Legislature(2011 - 2012)HOUSE FINANCE 519
03/17/2011 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 |
HOUSE FINANCE COMMITTEE
March 17, 2011
8:05 a.m.
8:05:30 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 8:05 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 Alan Austerman; Representative Eric Feige;
Senator Cathy Giessel; Bryan Butcher, Commissioner,
Department of Revenue; Lennie Dees, Audit Master, Tax
Division, Department of Revenue; Bruce Tangeman, Deputy
Commissioner, Department of Revenue; Roger Marks,
Legislative Consultant, Legislative Budget and Audit
Committee.
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."
8:05:38 AM
BRYAN BUTCHER, COMMISSIONER, DEPARTMENT OF REVENUE,
explained that the presentation would be about tax credits
as related to HB 110. He stated that tax credits were a
substantial part of the legislation.
Co-Chair Stoltze appreciated the prompt communications the
committee had been receiving from the department.
LENNIE DEES, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE, provided an overview of his credentials and work
experience, including a degree in accounting and twenty-
four years of experience in the oil and gas industry, both
in the natural gas pipeline sector and upstream oil and
gas. He noted that he had been with the Department of
Revenue (DOR) since 2008, right after Alaska Clear and
Equal Share (ACES) came into effect.
Mr. Dees offered a PowerPoint presentation, "Production Tax
Credits, March 17, 2011" (copy on file). He began with a
list of the seven different types of tax credits allowable
under the Alaska oil and gas production tax statute (AS
43.55) on "Types of Production Tax Credits" (Slide 3):
Credits which may taken against oil and production
taxes include:
· Capital Expenditure Credits
· Alternative Tax Credits for Oil and Gas
Exploration
· Net Operating Loss ("NOL") Carry Forward Credits
· Transitional Investment Expenditure ("TIE")
Credit
· Additional Nontransferable Tax Credits
· Well Lease Expenditures Credit
· Cook Inlet Jack-up Rig Credit
8:10:14 AM
Mr. Dees noted that the next slide provided a history of
when the various tax credits were created, illustrated with
comparative timelines on Slide 4, "Timelines for Production
Tax Credits." [NOTE: only the types of credits are listed
below, not the timelines, which can be found on the slide.]
43.55.023(a) QCE and (b) CFAL credits
43.55.023(l) 40% Well Lease Exp (CI)
43.55.023(i) TIE credits (PPT)
43.55.023(i) TIE credits (ACES)
43.55.024(a) New Area Development credit
43.55.024(c) small producer credit
43.55.025(20%/40%) credit for exploration
43.55.025(30%/40%) credit for exploration
43.55.025(l) Cook Inlet Jack-up Rig credit
Mr. Dees highlighted that the earliest credit enacted under
AS 43.55 was the alternative credit for oil and gas
exploration; the credit was enacted in 2003. Most of the
other credits came into being with the passage the passage
of the petroleum production tax (PPT), starting with AS
43.55.023(a), the qualified capital expenditure credits
(QCE) and AS 43.55.023(b), the carried-forward annual loss
(CFAL) credits; the two came into effect April 1, 2006.
Initially the credits were 20 percent each; during PPT,
credits taken under the particular statute could be taken
by a taxpayer in their entirety in the year they were
earned. The provision was changed by ACES so that a
taxpayer could only take 50 percent of the credit in the
year it was earned; the other 50 percent had to be taken in
later years.
Mr. Dees continued that the next credit enacted under PPT
was the transitional investment [expenditure] (TIE)
credits. Initially, the credit was for expenditures that
companies had made in the five-year period between April 1,
2001 through March 31, 2006; if the particular expenditures
would have been QCEs after April 1, 2006, the company would
have been able to get 20 percent of the particular
expenditures as a credit. However, each year the credit was
going to be limited by the amount of the company's
expenditures during that particular year. The credit
changed under ACES and was only available to companies that
did not have production prior to January 1, 2008, or
companies that were already producing before 2006 and 2007.
Mr. Dees turned to the next credit that came into effect
under PPT, the AS 43.55.024 non-transferrable tax credits.
There were two credits under the section. One was the new-
area development credit, a $6 million credit for those
companies producing oil and gas outside of Cook Inlet and
the North Slope above 68 degrees north latitude. The credit
could only be taken against a tax liability and was not
transferrable or useable in a succeeding year. The credit
was available to a company each year and had a sunset date
of 2016.
8:13:36 AM
Mr. Dees described the next credit available under AS
43.55.024(c), the small producer credit, with a $12 million
credit for companies producing less than 50,000 barrels per
day of oil and gas (BTU equivalent). The credit was pro-
rated down to zero at 100,000 barrels per day, could only
be used against a tax liability, could not be converted
into cash, transferred to another taxpayer or carried
forward, and the expiration date was 2016.
Mr. Dees informed the committee that the AS 43.55.025
credit came into being prior to PPT and was revised under
ACES for activities after June 30, 2008; the credit became
a 30 or 40 percent tax credit (it initially had been 20 or
40 percent). The credit amount was dependant on where the
activity took place; the activity had to be at least 25
miles outside the boundary of a unit on the North Slope or
10 miles outside the boundary of a unit in Cook Inlet. A
well drilled under the credit had to be three miles away
from an existing well.
Mr. Dees directed attention to the two tax credits passed
by the legislature in the prior year: the 40 percent well-
lease expenditure credit under AS 43.55.023(l) and the Cook
Inlet Jack-up Rig Credit under AS 43.55.025(l). The well-
lease expenditure credit was 40 percent for well-lease
expenditures (well-lease costs considered intangible
drilling and development costs, as defined by the Internal
Revenue Code). He noted that in the drilling of a well,
between 75 and 85 percent of the drilling costs were
typically considered to be intangible; intangible costs
were costs of items without a salvage value. The credit was
currently only available in areas south of 68 degrees north
latitude and became effective for expenditures after July
1, 2010.
8:17:07 AM
Mr. Dees provided details about the last credit, the Cook
Inlet Jack-up Rig Credit; the credit was for 100, 90, or 80
percent of the first $25 million for companies using the
same jack-up rig that targeted a particular zone within
Cook Inlet, the pre-tertiary zone. He noted that to date,
there was not a jack-up rig in Cook Inlet, but the
department anticipated that there would soon be one.
Representative Gara referred to prior discussion that the
credits were too liberal and concerns that the state was
giving away so many credits that companies were "gold-
plating." Some had talked about limiting credits to things
like exploration wells and development wells. He pointed to
the 20 and 40 percent credits listed for exploration (20
percent inside a field and 30 and 40 percent for further
away). He asked whether the credits covered every sort of
tangible capital expenditure besides development and
exploration wells. He wondered whether there were some
limitations.
Mr. Dees responded that exploration credits under AS
43.55.023(a)(2) and under AS 43.55.025 had a very limited
scope as to the activity that would qualify. The credits
could only be used for activities associated with the
drilling of an exploration well or a geological or
geophysical (G&G) activity such as a seismic shoot. The
scope was very limited and the purchase of vehicles would
not be allowed. The credit that would include all tangible
purchases (like the truck) would be the AS 43.55.023(a)(1)
credit, the qualified capital expenditure credit; the
expenditures that qualified for that credit were a broad
definition of what a capital expenditure was under Internal
Revenue Code 26 U.S.C. The credit would apply to the
purchase of equipment, vehicles, and the improvement of
buildings, in addition to the drilling of wells and the
construction of facilities.
8:20:52 AM
Representative Gara referred to the 20 to 40 percent
capital exploration credit (limited to more exploration-
related activities). He thought there was also the broader
AS 43.55.023(a) credit. He asked why the 20 percent capital
exploration credit was needed if a broad array of credits
was available under the first one.
Mr. Dees answered that the capital exploration credit under
AS 43.55.023(a)(2) was typically for those particular
exploration well or G&G activities that occurred within a
unit, so they would not qualify for the 30 to 40 percent AS
43.55.025 credit for outside the unit; it would be within
the 20-mile limit or within the 3-mile distance from an
existing well. The purpose was to allow for those companies
currently producing and conducting exploration activities
in the vicinity of their unit. He noted that another reason
for the separation was that there was a requirement for the
company to submit information to the Department of Natural
Resources (DNR) for the types of activities related to the
credits, in addition to the exploration wells.
Representative Doogan requested that the common names of
the tax credits be used in the discussion rather than the
numerical statute designations in order to better
understand the references.
8:23:18 AM
Vice-chair Fairclough queried the reporting mechanisms for
credits in totality. She referred to grids that the
committee had seen, with companies that were drilling and
permitting in various years (provided by Roger Marks in a
prior presentation). She asked whether there was a summary
of what credits were being accessed, the amounts of the
credits, and the companies using the credits.
Mr. Dees answered that the reporting mechanism for the
companies taking the credits off the top of tax liabilities
was the annual true-up based on the projected forecasted
capital expenditures. He noted that throughout the year,
the companies made installment payments based on the
projected forecasts and took credits against their tax
liability based on the projections. At the end of the year
when the companies did the true-up (on March 31), they
submitted information to DOR about the capital expenditures
amounts that led to the credits taken against their
liability. At that point, the department did not get the
detail; the invoice-level details on the expenditures would
not be acquired until the audit. The companies that were
not producers and did not have a tax liability and were
simply coming to the department to apply for transferrable
tax credit certificates had to submit (along with the
application) sufficient detail to support the amount of
expenditures for the credits claimed. For the AS 43.55.023
QCE credits and for the annual loss credits, the department
did a due-diligence review of the detail. He noted that
there had been occasions when claims were disallowed. After
issuing the certificate, the department maintained audit
rights to go back later and do a more thorough review of
the expenditures. When companies applied for the
exploration credits under Section AS 43.55.025 (alternative
credit for oil and gas exploration), they had to submit
sufficient detail, and DOR conducted a full audit of the
claims prior to issuance of a certificate.
8:26:52 AM
Mr. Dees continued that for the transferable tax credit
certificates, DOR would have either done a full audit or a
review of the information, so there would be more detail
about what types of expenditures there were and where they
were incurred. He added that the credits taken against the
tax liabilities would follow when the company's tax return
was audited.
Vice-chair Fairclough agreed that the procedures described
met government and general accounting standards. For the
credits just listed, she wanted a break-out per year of how
much money had been given away or invested in Alaska by the
entity asking for the credit. She wanted the committee to
be able to see whether the recommendations from the
administration matched with what the legislature wanted to
accomplish. She wanted to know who had accessed the
credits. She understood there was a six-year auditing
backlog. She wanted to know who the "winners and losers"
were in order to understand who the state was backing.
Commissioner Butcher responded that DOR would be happy to
put the information together for the committee. He warned
that there were confidentiality issues related to the tax
returns of individual companies; the department was limited
regarding a breakdown by company.
Vice-chair Fairclough stated that she did not want to break
confidentiality. She felt the legislature should still be
able to see how many dollars were applied per category in
order to analyze which credits were working. She commented
that the information should be available to the tax
division through an accounting system query. She asked how
the department would access the information requested.
8:30:34 AM
Commissioner Butcher replied that DOR would provide as much
detail as possible. He noted that the department was
somewhat hampered by its current accounting system; a new
data-base would be able to produce the information more
quickly. He pointed out that DOR was currently working with
the Department of Administration (DOA) on a more
comprehensive review of what was needed related to
software.
Vice-chair Fairclough clarified that to get the information
the department had to look through actual paperwork.
Commissioner Butcher answered "pretty much yes."
Co-Chair Stoltze asked that the report of the information
requested use the common names of the tax credits.
Representative Hawker addressed a "mischaracterization"
made of Mr. Marks's presentation about credits and gold-
plating. He stated that gold-plating was the result of high
tax rates and not of the existence of credits.
Co-Chair Stoltze noted that there would be a presentation
by Mr. Marks.
Representative Wilson understood that credits could be
detailed until full audits had been done. She asked what
was happening to credits if full audits had not been done
since 2006.
Mr. Dees answered that the credits had been taken off the
top of the tax liabilities. As long as the audits were
completed within the assessment periods, adjustments made
through the audits would be assessed to the taxpayer with
interest. The credits would not be in a holding pattern
because the statute allowed the taxpayer to take the credit
off the top of the liability.
Representative Wilson referred to the information requested
by Vice-chair Fairclough. She asked how the committee could
know which one of the companies could come back and say
which credit was not allowed without the information.
Mr. Dees agreed.
Representative Wilson asked whether a model could be
produced that would show what most companies would do (tax
liability and types of credits normally used for a new
operation) to compare the numbers of new producers and
longer-term ones.
Mr. Dees thought the model could be done.
8:34:26 AM
Commissioner Butcher offered to work with DNR to provide
the information for the committee.
Representative Wilson wanted to know the bottom line.
Co-Chair Stoltze referred to a Seinfeld episode reference
to "write-offs."
Co-Chair Thomas asked whether work-over wells were
available for credits.
Mr. Dees replied that it depended; not all workovers were
"capital" in nature. He did know that a portion of the
allowable credit under the 40 percent well-lease
expenditure credit referred to work-overs as being part of
the activity allowable. However, the costs had to be
intangible drilling and development costs. A work-over to
increase the efficiency or through-put of a well could be a
capital activity; a repair job to get a well back to its
normal production would not apply. He noted that the issue
would be a challenge for auditors.
Co-Chair Thomas pointed out that there had been over 500
work-over wells the previous year alone. He thought that
giving tax credits where they were not due without audits
would mean the state was operating "blind." He questioned
whether tax credits would be allowed for exploratory
drilling and development of oil too far from infrastructure
to deliver the oil.
Mr. Dees replied that activity on state land meeting the
distance requirements from units and wells would be
allowed.
Co-Chair Thomas thought the activity would only be allowed
if the oil was put into the pipe.
8:37:56 AM
Commissioner Butcher believed the incentive of including
all possibilities was meant to encourage companies to
explore in new areas and not be penalized twice if nothing
was found (no oil and no credits).
Vice-chair Fairclough asked whether taxpayers historically
tended to over- or under-report credits if the result meant
there would be penalties.
Mr. Dees opined that taxpayers did not over- or under-
report intentionally; he believed companies reported
expenditures they believed they were eligible for. He
stated that he had not come across a situation in which a
company had intentionally over- or under-reported. The
department had had disagreements with interpretations of
how types of expenditures fit a particular credit, but he
did not think the claims were deliberate.
Vice-chair Fairclough asked whether audits historically
resulted in more taxpayers receiving additional credits or
penalties.
Mr. Dees replied that typically, audits had resulted in the
state trying to get money back from taxpayers.
Vice-chair Fairclough asked whether the taxpayers received
a penalty and were charged interest.
Mr. Dees replied that as long as the filings were timely,
the taxpayer did not get a penalty. He added that there was
interest attached to an assessment.
Representative Doogan queried the status of the completed
audits.
Mr. Dees answered that the 2006 PPT audits had
substantially been completed and the work on the 2007
audits had been started. He added that the 2006 audits were
still under the three-year statute; the assessment period
for those audits expired March 31, 2010.
8:41:35 AM
Mr. Dees continued that the assessment period for the 2007
audits would expire March 31, 2014.
Representative Doogan asked whether the audits were under
the current tax system and not the proposed one. He
wondered what would happen if the system were "backed up."
Mr. Dees replied that the timeline would be two years
sooner. He believed the department would be able to
accomplish the task. The 2007 audits would be completed
sometime in the current calendar year.
Representative Doogan asked how the proposed new deadline
would affect the situation.
Mr. Dees replied that under the four-year statute of
limitation, the 2007 tax filings were filed March 31, 2008;
the statute of limitation would be March 31, 2012. The
particular section of the bill was scheduled to start in
2014, which he thought would provide the opportunity to get
more current on the audits.
Commissioner Butcher added that the most difficult
transition for the auditors was from the net tax to the
gross tax, which took place in the 2006 audits just done;
until then, DOR was working off the gross and not looking
at everything that could be taken off what was potentially
paid in taxes. He pointed out that the particular provision
was taken out in the House Resources Committee; the current
version of the bill was back to the six years.
Representative Doogan questioned forwarding a bill that
would cause a lot more paperwork just because it would mean
a lot more money for the industry.
8:45:01 AM
Mr. Dees spoke to the ways credits could be redeemed. He
directed attention to Slide 6, "Credits Applied Against
Production Tax Liability":
Credits may be redeemed in two ways:
(1) All Credits may be applied against production tax
liability
· Capital Expenditure and Capital Exploration
Credits split over two years (except south of 68
degree North latitude - eff. July 1, 2010)
· NOL, TIE, Small Producer and Alternative Tax
Credits for Oil and Gas Exploration may all be
applied against tax liability in total in a
single year
(2) Some Credits may be converted into a transferable
Tax Credit Certificate
· Capital Expenditure, Capital Exploration, NOL,
and Alternative Tax Credits for Oil and Gas
Exploration are convertible to tax certificates
· Capital Expenditure, Capital Exploration and NOL
Tax Credit Certificates must be applied over two
years (except south of 68 degrees North latitude
- passed 2010)
· Alternative Tax Credits for Oil and Gas
Exploration Certificates can be used in single
year
Mr. Dees detailed that the credits converted to a
transferable tax credit certificate could be either sold to
another taxpayer or sold back to the state for cash.
Mr. Dees turned to a chart on Slide 7, "Production Tax
Credits Applied Against Tax Liability (Fiscal Year)" with
historical and projected information related to tax credits
applied against tax liabilities since 2006. He noted that
the credit most used by taxpayers was the capital
expenditure credit. He pointed to the TIE credit, which
went away for most taxpayers effective at the end of 2007;
the 2008 number represented data for the last six months of
2007 (part of fiscal year 2008). There had been use of the
small producer credits; there were some taxpayers producing
less than the 100,000 barrels per day required for the use
of the credit. The exploration credits have also been
applied in some situations.
Representative Doogan thought the current law stipulated
that some of the credits had to be applied in two-year
segments. He wondered how a person could tell when the
credits were applied as opposed to when they were earned.
Mr. Dees responded that the information would be mostly on
the capital credit expenditure line; the major producers
use the credit the most and it was limited to the 50
percent split. Under PPT, 100 percent of the credits were
used in the year they were earned, but beginning in 2008 to
2010, there was a lag; 50 percent of one year's credit and
50 percent of the previous year's credit were used. He did
not think the numbers would provide the answer, because
there were variant levels of capital expenditure. He stated
that the numbers on the chart would suggest that as the
amount of the credits went up, the underlying capital
expenditures giving rise to the credits increased for those
years.
Representative Doogan thought that the number was
increasing because of the popularity of the credits; on the
other side, the state's liability was increasing in terms
of having to pay the credits.
8:49:40 AM
Mr. Dees clarified that the question related to the state's
liability referred to the actual credits the state was
paying out in cash. He stated that the two had to be
separated. The credits were not the ones the state was
paying out in cash, but were the credits resulting from a
company spending an amount in capital expenditures in a
given year and taking 20 percent against the liability; the
amount would never come to the state treasury. For example,
there would be a check for $280 million to the state on a
tax liability of $300 million. He was trying to account for
the fact that although the amounts did not come to the
state's treasury, the amounts represented the benefit to
the companies from making the capital expenditures. He
added that an upcoming slide would show the state's payout,
which was related to a different group of taxpayers.
Representative Doogan apologized for using the word
"liability" with an accountant. He surmised that overall,
the credits seemed to be costing the state increasingly
more each year. He asked whether the increase would
continue.
Mr. Dees replied that the ascending curve on the credits
(especially the capital expenditure credit line) had to be
directly tied to the amount of capital expenditures made by
companies. He said the numbers would increase corresponding
to the increase of capital expenditures by the companies.
He noted that a later slide would show what capital
expenditures had done over the last few years. He stated
that there was a direct correlation to the capital
expenditures made by a company. The numbers would continue
to rise if the capital expenditures continued to rise
because the numbers would be 20 percent of a higher number
(unless the credit laws changed).
8:53:09 AM
Co-Chair Thomas asked whether there had been an increase in
oil production with the tax credits. He suggested the
credits should be abolished if there had not been an
increase.
Representative Edgmon referred to a slide from a past
presentation by Mr. Seamount that had depicted the
precipitous drop in exploration activity in 2010 and the
years before that. He asked why the capital expenditure
credit number seemed to be going up and how that related to
the information from the previous presentation.
Mr. Dees answered that exploration activity would not be
reflected in the numbers listed in the credits. He noted
that there would be a slide further on in the presentation
that was more in line with Mr. Seamount's numbers and the
drop. He stressed that there was always a lag between
activities that were occurring and the request for credits;
the two did not necessarily happen in the same year.
Representative Edgmon recalled earlier information that
there were basically three types of wells: exploration,
development, and service wells. He was having difficulty
making a connection between earlier presentations and the
numbers Mr. Dees was presenting, particularly the numbers
under capital expenditure credits. He had read in the press
that the state had issued $3 billion worth of credits over
the past few years.
Mr. Dees pointed out that the $3 billion referred to was
inclusive of the numbers on Slide 7, plus numbers on
another slide. He added that most of the exploration
activity was being conducted by companies that did not have
a production tax liability. The numbers on the slide were
from companies that were paying a production tax liability.
The credits that had been claimed against the liabilities
were depicted. He explained there would be another slide
showing information from companies that did not have a
production tax liability.
Representative Edgmon asked whether the credits were
working for smaller companies and not working for larger
companies.
Mr. Dees responded that he could not say that; all
companies were taking advantage of the credits available to
them. Companies were incurring expenditures and doing the
activities that generated the credits. He did not know if
the companies would be doing the work if they were not
getting some benefit.
8:58:29 AM
Representative Gara apologized for an earlier
misunderstanding about Mr. Marks's statements about gold-
plating. He explained that he had not intended to change
anything said before. He stated that "your words on gold-
plating would be your words on gold-plating." He thought if
the gold-plating argument was that the combination of
deductions and credits put together were lucrative, then it
sounded more like what it was than what he had said.
Representative Gara recalled previous discussion about a
four-year statute of limitations. He thought the PPT audits
from 2006 were done "just in the nick of time" if there
were a four-year statute of limitations. He thought there
were currently a lot more taxpayers and people claiming tax
credits, and a greater need for audits. The department had
gone from a time when it could barely do the audits in four
years (with fewer companies) to a proposal to do them in
four years for more companies. He asked how many additional
companies were filing credit and tax returns.
Mr. Dees responded that the 2006 audits had been completed
in 2010, one year before the four years would have been up;
the 2006 audits would have been due in 2011 had they been
on the four-year statute of limitations. The audits were
completed a year earlier than the statute stipulated. As
far as the credits were concerned, the credits applied for
with the department received a due-diligence review (like a
"light audit") prior to issuance of the credits. A full
audit was done for the exploration credits up-front, so
there was no danger of running out of the statute of
limitations for the exploration credits. For most of the
companies for which the department did the due-diligence
review, there would be a determination about the need for a
full audit; there had not been a need to-date. He stated
that the department was current with most of the tax
credits, except for the ones that were taken on tax
liabilities. He stated that the number of taxpayers had not
substantially increased.
Representative Gara asked for the number of taxpayers that
would have to be audited, compared to 2006. Mr. Dees
offered to get the information to him at a later time.
Representative Gara asked whether the presentation would
cover operation expenses.
9:02:12 AM
Mr. Dees replied that most of the credits were issued as a
result of capital expenditures. He noted that the only time
operation expenditures came into the credit picture was
when they were part of the expenditures that led to a net
operating loss credit. He added that he did not plan to go
into operating expenditures.
Representative Gara referred to a November 30, 2010 Juneau
Empire article in which the commissioner of DOR had
estimated that operation-only capital expenditures had been
$4.7 billion the prior year. The numbers for the current
year were expected to be $5.1 billion, and the projection
for the following year was $5.5 billion. He estimated the
number represented an increase of about 8 percent per year.
He asked whether the numbers cited were correct.
Commissioner Butcher responded that he did not have the
information referred to but acknowledged there had been a
slow increase in spending in operating and capital
expenditures, which was one of the issues DOR had begun
researching. The industry had communicated that the
expenses replaced things in a mature field and were not
exploration related. He stated that DOR did not have that
kind of information, although it had since learned that
asking for more detail was allowed in the statutes through
regulations. He noted that the department had not requested
the information previously but it intended to include the
legislature as the information was developed. He offered to
get information about the capital and operating expenses by
year.
Representative Guttenberg referred to testimony that the
taxpayers were taking advantage of all the tax credits
available to them. He asked whether any of the tax credits
qualified as gold-plating. He wondered whether the
companies were spending additional money because it was
available to them.
Mr. Dees replied that he did not know whether companies
were gold-plating.
Representative Guttenberg pointed to the top line (for
capital expenditure credits) on Slide 7 ("Production Tax
Credits Applied Against Tax Liability"), and asked how the
increase from 2006 to 2011 related to oil production. He
wondered whether there was a correlation.
Mr. Dees responded that at the present time, DOR did not
have information to correlate the two, as the department
did not get information about how companies were spending
the money. He noted that the department was going to
request the categories of expenditures.
9:06:15 AM
Mr. Dees directed attention to "Transferable Tax Credit
Certificates" (Slide 9):
Companies may also claim tax credits by applying for a
Transferable Tax Credit Certificate (TTCC)
· Available to companies (explorers) with no tax
liability to which credits can be applied
· Tax Credit Certificates under 43.55.023(a) and
(b) must be split or applied over two years
(except credits issued for expenditures incurred
south of 68 degrees North latitude effective July
1, 2010)
· May be transferred to another taxpayer or cashed
with the state
Mr. Dees detailed that the certificates were available to
all companies, even those with production tax liability.
However, most companies preferred to take the credit off
the top of their tax bill. He emphasized that transferable
tax credit certificates were especially important to those
companies or explorers with no tax liability to which the
credit could be applied (for various reasons), as the
certificates could be sold to other companies or could be
sold back to the state.
Mr. Dees continued that tax credit certificates were split
in two when issued, because they had to be applied or split
over two years. He added that the prior year's legislation
made it so that effective July 1, expenditures incurred
south of 68 degrees north latitude could be issued in one
certificate.
Mr. Dees next discussed "Production Tax Credits Under AS
43.55 Claimed by FY ($M)" (Slide 10). He noted that the
previous slide had shown the tax credits that were directly
applied against tax liabilities; Slide 10 represented all
the requests for tax credit certificates received over the
years by DOR from various explorers or companies without
tax credit certificates. He pointed out that an earlier
version of the slide had a different amount in 2008 for
exploration AS 43.55.025 credits, but the net amount of
credits issued would not be changed.
Mr. Dees continued that Slide 10 represented what had been
requested by tax payers or explorers. He noted there had
been a trend related to exploration activity; the AS
43.55.025 numbers increased in FY 2008, came down a little
in FY 2009, and then had a big increase in FY 2010. He
emphasized that fiscal years were depicted; he stressed
that the period for drilling a well (the drilling season)
on the North Slope was typically between October of one
year through March of the next year. Accordingly, the $99.5
(million) number in 2010 did not mean that there was that
much activity in the state; it just reflected when the
particular applications were submitted to DOR for credit.
Most of the activity that was related to the $99.9 million
occurred during the exploration season from October of 2008
through March of 2009; in the fall of 2008, exploration
activity was high and there had been a large increase in
oil prices. Six months after the exploration activity was
over, the companies were required to submit their
applications for the AS 43.55.025 claims. The $99.5 million
figure represented claims that were submitted in September
of 2009 (which was part of FY 2010).
9:11:02 AM
Representative Guttenberg surmised that the AS 43.55.025
credits in 2010 reflected expenditures that had been made
because of the increased price of oil.
Mr. Dees responded that the number reflected activities
that had occurred during the drilling season beginning in
October 2008 and completed in March 2009; after the
drilling season was over, the companies had to apply for
the AS 43.55.025 credit within six months for the completed
exploration activities. Generally, around September every
year (when there was a lot of activity), DOR would get
inundated with a lot of applications for wells that were
drilled the previous season. He had hoped to illustrate
that even though the chart indicated the year 2010, it did
not mean that the activity had occurred in 2010. The chart
showed when the applications were received for activity
that occurred in a previous drilling season.
Representative Guttenberg asked whether DOR was finished
processing companies that had applied for credits in 2011.
Mr. Dees replied that the department had not finished
processing the applications, as FY 2011 went through June
30 of 2011. He provided an example related to dates between
October 2010 and March 2011; there was only one application
for $2.4 million, which indicated that there had not been
much exploration activity at the end of 2009. He believed
the numbers would correspond to a chart that had been
presented by Mr. Seamount. He underlined that there was a
lag between the exploration activity and the application
for the credit.
Representative Doogan opined that the chart was confusing.
He thought the chart seemed to say that up until 2011 (for
which there were no numbers) things were going well in
terms of exploration, and that it would not be known what
would happen in FY 2011 until the process was complete. He
thought the explanation of the chart just provided had
communicated something very different. He asked Mr. Dees to
rework Slide 10, because it did not match what was being
reported by the testifier.
Mr. Dees clarified that there was a lag between when the
activities occurred and when DOR got the application for
the credit. For example, for a drilling season that began
at the end of 2009 and went through the spring of 2010,
under the statute, the company had six months after the
exploration activity was completed to file for a tax credit
certificate. In September of 2009, DOR had only received
one application for exploration activity totaling $2.4
million; his interpretation of that was that there had been
very little exploration activity going on in the drilling
season that preceded the application.
Representative Doogan asked when Mr. Dees would know how
accurate the $2.4 million number was.
9:16:47 AM
Mr. Dees replied that the numbers (on Slide 10) represented
applications received through January 4, 2011; the number
was accurate through the listed date only. The department
had not received additional AS 43.55.025 applications.
Representative Doogan wondered when DOR would have the
final number. Mr. Dees replied that at the end of FY 2011
(June 30, 2011), he would update the chart to include all
the applications received through that date.
Representative Wilson wondered whether there had been
applications received between January 4 and the current
date (March 17).
Mr. Dees responded that typically the department was
inundated with year-end applications during the period that
it received the annual true-up. He noted that there was a
statutory requirement that everyone doing business in the
state that was incurring lease expenditures or expenditures
for which they would apply for credit had to submit the
information to DOR by March 31. He expected that
applications would be coming in; he thought most would be
received by March 31.
Representative Wilson suggested using the same deadline for
each year to be able see a comparable true-up over the
years. She wondered whether the information was available.
Commissioner Butcher replied that DOR would try to get the
information to the committee. He noted that the
presentation showed all tax credits that had come in up to
the date it was prepared.
Representative Wilson did not believe that the presentation
reflected the information stated. She wanted to see the
numbers based on the same date every year.
9:20:25 AM
Mr. Dees pointed out that the slide did reflect the same
date each year, June 30 of each year. Since it was not June
30 yet in the current year, he had provided the fiscal year
numbers to-date.
Representative Wilson wanted the numbers to reflect the
calendar year, since the decision would be made before the
end of the current fiscal year. She wanted to see the
numbers yearly to see whether the numbers had decreased
during the current year.
Mr. Dees clarified that DOR typically received the
exploration claims in September, within six months after
the October through March drilling season. Most of the
$99.5 (million) number reflected claims that were received
in September of 2009 (for FY 2010). In FY 2011, the $2.4
(million) was all that was received in September of 2010.
The same period was somewhat reflected. He emphasized that
the numbers illustrated that there had been a lot less
exploration activity in the drilling period.
Representative Wilson asked what DOR expected to receive by
March 31. Mr. Dees responded that he did not expect to get
many exploration claims, if any.
Vice-chair Fairclough thought DOR had given the committee
what was needed from an accounting perspective, but
observed that the committee was trying to get to a policy
perspective.
9:24:00 AM
Co-Chair Stoltze believed Commissioner Butcher would
provide the policy perspective.
Representative Gara hoped to draw conclusions from the
numbers on Slide 10. He summarized that the years
represented were ACES years. In 2010, the state paid almost
$100 million in exploration credits and in 2011, the number
was significantly smaller. He wondered whether the
fluctuations reflected the change in oil prices. For
example, in 2008, the price reached $140 per barrel and
then went down to $30 per barrel in 2009. He asked whether
there was a correlation between different prices and
different results for the different years.
Mr. Dees did not know whether there was a correlation. He
suspected that companies would tend to explore more during
the period of higher prices.
Co-Chair Stoltze asked whether the subject of the question
asked reflected Mr. Dees' area of expertise.
Mr. Dees replied that it did not.
Commissioner Butcher replied that the answer could be
obtained from companies that made the decisions. He added
that he could reply to questions about price and other
issues, but ultimately the companies made the decisions
about whether or not to explore and the criteria they used
when making the decisions.
Representative Gara pointed to the small 2011 number ($2.4
million). From a policy perspective, he wanted as much
input as possible from the government proposing the oil tax
and not from the companies that wanted the change.
Co-Chair Stoltze emphasized that there was a separation
between the two, and that was the problem.
Representative Gara referred to testimony that reflected an
expectation of one real exploration well in 2011. He noted
that the current presentation had helped him understand
that there was a lag between the numbers and the years the
exploration wells were done. He wanted to know whether
there was only one well for 2011 or whether that could
change between the current date and June. He wondered
whether the $2.4 million figure was from 2010 and not 2011.
Commissioner Butcher replied that DOR got the information
about the one well in 2011 from DNR and not DOR data. He
had asked DNR whether there was an expectation of more than
one well and DNR had replied no.
9:27:54 AM
Representative Neuman referred to the statutes. He queried
how the numbers for new exploration should be understood,
related to AS 43.55.023(b) providing for exploration
credits for new well exploration.
Mr. Dees replied that AS 43.55.023(b) was not for
exploration wells, but was the net operating loss carry-
forward.
Mr. Dees believed there was confusion being expressed about
dates. He stated that the year 2011 did not mean the
calendar year 2011, but the fiscal year beginning on July
1, 2010. In each of the years discussed, the dates were
between July 1 of one year and June 30 of the following
year. He was trying to reflect what had been received by
DOR in terms of claims for incurred expenditures, not in
terms of credits that had actually been issued.
Mr. Dees turned to the next chart, "Transferable Tax Credit
Certificate Activity by Fiscal Year ($M)" (Slide 11). He
emphasized that the chart showed the transferable tax
credit certificates that were issued each fiscal year, how
much the department had refunded to the taxpayers, how much
the taxpayers had either transferred or applied to tax
liabilities, and the balance as of a given date.
Mr. Dees directed attention to "Cash Refunds History"
(Slide 13):
Cash Refunds Governed by AS 43.55.028:
· To cash must be usable against tax liability
· Must show subsequent (24 months) QCEs or lease
bids equal to cash sought (repealed in 2010)
· Have a zero tax owed in current and past years
· Have no more than 50,000 BOE/d
Mr. Dees reviewed the attributes of cash refunds in Slide
13, "Cash Refunds History":
Cash Refunds Governed by AS 43.55.028:
· To cash must be usable against tax liability
· Must show subsequent (24 months) QCEs or lease
bids equal to cash sought (repealed in 2010)
· Have a zero tax owed in current and past years
· Have no more than 50,000 BOE/d
Mr. Dees spoke to Slide 14 ("Oil and Gas Tax Credit Fund"),
a history of the fund that had been appropriated in order
to pay the transferable tax credit certificates:
Oil & Gas Tax Credit Fund
Appropriations $ 904 M
Tax Credit Purchases (TC Fund) (772) M
Tax Credit Purchases (GF) (79) M
Interest Earned 22 M
Balance $ 75 M
9:32:10 AM
Mr. Dees concluded with Slide 15 ("Impact of Production Tax
Credits Total State Stimulus") with a bar graph depicting a
combination of the credits taken against tax liabilities
and the actual cash paid out by fiscal year. He noted that
2011 and 2012 were estimated numbers for what was expected
to occur by the end of the fiscal year.
Vice-chair Fairclough acknowledged that the administration
was providing data for a body that was trying to make a
policy decision. She voiced concerns about a statement made
related to legacy fields or large producers receiving tax
credits. She felt the committee was being told that there
was no different benefit in the tax-credit structure for
legacy fields versus for the explorers that the state was
trying to incentivize through ACES.
Mr. Dees replied that there was no difference other than
the 40 percent well-lease expenditures for well-lease
expenditures north of 68 degrees north latitude and the
Cook Inlet Jack-up Rig Credit. Otherwise, the same benefits
would accrue to the legacy fields; they would get an oil
credit if they happened to get into a net-operating loss
situation. They would get the same 20 percent capital-
expenditure credit and the exploration credits if they were
doing the appropriate types of activities.
Vice-chair Fairclough thought Mr. Dees was providing a
technical response; from a policy perspective, she wanted
to differentiate that the legislature was trying to
incentivize smaller exploration and smaller drilling
through ACES. She did not think that everyone had equal
access related to tax credits. The slide made it look like
that was not happening.
Vice-chair Fairclough spoke to concerns about jobs for
Alaskans. She thought jobs were being decreased on the
North Slope, specifically in the legacy fields. She
wondered whether there was additional information related
to tax credits that she had not yet heard.
9:36:37 AM
BRUCE TANGEMAN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
explained that Mr. Dees was describing the technical way
the tax credits were being used. The credits were available
and in statute, and companies were taking advantage of
them. He pointed to testimony from companies that were
enthusiastic about the tax-credit system already in place,
like Great Bear Petroleum. He emphasized that those
companies were not yet close to production. The other side
of the equation was the progressivity on the tax when the
companies started producing. He noted previous testimony in
the House Resources Committee by a company that was close
to production; up until that point, they had taken
advantage of the tax system, but progressivity was a
disincentive once they were looking at production. He
stated that all of the provisions in ACES were not being
thrown out, just the progressivity component, which the
department viewed as a serious problem on the production
side of the equation.
Representative Doogan referred to Slide 15. He asked
whether the graph meant to communicate that in 2012,
approximately half of the tax credits were going to the big
three companies and the other half to the smaller oil
companies.
Mr. Dees responded that he was correct; a little over half
was projected as going to companies applying tax credits to
their tax liability. He clarified that the companies
represented were more than just the "big three."
Representative Doogan asked whether the representatives
from DOR at the testifier's table had written the bill.
Commissioner Butcher responded "yes, we did; the three of
us primarily, as well as Joe Balash from the Department of
Natural Resources." [Commissioner Butcher, Deputy
Commissioner Tangeman, and Mr. Dees were at the testifier's
table.]
Representative Doogan asked whether the ideas behind the
bill and the approach to it were theirs.
Commissioner Butcher answered "yes." He noted that there
had been many conversations with the industry discussing
what individual companies would see as incentives and
"game-changers," as DOR did not operate in a vacuum. He did
not think there would be a point to coming up with
legislation that would not work. He acknowledged that there
had been "a lot of conversations" [with industry] but
ultimately, when the bill came out in January, they did not
see it before anyone else.
Representative Doogan asked whether "conversations" meant
meetings.
Commissioner Butcher responded that there were meetings
with members of the industry.
Representative Doogan asked whether the meetings were about
the bill.
Commissioner Butcher replied that the meetings were to get
input from the industry on what industry felt could be a
"game changer." He reported that industry was not happy
with all parts of the bill, as had been heard in testimony;
those were not things that had been discussed.
9:40:54 AM
Representative Edgmon referred to the subject of gold-
plating brought up in the detailed presentation by Roger
Marks, who had 25 years with the department as well as
extensive experience on the subject. He stated that he
could not tell from comments by the DOR senior officials
and the auditor whether there was gold-plating by
companies. He was troubled by the discrepancy and wanted
assurance that someone had a better idea of what was going
on with tax credits.
Mr. Tangeman replied that the department had stated that it
had gone from gross to net just in 2006 and had done the
audit for 2006. He believed Mr. Dees had stated that he had
not seen gold-plating taking place in the audit that was
substantially completed. He noted that DOR was in the midst
of auditing 2007 and that new information going from gross
to net would be available.
Commissioner Butcher pointed out that the department would
never have the staff to address the kinds of questions
raised during the presentation by Mr. Marks (related, for
example, to the decisions to buy different kinds of trucks
because of possible incentives). He added that the
department was looking for signs of gold-plating insofar as
the existing audit staff could.
9:44:14 AM
Representative Edgmon thought there was still a big gap
between what the committee was being told and how the
information was being substantiated by the department
through the auditing process. He stressed that the
legislature would have to make a major policy decision
based on information from audits, which were lagging behind
the real-time activity. He expressed confusion about how to
substantiate his decision.
Co-Chair Stoltze interjected that there was a "great deal
of subjectivity" in the whole area of gold-plating. He
asked for further comment by the department.
Commissioner Butcher agreed that the subject was
tremendously subjective. He thought the group could spend
an hour debating whether there could be a need by a company
for a nicer truck; he thought it all depended on how the
issue was being looked at. He argued that whether there was
overreaching by a company was very difficult to sort out,
other than through an audit.
Co-Chair Thomas referred to a television "reality" show in
which someone shot seven times at a caribou; he thought the
legislature was at shot three on the discussed subject. He
pointed to people who thought the state had gone back and
forth from taking too much to giving away too much. He
wondered whether the administration had a goal or a cap
related to how much it wanted to give back to the industry,
so that the legislature could get the bill right and shoot
the caribou once and for all.
Commissioner Butcher responded that the administration had
considered what it called the "zone of reasonableness." He
argued that when dealing with progressivity and tax
credits, the numbers changed; there would never be an
"exact sweet spot." Regarding progressivity, for example,
when the department considered the difference between
changing progressivity from a 0.4 to a 0.3 or 0.2
[percent], or considered brackets as a different approach,
it would run the numbers through a model to try and see
where it evened out at different prices. He stressed that
the department was trying to find where the state was
continuing to get its fair share while still allowing an
oil company (particularly when oil prices were higher) to
get a little more to incentivize exploration and
production. He believed a tax bill would always be an
inexact science.
Co-Chair Thomas agreed; he pointed out that with ACES, no
one had imagined oil could reach the high prices it did. He
wanted to assure the public that functioning programs would
continue to receive state funding.
Co-Chair Stoltze recommended not spending so much time
arguing over how the profits would be split that the job
never got started.
9:49:12 AM
Representative Gara stated that he was disturbed by the
lack of information on the bill. He referred to DOR
information published in the Juneau Empire that investment
spending on the North Slope was increasing about 8 percent
each year over the past four years. He pointed to another
statement by DOR in the Juneau Empire in December 2010 that
had the answer to a question the testifiers from DOR were
now saying they did not have an answer to; the quote was
that the increase in capital spending was not driven by an
increase in maintenance costs but primarily driven by new
projects coming on line. He asked whether the prior
commissioner was able to answer the question [in the Juneau
Empire] because he had information Commission Butcher did
not have.
Commissioner Butcher replied that he had not been in the
room with the prior commissioner [when the statement was
made] and he did not know what information he was looking
at and what evaluation he was making from the information.
He reported that in the few months prior, his
administration had considered what the decline curve looked
like, the lack of exploration wells, and had tried to make
connections about where the credits were. He added that
there was not a lot of activity expected in the near
future; he did not see much exploration or fields that were
ready to go.
Representative Gara asked why there was not a proposal
directing the state to enhance exploration and development
credits if the state was trying to get more exploration. He
thought testimony by Mr. Marks had led the committee to the
conclusion that the state was spending money (about $1
billion each year) on things it perhaps should not be
spending money on. He asked whether the administration
would consider starting over with the legislation and
focusing on things that were wanted, such as a credit for
processing facilities so that companies could develop the
smaller fields, or a credit that would be better for
exploration, or for development wells.
Commissioner Butcher responded that they had spoken to many
independent companies that had come to Alaska in response
to tax credits passed in ACES. He noted the companies would
be testifying about the issue. He believed the credits had
made the companies interested in Alaska, but there had been
challenges with negotiations related to the production. The
department believed more than incentivizing credits was
needed, because ultimately the tax paid over many years on
a producing field did not add up to much more than the
credits on the front end. Credits might bring companies in,
but the measure would only be half-effective if it did not
result in production through TAPS.
9:53:57 AM
Representative Gara referred to questions by Representative
Doogan about who the administration had worked with in
writing the bill. He asked which companies were involved in
the meetings. He asked whether Exxon, BP, and
ConocoPhillips were involved in the meetings.
Commissioner Butcher responded that the administration had
had meetings with ConocoPhillips, BP, Exxon, Chevron,
Armstrong, Pioneer, and with virtually every company
operating in the state. Everyone on the state team was not
in each meeting, but between them, the administration had
touched base with as many companies as possible to get as
much input as possible. He did not think there was a point
to creating a bill to incentivize private-sector decision
making without input about what potentially might work.
Co-Chair Stoltze interjected that there had recently been a
statement in a newsletter that industry had written the
bill.
Representative Gara was not concerned about who wrote the
bill but about who had influenced it. He asked whether
members of the companies had requested the major provisions
in the bill, including reducing progressivity and going
from monthly to annual taxation.
Commissioner Butcher replied that the discussions had
covered many topics, not specific requests. From the
beginning, conversations with members of the companies were
about doing something with progressivity, as the governor
had raised the issue months earlier; the governor thought
progressivity was inhibiting exploration and development
production on the North Slope.
Representative Costello noted that she considered the
constitution when thinking about the state's resources, and
quoted that it was the "policy of the state to encourage
the settlement of its land and the development of its
resources by making them available for the maximum use
consistent with the public interest." She questioned
whether it was in the interest of the public to develop and
produce the state's oil.
Commissioner Butcher responded that he believed it was in
the best interest of the state to develop its resources in
an environmentally safe manner.
9:57:05 AM
Representative Costello pointed out that production was
declining. She queried the purpose of tax incentives in
statute.
Mr. Dees replied that although it was not explicitly stated
in statute, the credits were intended to provide incentives
for companies to spend money in a way that would lead to
more oil and gas production. He noted that no outcome was
explicitly tied to whether or not a credit was given, but
he thought it was implied that if someone spent capital
dollars to drill wells, the result would be to either
maintain or increase the amount of oil and gas production.
Representative Costello continued that exploration and
development were two separate processes and that the state
was willing to take a significant amount of the risk. She
recalled information given that a low percentage of wells
drilled resulted in oil. She argued that the state should
be willing to take the risk at the beginning of the
exploration process for the long-term benefit of the
public. However, it seemed that the result had not been
production. She asked what the state was incentivizing and
whether it was incentivizing the right things.
Mr. Tangeman replied that Mr. Dees was very knowledgeable
about tax credits and how they were implemented, but the
question related to setting policy. He agreed that the
credits had gotten the state to a certain point; new
companies were exploring. However, there was a distinct
break between exploration on the one hand, and production
and throughput on the other, which had raised the concerns.
At high oil prices, people were interested in looking for
oil, but there was still not an increase in production
comparable to other areas in the world (such as North
Dakota).
Representative Costello asked whether the bill would change
the base tax rate.
Mr. Tangeman replied in the negative.
Representative Costello likened the situation to two
different things on either end of a balancing toy called a
seesaw. On one side, there were the tax credits or
incentives; on the other side was progressivity. She wanted
to achieve a balance, so that too much activity would not
be incentivized on one side. She queried the balance the
state was trying to achieve between incentives offered and
the tax rates the companies would pay.
Mr. Tangeman answered that the bill would only make one
change to the tax credit side, because the administration
believed that the tax credits already in place were being
used and were effective. The proposal was to go from 20
percent to 40 percent. He noted that the bulk of the bill
would address the progressivity side; everything else was
working.
10:03:01 AM
Representative Costello queried the value of the resource
in the ground that the state wanted to incentivize enough
to get to production.
Mr. Tangeman referred to earlier "optimistic" testimony by
the Alaska Oil and Gas Conservation Commission (AOGCC)
regarding the amount of oil present in the state. He noted
that the state was assisting industry with short-term
expenses through the tax credits in order to get the long-
term value of the oil. He did not think the department was
the expert on the amount of the resource, but AOGCC was; he
did believe there was enough oil for the pipeline for
decades to come.
Commissioner Butcher added that the value was certainly in
the hundreds of billions of dollars.
Representative Doogan stated that he wanted a list of the
meetings that were held related to the bill by Commissioner
Butcher, any of the people at the table, any of their
predecessors, and anybody in the governor's office. He
wanted to know when they met and who was at the meetings.
He understood that somebody might offer a privileged
defense regarding the contents of the meetings; he was not
asking for that. He wanted to know who the administration
had spoken to and when.
Commissioner Butcher replied that he would relay the
request to the governor's office. He asked whether
Representative Doogan also wanted a list of Native
Corporations. He stated that the group involved was broad
and not limited to just a handful of folks that they were
eliciting opinions from.
Representative Doogan stated that he wanted a list of
everybody involved. He wanted to know who was talked to and
when they were talked to.
10:06:01 AM
AT EASE
10:14:35 AM
RECONVENED
Representative Doogan wondered whether the committee would
receive something in writing based on the presentation.
ROGER MARKS, LEGISLATIVE CONSULTANT, LEGISLATIVE BUDGET AND
AUDIT COMMITTEE, provided a brief summary of his background
experience. He had been a petroleum economist with the Tax
Division at DOR before retiring in 2008. He had spent a lot
of time analyzing the production tax and had some role in
designing both the statutes and the regulations.
Mr. Marks presented an overview on the intent and design of
PPT and ACES, particularly the relationship between the
credit rates and tax rates and how it was all intended to
fit together.
Mr. Marks reported that PPT was designed in 2006 to do two
main things. The first was to increase taxes; most people
realized that the economic limit factor (ELF) had not been
working properly. The second goal of PPT was to incentivize
new investment. A two-pronged system was designed to reach
the goals. Exploration and new development would get the
credits, and production would pay the tax. The cycle was
supposed to work with a credit system; an entity could
convert losses to a credit. For example, under ACES, $100
million in exploration costs would convert into a $25
million carry-forward loss and a 20 percent credit,
totaling $45 million in credit.
Mr. Marks explained that the credit system was important
because in exploration economics, the main thing driving
the outcome was the probability of success and the cost of
drilling the well. He emphasized that the failure leg
carried more weight if there were a 90 percent chance of
coming up with a dry hole. He noted that a 90 percent
chance of failure was not an unreasonable number. Part of
the goal in designing the credit structure was for the
state to assume a share of the failure risk as a way of
incentivizing exploration.
Mr. Marks continued that new field-development costs were
mostly on the front end. The goal was "backend-loading the
tax," which meant reducing the cost to the developer on the
front end of the project to increase the value of the
project on the net present-value basis. He pointed out that
the described structure was used all over the world and
that accelerated appreciation was one example. The state
had a credit system that would give the producers more
money on the front end and get it back on the tail end.
10:19:18 AM
Mr. Marks explained that the system contained was a balance
between the tax rate and the credit rate to make sure
things worked right. He stated that his judgment was that
ACES had created a distortion in the balance. Currently, he
felt the state had a great system for incentivizing
exploration. For example, the government assumed 45 percent
of the dry-hole risk. In addition, costs for state and
federal corporate income tax could be deducted, which added
up to the government assuming 70 percent of the dry-hole
risk, a great incentive. However, exploration economics
(given a 90 percent chance of failure and a 10 percent
chance of success) meant that taxes were not relevant for
an entity in the exploration phase. Costs and probability
of success were the drivers.
Mr. Marks used the analogy of a scene in the movie "Butch
Cassidy and the Sundance Kid." The characters were being
chased by the law and came to the edge of a cliff; they had
to jump into a river. Sundance said to Butch, "I don't know
how to swim." Butch answered, "Don't worry, the fall will
probably kill you." During exploration, the taxes do not
matter that much, because when coming up dry, there would
be no taxes to pay.
Mr. Marks believed the current credit system worked well
for exploration. The tax was designed so that taxes would
be paid if a company found oil. However, currently, the
exploration incentives were so good the companies found
oil, began to produce, and then looked at the tax rate and
things slowed down as the impact of paying the taxes became
real. He believed the current disconnect between
exploration and production was a problem that was built
into the structure of ACES.
Mr. Marks emphasized that the credit system was strong,
with taxes that were not too high or too low; the problem
was the high taxes.
Mr. Marks addressed Representative Edgmon's question about
gold-plating. He did not believe that even a very strong
audit could tell that a company had purchased a better
truck than it needed to. He thought the solution to the
gold-plating problem was to have a tax structure that did
not incentivize such spending. He noted the main element
contributing to gold-plating was high marginal tax rates,
under which the tax rate and net value dropped with
additional costs. He estimated the credits contributed
perhaps 20 to 25 percent to the problem, but the main
driver for gold-plating was high marginal tax rates at oil
high prices.
HB 110 was HEARD and HELD in committee for further
consideration.
Co-Chair Stoltze reviewed upcoming presentations.
10:24:25 AM
ADJOURNMENT
The meeting was adjourned at 10:24 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB110 HFIN DOR Production Tax Credits 0317.pdf |
HFIN 3/17/2011 8:00:00 AM |
HB 110 |