Legislature(2017 - 2018)SENATE FINANCE 532

05/05/2017 09:00 AM FINANCE

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09:07:38 AM Start
09:08:54 AM HB111
10:17:20 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                                                                    
9:08:54 AM                                                                                                                    
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX                                                                      
DIVISION, DEPARTMENT OF REVENUE, introduced himself.                                                                            
9:09:28 AM                                                                                                                    
AT EASE                                                                                                                         
9:10:20 AM                                                                                                                    
Co-Chair MacKinnon announced that the presentation would be                                                                     
a continuation of the presentation from the prior day.                                                                          
9:10:50 AM                                                                                                                    
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,                                                                       
highlighted slide 21, "Fiscal Analysis" of the presentation                                                                     
titled, "DOR Senate Finance Presentation" (copy on file):                                                                       
     Fiscal Note Summary- Tax                                                                                                   
     •  Senate  bill  makes  no  material  changes  to  SB21                                                                    
     • Loosening of existing  minimum tax protection against                                                                    
     small  producer  and  GVR credits  results  in  ~$20-40                                                                    
     million less revenue per year through FY24                                                                                 
     •  Senate  Resources   bill  provides  certain  limited                                                                    
     "hardening"  of the  minimum tax  floor to  NOLs, since                                                                    
     these are no longer "credits."                                                                                             
          o Provision has no fiscal impact at forecast                                                                          
          o  Modeling  indicates  a   tax  increase  in  the                                                                    
          alternative price scenarios at  $40 oil when major                                                                    
          producers  would  be  expected to  have  operating                                                                    
9:14:05 AM                                                                                                                    
Co-Chair MacKinnon wondered whether  the most recent version                                                                    
of the  bill would  "pierce" the minimum  credit, or  was it                                                                    
existing  for small  producers. Mr.  Alper replied  that the                                                                    
small  producer credit  could not  be used  to go  below the                                                                    
floor  should  the company  used  sliding  scale per  barrel                                                                    
credits under current  law. He relayed that  the bill stated                                                                    
that  the small  producer  credit, and  the five-dollar  per                                                                    
barrel credit, could be used below the floor.                                                                                   
Co-Chair MacKinnon wondered whether  the idea contributed to                                                                    
the confusion about  the comparison with the  house bill and                                                                    
the  advisory bulletin.  She remarked  that  tax payers  had                                                                    
previously  ordered credits  differently  than the  advisory                                                                    
bulletin.  She stressed  that she  was referencing  the most                                                                    
recent version of the bill,  versus the house version of the                                                                    
bill. She  stated that the  advisory report changed  some of                                                                    
the language.  Mr. Alper responded  that the house  bill did                                                                    
not have a similar provision.                                                                                                   
Senator  Hughes stressed  that  the  structure affected  the                                                                    
activity of the company. She  noted the second bullet in the                                                                    
slide,  and wondered  whether there  was a  consideration of                                                                    
the policy  change and how  it might impact the  activity of                                                                    
the  company.  Mr.  Alper  replied   he  did  not  make  any                                                                    
assumptions  about  changes  in behavior.  The  fiscal  note                                                                    
tables  were  based  on the  assumptions  for  spending  and                                                                    
production. He  stated that any  change in  company behavior                                                                    
would result in a change in the numbers.                                                                                        
9:20:20 AM                                                                                                                    
Mr. Alper addressed slide 22, "Fiscal Analysis":                                                                                
     Fiscal Note Summary- Budget                                                                                                
     • Additional impact due to near-total elimination of                                                                       
     cash payments for tax credits (reduced spending)                                                                           
          o Long term forecast for cash credits is $150                                                                         
          million / year; reduced to essentially zero                                                                           
          o Most of the associated projects don't come into                                                                     
         production during the fiscal note period                                                                               
          •   $1.325   billion    in   reimbursable   credit                                                                    
          obligation removed over the 10-year fiscal note                                                                       
          o Resulting "carried forward" balance, with                                                                           
          uplift, is $1.785 billion in 2027 that can offset                                                                     
          future taxes                                                                                                          
          o Of this, about $460 million is accrued "uplift"                                                                     
In  response  to a  question  from  Co-Chair MacKinnon,  Mr.                                                                    
Alper explained that the governor  wanted the state to leave                                                                    
the business of buying cash credits.                                                                                            
Co-Chair  MacKinnon  wondered   whether  the  administration                                                                    
believed  that the  funds were  owed to  the tax  payer. Mr.                                                                    
Alper wondered  whether the question was  prospective or the                                                                    
held tax credit certificates.                                                                                                   
Co-Chair  MacKinnon stated  that  her  question referred  to                                                                    
reflective  action. She  remarked  that the  bill  set up  a                                                                    
system that required  the state to owe money,  and she hoped                                                                    
that  the  state's  "word  was good  going  forward"  as  it                                                                    
carried forward the losses. Mr.  Alper agreed that they were                                                                    
an  obligation  to  the  state. He  remarked  that,  if  the                                                                    
credits  were held  until the  company began  production, it                                                                    
became a reduction from the paid tax.                                                                                           
Co-Chair MacKinnon  surmised that  there was no  term limit.                                                                    
Mr. Alper replied that it depended on policy.                                                                                   
9:25:32 AM                                                                                                                    
Senator Micciche  wondered whether there was  an improvement                                                                    
from  the   prior  system  with   the  current   or  similar                                                                    
legislation.  Mr. Alper  replied  that the  strength of  the                                                                    
"ring  fence"  provisions in  the  bill  were important.  He                                                                    
stated that  it was possible  that a bankrupt  company could                                                                    
be  bought by  a  major producer,  and  the carried  forward                                                                    
losses  would be  purchased  that could  be  used to  offset                                                                    
taxes from  another field. He  stated that it was  a concern                                                                    
over the current  structure of the bill. He  stated that the                                                                    
house bill had  a stronger "ring fence", that  said that the                                                                    
carry-forwards  could only  be used  against the  production                                                                    
from  the  associated  fields  at   the  point  of  original                                                                    
Senator  Micciche  wondered  whether  there  was  a  greater                                                                    
benefit  leading  to  a greater  probability  of  production                                                                    
using the  method, versus incentivizing spending  as opposed                                                                    
to productive  spending. Mr.  Alper could  not speak  to the                                                                    
likelihood of what would lead  to production. He shared that                                                                    
the advantage  of a cash  credit based system would  make it                                                                    
easier for  new entrants  to come into  the world,  but they                                                                    
may not be able to bring production.                                                                                            
Mr.  Alper   looked  at  slide   23,  "Impact   of  Advisory                                                                    
     Many  of   the  circumstances   that  show  as   a  tax                                                                    
     "decrease"  are  due  to   exceptions  to  the  3/31/17                                                                    
     advisory bulletin on ordering of credits                                                                                   
     • For  the most part,  if the interpretation  that many                                                                    
     held prior  to 3/31 was  the actual legal  status, this                                                                    
     bill  would  be revenue  neutral  (no  tax increase  or                                                                    
     • Advisory  bulletin tends  to "push"  certain cashable                                                                    
     credits into future years, as  companies can't use them                                                                    
     in the year  incurred. In the absence  of the bulletin,                                                                    
     it's likely  that the "budget  impact" (change  in cash                                                                    
     credit demand)  of SCS  CSHB111(RES) would  be slightly                                                                    
     higher in the near term and lower in the later years                                                                       
Co-Chair  MacKinnon noted  that  there  was some  disconnect                                                                    
between the  economists and the auditors.  She remarked that                                                                    
the auditors were basing support  of the advisory opinion on                                                                    
two  minutes   of  conversation  about  an   amendment.  She                                                                    
wondered  how  a  previous  bill  impacted  the  issue.  She                                                                    
appreciated  that  the  bill  was  net  neutral.  Mr.  Alper                                                                    
replied that the  advisory bulletin was not  informed by two                                                                    
minutes of testimony  at 1:30am on April 4,  2013. He stated                                                                    
that the  drafting of  the regulation  was informed  by that                                                                    
conversation. The  regulation was  written to  interpret the                                                                    
perceived  intent  of  the  maker   of  that  amendment.  He                                                                    
stressed  that  the  regulatory process  was  extensive  and                                                                    
controlled  with drafts,  public review,  legal review,  and                                                                    
publication.  He stressed  that  the language  was the  same                                                                    
throughout the  process without comment. He  stated that the                                                                    
advisory bulletin clarified what was already in regulation.                                                                     
Co-Chair   MacKinnon  felt   that  from   the  legislature's                                                                    
perspective, Department  of Revenue  (DOR) may have  had the                                                                    
wrong  interpretation of  the  regulation.  She queried  the                                                                    
statute  that  provided  that authority.  She  assumed  that                                                                    
there was  a bill that allowed  tax payers to decide  how to                                                                    
use  their  credits  to  advantage  their  tax  position  to                                                                    
increase  production.   Mr.  Alper  replied  that   he  gave                                                                    
incorrect information  to the committee.  He stated  that he                                                                    
was  not  a  career  tax administrator,  and  those  in  DOR                                                                    
corrected  the record.  The statutory  direction  was in  AS                                                                    
43.55.024(j),  which  was  the  sliding  scale  credit.  The                                                                    
statute said  that the  credit could not  be used  to reduce                                                                    
taxes below  the minimum  tax. He  stated that  the previous                                                                    
regulations from  the beginning of credits  talked about the                                                                    
ability of companies to order  their credits in the sequence                                                                    
to their own best advantage.  He stated the addition in 2013                                                                    
was new  language that  bundling meant  you cannot  go below                                                                    
the floor.                                                                                                                      
Co-Chair  MacKinnon felt  that the  tax payer  would address                                                                    
the interpretation.  Mr. Alper  stated that there  were many                                                                    
that knew the statutes better than him.                                                                                         
9:36:24 AM                                                                                                                    
Mr. Alper  highlighted slide 24, "Fiscal  Analysis-impact of                                                                    
forecast  prices." He  stated that  the  table outlined  the                                                                    
fiscal note.  He remarked  that the  light blue  colors were                                                                    
subtotal lines. He stated that  all the lines above the blue                                                                    
lines were changes  in taxes based on  various provisions of                                                                    
the bill.                                                                                                                       
Co-Chair  MacKinnon looked  at "Total  Revenue Impact."  She                                                                    
stated  that  the  negative number  represented  a  loss  of                                                                    
revenue  to  the  state.  She  remarked  that  the  advisory                                                                    
bulletin  indicated that  loss.  Mr. Alper  stated that  the                                                                    
largest component  of the  negative numbers  was on  line 3,                                                                    
and he would address lines 1 and 2.                                                                                             
Co-Chair  MacKinnon  stressed  that  negative  numbers  were                                                                    
normally a "good thing." She  noted that the negative number                                                                    
was  indicative  of  the state  receiving  less.  Mr.  Alper                                                                    
Co-Chair MacKinnon  wondered whether the issue  was standard                                                                    
in  the oil  and  gas  industry. Mr.  Alper  replied in  the                                                                    
9:41:40 AM                                                                                                                    
Mr.  Alper continued  to discuss  slide 24.  He stated  that                                                                    
line 2 was  the ability added by the  legislation of certain                                                                    
tax payers being  allowed to offset their  cash credits with                                                                    
corporate  income   tax.  He  noted  that   the  number  was                                                                    
approximately $5  million to $10  million of  lower revenue.                                                                    
He stressed that the number  was not related to the advisory                                                                    
bulletin, but  would be considered reduced  corporate income                                                                    
tax revenue. He stated that line  3 opened up the ability to                                                                    
use certain  credits below the floor,  specifically the five                                                                    
dollar per barrel  credit and the small  producer credit. He                                                                    
stated that the small producer  credit was in the process of                                                                    
a  long sunset,  and  the numbers  were  not material  after                                                                    
three or four years.                                                                                                            
Co-Chair  MacKinnon surmised  that  line  3 represented  the                                                                    
impact of the advisory bulletin. Mr. Alper agreed                                                                               
Mr. Alper continued to discuss  slide 24. He shared that the                                                                    
budget portion  referred to  appropriations. He  stated that                                                                    
the  biggest  change  was the  elimination  of  North  Slope                                                                    
operating loss credits.                                                                                                         
9:45:03 AM                                                                                                                    
Co-Chair MacKinnon  surmised that similar language  could be                                                                    
used to describe  the costs for leases that  were applied to                                                                    
the production tax. Mr. Alper  replied that there was a time                                                                    
difference  in  that analysis.  He  explained  that a  lease                                                                    
expenditure  would see  a shift  in  a number  of years.  He                                                                    
stated that the bill found  a corporate income tax to offset                                                                    
in real time to be seen in the same fiscal year.                                                                                
Mr. Alper  finished discussing slide  24. He noted  that the                                                                    
total impact  was approximately $150  million per  year over                                                                    
the long-term.  He stated that  the total fiscal  impact was                                                                    
the  sum of  the budget  and fiscal  impact. He  stated that                                                                    
last  component dealt  with the  value of  the carry-forward                                                                    
lease  expenditures,  which   were  aggregate  numbers  that                                                                    
changed over time.                                                                                                              
Senator Micciche asked about the  total shift in total state                                                                    
spending  associated with  the bill.  Mr. Alper  shared that                                                                    
there was  a forecast  of approximately  $3.8 billion  to be                                                                    
spent  in the  time period.  He stated  that, under  current                                                                    
law, the $3.8 billion would  be spent by companies that were                                                                    
eligible for cash  credits. He shared that  the $3.8 billion                                                                    
would turn into approximately  $1.3 billion of credits, that                                                                    
current law  required the state  to pay. He stated  that the                                                                    
legislation  allowed  that  money  to  accumulate  to  track                                                                    
company carry-forwards to be used against future taxes.                                                                         
9:50:42 AM                                                                                                                    
Senator Micciche surmised that  the total fiscal impact line                                                                    
was reflecting  the uplift going forward.  Mr. Alper replied                                                                    
that the  total fiscal impact  reflected that the  state was                                                                    
no  longer buying  the credits  and small  tax changes.  The                                                                    
impact of  the carry forwards  did not show up  before 2027,                                                                    
because they were a future obligation.                                                                                          
Senator Micciche  stressed that  the discussion  was related                                                                    
to  only production  taxes. Mr.  Alper responded  that there                                                                    
was  no  anticipated change  in  royalty  within the  fiscal                                                                    
Senator Micciche felt  that there was an attempt  to not pay                                                                    
cash credit, with the hope that  the credit would be paid by                                                                    
producing  companies   in  the  future.  He   remarked  that                                                                    
removing  the number  in 2027  resulted in  nearly the  same                                                                    
number of  tax credits paid  in the future by  the producing                                                                    
entity. Mr. Alper agreed.                                                                                                       
Senator  Micciche hoped  to have  further discussions  about                                                                    
the North  Slope infrastructure.  He noted that  there would                                                                    
be  a  subtraction  of   that  outstanding  yearend  balance                                                                    
associated with  additional royalty and property  taxes. Mr.                                                                    
Alper replied  that the state's  obligation did not  come to                                                                    
fruition  until the  oil  production  occurred resulting  in                                                                    
taxes and royalties to the state.                                                                                               
Co-Chair  MacKinnon  restated  that   it  was  an  "accurate                                                                    
statement." Mr. Alper agreed.                                                                                                   
9:55:13 AM                                                                                                                    
Co-Chair  MacKinnon  noted that  the  plan  was based  on  a                                                                    
decade of  projections and assumptions by  the Department of                                                                    
Natural Resources (DNR).  Mr. Alper replied that  one of the                                                                    
components  of  the  underlying  revenue  estimate  was  the                                                                    
forecast of production from DNR.                                                                                                
Co-Chair MacKinnon surmised that the  slide was ten years of                                                                    
forecasting for  the price of  oil. She remarked  that there                                                                    
could be  some dramatic  changes based  on price.  Mr. Alper                                                                    
agreed, and  stated that the following  slide addressed that                                                                    
9:56:36 AM                                                                                                                    
Mr.  Alper discussed  slide 25,  "Fiscal Analysis-Impact  at                                                                    
Range  of  Prices." He  stated  that  the chart  showed  the                                                                    
impact at different price points.                                                                                               
Senator  Hughes looked  at slide  24. She  wondered how  the                                                                    
advisory  bulletin would  have  impacted the  number in  the                                                                    
bottom  right corner.  She remarked  that there  may be  the                                                                    
same number without the change  of policy, but remarked that                                                                    
there would  be a change  with inflation. Mr.  Alper replied                                                                    
that  he would  provide  that analysis.  He  noted that  the                                                                    
credits that could go below  the floor, referenced in line 3                                                                    
were credits that were not generally cashable.                                                                                  
Mr. Alper continued to discuss slide 25.                                                                                        
10:04:01 AM                                                                                                                   
Co-Chair MacKinnon remarked  that the state did  not need to                                                                    
protect  itself from  additional losses,  because there  was                                                                    
current  production. Mr.  Alper stated  that the  oil prices                                                                    
were extremely low at the time of the previous discussion.                                                                      
Co-Chair MacKinnon  stressed that  the government  could not                                                                    
always predict  how the private  sector would  respond, when                                                                    
they were in a negative position. Mr. Alper agreed.                                                                             
Co-Chair  MacKinnon   stated  that  there  was   reason  for                                                                    
optimism. Mr. Alper agreed.                                                                                                     
10:07:20 AM                                                                                                                   
Mr. Alper  highlighted slide 26, "Impact  of Carried Forward                                                                    
     It is hard to capture the future impact of carried                                                                         
     forward losses that don't have associated production                                                                       
     during the fiscal note period                                                                                              
     • The $1.785 billion represents about $3.8 billion in                                                                      
     carried forward losses ($1.325 billion at 35 percent)                                                                      
     plus uplift                                                                                                                
     • None of these totals include the not-yet-committed                                                                       
     spending that would be required for any of the large                                                                       
     announced discoveries                                                                                                      
Co-Chair  MacKinnon   wondered  if  the   outline  reflected                                                                    
worldwide behavior. Mr. Alper replied in the affirmative.                                                                       
Mr. Alper addressed slide 27, "Fiscal Analysis":                                                                                
     Preliminary Life Cycle Analysis                                                                                            
     • DOR's model looks at total state and producer cash                                                                       
     flow over 40 years for a large North Slope new field                                                                       
          o   750   million   barrels   recovered,   maximum                                                                    
          production of                                                                                                         
          120,000 bbl/ day                                                                                                      
          •  Senate  Resources  Bill reduces  producer  cash                                                                    
          flow by                                                                                                               
          $165 million and reduces IRR by 0.3 percent                                                                           
          o  Production tax  is zero  for three  years (GVR)                                                                    
          and minimum tax  for seven years after  due to use                                                                    
          of carryforwards.                                                                                                     
          Full production tax begins in year 11                                                                                 
          o This assumes the  interpretation that the use of                                                                    
          carryforwards  allows for  the loss  of per-barrel                                                                    
          credits. If  this were rewritten, the  minimum tax                                                                    
          would  be in  place due  to more  years of  carry-                                                                    
          forward use                                                                                                           
10:14:25 AM                                                                                                                   
Co-Chair  MacKinnon  queried  the amount  of  royalties  the                                                                    
state would receive in the  timeframe with the analysis. Mr.                                                                    
Alper replied that,  presuming the statutory tax  at a point                                                                    
of relatively high production layered  with the royalties at                                                                    
forecasted  prices,  there would  be  nearly  $1 billion  in                                                                    
state revenue from that large field.                                                                                            
Co-Chair  MacKinnon   noted  that  the  number   was  mostly                                                                    
impacted by  the advisory bulletin.  Mr. Alper  replied that                                                                    
the advisory bulletin was the  presumptive status quo, so he                                                                    
did not know whether it had material impact.                                                                                    
CSHB 111(FIN)(efd fld)  was HEARD and HELD  in committee for                                                                    
further consideration.                                                                                                          

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