Legislature(2011 - 2012)HOUSE FINANCE 519
03/14/2011 08:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 14, 2011
8:02 a.m.
8:02:31 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 8:02 a.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Representative Mike Hawker; Bryan Butcher, Commissioner,
Department of Revenue; Bruce Tangeman, Deputy Commissioner,
Department of Revenue.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
8:04:37 AM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled: "CS HB 110 (RES)
Introduction, Proposed Changes to the Oil & Gas Production
Tax." He discussed that HB 110 was related to Alaska's
future and that its goal was to make changes to the current
tax system that would make Alaska more competitive both
nationally and globally, to produce more jobs for Alaskans,
and to increase Alaska's oil production. He discussed that
a recent projection that North Dakota would pass Alaska in
oil production in the next five years, was a real wakeup
call for Alaska. The state needed to maximize the
production on its state lands given that the federal
government had been a deterrent to development in the Outer
Continental Shelf (OCS) and on federal lands. Many of the
credits and incentives that had been created over the past
few years had helped but production continued to decline.
He delineated that there continued to be a significant
amount of oil available for development on Alaska's state
lands. The two main goals of HB 110 related to the
development of unexplored oil fields and to the increase of
production from the legacy fields that currently provided
over 80 percent of the oil to the Trans Alaska Pipeline
System (TAPS). He stated that oil provided over 85 percent
of the revenue that was required to run the state's
government. He explained that the challenge was significant
and that the bulk of the easiest to recover oil had already
been extracted. The state was looking at the production of
viscous oil, heavy oil, and development in areas that had
very little to no infrastructure; therefore, the challenge
was greater than it had been previously. This was a main
component of the administration's multi-tiered process in
order to increase TAPS production. The process also
involved the Department of Transportation and Public
Facilities (DOT) Roads to Resources program; improvements
to and expediting of the permitting process by the
Department of Natural Resources (DNR); focus on federal
road blocks by the Department of Law (DOL); work by the
Department of Labor and Workforce Development (DLWD) to
train Alaskans for additional work that would arise in the
future; and, continued work by the Department of
Environmental Conservation (DEC) to ensure that development
would continue to be done in an environmentally sound
manner.
Commissioner Butcher discussed that the bill aimed to
improve the investment climate for existing players on the
slope and to invite new entrants. The bill also worked to
create jobs for Alaskans and to increase production and
extend the life of TAPS. There had been a pipeline shutdown
in January 2011 for almost one week and due to the extreme
cold on the North Slope it had been eye-opening and was
very evident just how fragile the pipeline really was. The
pipeline could have frozen and the fact that it was only
one-third full drew attention to the production level in
the state and to the potentially limited longevity of TAPS.
Once the pipeline reached a point where it could no longer
provide the work that needed to occur, the pipeline system
would shut down. Up to that point an increased amount of
work and money would be required for heating and other
items to keep the oil flowing. It would be more expensive
and would cut into funds that would have gone to the state
treasury.
Representative Gara referred to the term "pipeline
shutdown" and did not think that a reduction to the
pipeline volume was in the state's best interest; however,
a number of years earlier TAPS owners conducted a number of
retrofits to allow the pipeline to operate at a lower
volume.
Co-Chair Stoltze informed the committee that there would be
a thorough conversation at the end of the week.
Commissioner Butcher discussed Page 4 titled: "North Slope
Production." The chart showed the sharp increase in oil
production that occurred in 1977 and peaked in FY88 at a
little over two million barrels of oil per day. It detailed
the rather quick production decline that occurred in the
years that followed FY88. He emphasized that from the peak
in 1988 through 2010 that the barrels per day had dropped
over 68 percent. From that point the decline had been an
average of five percent to six percent on an annual basis.
The legacy fields continued to decline; however, the state
expected that half of its oil production would continue to
come from these fields in 2020. It was important to focus
on new field development and on the continued production at
existing legacy fields. He discussed that Page 5
"Forecasted ANS Production FY 2010 - 2020," provided a
forecast from the Department of Revenue's (DOR) fall
forecast book from 2000 through 2020. The light gray
portion of the chart represented that currently producing
fields followed the traditional decline curve and were the
easiest and most certain for DOR to predict. The darker
gray section represented fields such as Liberty that were
under development for expected production in the next
couple of years and were currently receiving a significant
amount of money and work. The most speculative were areas
that were under evaluation for potential development and
were represented by the dark black section on the chart. He
delineated that the bill could potentially be very valuable
to oil fields that were under evaluation and to other areas
that had not been seriously considered due to the current
tax regime. More detail on the chart would be provided at a
production forecast meeting with DOR's production economist
Frank Molly that was scheduled later in the week.
Commissioner Butcher discussed a chart titled: "North Slope
Development Drilling" (Page 6) that provided information on
development and service wells. Development wells aided in
the development of existing fields, whereas, service wells
were injection wells that helped development wells to
recover more oil from the fields. A green line on the chart
represented the Alaska North Slope West Coast (ANS WC)
price. Through the early 2000s the price was close to
$200.00 then it slowly dropped and popped up slightly in
2010 with the price of oil.
8:14:14 AM
Commissioner Butcher addressed the chart on Page 7 titled:
"North Slope Exploration Drilling" that provided a snapshot
of exploration well locations. There had been 18 wells
drilled in 2007 at the time that Alaska's Clear and
Equitable Share (ACES) legislation passed. When the bill
passed at the end of 2007 the locations for exploration had
already been decided for 2008 and as a result the number of
locations dropped to nine in 2009 and four in 2010. Two of
the four wells were not in the true exploration category as
they were drilled in the previously developed Point
Thompson field. He communicated that DNR expected that only
one exploratory well would be drilled in 2011.
Commissioner Butcher discussed Page 8 titled: "There's Lots
of Oil Left in Alaska." The cumulative production from the
beginning of TAPS through 2010 was 16 billion barrels. The
Department of Natural Resources estimated that the
remaining North Slope reserves exceeded five billion
barrels; however, geology based estimates of total oil
volumes were much higher. He explained that the five
billion to six billion barrels in the forecast did not
include approximately 20 billion barrels in the giant Ugnu
deposit or offshore volumes from the Chukchi or Beaufort
Seas. The Ugnu deposit would be factored into the DOR
revenue forecast when it became economic to produce heavy
oil.
Commissioner Butcher addressed Page 9 titled: "Areas of
North Slope are Underdeveloped" that showed oil and gas
activity in 2010 and 2011. The dark shaded areas at the top
of the map represented the primary oil production areas
from the past few decades, such as Prudhoe Bay and Kuparuk.
The lighter gray area that was circled in red was
indicative of areas that had not experienced exploration.
The undeveloped area included much of what the developers
Armstrong, Repsol, and Great Bear Petroleum were focused
on. The governor believed that the 15 percent oil taxes
could be of benefit in the unexplored fields and that the
state should encourage the development and exploration of
oil in the region.
Commissioner Butcher pointed to Page 10 titled: "How Can We
Reverse the Trend?" The list of sample investor criteria
included prospectivity or opportunities that existed for
oil companies; geopolitical stability, which was a
tremendous benefit to the U.S.; regulations, access to
resources, development permitting, environmental
constraints, which had all been a challenge federally; and,
operations, the location of the existing infrastructure,
experienced workforce availability, costs, and market
proximity. He explained that Alaska's limited
infrastructure and workforce availability combined with
expensive transportation costs due to its distance from
market, made production in Alaska more challenging than in
Texas, North Dakota, and many of the other oil producing
states. Given all of the challenges in Alaska, the bill
focused on making a change to the tax regime. He believed
that the difficulties contributed to the decline of
investment in Alaska's oil industry and as the price of oil
had increased over the past few years there had been
increasing investment in North Dakota, Texas, and in many
other states and countries.
8:19:20 AM
Representative Doogan asked whether there would be a chance
to ask questions about the presentation.
Co-Chair Stoltze responded that they would see whether time
allowed for questions during the meeting. He informed the
committee that there would be time for questions the
following day.
Commissioner Butcher moved to Page 12: "Production Tax
Overview." He explained that the production tax value (PTV)
was the market price less transportation costs and
allowable lease expenditures. Allowable lease expenditures
included both operating and capital expenditures. The
current PTV base tax rate was 25 percent and it would not
change under the proposed legislation. The current
progressive surcharge rate was triggered when a company's
PTV reached $30.00 per barrel. He explained that from
$30.00 dollars per barrel to $92.50 per barrel the
surcharge added 0.4 percent to the tax rate of each
additional $1.00 increase until the combined tax rate
equaled 50 percent. He relayed that the additional tax
applied to the entire cost of the barrel; therefore, higher
progressive rates experienced marginal tax rates with 93
percent government take and the cost of the barrel
increased by 1 percent.
Commissioner Butcher explained that the bill would shift
from progressivity to a bracket system, where a tax rate
would be applied with each additional bracket. The tax
increase would only apply to a particular portion of the
barrel and would result in a more gradual progressivity
slope. The state would continue to take a higher share when
oil prices were high. He discussed that from $92.50 per
barrel and $342.50 per barrel the surcharge dropped from
0.4 percent to 0.1 percent for each additional $1.00
increase in PTV until the combined tax rate reached the
maximum of 75 percent. The bill would reduce the cap to a
maximum of 50 percent. He relayed that the department would
provide a comparison between the current law and the
changes that would take place under HB 110.
Commissioner Butcher addressed a second page titled:
"Production Tax Overview" (Page 13). He explained that the
total tax before credit was calculated by adding the
progressive surcharge rate that was applied above 30
percent, to the base tax rate of 25 percent. A company's
final tax bill was calculated by subtracting the credits
that had been applied against the taxes from the total tax
before credit. Page 14 titled: "FY 12 Production Tax
Projected," provided detail on the FY12 fall revenue
forecast that totaled $82.67 per barrel with the production
estimate at 622,182 barrels. He pointed out that the
numbers would change in the revised spring revenue forecast
that would be released in the last few days of March or in
early April. He explained that the annual production value
of $18.774 billion was determined by multiplying the price
per barrel and the number of barrels. The royalty and
federal barrels were not taxed and were subtracted from the
$18.774 billion, which resulted in $15.9 billion. The
$1.229 billion ANS marine transportation and tariff on tax
cost was subtracted from the $15.9 billion. The FY12 PTV
was estimated to be $9.675 billion and was determined by
subtracting the deductible operating expenditures that were
estimated at slightly under $2.5 billion and the deductible
capital expenditures that were estimated at slightly over
$2.5 billion. The total $2.754 billion production tax for
FY12 was determined by subtracting the base tax rate of
$2.4 billion, the progressive tax rate of $785 million, and
the estimated tax credits of $450 million. He reiterated
that the numbers would change in the spring revenue
forecast.
8:26:08 AM
Commissioner Butcher pointed to the "Production Tax Credits
Overview" on Page 15 that listed numerous current credits.
The qualified capital expenditure credit was 20 percent,
and a 40 percent credit for well lease expenditures outside
the North Slope had been implemented to encourage more
development in Cook Inlet. When a company had a carried
forward annual loss it received a 25 percent carried-
forward annual loss credit or net operating loss credit
(NOL). The small producer and new area development credit
was up to $12 million per year for small producers and up
to $6 million per year for production outside the North
Slope and Cook Inlet. The alternative credit for
exploration was 30 percent to 40 percent of eligible
exploration expenditures provided that certain criteria
were met. The Cook Inlet jack-up rig credit was 100 percent
to 90 percent to 80 percent for the first three exploration
wells drilled using a jack-up rig in Cook Inlet. He relayed
that the jack-up rig credit had motivated companies to
explore in the Cook Inlet area and that Escopeta Oil and
Buccaneer Energy were currently working to bring jack-up
equipment into the state.
Commissioner Butcher discussed that the bill was comprised
of three major components and that it would make a number
of smaller changes to state statute. First, the
progressivity rate would be changed to a bracket system
that would have a similar structure to the federal income
tax system. He used federal income tax as an example and
explained that an income of $0.00 to $30,000 would have a
10 percent tax, income of $30,000 to $40,000 would have a
13 percent tax, and that the tax would continue to increase
as income increased. He explained that the higher tax
bracket was not applied to the entire amount of earned
income from the year and a person would still pay the 10
percent rate on the first $30,000 that they earned. Under
the current oil tax system the taxes picked up a higher and
higher percentage of the entire barrel of oil.
Co-Chair Stoltze noted that petroleum economist Roger Marks
would present to the committee the following day and would
be available for questions on bracketing.
Commissioner Butcher discussed Page 17 titled: "Main
Proposed Changes." The base tax rate would remain at 25
percent; however, in order to motivate production and
exploration the base tax rate would be reduced from 25
percent to 15 percent for exploring leases or properties
that had not been unitized or producing on or before
December 31, 2010. The bill would reduce the maximum cap on
the tax rate from 75 percent to 50 percent and for the
unexplored fields the rate would decrease from 50 percent
to 40 percent. He delineated that the tax rate would start
10 percent lower and would be capped 10 percent lower. The
third major component of the bill would extend the 40
percent North Slope well lease expenditure tax credit in
order to motivate additional development on the existing
fields. The current 20 percent well lease expenditure
credit was increased to 40 percent for areas south of 68
degrees north latitude. Under the legislation tax credits
could be claimed in one year and would benefit smaller
independent companies that had cash flow issues. The
current process required tax credits to be claimed in two
years and made it difficult for DOR to deal with the
credits because they had to split multiple years. He
explained that annually the department dealt with the
second year of a previous tax credit and the first year of
the new two-year credit. Ultimately the revenue effect was
negligible given that the amount of money the department
would handle would not change under the one-year claim
period. The bill also changed the monthly tax calculation
that was impacted by short term price and cost peaks to an
annual tax calculation that was based on average prices and
costs. The annual calculation was easier for DOR to
administer and helped the industry to move away from the
peaks and valleys that were present in the monthly
calculations. He directed attention to the effective dates
that would be implemented as a result of the legislation
(listed on the right-hand side of Page 17). The effective
date of the change from progressivity to brackets, new-area
15 percent tax, and the yearly calculation would be January
1, 2013 and would give DOR time to work on regulations and
to prepare the tax for implementation. The extension of the
well lease credits from 20 percent to 40 percent would be
January 1, 2012 and did not require the preparation time
that was required for the other modifications.
8:33:06 AM
Commissioner Butcher relayed that Page 18 titled: "Nominal
Production Tax Rates" showed the current ACES nominal rate
(in blue). Changes that would occur under HB 110 were
indicated with a red line that represented unitized fields
nominal rates and a green line that was 10 percent less and
represented the nominal rates of non-unitized fields that
were not currently producing or being developed. The
brackets were set up on the same progressivity curve as
ACES but increases would not be applied to the entire
barrel and would only impact the brackets.
Representative Gara wondered where the loss was under the
bracketed system. He communicated that at $90.00 per barrel
the ACES nominal rate and the HB 110 unitized fields
nominal rate were not the same. He remarked that the chart
made it look like the tax rate would be the same under each
system, but that Commissioner Butcher had explained that
the rates would not be the same. Commissioner Butcher
responded that the tax rates would be at the same place at
$90.00 per barrel.
BRUCE TANGEMAN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
explained that the bracket for the particular section would
cover a range of $80.00 to $92.50; therefore, $92.00 would
be slightly different when comparing ACES to the bracket
system.
Representative Gara asked whether there was a chart that
showed the actual tax rate at $90.00 per barrel for all of
the oil under the new law compared to the actual tax rate
under the old law.
Co-Chair Stoltze asked the department to have the chart
available for a future hearing.
Representative Hawker reported that Roger Marks would
discuss the difference between nominal and effective rates
in the meeting the following day.
Commissioner Butcher addressed Page 19 titled: "Marginal
Government Take." He explained that marginal referred to
the percentage taken by government for each additional
$1.00 that the price of oil increased. He explained that
the slope of the ACES marginal take increased at a much
sharper rate given that under the current system an
increase applied to the entire barrel of oil. Under HB 110
the government share would continue to increase with the
price of oil; however, the rate increase would not be as
extreme as it was under ACES. He relayed that at $92.50 the
PTV of the federal and state government take would be 93
percent and the producer take would be 7 percent. He
discussed the concern that producers had over the
distribution between government and producer take given
their front-end financial contribution to exploration. The
prospect of receiving very little on the back-end when oil
prices were high made investment in Alaska less attractive
than it was in other locations.
Commissioner Butcher discussed Page 20 titled: "Share of
Total Profit - ACES" that related to the percentage share
of the profit under ACES that was based on the price of oil
that ranged from $40.00 to $265.00. He reminded the
committee that when oil production first began off of the
North Slope that former Governor Jay Hammond and the
legislature had believed in an "even share" between the
producers, the state, and the federal government. He
relayed that the state did not currently have control over
the federal share, but that it did have control over its
own share. He discussed that using the recent oil price of
$115.00 per barrel, the state's share would be 57 percent,
the producer's share would be 28 percent, and the federal
share would be 15 percent. At the current price the state
would earn between half and two-thirds of the profit,
producers would receive less than one-third and the federal
government would receive less than the producer share. He
discussed that under HB 110 at $115.00 per barrel the
state's share would be 45 percent, the producer's share
would be 35 percent, and the federal share would be 19
percent. The share of the total profits would increase with
the price of oil and the state would continue to receive
its fair share under the governor's proposed legislation.
Page 22 titled: "Share of Total Profit CS HB 110 (RES):
Non-Unitized Fields," outlined the non-unitized fields
where no exploration had occurred. To provide incentive for
producers when oil was at $115.00 per barrel the state
would receive a smaller portion at 38 percent, the
producers would receive 40 percent, and the federal share
would be 22 percent. He explained that an increase in oil
price would increase the state's share and decrease the
producer's share.
8:40:11 AM
Commissioner Butcher reiterated that the goals of HB 110
were to improve the investment climate for the state, to
increase production, and to create jobs for Alaskans. He
relayed that increased oil prices over the past few years
had encouraged significant development in Texas despite
that it was a far more mature oil producing state than
Alaska. The administration believed that a reduction in the
upper level tax rates would contribute to an improved
investment climate that would in turn increase production
and create jobs in Alaska.
Representative Doogan wondered when the committee would see
actual numbers that would illustrate how the changes in the
bill would impact Alaska. Commissioner Butcher replied that
there would be an in depth discussion on the fiscal note
during the department's time in front of the committee that
week. They would discuss the short-term impacts as well as
different investment scenarios for the future. He
communicated that it was impossible to determine exactly
what the figures would be, but a number of scenarios would
be provided.
Representative Doogan queried whether DOR would be able to
tell the committee what the cost of the bill would be.
Commissioner Butcher responded that the department would
provide estimates on the short-term costs; however, they
would not be able to provide the exact production that
would result 10 years in the future. He added that the
administration could outline its solution to the problem
and it could lay out various scenarios; however, it would
ultimately be the industry's responsibility to present a
compelling case to the legislature on why it believed a
material change was necessary to do business in the state.
Representative Doogan wondered when the committee would be
able to ask specific questions about the presentation.
Co-Chair Stoltze responded that the committee would be able
to ask questions over the next couple of days. He explained
that it would be helpful for committee members to provide
complex questions ahead of time in order to give the
department time to prepare.
Vice-chair Fairclough referred to Page 7 titled: "North
Slope Exploration Drilling." She requested that the
administration provide its perspective on why only one well
had been drilled in 2003. She also wanted to hear from
producers or others on why they believed the 2003 decline
had occurred.
Representative Gara wondered whether DOR planned to amend
fiscal notes based on information that had surfaced in
prior testimony. He relayed that prior committees had
determined there would be a cost associated with the
governor's proposal to tax on an annual basis as opposed to
a monthly basis. Under the proposed legislation the cost
would have been approximately $600 million in lost revenue
three years earlier. He referenced that Commissioner
Butcher had stated the average lost revenue could be
approximately $200 million; however there was no reflection
of the loss in the fiscal note. Commissioner Butcher
responded that DOR would provide a slide that would
estimate the future loss. He communicated that it was
possible to account for the fact that 2008 was the most
volatile oil price year in history, but it would not be a
reflection of the norm. He stated that the department would
provide the information to the committee.
8:46:16 AM
Representative Gara wondered whether there would be a
fiscal note related to the cost. He observed that a fiscal
note was typically required when there was a cost to the
state. Commissioner Butcher replied that the figure would
be listed in the fiscal note and an adjustment would be
made in the department's spring revenue forecast that would
be released in several weeks.
Representative Joule knew that it was hard to project all
of the variables looking into the future; however, he
wondered how the bill would have applied looking back for
the past couple of years. He asked how the bill would have
impacted taxes historically. Commissioner Butcher responded
that DOR would provide the information to the committee. He
added that the department would only be able to show how
the reduction in tax would have impacted the state and not
what the state would have seen in increased production as a
result of the tax.
Representative Wilson asked why the federal government
share of total profits that was shown on Pages 20-22 would
increase extensively. She wondered why the federal
government would receive as much profit as the oil
companies. Commissioner Butcher replied that oil companies
were able to deduct the percentage of their state taxes
from their federal taxes. He explained that a lower state
tax would increase a company's federal taxes because they
would lose the ability to deduct the state tax from their
federal tax. He offered to provide more detailed
information at a later time.
Representative Wilson asked the department to provide
additional information in the future.
Representative Neuman asked for detail on the restoration
and redevelopment wells that were included in the chart
titled: "North Slope Development Drilling" (Page 7). He did
not believe that the rediscovery and redevelopment of old
wells with new technologies should be classified as new
exploration. He thought the breakout would help to
differentiate the new exploration wells from wells that
already existed. He believed that the differentiation was
relevant to the portion of the bill that discussed credits
or improvements towards the expansion of development,
drilling, and access to Alaska. Commissioner Butcher
replied that DOR would provide the detail to the committee.
The Department of Natural Resources would be present at
future meetings and would be able to answer questions as
well.
Co-Chair Stoltze noted that DOR was carrying the bill for
the administration and that it would be the conduit for the
other departments.
Representative Guttenberg hoped that DOR would provide the
rationale on why and how the changes in the bill would
result in modified industry behavior and increased
production and development. He asked what had led the
department to believe that the proposed changes would
result in the desired outcome. He wondered what changes to
historical tax scenarios would have created a shift in the
behavior of the industry when they were or were not
conducting development. Commissioner Butcher replied that
DOR would do their best to get that information to the
committee. He believed that there was not historical data
related to all of the changes given that oil taxes had not
been reduced before.
Representative Guttenberg emphasized that there was a
certain amount of evidence of historical information. He
communicated that at different times the tax rates had been
different and they did not always stay the same. He
referred to the chart titled "North Slope Production" (Page
4) that showed a spike in production in 1977 and a decline
in later years. He said that the state had been faced with
the issue of production decline in the past and many people
had asked what the tax rates had been and why further
development was not underway. He remarked that Alyeska had
looked at what their capabilities would be in advance.
Commissioner Butcher replied that the questions would be
good ones for the industry. He discussed that there had
been questions about the dip at the tail end of the
Economic Limit Factor (ELF). There were many elements that
played into the dip and that the price of oil and a
company's forecast were important to factor in. He believed
that in light of the spike in oil prices over the past
several years that it was shocking Alaska had not increased
production spending like other states had.
Representative Edgmon wondered whether the administration
would make budget plans and projections for items such as
corrections, energy, education, and everything on the
spending side that may not be discussed in depth like the
revenue and economic development side. He discussed that
when the operating budget had recently reported out of the
committee the co-chair had discussed that a handful of
state agencies, retirement funds, and debt service expenses
were driving about 75 percent of the general fund.
Commissioner Butcher replied that DOR would present a slide
that would provide its view of the revenue picture overlaid
with its view of the state budget. He communicated that the
department was working with the Office of Management and
Budget (OMB) and that there would be a reasonable increase
in the budget due to items such as Medicaid and other.
8:55:16 AM
Representative Edgmon wondered whether there would be
detailed fiscal planning related to the expenditure side of
the legislation. He understood that in order to plan for
the legislation to take effect that there was a projection
forward that included assumptions on the exploration and
the revenue side. Commissioner Butcher did not know what
OMB was factoring in specifically and would be surprised to
find that they had looked at details at that level. In work
with OMB the department had examined what would make sense
based on historical terms to determine a snapshot of the
budget that was as accurate as possible. He communicated
that the department would ask OMB to follow up on the
question.
Representative Gara thought that the commissioner had made
conflicting statements about current oil production in
Texas. He wondered whether production had been increasing
or whether it had maintained at the same level.
Commissioner Butcher responded that the amount of company
spending in Texas had been increasing but production had
plateaued and was currently down approximately five
percent.
Representative Gara relayed that in 2006 when ELF had still
been in place, 15 out of 19 oil fields had paid a zero
percent to less than one percent production tax. He
communicated his intention to ask about that point in
history given that it appeared to be a model of what would
occur under a lower tax structure.
Representative Neuman wondered whether there would be a way
to model how changes in tax rates applied to different
production levels. He surmised that there was not really a
cost to the bill but a change in tax rates. He referenced
earlier questions about plans related to future budget
shortfalls and hoped that the changes to the tax structure
would result in increased production and a neutral revenue
stream. He provided an example about bread at a Carr's
grocery store that had originally been priced at $1.25 and
went on sale for $1.00. He asked whether the store was
losing $0.25 or whether it hoped to sell more bread and
provide job security for the bakery employees.
Representative Neuman shared that the goal was to determine
how changes to the current system would result in more oil
production and to extend the length of TAPS, which equated
to 90 percent of the state's general fund revenue. He
explained that restoration and rehabilitation legislation
had encouraged more oil exploration and that subsequently
the decline in TAPS had slowed by more than one percent. He
believed that past events provided some proof on how the
tax changes would impact the state. He discussed historical
taxation, ELF and low tax rates, and that new technology
made it easier for producers to recover some of the oil
that had not been available in the past despite the lower
tax rates. He emphasized that the oil that had been easy to
recover no longer existed in Prudhoe Bay and Kuparuk.
Representative Doogan wondered what production increases
the department expected under the legislation. He expressed
that the proposed legislation included significant changes
to the current system and that the department should inform
the committee on the expected impacts. He requested
information on the changes beginning with the bill's
effective date and moving forward. Commissioner Butcher
replied that it would be difficult for the department to
provide its best guess out of an infinite number of
possibilities; however, a small range of scenarios would be
provided to the committee.
9:02:31 AM
Representative Doogan replied that he would expect the
administration to defend the legislation on both the profit
side and the cost side. He wondered when the industry would
speak to the committee about the bill.
Co-Chair Stoltze replied that the schedule for the
remainder of the week would be completed that day.
Vice-chair Fairclough requested a budget model to reflect a
scenario in which oil stopped flowing through the pipeline.
She opined that there was a risk that the oil flow would
stop, but that some people believed that the pipeline would
continue to run in perpetuity. She understood that the
pipeline had recently been shut down and had been restarted
despite an existing hole because the temperature had
dropped at a faster rate than anticipated. She understood
that if the temperature got too cold that there would be
one large "piece of licorice" that would be required to be
disassembled and shipped away. She noted that Alyeska, the
pipeline operator, may have been able to speak to the
statement more specifically.
Co-Chair Stoltze wondered how DOR would handle the revenue
side of a pipeline shutdown.
9:06:24 AM
Representative Doogan asked to hear from the industry on
whether the introduction of several additional heaters
could have prevented the pipeline problem.
Representative Costello was interested in a comparison
between the nominal, effective, and marginal tax rates. She
wondered how Alaska compared to the rest of the world in
the three areas.
Representative Hawker discussed the tax proposal evaluation
process that had taken place in the legislature over many
years. The Legislative Budget and Audit Committee (LB&A)
had been charged with securing and providing professional
consultation services to support the legislators in their
deliberation and understanding of the issues. Approximately
a year and a half earlier LB&A had undergone an extensive
request for proposal (RFP) process to secure the services
that would support gas-line and tax change discussions.
Roger Marks had spent over 25 years as the state's senior
petroleum economist and would be available all week for
questions. He relayed that Mr. Marks would provide a
technical analysis of the governor's bill the following
day. Dan Dickinson, the state's former tax director was
also on contract and would be available to discuss tax code
and statutes. The resources were intended for the use of
the committee and he encouraged anyone with questions to
contact his office to set up a meeting.
Commissioner Butcher looked forward to working with the
committee on the legislation.
Co-Chair Stoltze made his office available for any
questions related to the committee process regarding the
bill. He encouraged members to provide detailed questions
ahead of time to provide preparation time for presenters.
Commissioner Butcher expressed that DOR would be very happy
to meet with members at anytime regarding the bill.
HB 110 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
9:13:52 AM
The meeting was adjourned at 9:13 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSHB110(RES)NEW FN-DOR-TAX-03-10-11.pdf |
HFIN 3/14/2011 8:00:00 AM |
HB 110 |
| CS HB110 (RES) - House Finance Committee - final - 20110311.pdf |
HFIN 3/14/2011 8:00:00 AM |
HB 110 |