Legislature(2009 - 2010)BUTROVICH 205
02/17/2010 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB267 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 267 | TELECONFERENCED | |
| += | SB 220 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 17, 2010
3:34 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Thomas Wagoner
MEMBERS ABSENT
Senator Gary Stevens
COMMITTEE CALENDAR
SENATE BILL NO. 267
"An Act relating to the duties of the Department of Labor and
Workforce Development; relating to the tax rate applicable to
the production of oil and gas; relating to a rebate of the
production tax on oil and gas based on the employment of
resident workers; relating to credits against the oil and gas
production tax; relating to the period in which oil and gas
production taxes may be assessed; relating to the interest rates
applicable on certain amounts due related to various taxes,
penalties, payments, and the Alaska Gasline Inducement Act; and
providing for an effective date."
- HEARD AND HELD
SENATE BILL NO. 220
"An Act declaring a state energy policy; relating to energy
efficiency and alternative energy; establishing the energy
efficiency grant fund, an emerging energy technology fund, a
renewable energy production tax credit, and an energy use index;
and relating to a fuel purchasing cooperative, to energy codes
and efficiency standards, to energy conservation targets in
public buildings, to a state agency energy use reduction plan,
to the alternative energy revolving loan fund, and to the
renewable energy grant fund."
- HEARING CANCELED
PREVIOUS COMMITTEE ACTION
BILL: SB 267
SHORT TITLE: OIL AND GAS PRODUCTION TAX
SPONSOR(s): SENATOR(s) MCGUIRE
02/10/10 (S) READ THE FIRST TIME - REFERRALS
02/10/10 (S) RES, FIN
02/17/10 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
DAN DICKINSON
Legislative Consultant
Legislative Budget and Audit Committee
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Presented SB 267.
JOE MATHIS, President
Nana Pacific
Nana Development Corporation
Anchorage, AK
POSITION STATEMENT: Commented on loss of jobs on the North
Slope.
DAVE CRUZ
President, Cruz Construction
President, Associated General Contractors
Palmer, AK
POSITION STATEMENT: Described loss of jobs on the North Slope.
JIM GILBERT, President
Udelhoven Companies
Anchorage, AK
POSITION STATEMENT: Described loss of projects on the North
Slope.
COMMISSIONER PAT GALVIN
Alaska Department of Revenue (DOR)
Anchorage, AK
POSITION STATEMENT: Agreed with Mr. Dickinson's presentation on
SB 267.
ACTION NARRATIVE
3:34:56 PM
CO-CHAIR LESIL MCGUIRE called the Senate Resources Standing
Committee meeting to order at 3:34 p.m. Present at the call to
order were Senators French, Wielechowski, Stedman, Huggins and
McGuire.
SB 267-OIL AND GAS PRODUCTION TAX
3:35:37 PM
CO-CHAIR MCGUIRE, sponsor of SB 267, said her intent in
introducing the bill is to recognize the changes made in
Alaska's Clear and Equitable Share (ACES) and about possible
significant deterrents it made to drilling and job loss in the
state. She said small business owners, in particular, have lost
a number of opportunities for employees and as a result had
layoffs.
3:36:47 PM
She said SB 267 combines a few elements, but the biggest one
pertains to the progressivity elements in ACES. She explained
that this committee was a big part of the work that was done; it
was here for months looking at charts and graphs knowing that
the economic limit factor (ELF) method of taxing on the gross
was a broken system. In an attempt to reach a better tax system,
they looked at all kinds of data and had experts from all over
the world. They did the best they could to establish a formula
that would strike a healthy balance between the state's royalty
and severance taxes and private industry's take on the risk they
were taking to develop these oil resources. She said they
experimented with a variety of rates for the progressivity
element. She said that SB 267 has a starting point of reducing
the progressivity factor from .4 to .2 at $30/barrel and up.
3:38:17 PM
CO-CHAIR MCGUIRE said some people think that the marginal tax
rate, itself, becomes so high at certain points that when
companies are competing on a global scale for that kind of high
risk investment opportunity that the risk/reward ratio is not
competitive with other jurisdictions.
She said the committee worked on getting some kind of a credit
that would incentivize the hiring of more in-state workers - a
very difficult area of the law because in-state hire provisions
have been thrown out as unconstitutional based on right to work,
the commerce clause and other things. But the question about
incentivizing that remained open enough that they took a healthy
stab at trying to establish at various percentage rates the
employing of more in-state workers.
Finally, if there were a constitutional challenge, she supposed
it would be on the part of an out-of-state worker working for a
company or maybe a company would challenge the state based on
the fact they thought it was unfair that another oil and gas
company got the incentive for in-state hire. It would be an
interesting argument that could play out in the state's favor.
Lastly, she said, SB 267 incorporates the Governor's provisions
that she wanted to hear comment on from the administration.
CO-CHAIR MCGUIRE said that first they would hear from Dan
Dickinson, Legislative Consultant, about the impact of ACES.
Then they would hear from two industry representatives on their
perspectives, the administration and others.
3:41:42 PM
DAN DICKINSON, Legislative Consultant, Legislative Budget and
Audit Committee, said he is a CPA. In the 1980s and 1990s he was
an expert in some tax and royalty cases brought by the
Department of Natural Resources (DNR) and the Department of
Revenue (DOR), and he was in the DOR for seven years mostly as
the director of the Tax Division.
He said he was going to talk to them basically about the
technical aspects of SB 267 [Technical Aspects of SB 267
(Version A), by Dan Dickinson, CPA, Senate Resources Committee,
Feb. 17, 2010]. The mechanics of tax issues tend to be complex,
he said, and the bill has six changes:
1. Changes progressivity from .4 percent to .2 percent per
dollar
2. Well credit for well work
3. Tax rate tied to resident hire
4. Interest not due on retroactive rate changes until those
regulations are implemented
5. Interest rate is lowered to fed funds +2 or 11 percent
6. Restore three-year statute of limitations from the six
years that was implemented in 2007.
3:45:10 PM
He emphasized that most of the provisions in SB 267 have nothing
to do with the changes he just mentioned. The bill changes the
structure of the interest provision, AS 43.55.225, which goes
from being a single section to sections A and B. This means that
every time interest is referenced in Title 43 it had to be
changed; so most changes in the bill change the reference from
AS 43.55.225 to AS 43.55.225(a) with no substantive change.
3:46:03 PM
MR. DICKINSON said the first substantive change is to the
progressivity feature. He reviewed the current base production
tax rate that is 25 percent on the net value at the well (TTV)
that is combined with a progressivity tax that can range from 0-
50 percent; so the total effect of those two together is
somewhere between 25 and 75 percent. The current progressivity
is triggered when the net value of oil is $30/barrel. Under
current law it increases .4 percent for every dollar over $30.
Then there is a "bend over point" or "wrap around point" at $92
when it drops down to .10 percent for every dollar. This bill
drops the rate from .4 percent to .2 percent and to make the
math work out the bend-over point is at $155.
In 2008, he said, the total base tax generated about $4.2
billion; the progressivity generated about $3.2 billion (for
comparison, roughly the same size as all royalties and much
larger than the income and property taxes).
SENATOR FRENCH said most of them know what $30 net value means
when progressivity kicks in, but that is after all the shipping
and production costs have been deducted. He asked him to clarify
that more.
MR. DICKINSON responded saying, for instance, if oil is selling
at $90 on the U.S. West Coast, it would cost about $5 to get it
to that market from the North Slope (using TAPS and tankers). If
you are at Prudhoe Bay, you have to deduct the costs of getting
it out of the ground (operating expenses); if you're at a
further field, like Kuparek, then you subtract the pipeline to
Kuparek (up to another $1). You deduct the costs in the field -
around $20/barrel and include the capital investments that are
being made for the future. The DOR uses $26 for the difference
between the value of where the oil is sold on the West Coast and
the value on the North Slope.
SENATOR FRENCH said from $0-26/barrel, the company is recouping
its costs of doing business and paying no production tax; from
$26-56/barrel it's paying 25 percent tax (the base rate), and
above $56/barrel is when progressivity kicks in.
3:49:50 PM
MR. DICKINSON agreed "roughly," but it's important to note that
when progressivity kicks in it applies to all the production
whereas federal income tax applies different tax rates to
different income levels individually.
SENATOR FRENCH asked if he calculated what the state would have
collected under this bill if it had been in effect in 2008.
MR. DICKINSON answered no, but to a degree it's a linear
extrapolation and the progressivity would have roughly cut the
state's take in half or $3.2 billion down to about $1.6 billion.
The price was beyond the bend-over point two months out of the
year.
SENATOR FRENCH asked if they were to give back that $1.6
billion, how much oil production would be needed to make up that
difference.
MR. DICKINSON replied that obviously, it would depend on the
price.
SENATOR FRENCH said $80/barrel.
3:51:47 PM
MR. DICKINSON explained how the formula works. With roughly $7
billion in production taxes and other things to reach $10
billion, you would be looking at roughly 15 percent of that
total. At current production levels which are 600,000
barrels/day, that would be about 80,000 barrels/day.
MR. DICKINSON went on to explain the marginal rate that says
every additional dollar earned will affect this tax. So as soon
as progressivity is hit (slide 9), the marginal rate starts to
jump greatly. For comparison, he said, under an income tax
system when one passes from one bracket to another, his tax rate
goes up a little bit, but not by a large leap (slides 12-20
showed how progressivity works compared to personal income tax).
3:57:59 PM
He said Governor Palin actually proposed a less aggressive
progressivity tax, but her proposal would have been .2 percent
hitting a ceiling at 25 percent. The law that eventually emerged
and became ACES has a cap at 50 percent instead of 25 percent
(slide 23). This is all on top of the 25 percent base tax. His
graphs compared progressivity to personal income tax. The net
effect of changing the cap is to move the slope of the rate out
so it climbs at a less dramatic rate.
3:59:16 PM
Under SB 267, Mr. Dickinson explained, the jump up in marginal
rate continues to grow, but at a lesser rate than under current
law. The final graphic (slide 26) looked at not just the
production tax but property, production and a special income tax
as well as a royalty that is paid by most of them. So the
nominal rate that most taxpayers would face is 50-60 percent.
The marginal rate under current law can hit 100 percent at
certain prices. He summarized that the effective rate in this
bill would fall somewhat lower than the current effective rate
and the marginal rate wouldn't have the dramatic increase.
4:00:03 PM
CO-CHAIR WIELECHOWSKI asked him how the credits are tiered.
MR. DICKINSON replied that in general the credits aren't tiered
or dependant on anything, although some provisions apply to
producers producing fewer than 50,000 barrels/day (those other
than the three largest producers). In general, the credits are
at face value and can be transferred around; so the marginal
effect is not going to be as price-dependent.
CO-CHAIR WIELECHOWSKI asked if the credits are 20 percent in-
field and 30 percent for exploration.
MR. DICKINSON responded that he has a slide that summarizes all
of that but it was later in the presentation.
CO-CHAIR WIELECHOWSKI said he would wait until they got there.
MR. DICKINSON said SB 267 also gets into marginal rates that
exceed 100 percent, but they don't get there until prices get
somewhere north of $200/barrel.
4:02:09 PM
The second piece on progressivity, Mr. Dickinson said, is on
slide 29 and addressed Senator Wielechowski's question. Under
current law there is a 30-percent credit for exploration wells,
a 40-percent if that well is both outside of an existing unit by
more than 25 miles and 3 miles from any other wells (with
special rules for Cook Inlet), and finally a general 20 percent
capital investment (not cumulative if you take a dollar under
one of the other programs) that would deal with more development
and production investments. One of the important points is that
under this bill there is no change to the exploration credits.
This credit has been placed in the AS 43.55.023 credits.
4:03:04 PM
Compared to the Governor's proposal, he said, both create a 30-
percent credit for well work and both include CAPEX and OPEX. SB
267 should be effective on the first day of the month so they
don't have costs within a month; the Governor chose July 1,
2010.
MR. DICKINSON said the differences are that the Governor's bill
places the credit in the AS 43.55.025 section which is an
exploration section, renames it "exploration development" and
rewrites a lot of that current law. SB 267 places this
particular credit in the section called "Tax credits for certain
losses and expenditures."
A second, critical, difference is that there is a different
definition of well-related expense and the Governor's bill did a
systematic rewrite of the exploration credits. Part of it was
entirely appropriate in the sense that the exploration credits
came in 2003 and have been amended basically every other year
since then; the structure was getting more and more bizarre and
this clarified it. But he had other concerns that he would cover
later.
MR. DICKINSON explained that there are lots of differences
between putting the bill in to AS 43.55.023 or AS 43.55.025.
Basically, two different structures are created. AS 43.55.023
deals with capital costs in section (a); it deals with lease
expenditures in section (b) and the rest of the sections refer
back to sections (a) and (b). So in some sense, looking at the
bill putting well work credit into AS 43.55.023 fits nicely. AS
43.55.025 is currently meant to be just about explorers; so the
administration suggested totally rewriting and re-titling this
work and talks about "explorers and producers" instead of just
"explorers." Ultimately none of that matters, he said, because
you can cross-reference, but what is more important is how the
two credits are structured. Anything under AS 43.55.023 starts
out by being a lease expenditure. (AS 43.55.165(e) is the 21
specific disallowances - things that folks cannot do.) So if you
put a capital or operating cost in AS 43.55.023, then all those
disallowances apply. On the other hand, if you go to AS
43.55.025 that has one paragraph saying the credit can't be
these things - the words are not the same. And as they generally
know, a judge seeing different words would assume they didn't
mean the same thing. So lots of things, like how costs that are
considered internal transfers or dealing among related parties,
are handled differently between AS 43.55.023 and AS 43.55.025.
Finally, he said, the "clawback" provision on how credits
interact with the limitations that have been put on Cook Inlet
gas and oil taxes (AS 43.55.011(m) all apply if the well work
credit is put in AS 43.55.023, but not if it's put in AS
43.55.025. These could all be cross-referenced, but if it is
simply "dropped in" one or the other, all the rules would apply.
Another caution Mr. Dickinson raised is if it's necessary to
totally restructure AS 43.55.025 to fit the well credit in, the
last thing explorers, who are comfortable with AS 43.55.025 now,
and the department that is comfortable with how they are
auditing under those rules now, want to have is a total revamp
seven years later - and everyone has to figure out if the new
rules apply.
4:09:20 PM
MR. DICKINSON said the definition of "well work" should be
better. SB 267 starts out by talking about a lease expenditure,
which immediately presents pages and pages of law, but not what
is considered a well and what isn't. It doesn't deal with the
chronological issue - if he has to put in a road and a bridge
and a support camp for a well - is that part of the well costs
or not? It should be better defined in the bill.
SB 267 talks about lease expenditures for the purposes of side
tracking, well deepening, well completion, and well workover;
the sort of comparable list over in the Governor's bill is re-
drilling, casing, cementing, logging, completing well work over
operations or other operations intended to increase or enhance
well production from a known productive pool. Then there is sort
of a flip side provision in SB 267 that very specifically says
you would include an injection well (designed not to bring more
oil or gas to the surface but to put liquids in to force it up
elsewhere) whereas the Governor's language specifically says
that a service well (the definition includes an injector) is not
permitted. Neither is a stratigraphic test well.
4:10:22 PM
MR. DICKINSON moved on to the third item - the tax rate tied to
resident hire - and said according to the Department of Labor
and Workforce Development (DOLWD), Alaska has 17,000 oil field
workers on the North Slope, but as of 2008, roughly 5,000 of
those don't meet their definition of resident and are considered
non-resident hires.
The general approach of SB 267 is to say there is a base tax
rate of 25 percent. At the end of the year, they go back and
look at the labor that was part of their tax calculation, and
see how much of it was resident and how much of it was non-
resident; then they apply for a rebate of taxes if they had a
residential hire rate above 80 percent. The rebate could take
them from an effective tax rate of 25 percent down to 20
percent. So the 20 percent would become the new floor for
someone who had 100 percent resident hire.
CO-CHAIR WIELECHOWSKI asked if that is realistic. Could those
5,000 non-resident hires all be filled with Alaskans?
MR. DICKINSON said he didn't know; but he observed if it's an
issue of training, in the recent DOLWD regulations, training
employees for oil field jobs is not considered a deduction. That
might be worth looking at if they want to encourage training
residents, but he also had other mathematical issues with the
number.
4:12:29 PM
CO-CHAIR WIELECHOWSKI asked if he had any sense of the
constitutionality of this provision.
MR. DICKINSON said he was addressing a number of attorney's
there and as a CPA, he had learned he couldn't get anywhere near
giving a legal judgment.
SENATOR STEDMAN remarked that the 25 percent credit amounts to a
couple billion bucks.
MR. DICKINSON said he would give some examples and if he didn't
answer his question, to remind him of it at the end of this
section. Slide 36 showed the resident hire ratios. Moving from
70 to 80 percent has no effect to the tax rate; the conversation
doesn't start until one is at 80 percent. After that, between 80
percent up to 97.5 percent, basically for every 2.5 percent
increase in hire rate the rebate goes up by 2 percent. An easier
way to think about the net effect is a half percent drop in your
effective nominal tax rate. Then from 97.5 - 100 percent is just
a little bit steeper.
4:13:33 PM
An extreme quote he pulled out of the Anchorage Daily News when
the companion bill, HB 308, was discussed is that according to
DNR hiring one Alaskan could mean $30 million in tax savings.
But the math works out just about right. In his example he used
calendar year 2009 that had a high price and a tax base of $13
billion. So, if one company was responsible for half of that,
the base tax involved would be $1.6 billion. His point was if a
company were right up against one of these brackets and needed
one more hour to complete its ratio, in fact, that one hour
could derive the $30 million effect. He explained that the bill
is based on the number of hours worked by residents or non-
residents not on the number of people. But, Mr. Dickinson said
he wanted to focus on the opposite effect, which is when a
company is below 70 percent (which is where the DOLWD says we
are starting). It would have to add 649 Alaskans as workers, but
the tax rate would not change by one iota - and that would just
be getting it to where the conversation starts.
4:16:16 PM
MR. DICKINSON said that folks tended to focus on what happens if
they were right on one side of the bracket and moved just a half
a percentage point to the other side and their tax rate would
jump by a half percent - but a half percent for this purpose is
hundreds of millions of dollars. But equally true is if he is
exactly at 80 percent and kept adding workers his tax rate
wouldn't change one bit. So, a hypothetical company with 6,500
contractors, employees and laborers could add 162 workers and
get no effect on their tax rate. Mr. Dickinson suggested that it
would be very easy to translate this into a formula where they
didn't have these brackets.
CO-CHAIR MCGUIRE said that committee staff, Mike Pawlowski, was
indicating he would work with him on that.
MR. DICKINSON said one thing that is more problematic and worth
focusing on is the question of if the law is put in place and
then it goes to the folks who are obligated to try to pay the
least tax possible as long as it can be done within the rules.
They would say why not go through the tax return and pull out
every single non-resident hour; taxes would go up because they
would be pulling out deductions, but they would get a benefit at
the other end when they get their rebate. For example, he said
if the tax base is $10 billion, the base tax would be $2.5
billion. The maximum rebate would be 20 percent or about $500
million. At the other end, assuming 5000 workers at $100,000
each/year ($.1 million), the total non-resident payroll would be
$500 million. If he took that out of all his costs, his tax base
would go up by $500 million (25 percent of that for base tax)
and the net effect of not claiming the non-residents would be
$125 million. But because he went to 100-percent resident hire
by the test that was established in the bill, he picked up a tax
benefit of $500 million. So, the net effect of not claiming non-
resident workers would be a $375-million benefit.
4:21:27 PM
MR. DICKINSON said he had four suggestions for avoiding this
kind of problem:
1. Shift the scale so the maximum tax savings are not 5
percent but 1 percent
2. Require that any labor be allowed as a lease expense
3. Focus on new hires only
4. Have the commissioner of DOR determine a tax rate every
year.
4:23:58 PM
MR. DICKINSON said it is very important to understand that there
really are just three tax payers. That's all they are really
talking about here. The producers are the taxpayers in Alaska;
they have the working interest in the leases. They go out and
hire an operator to run those leases. The operators also have
employees, but they generally hire contractors to do the actual
work. If you come right down to it, direct employment from oil
and gas is 4000; the oil field services, the people that are
working on the leases is 13000. The thing to focus on is that
most of the employment is with people who are not taxpayers who
will not flow through to the tax return as various items.
4:24:14 PM
CO-CHAIR WIELECHOWSKI asked under the bill's current structure
if the resident hire kicks in only for employees of the oil
company or does it pass through to contractors.
MR. DICKINSON replied it would pass through to contractors, but
how it passes through would have to be resolved (not in
regulation). The bill talks about "labor." The question is if
you buy a module, are you buying X amount of labor in a module
or what happens if you have a turnkey contract or a fixed price
contract. The concept that becomes a deduction is fair game for
the resident hire calculation (slide 47).
4:25:15 PM
SENATOR WAGONER said that it is pretty evident that this would
be much better structured in two different bills, one for oil
taxes and one for local hire. He didn't see SB 267 going a long
ways in the next 60 days if it didn't get a lot of
clarification.
MR. DICKINSON said slide 49 showed who the largest taxpayers are
on the North Slope. Cook Inlet is another unit that represents
about 10 percent of the state's total production (mostly gas),
but it's less than one half of one percent of the tax due to the
"J&K" limitations that basically say "no production tax on oil
and gas is limited to something like 17.5 cents/mcf." So, total
Alaskan production is 280,000 barrels and 251,000 of that is on
the North Slope.
4:26:16 PM
CO-CHAIR WIELECHOWSKI asked for an estimate of barrels of oil
left in Cook Inlet.
MR. DICKINSON said he couldn't hazard a number, but the DNR
publishes those numbers.
CO-CHAIR WIELECHOWSKI asked the tax rate in Cook Inlet.
MR. DICKINSON answered the production tax rate for oil is zero
and the production tax rate for gas is frozen (from 2006) at 17
or 18 cents/mcf.
CO-CHAIR WIELECHOWSKI asked how exploration for oil in Cook
Inlet is doing with that low tax rate.
MR. DICKINSON said other folks could speak to that more
specifically than he could, but some exploration is going on.
SENATOR WAGONER said the tax rate for oil is at zero (from PPT
discussions). He didn't know how much was recoverable and he
reminded them of a royalty reduction in some cases depending on
the amount of production.
4:29:44 PM
MR. DICKINSON said a credit for up to $1 million/month is
available in Cook Inlet that most of the players - Aurora,
Pacific, Marathon, and ML&P - would qualify for. The only folks
not qualifying for that would be ExxonMobil and ConocoPhillips
who are also on the North Slope. The small players on the North
Slope - Nenana, Doyon, Forest, ENI, and Pioneer - are covered by
that. The $1-million credit would eat into what Anadarko and
Chevron owes, but they would probably still owe something and so
the 95/5 split is probably closer to 97/98 being paid by three
taxpayers with 2 percent being paid by the remaining two.
According to DOLWD data, he said, the employers are ASRC,
CH2MHill, Nabors, and Schlumberger - the oil field services
companies. He remarked that H2MH
instead of mandating local hire, the whole theory behind this
bill is when BP and ConocoPhillips go out and hire operators or
when the operators go out and look for contractors that the
resident hire ratio is important. And, therefore, it's a bid
variable.
4:32:10 PM
Slides 55-60 show how the mechanics of the change would fit
together and his next two issues concerned the regulations now
coming out on the new set of rules the Legislature created in
2007. The question is if a producer didn't know he owed tax, and
suddenly a rule change says he owes tax, under current rules, he
would owe an interest all the way back to when that tax was
first due. SB 267 and the Governor's bill set up a situation
where the interest would not start running until some period
after the regulation had taken place. When SB 267 was put
together it was with the real intent of not having any
retroactive rules. But for this particular issue it is very hard
to come up with a rule that isn't backward looking. Governor
Parnell's bill is retroactive.
4:33:32 PM
Slides 60-61 show state and federal fund interest rates; the
federal rate is calculated with the formula of the base rate +5
percent. From June 1991 until now, except for a handful of
months, the state's has always been below that. So, essentially
the state has an 11 percent interest rate. Now the federal fund
rate is .5 percent and the interest, which is not supposed to be
a penalty, is at 11 percent. He hoped to illustrate that
historically when the 11 percent was put in the interest rate
situation was very different than the one we find ourselves in
today. The numbers that this bill incorporates are very close to
what the federal income tax uses. The major difference is that
this bill also puts in a ceiling of 11 percent; the federal
funds have no ceilings or floors.
4:35:17 PM
The last issue is simply changing the statute of limitations the
department has to assess tax from three years to six and now
back to three. It's important to understand that if there is a
false or fraudulent return or intent to evade taxes, the statute
of limitations doesn't apply. This items is just in the course
of events when the department issues an assessment for a change.
4:36:04 PM
JOE MATHIS, President, Nana Pacific, a wholly-owned subsidiary
of Nana Development Corporation, Anchorage, said he was invited
to present here today because his is one of the larger companies
that lost a lot of jobs in the last two years. He said that Nana
Development Corporation has many areas of business that it
conducts in the oil field, primarily in the security business -
protecting the oil field, along with some food services,
maintenance of shops, housing, engineering, construction and
personnel services.
He said that approximately two years ago they had about 650
engineering-related jobs in Anchorage. Now they are down to just
over 350. It would be nice to be able to say they lost those
jobs to competition, but they disappeared because projects
disappeared. When Nana had the 650 employees they were looking
at lots of projects coming up and they leased a tremendous
amount of space for them. Now they have a lot of vacant office
space in mid-town, down-town and south Anchorage. He said that
unfortunately those people who lost their jobs don't have
another project to move to; they are going to have to move
Outside where the demand is.
MR. MATHIS said their other business sectors have seen about a
12-percent decrease in employment. This particular one was
related to project engineering and it was severely affected by
the cutbacks.
SENATOR WAGONER asked for a breakdown in the kinds of engineers
he lost.
MR. MATHIS answered mechanical, electrical, and petroleum
engineers.
4:40:13 PM
DAVE CRUZ, President, Cruz Construction, Palmer, Alaska, said he
is also president of Associated General Contractors. He wanted
to speak firsthand about the impact they had seen on the North
Slope. His company supplies ice roads, rig moving, oil field
support, rig maintenance, rig service and various other services
associated directly with the oil companies up North, small and
large. Two years ago they worked solid from October to May and
ran 200 folks in their field operation; last year at this same
time they ran 150. Today he has 8 people working out of Prudhoe.
He has seen a significant downturn; no projects are coming out
and he attributed it to strangling the only industry we have
that has been sustaining jobs.
4:42:21 PM
CO-CHAIR MCGUIRE asked what kind of lead time projects need.
MR. CRUZ replied that projects generally need a year in advance
for planning and budgeting.
CO-CHAIR MCGUIRE asked if he talks to producers who hire him
about why there isn't project development.
MR. CRUZ answered yes; he is being told that Alaska is not a
good place to do business in because of the current taxation
system on oil. It takes about two weeks to get a drilling permit
in Alberta, but in Alaska it takes about a year. There is a lot
of work that goes into getting a drilling permit in Alaska; so
things are substantially more expensive here than working in
other places.
SENATOR HUGGINS said what he is saying is very interesting,
because they are seeing bar graphs that essentially describe a
very rosy-colored scenario about employment. But then hearing
people like him and Mr. Mathis describing what is happening to
their employment force you get a different picture. Then, he
also listened to Kevin Banks, Division of Oil and Gas, in
particular, who said that in 2009 there were 13 developmental
permits, but in the prior year there was 33, the year before
that there were 39, and before that 43. That is a dramatic
decrease that tells a completely different story that is very
alarming.
4:45:56 PM
JIM GILBERT, President, Udelhoven Companies, Anchorage, Alaska,
said he was asked how long it would take for him to see a change
in business if ACES passed. His answer is almost immediately.
His personnel work is in project management for the producer
companies, primarily in capital expansion. They were just
starting to staff a job involved in long-term western region
development at Prudhoe Bay - at least four to five years with a
sealift of large modules - and less than two years into the
project it was canceled. He had about a dozen skilled project
engineers working on that; about half of them have had to
relocate to Louisiana on two projects they started down there.
Mr. Gilbert said he thinks ACES is broken and needs to be fixed.
Progressivity seems to be the biggest component that needs
repair.
He related that at about the same time in 2007, ConocoPhillips
was preparing to start its ultra-low sulphur diesel (ULSD)
project and Udelhoven already had people working on it; but
there again, because of the tax situation, they canceled the
project. It's not a coincidence; ACES is broken.
MR. GILBERT said that many projects don't make it through the
review stage, because they cannot withstand the tax or bottom
line scrutiny. As production continues to decline, people can't
stand in the way of the means and methods to increase
exploration, development production, but ACES does just that. It
blocks efforts by producers to increase production and it
stifles development. It hurts Alaska.
SENATOR FRENCH thanked him for coming down and bringing them
some real stories. He said he had a pair of graphs; one is for
U.S. workover rigs and the other is for rotary drill rigs. Both
show a dramatic drop in drilling activity across the nation in
2008/09 that happened coincidentally when ACES was passed. He
didn't think that ACES affected the U.S. drilling activities;
something else did. Everyone knows that oil prices went from
$145/barrel down to much lower. He was interested in stimulating
jobs in Alaska, but he wanted to be cautious about drawing too
many conclusions in seeing this kind of drop across the nation
in drilling activities.
4:49:50 PM
MR. GILBERT said he wasn't sure where Senator French's data came
from, but he knows that areas in the Gulf of Mexico, Texas and
Louisiana, are booming.
SENATOR FRENCH said his data came from the most recent edition
of a magazine called "World Oil" that he found in the State
Library.
CO-CHAIR MCGUIRE said she would be interested, generally, in
taking suggestions on what kinds of things Texas and Louisiana
governments do to make it easier to do business in those places.
She said on a broader perspective, that the state hadn't been
competitive the way they would like to be in terms of drilling
wells, ACES aside.
MR. GILBERT said it's really a single word - taxation. He said
he has an office in Canada also and agreed with Mr. Cruz that
they can get a drilling permit in two weeks there - the same for
the Gulf of Mexico where Udelhoven has been doing business for
eight years. He sees an adversarial relationship in this state
with industry.
4:53:19 PM
SENATOR HUGGINS thanked him for testifying. He also pointed out
that the one state agency that substantiates what he is telling
them about the numbers is the Alaska Department of Labor and
Workforce Development and they have to pay attention to those
numbers.
CO-CHAIR MCGUIRE thanked him, too, and said they offered equal
time to the Department of Revenue.
SENATOR WAGONER said they have heard the same story continuously
about permitting times for the eight years he had been here.
Maybe they should bring someone in from the permitting division
and walk through the permitting steps when they have some time.
He knew the owner of Pelican Oil had walked his permit through
himself much faster than one year.
CO-CHAIR MCGUIRE said she had heard that some jurisdictions
around the world have people apply for "bundled" permits. So she
thought permitting would have opportunities as well.
4:54:01 PM
COMMISSIONER PAT GALVIN, Alaska Department of Revenue (DOR),
Anchorage, Alaska, agreed with Mr. Dickinson's presentation. He
said that Senator Stedman [Finance Committee] had asked the
department to present a lot of this kind of information that
would be beneficial to anybody looking at this issue. He didn't
have much to add.
COMMISSIONER GALVIN said that Mr. Dickinson had successfully
walked them through the different issues associated with the
current structure in SB 267 regarding resident hire and the
opportunities to change that structure. He said the
administration is interested in doing anything it can to
encourage local hire. It is a struggle the state has been up
against in terms of the constitutional limitations.
4:58:18 PM
The issue they have with the concept of providing a tax rebate
is that they want to insure it is done in the most efficient
manner and has the desired results. This philosophy would also
carry over to the issue of the 30 percent credit for drilling
and the change in the progressivity. They are interested in
pursuing a way to get what they are all striving for, which is
more investment in more drilling rigs and more Alaskans being
hired to ultimately result in more production.
CO-CHAIR MCGUIRE said that she thought this was a worthy credit
to give. It's an incentive not a requirement. And she invited
him to continue to offer suggestions to the Legislature on how
to do that.
CONMMISSIONER GALVIN said they had presented the mechanics of
how the credit would work for resident hire. He added that Mr.
Dickinson in his presentation also provided a picture of the
choice that has to be made if they are looking at putting the 30
percent drilling credits into AS 43.55.023, the standard
credits, or into the exploration credits in AS 43.55.025.
With regard to the interest rate, they share the goal of trying
to insure that the retroactive application of the regulations
does not operate as an unfair penalty for those who are affected
by it in a good faith attempt to actually comply with the law.
He thought they had a fairly straight-forward way to get there.
5:02:35 PM
With regard to the change in the interest rate calculation
method, Commissioner Galvin said his primary concern is that it
may provide an incentive for a taxpayer to basically use the
state as a bank by not paying a tax. If the interest rate
calculation method provides a rate that is substantially below
either what a taxpayer would get by borrowing from a commercial
bank or what their normal cost of capital would be, it would
provide a disincentive for them to make a payment in a more
expeditious manner.
COMMISSIONER GALVIN said he shared the recognition that the
current methodology might not be the best with the automatic 11
percent floor given where current interest rates are, and
probably an area in between would actually work for both sides.
5:04:18 PM
Finally, he mentioned the statute of limitations is an area of
concern he would have if they bring it back to three years. It
was discussed in detail during the ACES session with regard to
the complexity of the tax system and the issues associated with
how to mechanically be able to accomplish an audit in three
years. Three years is not an adequate time to have a certain
fairness between the taxpayer and the state in accomplishing
that exercise. If three years were imposed given the current
system in place, the state would be in a position at the end of
that time to basically put a "blue sky number" out there and
just say this is what we're going to assess simply because we
don't have the data to give an accurate reflection.
COMMISSIONER GALVIN said he would be happy to talk about any of
these issues in more detail as they go forward with evaluation
of this and the Governor's bill.
CO-CHAIR MCGUIRE found no further discussion or questions from
the committee and adjourned the meeting at 5:06.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Dan Dickinson - SB 267.pdf |
SRES 2/17/2010 3:30:00 PM |
SB 267 |