Legislature(2011 - 2012)HOUSE FINANCE 519
03/17/2011 01:30 PM 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
| + | TELECONFERENCED | ||
| += | HB 110 | TELECONFERENCED | |
HOUSE FINANCE COMMITTEE
March 17, 2011
1:46 p.m.
1:46:49 PM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 1:46 p.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 Mark Neuman
MEMBERS ABSENT
Representative Reggie Joule
Representative Tammie Wilson
ALSO PRESENT
Representative Mike Hawker; Senator Cathy Giessel; Dr.
Scott Goldsmith, Institute of Social and Economic Research,
University of Alaska Anchorage.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
Vice-chair Fairclough discussed the merits and success of
the "Pick. Click. Give." program and thanked Co-Chair
Thomas for introducing the bill.
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."
1:49:27 PM
DR. SCOTT GOLDSMITH, INSTITUTE OF SOCIAL AND ECONOMIC
RESEARCH (ISER), UNIVERSITY OF ALASKA ANCHORAGE, provided a
PowerPoint presentation titled "Alaska's Petroleum
Industry: Transformative, But is it Sustainable?"(copy on
file). The presentation had two objectives, the first was
to demonstrate the transformative impact that that
petroleum had on the economy; the second, was to answer
whether petroleum as an industry could sustain itself and
the prosperity that Alaskans had come to expect for the
next 50 or more years. He looked back 50 years to provide a
view of Alaska's economy at statehood. He explained it was
important to help understand how far Alaska had come as an
economy; however, it was difficult for many Alaskans to see
back to 1959 because they were either too young or had more
recently arrived to the state. Approximately 90 percent of
the state's citizens had only known the current Alaskan
economy and viewed it as "normal." He emphasized that it
was anything but normal. He provided a list of important
features that pertained to Alaska's economy at statehood
("1960 Economic Structure," Page 2):
· Small: 90 thousand jobs
· Thin: Limited support businesses
· Seasonal: Summer private jobs 2x winter
· Transient: Seasonal and temporary
· Federal Domination: 1/2 jobs with fed
· Infrastructure underdeveloped
· Limited Tax Base
· Poor: Income 10-20% below US average
Dr. Goldsmith explained that the economic characteristics
on Page 2 were largely the result of the economic structure
of the time or the "economic base." The activities that
brought money into Alaska from "outside" were the driving
forces behind the economy. Although there was a belief that
natural resources provided the economic foundation of the
state, in 1960 it was possible to trace 80 percent of all
market jobs directly or indirectly to the activities of the
federal government. The federal government provided money
for military payroll, for a large construction program that
supported private construction and other infrastructure
workers, and for the management of federal lands and other
programs. He delineated that most trade and services jobs
were supported by the payrolls of federal workers and their
private infrastructure partners. Seafood was the largest
private natural resource industry; however, together with
mining and timber, natural resources only accounted for 15
percent of jobs on an annual basis. He expounded that
because fishing was seasonal that most activity was
concentrated during the summer months. Tourism was only
just beginning in 1960 and there were not many other things
going on.
Dr. Goldsmith presented a depiction of what Alaska's
current economy would have looked like without the presence
of the petroleum industry ("Alaska Today: No Oil" Page 3):
· Small: 187 thousand jobs
· Thin
· Seasonal
· Transient
· Federal domination
· Infrastructure underdeveloped
· Limited tax base
· Poor: Income 10-20% below US average
Dr. Goldsmith delineated that although no two people would
conduct the experiment in the same way, the broad outlines
of the absence of petroleum on the economy were clear. He
shared that there would be 187,000 jobs, which was twice
the number in 1960; however, the other characteristics of
the economy would be very similar to those at the time of
statehood. He explained that the economic characteristics
would be similar because the economic structure would not
have changed significantly (Page 4: "2007 Economic
Structure Without Petroleum"). The economy would have
benefited from the following: private sector job growth
that would have come from natural resources such as
fishing, mining, and timber; the rise in tourism; and the
state's location that would have resulted in an air cargo
industry. Growth would not have come easily and the economy
would still be dominated by federal spending for military
and civilian programs. He contended that without petroleum
Alaska would currently look similar to Maine, which was
dependent on natural resources, tourism, and federal
spending, with a limited tax base, and ageing
infrastructure and population.
1:54:45 PM
Dr. Goldsmith reasoned that Alaska's economic picture did
not look more positive because it was an "island" economy.
He moved to Page 5 titled "Alaska: An Island Economy," and
discussed that similar to other islands, Alaska was remote
and had a small population. The state's remoteness meant
that the cost of transporting goods in from suppliers and
out to markets was high compared to other locations, and
the state's small population meant that there was a lack of
"economies of scale" in the production of goods for export.
The two characteristics put Alaska at a competitive
disadvantage that was almost impossible to overcome with
the exception of some "niche" markets that could include
seafood, tourism, and mining. He detailed that strategic
location could also work to an island's advantage. Niche
markets were not typically large enough to financially
sustain an entire population; therefore, subsistence and
foreign aid were also necessary for the well being of the
economy. He asserted that Alaska was an island economy at
statehood, and because of geography, had remained an island
economy.
Dr. Goldsmith discussed three components of petroleum's
contribution to the state's economy that doubled the size
of the economy and significantly changed the state's
characteristics. First, was its contribution through oil
patch activity ("Petroleum Jobs: Oil Patch Related" Page
6). He relayed that a recent study had estimated that
42,000 jobs were a result of oil patch activities such as
exploration, development, production, transportation, and
processing. He opined that the study had underestimated the
number of jobs by approximately 20,000 for a variety of
reasons. He elaborated that the petroleum payroll was much
larger than the job count suggested. The graph on Page 7
compared the petroleum payroll (in black) to other resource
industries such as fishing and tourism that were the next
largest payrolls on the graph and directly employed many
more workers ("Petroleum Jobs: Oil Patch Payroll (Million
$)"). Petroleum jobs were the highest paying in the state
and averaged over $100,000 per year, whereas the average
annual tourism wage was $29,000. He contended that because
many tourism jobs lasted approximately four months that the
wage for each individual job was closer to $10,000. He
communicated that high wages meant high purchasing power
filtered through the rest of the economy and supported jobs
in the trade and service sectors.
Dr. Goldsmith discussed that petroleum's second
contribution to the economy was due to a small number of
petroleum producer jobs, such as BP, Conoco, and Exxon,
that sustained a larger number of oil and gas support jobs
in drilling companies, etc. The smaller businesses were
then able to support a more expansive range of
transportation, engineering, warehousing, utilities,
financial, legal, fabrication, and camp businesses. He
explained that the petroleum industry job configuration
resembled an upside down pyramid and that the top was
represented by businesses that were supported by the
payrolls from the large oil companies at the bottom (Page
8: "Petroleum Jobs: Oil Patch Support"). On Page 9 titled
"General Fund Oil Revenues," he discussed that the second
component of the petroleum contribution to the economy came
from revenues that it generated for state and local
governments. The red bars on the graph represented oil
revenues that were currently $5 billion to $6 billion
annually and the black line represented the petroleum share
of total general fund revenues, which was currently 90
percent. He relayed that 90 percent was an underestimate of
oil's importance to state general fund revenues. The number
was closer to 95 percent with the inclusion of activities
that supported petroleum production, such as corporate
taxes paid by drillers, construction and engineering firms,
etc. He reported that 98 percent of Alaska's resource
revenues had come from petroleum since statehood.
2:00:45 PM
Representative Gara wondered how many support industry
companies paid corporate taxes. He discussed that a
significant number of companies, doctors, lawyers, and
businesses in the state avoided paying corporate taxes by
avoiding the "C corporation" classification. Dr. Goldsmith
could not provide a specific number. He disclosed that the
share of businesses that actually paid corporate income
taxes was less than 10 percent. The Department of Revenue
(DOR) did not provide a breakout that showed which
companies were paying corporate income tax.
Dr. Goldsmith addressed Page 10 titled "Petroleum Jobs:
Funded by Petroleum Revenues." He discussed that the $5
billion to $6 billion annual oil revenues created jobs in
state and local government, construction, and for other
businesses that worked with the state government. The jobs
tended to be year-round and high paying and the payroll
filtered through the economy to provide support sector
jobs. He estimated that approximately 50,000 jobs in the
state were attributable to state spending of petroleum
revenues and with the inclusion of the Permanent Fund
Dividend (PFD), the total was close to 60,000.
Dr. Goldsmith introduced the third category he called
"spinoffs from oil wealth" ("Spinoffs from Petroleum," Page
11). He mentioned four spinoffs that accounted for 60,000
additional jobs: a light tax burden on resource industries;
public spending in support of economic development;
services to senior citizens; and seasonal stability. He
moved to Page 12 titled "Alaska Petroleum Revenues," where
he estimated that 60,000 jobs had been created as a result
of the $157 billion in oil revenues and that the majority
went to businesses, to the reduction of household tax
burdens, and to expand public spending. Approximately 24
percent had been saved and had consisted of PFD deposits,
accumulations in the Constitutional Budget Reserve (CBR)
and in the general fund. Page 13 titled "Petroleum Spinoff:
Lite Tax Burden on Households," showed that the current
household tax burden in the absence of petroleum could have
been $2,300 per capita based on national average rates for
state income tax and state sales tax.
Dr. Goldsmith turned to Page 14 titled "Petroleum Spinoff:
Lite Resource Industry Tax Burden." He observed that
household taxes would not generate enough revenue to
support a level of public spending that compared with other
states. The resource industries would receive pressure to
increase their contribution to the cost of government
because it was not possible to tax the federal government.
He expounded that the non-petroleum resource industries
would have to increase their tax contribution by 400
percent above current levels. He opined that an increase of
that amount was unrealistic but that an increase above
current levels would be likely. He added that higher taxes
tended to drive away business and without petroleum the
non-petroleum resources would have suffered. The existence
of petroleum had taken some of the tax burden off of the
shoulders of the other resources. He moved on to Page 15
titled "Petroleum Spinoff: Enhanced Public Spending." He
detailed that increased public spending had been good for
business and for Alaskans' quality of life. Public spending
had reduced costs and increased customer bases for
businesses and had helped to keep labor costs down for
employers. The goods and services made the state more
appealing to senior citizens who used to leave the state
when they retired, but currently made up the fastest
growing segment of the population. He equated seniors to
year-round tourists that did not leave during the winter
months.
2:07:27 PM
Dr. Goldsmith discussed the fourth important spinoff from
petroleum called seasonal stability (Page 16: "Petroleum
Spinoff: Stability"). He reiterated his earlier remarks
that when Alaska first became a state there had been a
significant number of jobs in the summer, but that the
economy essentially closed down in the winter. He
communicated that under the circumstances businesses that
supported the resource industry had a hard time becoming
established. Page 16 showed the monthly employment levels
from 2007 in the seafood dominated Bristol Bay Borough
(upper left graph) and the tourism dominated Denali Borough
(lower left graph). He highlighted that employment was high
in the boroughs only during the summer months and that non-
residents accounted for a large share of the jobs. He added
that the seasonal industries were still a part of the
state's economy; however, oil and public sector jobs were
year-round and supported businesses throughout the state.
Dr. Goldsmith addressed Page 17 titled "Petroleum
Transforms Alaska Economy." He pointed out that currently
oil patch, petroleum revenue, and spinoff jobs combined
made up half of the 375,000 jobs in Alaska. A pie chart on
the right-hand side of the page showed that petroleum made
Alaska's economic structure much more diversified. He
explained that the graph illustrated the concept of the
"three legged stool," with one-third represented by
petroleum jobs, one-third represented by the federal
government jobs, and one-third represented by the remainder
of jobs including the seafood, mining, timber, and other
industries. The economic characteristics were much more
positive:
· Depth; lots of support businesses
· Non-seasonal
· Less transient
· No federal domination
· Rich infrastructure
· Large tax base
· Prosperous
Dr. Goldsmith turned to Page 18: "A Troubling Indicator:
Oil Barrels per Capita." The graph indicated in per capita
terms that during the positive economic transformation, the
production of oil had been declining. He explained that
news of the decline had been slow to emerge for three
reasons. First, despite the decline, state employment had
continued to grow; therefore, people had underestimated
petroleum's importance for the economy. Second, the high
price of oil had diverted attention from the production
decline. Third, official state production and revenue
projections only looked forward one decade; therefore, it
was easy to pretend that the future looked "rosy" ("Looking
Ahead: The Official Story (Extended)," Page 19). A graph on
Page 19 showed the production decline that would occur
beyond 2020. He questioned whether the production decline
was a signal that Alaska would return to its island economy
status and that revenue, employment, and spinoff benefits
would decline.
2:11:56 PM
Representative Doogan asked what the purple section
represented on Page 18: "A troubling Indicator: Oil Barrels
per Capita" [Note: The "purple" section appears in blue in
the presentation available on BASIS]. Dr. Goldsmith
answered that the purple section represented Cook Inlet and
the section in gray represented the North Slope. He added
that at the peak there were four barrels per capita per day
and that currently there was one barrel per day.
Dr. Goldsmith discussed five commonly suggested strategies
related to the decline beginning on Page 20: "Strategies
Moving Forward #1: Gasline." He argued that none of the
strategies that he would cover would have sufficient
strength to offset the petroleum decline. The first
strategy was the commercialization of gas. He contended
that a gasline would generate jobs, but its revenues would
not be able to replace oil revenues because the tax base
for gas was much smaller than the tax base for oil on a BTU
basis. The chart on Page 20 compared the current market
value of oil that was $14.00 and gas that was $6.00 on a
one million BTU basis. He explained that the energy value
of oil was worth much more than that of gas. Additionally,
it would cost approximately $1.00 to transport one million
BTU of oil through TAPS [Trans-Alaska Pipeline System] and
approximately $4.00 to transport gas through a $30 billion
to $40 billion gasline. He underlined that there was a
significant difference between the value of oil and the
value of gas and that revenues from a gasline would not be
able to offset the decline in petroleum revenue.
2:15:39 PM
Dr. Goldsmith relayed that the second strategy identified
that non-petroleum natural resources would fill a void
created by an oil production decline: "Strategies Moving
Forward #2 Non-Petroleum Natural Resources" (Page 21). He
looked at job growth over the past 20 years in mining,
tourism, and seafood and applied the same growth looking
forward 20 years; the majority of the very modest growth
was in tourism. Mining had a growth of 1000 jobs, tourism
had growth of 10,000 jobs, and there was no additional
growth in the seafood industry job market. He used the page
to indicate that the other economic drivers did not "pack
the revenue punch" that oil did. He reported that the state
would need to bring in $2,000 per tourist in order to
replace $3 billion of petroleum revenues.
Co-Chair Stoltze asked whether taxes comprised the $2,000
per tourist figure. Dr. Goldsmith replied that it related
to taxes and fees.
Dr. Goldsmith noted that it was more than each tourist
currently spent during their visit to the state. The figure
would equate to a tax of $20 per salmon and $4,000 in tax
per one ounce of gold.
Co-Chair Stoltze asked whether it would equate to $4,000 in
tax on gold that was currently selling for $1,400. Dr.
Goldsmith replied in the affirmative.
Co-Chair Stoltze remarked that the numbers were sobering.
Dr. Goldsmith agreed. He reminded the committee that the
figures were representative of the amount that would be
required from tourists to make up the $3 billion from
petroleum revenue.
Co-Chair Stoltze wondered how much the state would have to
charge for a pack of cigarettes. Dr. Goldsmith thought it
would be around $1,000.
2:18:34 PM
Representative Doogan asked for clarification that it would
be necessary to charge an amount equal to the revenue that
was generated by oil. Dr. Goldsmith replied that using
tourism as the only resource to make up for the loss of $3
billion in oil revenue would mean that $2,000 per tourist
would be necessary.
Representative Doogan determined that the number would be
lower when mining, tourism, and seafood industries were
combined to share the amount generated by petroleum.
Co-Chair Stoltze clarified that the chart was hypothetical.
Mr. Goldsmith agreed.
Dr. Goldsmith discussed the third strategy on Page 22:
"Strategies Moving Forward #3: Traditional Economic
Development." He observed that Alaskans had been lured in
the past into the pursuit of value added and economic
diversification development strategies that were typically
supported by outside experts and that usually had not been
successful. Examples included, fish processing plants, the
Alpetco petrochemical plant, aluminum reduction, server
farms, dairy farming, etc. He reported that past experience
and economic realities would not and should not discourage
economic boosters; however, the state should be very
cautious about spending its revenues on projects that
promised to replace petroleum. A Google search on Alaska
economic development strategic plans had 374,000 results or
one for every two Alaskans. He emphasized that a
significant amount of economic development strategizing had
occurred, but that it had not produced any revenues for the
state general fund.
Dr. Goldsmith examined the fourth strategy on Page 23:
"Strategies Moving Forward #4: Speculatively Invest in
Infrastructure." The strategy was modeled after the
Norwegian economy and argued that investment in
infrastructure would reduce the price of energy and
transportation and open the door for profitable non-
petroleum resource investment opportunities. He observed
that it was dangerous to invest in something that could not
provide certainty of a long-term return in the form of jobs
or revenues to the state. He addressed the fifth strategy
that related to the development of the state's renewable
energy sources on Page 24: "Strategies Moving Forward #5:
Develop Renewable Energy." The strategy would be good for
the environment, help to stabilize prices for consumers and
businesses, and temporarily generate employment
opportunities, but it would not create revenue for Alaska.
Dr. Goldsmith offered three possibilities for the future of
the state based on the petroleum decline and the experience
of the past 30 years (Page 25: "What is the Economic Future
of Alaska?"). The first possibility titled "We Are the
Chosen Ones," was that Alaska's luck had saved the day in
the past with the Prudhoe Bay oil discovery and high oil
prices and that luck would continue in the future. The
second possibility titled "The Big Crash," recognized that
the mid-1980s oil price crash could happen again in the
future and have a devastating impact on Alaska's economy.
The third possibility was titled "The Slow Squeeze." He
discussed that the economy had experienced a moderate,
steady growth in the 1990s, but that flat oil prices and
falling production had diminished oil revenues. Without the
CBR that was used to balance the state's budget in the
1990s, dramatic budget cuts and tax increases would have
damaged the economy. He opined that state spending and the
economy could drop off in the event of flattening oil
prices and diminished exploration and development.
2:25:11 PM
Dr. Goldsmith relayed that there was at least one other
future scenario (Page 26: "Undiscovered Potential North
Slope Resources: Technically Recoverable"). Under the
fourth scenario the state was still rich in petroleum and
the production decline figures were based on production
only on state lands in Cook Inlet and the North Slope
between the Colville and Canning Rivers. Production from
the state lands had been approximately 16 billion barrels
and there were DOR forecasts of 4.5 billion barrels that
remained in known and unknown fields; however, the total
market value of the 16 billion barrels was worth
approximately $500 billion in 2010 and the average price
was between $25 and $30 per barrel. He professed that the
market value of the remaining oil may be approximately $450
billion; therefore the state may have been only halfway
through its inventory.
Representative Hawker wondered about the large dollar value
for gas that was shown on Page 26. He believed that there
would need to be a substantial shift in world commodities
market prices in order to gain a significant increase in
income from gas. He referred to Dr. Goldsmith's earlier
testimony that gas would not replace oil and that currently
gas prices were approximately $4. The cost of getting the
gas to market was close to $4, which indicated there was
not currently a substantial margin remaining in gas. Dr.
Goldsmith responded that between technically recoverable
barrels of oil and TCFs [Trillion Cubic Feet] of gas that
the action in the short run would be in oil. He relayed
that the state's potential gas resources were impressive
looking forward a couple of generations.
Dr. Goldsmith continued to discuss Page 26. He communicated
that the 4.5 billion barrel oil estimate for
Colville/Canning (first cell, middle column of the graph)
was "conventional" oil. In addition, there were 34 billion
to 35 billion of technically recoverable barrels of oil on
federal lands including ANWR [Alaska National Wildlife
Refuge], OCS - Beaufort [Outer Continental Shelf], OCS -
Chukchi, and NPRA [National Petroleum Reserve-Alaska].
There were unconventional reserves in heavy and viscous oil
and shale oil that were not included on the chart. The
chart showed that there was still significant petroleum and
gas development potential on the North Slope. He cautioned
that it was important to remember that the movement of oil
and gas to market was still very expensive (Page 27:
"Alaska's North Slope"). The market price needed to support
the high cost of transportation in order for the production
of the potential resources to occur. He discussed several
factors that contributed to transportation cost including,
size, distance, and physics. He elaborated that new
conventional production on state lands would be from
smaller oil fields that lacked the economies of scale of
Prudhoe Bay. Production from federal lands would occur
farther away from TAPS and OCS drilling would be offshore.
He explained that heavy and viscous oil would be
technically challenging to produce and transport and that
shale oil was too new to speculate about. Additionally,
extracting more out of the legacy fields would involve
expensive new technologies.
Co-Chair Stoltze noted that Tom Barrett, President, Alyeska
Pipeline Service Company, would speak to the committee the
following day and that the committee should inquire about
the challenges of moving smaller quantities of the
different grades of oil.
Dr. Goldsmith continued on Page 27 and explained that some
analysts believed the costs would be too high to justify
further production; however, the opportunity for further
production was clearly available. He asked what production
of some of the oil and gas could mean for jobs, income, and
public revenues in the future on Page 28 titled: "Daily Oil
Production per Worker (Barrels)." He conveyed that
historically, production per employee had fallen (indicated
on the large graph), but total employment had grown over
time (shown on the small graph on the lower left). The bad
news was that the cost of getting each barrel of oil out of
the ground had increased in terms of worker time; however,
the good news was that employment had not fallen despite
production decline.
2:31:58 PM
Dr. Goldsmith addressed that in the future it was possible
that development of additional resources could
significantly add to employment ("One Petroleum Employment
Projection," Page 29). The graph was a petroleum related
jobs projection from a recent ISER study on the potential
impacts of OCS development on employment from 2008 to 2050.
It showed that the employment generated by OCS development
could impact total employment similarly to Prudhoe Bay
development and span more than a generation. He discussed
Page 30 titled: "How to Get Those Petroleum Jobs." He
relayed that the jobs were not guaranteed and in order to
maximize the chance of achieving the jobs it was important
to work to open federal lands to development including OCS,
ANWR, and NPRA, which would help make the national security
and the economic health of the nation better. He noted that
the argument that the oil would not be available for 10
years had been made in the past and had been incorrect.
Additionally, it was important to adopt a rational and
positive attitude with the oil industry to cultivate
continued development on state lands.
Representative Hawker asked how the oil and gas economy
would sustain the substantial decline in daily oil
production per worker (shown on Page 28) with an increase
in 40,000 jobs in oil field support (shown on Page 29). He
wondered how the cost per barrel was impacted. Dr.
Goldsmith explained that the graph on Page 29 only provided
an overlay of the additional jobs associated with strong
oil and gas development over the next 40 years in the
Chukchi and Beaufort Seas. He clarified that the bottom
purple section on Page 29 represented the oil field
employment.
Representative Hawker asked whether the purple section on
Page 29 that represented direct employment from petroleum
was the number that correlated to the previous page. Dr.
Goldsmith replied in the affirmative. He added that
everything on top of the oil field employment was related
to indirect jobs generated elsewhere in the economy or jobs
generated by the revenues from OCS activity.
2:36:00 PM
Representative Hawker wondered what the required oil
production per worker would be in 2020 when factoring in
the charts from Pages 28 and 29. He surmised that the
petroleum employment projection on Page 29 increased up to
10,000 in 2020. Dr. Goldsmith was not certain what the
number would be in 2020. He opined that the prospects of
the OCS would have to be large and potentially profitable
before the oil industry would invest in production. He
believed that the productivity per worker in terms of the
oil produced would be larger on the big fields in the OCS
than it was currently on production of state lands. He
doubted it would reach the productivity level that Prudhoe
Bay had at the beginning of its lifetime.
Representative Hawker surmised that the chart titled "One
Petroleum Employment Projection," presumed the
"hypothetical" that the state would bring on very
significant volumes of production from currently
undeveloped and prohibited resources. Dr. Goldsmith
responded that he was correct. Dr. Goldsmith pointed out
that the number of jobs generated by oil patch activity was
currently approximately 60,000; however, the chart on Page
29 showed that the peak was approximately 50,000. He
explained that the chart showed a picture of the upside
potential that would be presented given OCS development and
economically producible discoveries. He added that the
analysis had begun two and a half years earlier and that
the schedule for OCS had slipped two and a half years, but
the picture was the same.
Representative Doogan asked whether the chart on Page 29
showed the total jobs generated by oil production. He
remarked that the chart was confusing and made it look like
there were 50,000 direct employment jobs from petroleum.
Dr. Goldsmith explained that the chart had four separate
sections and that the bottom section shown in purple
represented the jobs that were directly related to the
production, exploration, development, and transportation of
oil. The analysis that had been conducted a couple of years
earlier included gas production because the cost of gas had
been higher and projected to increase.
Representative Doogan wondered whether the bulk of the jobs
on the chart were support positions. Dr. Goldsmith
responded that they were various support functions and
included drillers, truckers, engineering firms, in addition
to all of the jobs in Anchorage that resulted from workers
buying homes and spending money in urban areas, etc.
Representative Doogan wondered whether it would include
workers such as baristas, etc. Dr. Goldsmith responded yes.
2:40:40 PM
Dr. Goldsmith voiced that the current challenge was how to
get the petroleum jobs. He asked whether the development of
resources could generate the public revenues that Alaska
had grown accustomed to ("Fiscal Terms," Page 31). He
relayed that the answer was "no." He used a hypothetical
oil field in the "matrix" on Page 32 ("State Revenues
(million$/year): Hypothetical Field") to determine what oil
revenues would be generated from production under various
scenarios and conditions. He compared a field on state land
(far left hand column) that generated $838 million annually
to a federal field in the OCS more than six miles offshore
(far right hand column) that generated $0.00. He clarified
that the state would receive revenue from the economic
activity; however, it would have to capture revenues from
onshore activity.
Vice-chair Fairclough wondered whether he had done research
to determine the existence of increased exploration on
state versus federal property following the implementation
of the new tax [Alaska Clear and Equitable Share (ACES)].
She had asked the Department of Natural Resources, but had
not received a clear answer. Dr. Goldsmith had not done any
research. He thought it was possible that the Alaska Oil
and Gas Conservation Commission had the data.
Vice-chair Fairclough was interested in analyzing the ACES
structure. She believed that there had been a migration of
development from state land to federal land that had
followed the adoption of ACES in order to avoid the new
tax.
2:43:55 PM
Dr. Goldsmith focused on the ability to maintain public
spending from petroleum and jobs created from the spending
with increased oil production and employment with less
petroleum revenues ("Petroleum Wealth (Billion $)," Page
33). He argued that the way people think about petroleum
revenue needed to be changed and that the state could not
continue to "mindlessly collect the revenues, pat ourselves
on the back when we put a few dollars away in a savings
account, spend a few dollars when we have a short term
surplus, and just hope for the best." The petroleum wealth
needed to be inventoried and managed as an asset. Page 33
showed his present value estimate of the state's wealth,
which was $126 billion that consisted of $45 billion of
financial assets that were derived from past revenues, and
$81 billion in potential tax and royalty revenues from
undeveloped petroleum. He discussed how the wealth should
be managed ("What is My Annual Share," Page 34). He cited
the common belief that the state's natural resources
belonged to all Alaskans; with that belief in mind every
Alaskan should have an equal share of the net worth. He
provided a calculation that assumed that Alaskans cared
about all future generations of Alaskans, that petroleum
was annually growing one percent sustained by the petroleum
industry, and that future generations of Alaskans would not
be richer or poorer than the current generation. He
calculated that $7,200 was the maximum amount of wealth
that could currently be distributed annually to each
Alaskan, while the value for future generations was
maintained. He explained that with a distribution of $7,200
that each Alaskan would receive the same amount, adjusted
for inflation, each year in perpetuity until another
economic driver could replace petroleum jobs and revenues.
Dr. Goldsmith estimated that the state could spend $5
billion in the current year and could preserve Alaska's net
worth for future generations ("Wealth Preservation
Strategy: Implementation = Spending Cap," Page 35).
Additional spending would need to come from sources outside
of petroleum wealth. He ascertained that "if spending is
preserving our net worth, then whatever petroleum revenues
are not spent must go into income generating investments."
He opined that movement away from the present budget
strategy focused on current petroleum revenues would be
required in response to a shift to net asset fiscal
management. He highlighted several advantages of the shift
that included: the ability to avoid an economic crash,
which otherwise seemed inevitable; the fiscal burden would
not be passed on to the following generation, because each
generation would receive an equal share of the wealth;
those who benefited from public expenditures also paid for
the public expenditures; the state would show the world
that it could handle its wealth responsibly; and the fiscal
policy and wealth management would be de-coupled, which
would take the pressure off of oil and other industries to
perpetually provide revenues to fund the budget.
2:48:05 PM
Dr. Goldsmith presented a chart that showed how a wealth
management plan would work over time ("Wealth Preservation
Strategy: The Long View," Page 36). It spanned from the
date of first oil production on the North Slope in 1978
when all of the state's wealth was "in the ground" to the
future date of 2050 when all of the oil would have been
produced. He explained that under the strategy that the net
asset value of the state's combined assets would grow over
time at one percent with the population. The green arrow at
the top of the chart showed where the state was currently
with its wealth split between oil in the ground and money
in the bank.
Dr. Goldsmith concluded that the answer to the question of
whether the state's petroleum economy was sustainable was
"maybe" ("Can We Do It," Page 37). He detailed that there
was no guarantee that petroleum could sustain Alaska's
economy for the next 50 years and that it would require
luck. He communicated that petroleum offered the best
chance for continued prosperity. He emphasized that without
a proactive stance, the state would "be like the frog, who
doesn't realize she is slowly cooking in a pot of boiling
water." In the past, the state had been both smart and
lucky, but it needed to be smarter as it could not count on
good luck forever. He professed that Alaska needed to take
the words of Yogi Berra to heart, "the future ain't what it
used to be."
Representative Doogan wondered whether the $7,200 figure on
Page 34 was reflective of current spending and what the
number included. Dr. Goldsmith replied that because the
state was in a surplus the current spending of financial
assets included the PFD and petroleum revenues. He
explained that presently the state did not spend all of the
petroleum revenues that were collected due to the current
surplus environment. The portion that was spent went
towards funding the general fund.
Representative Doogan asked what would happen in the event
that the state spent more money than it brought in during
the present year. He wondered whether the spending would be
encompassed in the $7,200 figure. Dr. Goldsmith responded
that in order to maintain the value of the state's assets
that any draw from the CBR or general fund would need to be
included in the figure. He added that in a deficit year
that it would be necessary to look at a combination of
categories that included petroleum revenues into the
general fund, draws from the CBR and the general fund, and
the PFD.
2:52:07 PM
Vice-chair Fairclough asked whether the $7,200 took into
account the PERS/TRS [Public Employees' Retirement
System/Teachers' Retirement System] liability. Dr.
Goldsmith replied that it did not take into account how the
money would be spent; however, if the PERS/TRS liability
caused the spending out of the general fund to exceed the
$7,200 limit it would become necessary to locate money from
elsewhere in order to maintain the value of the assets.
Representative Gara asked what an income tax would have to
be to cover the current operating budget of $8.9 billion in
non-federal money in order to replace oil revenue in the
event of production decline and eventual pipeline shutdown.
Co-Chair Thomas replied that it would be $16,000.
Co-Chair Stoltze asked whether the $16,000 was for tax
payers or per capita. Dr. Goldsmith responded that the loss
of the $8 billion to the economy would cause a significant
percentage of the population to leave the state. He
explained that it was necessary to determine what the size
of the economy would look like in the absence of oil
revenue and to then determine what an income or sales tax
would have to be on the remaining residents in order to pay
for the same size of government. He did not know the answer
to that. He referred to Page 13 showed that the burden on
households in the event of a state income and sales tax
would be $2300 per capita. Given Alaska's current
population the total revenue from income and sales tax
would amount to approximately $1.7 billion. He explained
that it would be necessary to multiply the tax by four or
five to reach the $8 billion figure.
Representative Gara wondered whether Alaska would gain any
ground by putting $2 billion per year into savings in a
scenario in which the state was lucky and oil prices
remained high for five to ten years.
2:56:55 PM
Dr. Goldsmith responded that the state was currently lucky
for the fourth time in its history and that it should take
advantage of the luck by saving as much as possible for an
uncertain future.
Co-Chair Stoltze wondered whether Alaska had sufficient
time to save enough money in a state retirement account
similar to a 401 K before the oil was gone, assuming
continued spending and increases. Dr. Goldsmith believed
that with forward thinking by the state it was possible.
The state was currently blessed with high oil prices that
provided the state with surpluses. He communicated that DOR
had projected very high oil revenues for at least the next
ten years.
Representative Doogan remarked that a member at the
committee table had a proposal to put another $10 billion
into the permanent fund.
Co-Chair Stoltze asked how much the state was currently
spending on state operations from the permanent fund.
Representative Costello wondered whether Dr. Goldsmith
agreed with the bill's [HB 110] premise that ACES and the
progressivity were discouraging investment in Alaska. She
discussed that the bill changed how the progressivity was
applied to the current tax structure and included a 40
percent tax credit on infield work. Dr. Goldsmith responded
that incentives matter and a tax regime that was made more
attractive to the industry would attract more production.
He thought that it was difficult to determine how much,
when, or how it would increase production; however, he was
confident that it would. He believed that it was important
to rethink the current oil tax policy because ACES had been
developed in a lower priced environment and the current
high oil prices were an unchartered territory that could
continue forever. He elaborated that it was an important
factor to determine what Alaska could be in relation to
itself and to other locations.
Representative Costello wondered whether the marginal and
effective tax shift to the left caused by the progressivity
adjustment in HB 110 was sufficient to make Alaska more
competitive with world markets.
3:01:48 PM
Dr. Goldsmith did not know how far the shift to left should
be. He believed it would be very beneficial for the state
to know what the opportunities were for new oil
developments on the North Slope and what the associated
cost structures were. He explained that it was possible to
statistically get a sense of how a change in tax rate
impacted production in North Dakota where there were a lot
of small and easily accessible drilling operations going
on; however, it was more challenging in Alaska because
there were a limited number of projects and it was hard to
know how far to move the tax structure to "kick" an
unprofitable well into profitability.
Co-Chair Thomas wondered whether incentivizing the
production of new oil with tax credits and a different tax
rate would spur oil and job development. He did not believe
it was necessary to lower the tax rate for "old" legacy oil
wells. Dr. Goldsmith replied that ACES had attempted to
address that there were some very profitable fields that
could withstand a higher tax rate; however, new
developments could not support the same high rate. He
reasoned that it was not possible to balance the two with
one tax rate; therefore, ACES had provided a high tax rate
combined with tax credits. He believed that it had been an
interesting concept, but that it had not been entirely
successful. He relayed that it was necessary to compromise
between taxing a high rate for current revenues and taxing
a lower rate for long-term revenues.
3:06:05 PM
Representative Edgmon wondered how long it would take to
put together a composite economic picture that used present
value calculations, inflation adjustments, and population
trends. He recognized that Alaska was in a tough situation
but it was necessary to consider the state spending
aspects. Dr. Goldsmith asked for clarification on the
question.
Representative Edgmon asked how long it would take to
compile a report that included a timeline that showed when
the state would need to dip into savings and the formula
programs that required state support, using the assumption
that there would be a reduction to oil taxes and a
subsequent $1 billion to $2 billion revenue shortfall as a
backdrop. Dr. Goldsmith did not think it would take very
long. He recommended the Office of Management and Budget
(OMB) 10-year report that used DOR 10-year forecast and
overlaid it with a forecast of general fund spending. He
believed the report was a very useful tool and that the
forecast should be pushed out beyond 10 years given that
under current assumptions that there would be economic
surpluses for the next 10 years. He explained that looking
farther than 10 years into the future with different
revenue regimes and expenditure growth rates would help to
provide a fuller and richer picture that indicated where
the vulnerability was.
Representative Edgmon wanted a model that projected into
the future that also provided information on current
implications, available savings, and liquid assets without
the use of Permanent Fund earnings or tax increases that
would allow the state to function while it waited for
further oil development.
3:10:13 PM
Representative Gara referred to Dr. Goldsmith's comment
that ACES had a high tax rate. When ACES had been developed
it had been explained that a lower tax rate on less
profitable fields and a higher tax rate on more profitable
ones was accomplished with a 25 percent tax rate and
progressivity that did not kick-in until each field had $30
worth of profit. Dr. Goldsmith believed that he was right
and that ACES had a number of "interesting" features.
Representative Hawker wondered what thoughts were
underlying Mr. Goldsmith's characterization of ACES as
"interesting." Dr. Goldsmith responded that one of the most
interesting things was the way that ACES attempted to deal
with the challenge of determining how to tax legacy fields
at a high rate and new development at a lower rate. He
believed that the fact that it was an economic challenge
made it interesting.
Representative Hawker asked for verification that Mr.
Goldsmith thought that ACES attempted to tax legacy fields
at a higher rate and new fields at a lower rate. Dr.
Goldsmith agreed, but did not claim to be an expert on
ACES.
Representative Hawker wondered why the state would want to
tax an already "stressed" legacy field at a higher rate
than a young and "vigorous" field. He believed that the
saying "the best place to find oil was in an oil field,"
may have been inconsistent with Mr. Goldsmith's analysis of
ACES. He discussed that the cost of additional production
on mature legacy fields was much higher on a per barrel
basis. Dr. Goldsmith replied that squeezing another one
percent out of a field like Prudhoe Bay or Kuparuk would be
the equivalent to developing a new satellite or finding a
new field. He believed that it would be beneficial to apply
new technology to the existing fields, which would have
comparable to much higher marginal costs than new field
development. He opined that the tax structure should
incentivize the higher costs on the legacy fields. He
explained that a legacy field that had existing daily
production of $80 per barrel that increased to $120 held a
profit that was not reflected by an increase in cost. He
delineated that in a situation in which the sole concern
related to current revenues that the knowledge of "perfect
information" would allow the state to set tax rates that
would "skim off" as much excess profit as possible.
3:16:41 PM
Representative Hawker wondered whether the state should
currently skim as much "take" as possible or whether it was
wiser to moderate the short-term skim for a long-term
sustained skim. Dr. Goldsmith believed that the state
should not try to maximize the skim because the risk
associated to activities in the oil patch tended to be
overlooked. Aside from the issue of the ability for the
state's tax rate to compete with other locations, the rate
of return needed to be higher to compensate for the extreme
risk associated with investing large amounts of capital on
activities that may or may not pay off in the short-run or
long-run.
Representative Doogan thought that Dr. Goldsmith's
presentation had gotten much more sophisticated and had
changed from 30 years earlier. Dr. Goldsmith remarked that
Alaska had experienced a significant amount of good luck
over the years. He looked back towards the beginning of oil
production when the state had expected to get a maximum of
10 billion barrels of oil in Prudhoe Bay and Kuparuk;
however, the state was looking at a 20 year to 30 year
lifetime for the oil industry and there had been 16 billion
barrels of oil produced on the North Slope that was still
going strong. With luck and good planning the state was
looking at enough remaining petroleum to sustain the
economy for many generations.
Representative Edgmon wondered what a forecast for a
downward curve in federal spending in Alaska would look
like. Dr. Goldsmith remarked that federal funding was going
down to approximately $60 million per year for particular
areas such as the Denali Commission and clean water and
sewer. He detailed that it would be necessary to work very
hard to maintain future funding for the state's highways
and airports, which were big contributors to the state
capital budget each year. He relayed that a future change
to the formula for highway funding would be very important
for the state to be concerned with. Military spending was
the other big uncertainty; however, it had held up well in
the past few years.
3:23:15 PM
Vice-chair Fairclough wondered whether he was tracking the
decline in earmarks and the evident decline in resources
from Washington D.C. that had been provided by former
Senator Ted Stevens (the "Stevens' Effect"). Dr. Goldsmith
replied he did try to track money coming into the state;
however, the federal reporting was really "lousy." He
relayed that earmarks only accounted for approximately $8
billion to $9 billion per year in total federal dollars
provided to Alaska and the funds were divided between
capital and operating grants, social security, retirement,
military, and non-profits.
Vice-chair Fairclough wondered whether there was a way to
track money that came into the state for the Bureau of
Indian Affairs and tribal entities and to determine whether
funds were dropping for these areas as well. Dr. Goldsmith
replied that in theory there was a way to track the funds,
but the tracking that occurred in Washington D.C. was
inadequate.
Vice-chair Fairclough wondered whether he had any advice to
help policy makers gain public engagement and support from
Alaskans on the development of a proactive plan to save and
protect the next generation's future. She thanked Dr.
Goldsmith for participating in the fiscal policy
subcommittee working groups.
3:27:17 PM
Dr. Goldsmith responded that it was important to make the
message simple and to pound the message home. He believed
that the "three legged stool" analysis provided a clear and
simple message that was easy to understand.
Vice-chair Fairclough remarked that zero production times
$250 per barrel equaled taxes for Alaskans.
HB 110 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
3:29:59 PM
The meeting was adjourned at 3:29 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB110 ISER UofA HFIN 03172011PDF.pdf |
HFIN 3/17/2011 1:30:00 PM |
HB 110 |
| CSHB110-NEW FN DNR-DOG-3-11-2011.pdf |
HFIN 3/17/2011 1:30:00 PM |
HB 110 |