credit.  The  sliding-scale  credit  could not  be  used  to                                                                    
reduce  taxes  below  the  minimum  tax.  He  described  the                                                                    
creation  of the  amendment as  a  "late-night process"  and                                                                    
asserted that  the intent  had been to  get the  minimum tax                                                                    
from the  production no matter  what. He  questioned whether                                                                    
the  regulation   reflected  the   broader  intent   of  the                                                                    
legislation.   He   stated   that   there   were   different                                                                    
interpretations by different  sections of DOR as  to how the                                                                    
floor was hardened.                                                                                                             
Mr.  Alper continued  discussing the  DOR advisory  opinion,                                                                    
relaying  that  the  department had  needed  to  resolve  an                                                                    
internal  difference of  understanding between  the auditors                                                                    
and economists. He explained that  DOR had wanted to publish                                                                    
the advisory opinion in time  for payment of 2016 taxes. The                                                                    
advisory  opinion  iterated  that  the  floor  was  somewhat                                                                    
harder than previously understood. If  a company was using a                                                                    
sliding-scale credit,  it could  not go  below the  floor. A                                                                    
company  that  might  earn  a  small  amount  of  per-barrel                                                                    
credits could  forego all of  them and use other  credits to                                                                    
go below the floor.                                                                                                             
Mr. Alper continued  to discuss the effects  of the advisory                                                                    
opinion. In  summary, the  credits could  not be  used below                                                                    
the floor in the  baseline assumptions. When considering the                                                                    
fiscal note,  the specific credits  that could go  below the                                                                    
floor  looked like  negative numbers.  He thought  that from                                                                    
the producers'  point of  view it should  be a  net neutral.                                                                    
Considering the  interpretation of  the law  and regulation,                                                                    
the opinion constituted a reduction in revenue.                                                                                 
10:21:48 AM                                                                                                                   
Co-Chair  MacKinnon discussed  different interpretations  of                                                                    
the sliding  scale credit,  and Mr.  Alper's reference  to a                                                                    
late-night amendment. She made  the point that the committee                                                                    
would   model  against   two  different   scenarios  because                                                                    
taxpayers  were  interpreting the  regulations  differently.                                                                    
She  asserted that  the committee  wanted to  understand the                                                                    
ramifications  from  a  taxpayer  perspective.  She  thought                                                                    
taxpayers had an opportunity to  sue to the state through an                                                                    
appeals process.                                                                                                                
Co-Chair MacKinnon  recalled a  conversation with  Mr. Alper                                                                    
in committee in  which he may have  previously misstated how                                                                    
the  sliding scale  credits  could be  used.  She wanted  to                                                                    
clarify that  in addition  to a  complex tax  structure, the                                                                    
committee  was contemplating  two perspectives.  She thought                                                                    
it would  be difficult  to understand for  those not  in the                                                                    
room. She hoped that the committee understood her comments.                                                                     
Co-Chair  MacKinnon asserted  that the  committee had  asked                                                                    
DOR for  figures that had  not been provided.  The committee                                                                    
was waiting  for data pertaining to  the two interpretations                                                                    
of the sliding scale credits.                                                                                                   
Mr.  Alper stated  that DOR  had received  clarification the                                                                    
previous  day regarding  the  alternative scenario  analysis                                                                    
that  the  committee  had requested.  He  relayed  that  Mr.                                                                    
Stickel had  worked late the  previous day and early  in the                                                                    
morning to provide information.  He thought he could provide                                                                    
the requested information by the following day.                                                                                 
Mr. Alper asserted  that the advisory opinion was  not a new                                                                    
interpretation  of policy,  and considered  a difference  of                                                                    
opinion  between  the auditors  and  economists  at DOR.  He                                                                    
emphasized  that   the  "audit  masters"  had   written  the                                                                    
regulations,  and  had  achieved  only  partial  success  in                                                                    
communicating  them   in  2013.  He  articulated   that  the                                                                    
advisory bulletin  was a plain  reading of  the regulations.                                                                    
The regulations had gone through  the public review process,                                                                    
and did not change from the draft to the final.                                                                                 
Co-Chair  MacKinnon  asked  if  it  was  fair  to  say  that                                                                    
taxpayers may have been treated differently.                                                                                    
Mr.  Alper thought  it was  fair to  say that  taxpayers may                                                                    
have understood the rules differently.                                                                                          
10:26:58 AM                                                                                                                   
AT EASE                                                                                                                         
10:28:05 AM                                                                                                                   
Senator  Micciche  stated that  only  in  Alaska was  a  $55                                                                    
million  shift characterized  as a  "nuance." He  asked when                                                                    
Mr. Alper had  become aware of the inconsistency  in how the                                                                    
taxpayers were evaluating the regulation.                                                                                       
Mr. Alper  stated that the $55  million he cited was  for an                                                                    
earlier  version  of  the  fiscal note,  and  there  was  no                                                                    
negative $55 million in the  current note. He furthered that                                                                    
DOR  had  made  an  adjustment  based  on  an  understanding                                                                    
related  to  an  overhanging   current  operating  loss.  He                                                                    
clarified   that  he   personally   became   aware  of   the                                                                    
inconsistency  the previous  fall when  the special  session                                                                    
was  over, and  he was  able to  re-engage with  some deeper                                                                    
policy  issues.  He  detailed  that it  had  taken  time  to                                                                    
understand  the  issue, vet  it  internally,  talk with  the                                                                    
commissioner, and decide on a course of action.                                                                                 
Mr. Alper continued  addressing Senator Micciche's question.                                                                    
He recalled that  when he learned of  the inconsistency, the                                                                    
fall forecast was  issued with the assumption  of the softer                                                                    
floor. He  continued that DOR  had anticipated  $100 million                                                                    
of exploration credits to be  purchased and used against tax                                                                    
liability in FY  18, which had not been possible  due to the                                                                    
tighter  strictures of  the advisory  bulletin. He  informed                                                                    
that the  main reason for  the delay of the  spring forecast                                                                    
was  that  DOR  needed  to re-do  all  the  assumptions.  He                                                                    
summarized   that   the   department  was   aware   of   the                                                                    
inconsistency in  the fall, had  brought it up  in committee                                                                    
in  late January,  and had  published the  advisory bulletin                                                                    
and revised the spring forecast in March and April.                                                                             
Senator Micciche wondered  if DOR had given  any advice, and                                                                    
if it had  understood the order of the usage  of the credits                                                                    
in  every  case.   He  was  wondering  if   there  would  be                                                                    
forthcoming court cases.                                                                                                        
Mr. Alper stated  that the department tried  to avoid giving                                                                    
tax  advice.  The  department  had  been  asked  if  it  had                                                                    
concerns with people purchasing  credits, and the department                                                                    
had answered in  the negative. He referred to  a "20 percent                                                                    
rule" referenced on an earlier  slide, under which a company                                                                    
could use purchased 023 credits  to offset 20 percent of its                                                                    
taxes. Additionally, purchased 025  credits could offset 100                                                                    
percent of taxes; which was  why the department had presumed                                                                    
there would  be a focus  on 025 credits. The  department had                                                                    
built the  $100 million  liability into  the system.  To his                                                                    
knowledge,  none   of  the  credits   were  sold   with  the                                                                    
expectation  of being  used, and  then were  not usable.  He                                                                    
thought the topic  was an awkward circumstance  if the issue                                                                    
would end up in court someday.                                                                                                  
Co-Chair MacKinnon  did not  want DOR's  team to  be working                                                                    
till the  early hours  of the morning  to produce  a product                                                                    
that may or  may not be accurate. She asked  for a realistic                                                                    
time  frame  for  production   of  the  requested  alternate                                                                    
scenarios. Co-Chair MacKinnon discussed the requested data.                                                                     
10:33:58 AM                                                                                                                   
Mr. Alper mentioned Co-Chair  MacKinnon's reference to post-                                                                    
advisory-bulletin  information. He  stated  that there  were                                                                    
two things  to consider:  the underlying change  between the                                                                    
fall and spring  forecast, and the addition  of the advisory                                                                    
bulletin into  the underlying  assumptions and  analysis. He                                                                    
believed that DOR  had provided a revised version  of the HB
111 (version  L) fiscal  note. He  clarified that  the House                                                                    
Finance Committee  had used more of  a pre-advisory-bulletin                                                                    
analysis.  He asked  if  Co-Chair  MacKinnon was  requesting                                                                    
that DOR do an analysis of the House Resources CS.                                                                              
Co-Chair   MacKinnon  answered   in  the   affirmative.  She                                                                    
understood that  there were significant changes  to the bill                                                                    
in the  House Finance Committee,  and wanted to  compare the                                                                    
final product with  the changes that were made  in the House                                                                    
Resources Committee.                                                                                                            
Mr. Alper noted that one  feature of the current fiscal note                                                                    
was a  breakdown in the  carry-forwards to see the  value of                                                                    
the  uplift as  a separate  line  item. He  stated that  the                                                                    
House Resources Committee  version of the bill  was the only                                                                    
other version  that had  some version  of uplift.  He stated                                                                    
that DOR  would provide  the same additional  granularity in                                                                    
analyzing the House Finance version of the bill as well.                                                                        
Senator  Micciche   had  reviewed  both  fiscal   notes.  He                                                                    
referenced  a  $45 million  shift,  and  wondered about  the                                                                    
evaluation of the House version of the bill.                                                                                    
Mr. Alper  stated that DOR  had recognized that  the status-                                                                    
quo carry-forwards  had included  a certain amount  of loss.                                                                    
He questioned  when companies  would use  the carry-forwards                                                                    
and  how.  He  detailed  that  under  the  Senate  Resources                                                                    
version of the  bill there had been a distortion  in how the                                                                    
carry-forwards  were viewed.  He  discussed  changes to  the                                                                    
fiscal  note; and  stated  that the  net  impact across  ten                                                                    
years  was the  same, but  the numbers  had shifted  between                                                                    
10:37:26 AM                                                                                                                   
Vice-Chair Bishop echoed the  comments of Co-Chair MacKinnon                                                                    
regarding taking  time to  do quality  work. He  thought the                                                                    
Co-Chair had  expressed consideration for the  well-being of                                                                    
DOR employees.                                                                                                                  
Co-Chair  MacKinnon concurred,  and was  aware that  the DOR                                                                    
team  was working  exceptionally long  hours. She  wanted to                                                                    
ensure that  the quality of  the work  remained consistently                                                                    
high as it had been in the past.                                                                                                
Mr. Alper  stated that the  economic research  group (within                                                                    
the tax division)  was an essential asset to  the state. The                                                                    
group  had many  different  functions but  was a  front-line                                                                    
responder   during   legislative   session.   He   expressed                                                                    
gratitude for the group's skill and diligence.                                                                                  
Senator  von Imhof  spoke to  slide  22, in  which the  last                                                                    
bullet  referred to  approximately $460  million in  accrued                                                                    
uplift.  She  thought the  point  was  illustrative of  what                                                                    
could potentially  accrue over  time. She  pondered allowing                                                                    
the GVR  to be taken  early on. She  asked if it  would make                                                                    
sense to  model the  cost to  the state  if the  GVR credits                                                                    
could be taken first, with  no uplift; versus allowing a ten                                                                    
percent uplift.                                                                                                                 
Mr.  Alper  did not  fully  understand  Senator von  Imhof's                                                                    
10:39:55 AM                                                                                                                   
AT EASE                                                                                                                         
10:47:10 AM                                                                                                                   
Co-Chair  MacKinnon explained  that  members should  forward                                                                    
any  questions  pertaining to  the  CS  to her  office.  She                                                                    
referenced a table from page  four of the fiscal note, which                                                                    
had been enlarged  for easier viewing. She  relayed that the                                                                    
committee would  hear the remainder of  the presentation the                                                                    
following day.                                                                                                                  

Document Name Date/Time Subjects
HB111 - DOR Senate Finance Presentation - 5.4.17.pdf SFIN 5/4/2017 9:00:00 AM
HB 111
HB111 - DOR Senate Finance Presentation - Slide 24 Copy - 5.4.17.pdf SFIN 5/4/2017 9:00:00 AM
HB 111