Legislature(2023 - 2024)ADAMS 519
01/26/2023 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Revenue Forecast: Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
January 26, 2023
1:32 p.m.
1:32:36 PM
CALL TO ORDER
Co-Chair Johnson called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Neal Foster, Co-Chair
Representative DeLena Johnson, Co-Chair
Representative Julie Coulombe
Representative Mike Cronk
Representative Alyse Galvin
Representative Sara Hannan
Representative Andy Josephson
Representative Dan Ortiz
Representative Will Stapp
Representative Frank Tomaszewski
MEMBERS ABSENT
None
ALSO PRESENT
Adam Crum, Commissioner Designee, Department of Revenue;
Dan Stickel, Chief Economist, Economic Research Group, Tax
Division; Colleen Glover, Director, Tax Division.
SUMMARY
REVENUE FORECAST: DEPARTMENT OF REVENUE
Co-Chair Johnson reviewed the meeting agenda.
^REVENUE FORECAST: DEPARTMENT OF REVENUE
1:34:24 PM
ADAM CRUM, COMMISSIONER DESIGNEE, DEPARTMENT OF REVENUE,
introduced himself and staff.
1:35:11 PM
DAN STICKEL, CHIEF ECONOMIST, ECONOMIC RESEARCH GROUP, TAX
DIVISION, introduced himself.
COLLEEN GLOVER, DIRECTOR, TAX DIVISION, introduced herself.
Mr. Stickel introduced a PowerPoint presentation titled
"Fall 2022 Forecast Presentation: House Finance Committee,"
dated January 26, 2023 (copy on file). He began on slide 2
and briefly outlined the presentation agenda:
1. Forecast Background and Key Assumptions
2. Fall 2022 Revenue Forecast
• Total State Revenue
• Unrestricted Revenue
3. Petroleum Forecast Assumptions Detail
• Oil Price
• Oil Production
• Oil and Gas Lease Expenditures
• Oil and Gas Transportation Costs
• Oil and Gas Credits
4. Oil and Gas Production Tax Audit Update
Mr. Stickel moved to slide 4 titled: "Background: Fall
Revenue Forecast." He detailed the revenue forecast was
published by the Department of Revenue (DOR) in mid-
December in the Revenue Sources Book (RSB). The department
also published an updated forecast each spring. He
explained that the RSB was an annual publication that
included information about the state's revenue sources and
key forecast variables from the Tax Management System,
state accounting system, and other state agencies. The
department's Economic Research Group maintained 10-year
forecast models for all of the state's major revenue
sources. The RSB fulfilled a statutory requirement for the
governor to provide a revenue forecast ahead of the budget
release, in addition to the statutory requirement for a
long-term fiscal plan.
1:37:13 PM
Mr. Stickel turned to slide 5 and discussed fall forecast
assumptions. He pointed out the forecast came in a period
of continued uncertainty. He detailed that recent events in
China had highlighted some of continuing uncertainty
related to the COVID-19 pandemic. The ongoing conflict in
Europe reflected some of the geopolitical uncertainty.
Additionally, there was uncertainty associated with Federal
Reserve policy and other variables. He noted the DOR
forecast was one plausible scenario within a range of
potential outcomes.
Mr. Stickel addressed key assumptions of the forecast on
slide 5:
• Investments: Stable growth in investment markets,
7.00% for FY 2023 and 7.05% for FY 2024+.
• Federal: The forecast incorporates stimulus funding as
of December 1, 2022, includes updated estimates of
IIJA funding.
• Petroleum: Alaska North Slope oil price of $88.45per
barrel for FY 2023 and $81.00 per barrel for FY 2024.
• Non-Petroleum: Continued economic growth. 90% of
capacity assumption for 2023 cruise season, minerals
prices based on futures markets.
Mr. Stickel noted the returns shown in the first bullet
point under key assumptions on slide 5 pertained to the
Permanent Fund. He elaborated on the third bullet point
above and relayed the forecast included oil prices at $75
per barrel beyond FY 24 in the 10-year forecast period. He
referenced the fourth bullet point and noted there had been
talk among economists and press about potential economic
slowdown. The department's forecast assumed if there was
any slowdown it would be short and mild. The department was
forecasting a total cruise ship capacity of slightly over
1.6 million passengers, sailing at a capacity of 90
percent. He referenced minerals prices based on futures
markets and noted that futures prices had pulled back a bit
since the spring forecast.
1:40:21 PM
Representative Galvin pointed to slide 5 and the roughly 7
percent return on investments in FY 23 and FY 24. She asked
for the return on investment from FY 22. She remarked that
the Permanent Fund return for the last year had been -1
percent, while the return had been close to 30 percent the
year before last. She asked for comment on the vast swing.
She asked Mr. Stickel to point out areas where a lower than
projected return of 7 percent could have a large impact.
Mr. Stickel replied that FY 21 was a record return for the
Permanent Fund and financial markets had pulled back a bit
in FY 22. The forecast was for more moderate returns going
forward at 7 and 8 percent for FY 24. He noted there was a
slide later in the presentation that put a sensitivity
analysis around potential investment returns.
Representative Galvin asked Mr. Stickel to point out areas
where a lower than predicted return of 7 percent could have
a large impact.
1:42:36 PM
Mr. Stickel turned to slide 6 titled "Relative
Contributions to Total State Revenue: FY 2022." He pointed
out that federal and petroleum revenue generated the
majority of revenue in FY 22. He highlighted investments
showed net losses for the year for the first time since
2009. He added the losses came on the heels of record
returns in FY 21. All of the other revenue sources combined
added up to slightly over 12 percent in total state revenue
in FY 22. Total state revenue of approximately $8.7
billion.
Representative Hannan found it rather startling that
federal revenue had accounted for almost 80 percent of the
state's revenue in FY 22. She asked whether it pertained to
COVID funding. She asked if there should always be a ratio
showing the state always received more federal funding than
from other sources.
Mr. Stickel replied there were a couple of things going on
when looking at the federal share of revenue for FY 22.
First, there was a high numerator with many of the one-time
COVID funds in FY 22 combined with a lower denominator
resulting from investment losses. He remarked that the next
slide for FY 23 would show a more typical year.
Mr. Stickel turned to slide 7 titled "Relative
Contributions to Total State Revenue: FY 2023." The
department was expecting the three major sources of revenue
investment earnings, federal revenue, and petroleum all
generated about one-third of total state revenue. All other
sources combined were forecasted to generate slightly over
7 percent of total state revenue.
1:45:55 PM
Mr. Stickel advanced to a table titled "Unrestricted
Revenue Forecast: FY 2022 and Changes to Two-Year Outlook"
on slide 9. The slide showed a comparison of some of the
changes between the fall and spring forecast. He
highlighted that the spring forecast (released in early
2022) had come out during a period of unprecedented
volatility. He detailed the forecast had come out right as
the conflict in Ukraine had begun, which had caused
significant uncertainty and volatility around oil prices.
as the markets had gained more stability, the outlook for
oil prices had come down; therefore, DOR had reduced its FY
23 forecast for Alaska North Slope (ANS) oil prices by
$12.55 per barrel and the FY 24 forecast had been reduced
by $9.00 per barrel.
Mr. Stickel continued to review slide 9. He directed
attention to the line pertaining to the Permanent Fund
transfer and unrestricted general fund (UGF) revenue. He
explained the Permanent Fund transfer was calculated based
on 5 percent of the ending value and the first five of the
last six fiscal years. He elaborated that the Permanent
Fund transfer for FY 23 had been known when DOR generated
its spring forecast. He pointed out that the FY 24 forecast
had been reduced by about $75 million based on lower
investment returns. The department had reduced its total
unrestricted revenue forecast for FY 23 by about $1.1
billion and its FY 24 forecast by about $700 million,
almost entirely due to the reduction in the oil price
forecast.
1:47:59 PM
Mr. Stickel moved to slide 10 showing the total state
revenue forecast for FY 22 to FY 24. He explained that the
revenue forecast included four categories of revenues. He
detailed that UGF revenues were available for general
appropriation for any purpose. He noted that budget
discussions often focused on UGF revenue. The designated
general fund (DGF) revenues were technically available for
appropriation but were customarily appropriated for a
specific purpose. For example, half of the alcohol tax
revenue was customarily appropriated for alcohol and drug
abuse treatment and prevention. The "other restricted
revenue" category included restricted revenue that was not
available for general appropriation. The revenues had some
restriction by federal law, constitution, and/or debt
covenants. He used the following examples: the
constitutional dedication of royalty revenue to the
Permanent Fund or tax revenue from aviation fuel which was
federally required to support airports. The last category
was federal revenue where the federal government placed
different restrictions on how the funds could be used.
Total state revenue in FY 22 was approximately $8.7
billion. The forecast projected total state revenue at
slightly over $15 billion in FY 23 and FY 24. The UGF
portion was about $6.9 billion in FY 22 with a forecast of
$7.2 billion and $6.9 billion in FY 23 and FY 24
respectively.
Representative Stapp asked if the increase in federal
receipts from FY 23 to FY 24 was due to the anticipation of
federal funds for capital projects such as broadband.
1:50:43 PM
Mr. Stickel answered that the federal revenue forecast was
provided by the Office of Management and Budget (OMB). He
deferred to OMB for specifics. He stated that the federal
infrastructure bill [Infrastructure Investment and Jobs Act
(IIJA)] was included in the forecast. He speculated it was
the reason for the increase.
Mr. Stickel turned to slide 11 titled "Unrestricted Revenue
Forecast: FY 2022 to FY 2024 Totals." He relayed that the
remainder of the revenue slides would focus on the UGF
forecast as it had the most flexibility and discretion
around how the monies could be used in the budget. He
stated that investment revenue and petroleum revenue were
two of the largest sources of unrestricted revenue.
Investments contributed about $3.1 billion in unrestricted
revenue in FY 22 and were forecast at $3.4 billion in FY 23
and slightly over $3.5 billion in FY 24. The primary
element was the percent of market value (POMV) transfer
from the Permanent Fund. Petroleum revenue generated $3.5
billion in FY 22 and was forecast at $3.4 billion in FY 23,
and $2.9 billion in FY 24. Lastly, various non-petroleum,
non-investment revenue sources were expected to contribute
about $450 million in FY 23 and $474 million in FY 24. He
would review each of the categories in more detail on
coming slides.
1:52:38 PM
Representative Galvin referenced the non-petroleum revenue
line for FY 23 and FY 24 on slide 11. She asked if it
factored into the governor's plan to bring carbon credits
to market for Alaska.
Mr. Stickel clarified that the revenue forecast was based
on current law and did not include any new revenue sources
or proposed legislation.
Mr. Stickel moved to slide 12 titled "Unrestricted
Investment Revenue: FY 2022 to FY 2024 Totals." The
Permanent Fund transfer alone was anticipated to account
for between 43 and 62 percent of unrestricted revenue
annually over the 10-year revenue forecast. Additionally,
there was a small amount of unrestricted revenue from other
investments, which represented primarily earnings on cash
balance in the General Fund. He highlighted an investment
loss in FY 22 due to the impact of vastly rising interest
rates on various fixed income investments. The department
was expecting the returns on the General Fund investment to
return to small positive revenues in FY 23 and beyond.
1:54:33 PM
Mr. Stickel turned to slide 13 titled "Unrestricted
Investment Revenue: Percent of Market Value (POMV) Transfer
Forecast." The chart showed the estimated transfer from the
Permanent Fund to the General Fund was estimated to reach
about $4.5 billion by FY 32 based on an assumption of 7.05
percent long-term annual return and a 5 percent POMV
payout. He explained the department had looked at a range
of possible investment returns including a high and low
thth
case representing a 10 percentile and a 90 percentile.
The low case showed a fairly flat POMV transfer and the
high case showed a strong increase. The information on the
slide indicated the Permanent Fund transfer was a fairly
stable revenue source, especially compared to petroleum
with its significant price volatility. Part of the
stability pertained to how the transfer was calculated. He
detailed that the calculation was based on the annual
average market value of the first five of the last six
fiscal years, which smoothed out year-to-year fluctuations.
1:56:28 PM
Mr. Stickel moved to slide 14 titled "Unrestricted
Petroleum Revenue: FY 2022 to FY 2024." He relayed there
were four primary sources of unrestricted revenue from
petroleum. He relayed that the state levied a property tax
on all oil and gas property in the state, which was a
fairly stable revenue source generating slightly over $100
million per year. He pointed out it represented only the
state's share of property tax revenue. The majority of
property tax on oil and gas went to the municipality where
the property was located; municipalities received about
$450 million from oil and gas property taxes in FY 22.
Mr. Stickel continued to review UGF revenue on slide 14.
Petroleum corporate income tax was levied on most but not
all corporations doing business in Alaska. The tax
generated just under $300 million in FY 22. Based on
improved profitability in the industry, the forecast was
$390 million in FY 23 and $320 million in FY 24. He noted
that one impact pertained to some loss carryback provisions
in the federal Coronavirus Aid, Relief, and Economic
Security (CARES) Act. He explained the CARES Act enabled
corporations to carryback any net operating losses in 2018,
2019, and 2020 to potentially receive refunds on prior year
taxes paid. He relayed that the State of Alaska adopted
federal corporate income tax code and automatically adopted
any changes to the federal tax code unless the state
specifically opted out. Since 2020, which had been a
difficult year for oil and gas, there had been some losses
and about $79 million of refunds were paid out in FY 22.
Absent the refunds, the revenue would have been a bit
higher.
Mr. Stickel explained that the oil and gas production tax
was the state's severance tax on petroleum. For the North
Slope it consisted of a net profits tax with a gross
minimum tax floor. At current oil prices, DOR expected most
of the companies to be paying under the net profits tax and
the tax was expected to bring in $1.6 billion in FY 23 and
about $1.2 billion in FY 24. The last major source of UGF
petroleum revenue was royalties from oil and gas production
on state land. Royalties brought in about $1.3 billion UGF
in FY 22 and was forecast to bring in $1.3 billion in FY 23
and $1.2 billion in FY 24. He pointed out there was a
significant amount of restricted revenue from royalties
including deposits to the Permanent Fund and School Fund.
He would provide more detail on the assumptions behind the
petroleum revenue forecast later in the presentation.
2:00:23 PM
Representative Stapp asked for the driving factor in the
increase in the mineral bonuses and rents line on slide 14.
Mr. Stickel answered the increase reflected an expected
recovery of lease sales. He elaborated that some lease
sales did not happen during COVID and there had been some
delays. The department expected leases to return to a more
historically normal level.
Mr. Stickel turned to slide 15 showing UGF revenue from
non-petroleum sources with taxes accounting for the largest
component. He remarked that typically corporate income tax
accounted for the largest portion of the tax component,
bringing in $112 million in FY 22 and expected to generate
$105 million in FY 23 and $125 million in FY 24. The
impacts of the net operating loss carrybacks for corporate
income tax also applied to non-petroleum corporations. He
discussed that the pandemic was very challenging for some
of the corporations in the tourism industry in particular,
including airlines and transportation companies. There had
been some significant refunds in FY 22, amounting to about
$80 million. Absent the refunds, the FY 22 revenue would
have been around $190 million. The forecast for FY 23 and
FY 24 was based on earnings projections and reflected the
potential for a bit of an economic slowdown.
Mr. Stickel reviewed other significant taxes on slide 15
including the mining license tax, insurance premium tax,
fisheries tax, and various excise taxes. In total,
nonpetroleum taxes were expected to generate about $330
million in FY 23 and $335 million in FY 24. The bottom line
of the table showed "other" non-petroleum UGF revenue and
included things like rents and royalties on mining on state
land, fines and forfeitures, charges and services, and
other miscellaneous revenue such as dividends to the state
from state-owned corporations.
2:03:40 PM
Representative Galvin looked at the substantial decrease in
revenue associated with mining licenses in FY 24 and asked
for detail.
Mr. Stickel answered that minerals prices had been strong
and the reduction to the mining tax in FY 24 reflected two
things. First, the futures market was adjusting that
minerals prices would pull back a bit resulting in slightly
lower revenue. The forecast also incorporated assumptions
about a potential increase in operating costs in response
to some of the cost of inflation.
Representative Cronk looked at the fisheries statistics. He
asked if the decrease in the revenue was due to any
collapse in a certain fishing industry. He wondered about
the loss of $4 million [in FY 23 and FY 24].
Mr. Stickel answered that the fisheries projections
accounted for some of the expected lower value in certain
fisheries. Additionally, FY 22 included revenue from a
particularly strong salmon year.
Representative Josephson asked if the total loss due to the
carryback provision from net operating losses was about
$170 million. He thought Mr. Stickel had stated the loss
was about $80 million from petroleum and $90 million from
other sources.
Mr. Stickel answered that for FY 22 the impacts were [a
loss of] about $80 million for non-petroleum and $79
million from petroleum.
Representative Josephson surmised it came in the form of
less revenue. He asked for verification the state did not
"cut anyone a check."
Mr. Stickel replied there were two options a company had
related to the carryback losses. He explained that a
company could request a refund for prior year taxes paid.
He detailed the refund would be revenues a company had
already paid to the state. A company could also choose to
carry the losses forward and apply them to reduce a current
tax payment.
2:06:45 PM
Representative Hannan asked about tobacco revenue received
by the state. She referenced federal multistate litigation
revenue the state received from tobacco. She remarked that
if the state did not comply with the federal smoking age of
21, the federal government would reduce the state's share.
She asked if the federal government had notified the state
that if it did not comply it would receive reduced funding.
She asked for details.
Mr. Stickel responded that the unrestricted tobacco revenue
on slide 15 represented a portion of the state's cigarette
tax revenue and revenue from the other tobacco products
tax. He clarified that a significant portion of the
cigarette tax revenue was considered restricted and was not
reflected in the table. In addition, the state received
revenue from the Tobacco Master Settlement Agreement, which
was considered to be restricted revenue and was reflected
in the fines and forfeitures section of the Revenue Sources
Book. The federal government had changed its minimum
[smoking] age to 21. Alaska had not conformed in state
statute; however, most if not all retailers in the state
were conforming to the federal law. The department had not
incorporated any potential decrement or impact to its
revenue forecast and he not prepared to speak to the
nuances of the policy.
Representative Hannan asked if the federal treasury would
notify the state if it was going to reduce the amount
Alaska received through the Tobacco Master Settlement
Agreement.
Mr. Stickel replied that he would follow up on the
question.
2:09:22 PM
Representative Ortiz looked at slide 15 showing fisheries
taxes of $26 million in FY 23 and mining license taxes of
$52.5 million. He returned to slide 7 showing percentages
of revenue coming into the state into the state in FY 23.
He pointed out that slide 7 indicated fisheries taxes
accounted for 0.7 percent of the state's revenue in FY 23
and mining contributed 0.4 percent. He observed that
fisheries contributed a higher percentage of the revenue;
however, the numbers indicated fisheries taxes were lower
than mining taxes.
Mr. Stickel answered it had to do with restrictions on how
the revenue could be used. He explained that the mining
license tax was considered entirely UGF revenue, whereas 50
percent or more of the fisheries taxes were shared back to
municipalities. Additionally, there were various fisheries
assessments that were entirely shared with the beneficial
organizations. He summarized that the state received all of
the mining revenue and only a portion of the fisheries
revenue.
Co-Chair Edgmon referenced the carbon tax credit revenue
and remarked the committee had just heard a presentation
from the Office of Management and Budget that included
carbon tax revenue in the 10-year plan. He thought the 10-
year plan was held to the same standard as the revenue
forecast where unrealized or future revenues were not
included. He asked if he was mistaken. He asked who came up
with the number if it was possible to include hope for new
revenue in the 10-year forecast.
Mr. Stickel answered that DOR produced a 10-year forecast
of state revenue based on current law with no additional
revenue sources incorporated. He noted the forecast was
also developed agnostic to the budget. The forecast was
provided to OMB, which was responsible for developing the
10-year plan. He deferred to OMB for detail.
Co-Chair Edgmon stated that it was the answer he had been
looking for. He stated that the number of carbon tax
credits was based on something and had he known, he would
have dug into the data further.
2:12:55 PM
Mr. Stickel moved to a chart on slide 17 titled "Petroleum
Detail: Changes to Long-Term Price Forecast" showing the
fall 2022 forecast compared to the spring forecast released
earlier in 2022. The forecast methodology used the futures
market for its price forecast for as many years as were
available (the chart used the futures market outlook
through 2029) and applied an inflation adjustment. The fall
price forecast had been generated on December 7 using
futures market prices for the first five trading days in
December, which resulted in a reduction to the forecast of
about $12.55 per barrel for FY 23 and a reduction of about
$9.00 per barrel for FY 24. The reduction was not as
significant between the spring and fall forecasts in the
later years of the forecast. He noted it related to
volatility going on in the oil price market when the spring
forecast had been produced (i.e., related to the conflict
in Ukraine). He stated as markets had stabilized somewhat,
the near-term prices had come down a bit.
2:14:46 PM
Representative Galvin asked about the certainty of the
price of oil and the forecast. She stated that a drop of $9
made a big difference to legislators in terms of the
budget. She asked for information on the history of the oil
forecast. She remarked on the current global volatility.
She remarked it would be a very important decision in the
current session.
Mr. Stickel qualified oil prices as extremely uncertain. He
reported that ever since the COVID-19 pandemic, oil prices
had seen historically high volatility. The forecast
reflected the most likely case within a wide range of
potential outcomes. He would present a sensitivity analysis
later in the presentation demonstrating the impact of
higher or lower oil prices on state revenue.
2:16:42 PM
Mr. Stickel turned to slide 18 titled " Petroleum Detail:
Nominal Brent Forecasts Comparison as of January 24, 2023."
He noted the chart had been updated earlier in the week. He
explained that DOR compared the ANS price to Brent prices
because Brent was a global benchmark that was widely
traded. Typically, ANS traded very close to Brent oil. The
chart showed a comparison to the current futures market
outlook, an average forecast from a variety of industry
analysts, and the short-term energy outlook from the Energy
Information Agency. He highlighted for the current fiscal
year the DOR forecast was a bit lower than some of the
other revenue sources, but in 2024 and beyond, it was in
the range of the other revenue sources. In general, the
other sources suggested oil price stabilizing in the $70 to
$80 per barrel range, which was consistent with the
department's revenue forecast.
Mr. Stickel moved to slide 19 titled "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV): FY 2024." The
slide addressed a scenario where the DOR forecast turned
out to be wrong. He stated that oil prices were inherently
uncertain and the likelihood of prices coming in exactly as
forecast was pretty low. The slide showed the department's
FY 24 forecast of $3.4 billion UGF revenue before
accounting for the Permanent Fund transfer based on an
average oil price of $81.00 per barrel for ANS. He detailed
that in FY 24, each $1.00 change in oil price above or
below the forecast led to a $70 million difference in UGF
revenue. He explained that the value per dollar was a bit
higher at oil prices exceeding about $90 per barrel and was
a bit lower at oil prices below about $70 per barrel.
2:19:21 PM
Mr. Stickel showed a North Slope petroleum production
forecast on slide 20 including a high and low case. He
noted the information was a recap of information recently
provided to the committee by the Department of Natural
Resources (DNR). The official forecast was for stable to
slightly increasing oil production. The slide also included
the high and low cases, which were meant to speak to
another source of uncertainty in the forecast. The official
forecast was about 550,000 barrels per day, but the range
could be below 300,000 or above 800,000.
Co-Chair Johnson asked if the numbers included the Willow
and Pikka fields. She asked for detail on the variations
included in the forecast.
Mr. Stickel answered that the new fields were included in
the forecast on a risked basis as previously described by
DNR. The DNR forecast accounted for the uncertainty around
the timing and production of the fields by only
incorporating a portion of the potential production from
those fields. The numbers were included in the official
forecast on slide 20. The high and low cases represented
uncertainty on performance of wells and fields projected in
the future.
2:21:49 PM
Mr. Stickel discussed changes to the North Slope petroleum
production forecast on slide 21. The chart looked at the
next five years of expected production in the most likely
case compared to the spring revenue forecast. He explained
there were only minor changes to the official forecast,
especially in the near-term. He elaborated that projects
were generally progressing about as was expected in the
spring forecast. There had been some minor reductions from
the spring forecast, but still a trend of stable to
slightly increasing production overall.
Mr. Stickel discussed a chart on slide 22 titled "Petroleum
Detail: North Slope Allowable Lease Expenditures." The
chart showed how allowable lease expenditures for the North
Slope had changed over the past decade and how they were
expected to change over the coming decade. The allowable
lease expenditures represented any operating and capital
costs incurred by companies that were allowed to be
deducted into the state's production tax. He explained it
included most, but not all of the costs of producing oil in
the state. The slide also included a 10-year history of oil
and gas employment to show the general correlation between
company spending and employment on the North Slope. The
allowable lease expenditures were tracked for two reasons.
First, as an input into the oil production tax forecast as
a net profit based tax. Second, as an indicator of company
activity.
Mr. Stickel elaborated on slide 22. He shared that in FY 22
North Slope capital expenditures had been about $1.4
billion in FY 22 and operating expenditures had been about
$2.5 billion. The expenditures reflected continued lower
levels of activity following the COVID-19 pandemic
recession. He relayed that activity had begun to pick up
over the last several months. He stated it was a robust
winter of activity on the North Slope and the department
was expecting a rebound in overall company spending in the
current fiscal year through FY 25 followed by a
stabilization with capital expenditures at about $2.5
billion per year. The department expected operating
expenditures to slowly increase over time due to a
combination of inflationary impacts as well as the cost of
operating some of the new fields expected to come online.
2:24:52 PM
Representative Josephson stated that in HB 111 bill there
had been a seven-year or ten-year window for companies to
use their carryforward lease expenditures. He asked if the
allowance had been for nonproducers and producers. He asked
for verification that under the current regime,
nonproducers needed to begin producing or in a relatively
short window costs could not be absorbed or subtracted from
profits.
Mr. Stickel explained that for purposes of calculating the
production tax value (the net profits), allowable lease
expenditures were allowed to be deducted from the value of
oil production when calculating their tax. He expounded
that a company with sufficient gross revenue would be able
to apply the costs in the year incurred, whereas a company
without sufficient gross revenue would earn a carryforward
lease expenditure. He explained it enabled a company to
realize the benefit of the spending in a future year.
There was a provision where the value of the carryforward
lease expenditures reduced by 10 percent annually beginning
with the eighth or eleventh year after the carryforward was
earned depending on whether the carryforward was earned for
a project in production or not in production.
Representative Josephson thought it suggested if a company
was going to try to get into production it had better
understand the rocks and have a good sense it would come
online within the specific time window or it would suffer.
He noted it was a ticking clock and the window was not huge
for producers.
Mr. Stickel answered it put some pressure on companies. The
reduction in the value of the carryforwards was
unconventional when compared to other jurisdictions. He
explained that several other jurisdictions provided an
uplift where the value increased over time. He stated it
was a unique provision in Alaska's tax law.
2:27:44 PM
Co-Chair Edgmon was interested in how Willow fit into the
scheme of things going forward. He looked at slide 21 and
noted that Willow was awaiting a record of decision based
on the environmental impact statement. He considered that
first oil was expected six years after the final investment
decision (FID). He believed Mr. Stickel had stated that the
blue line reflecting fall 2022 took that into
consideration. He asked if the blue line contemplated a
potential hiccup with the project where it took longer for
first production to occur. Alternatively, he asked if the
blue line reflected the anticipation that Willow would be
online in the near future.
Mr. Stickel responded that the production forecast shown on
slide 21 was the same forecast presented by DNR. He
explained that DNR produced the production forecast and DOR
collaborated on the process. He stated that the comparison
of the spring and fall forecasts on slide 21 primarily
represented a reevaluation of some of the near-term
projects and the performance and activities of major
(existing) fields. The impact of some of the new
developments was largely beyond the five-year window shown
on slide 21. The reason for the five-year outlook was to
focus on the next several years and the more certain
portion of the production forecast.
Co-Chair Edgmon surmised that Willow would play a
significant part in overall oil production over time, but
perhaps not necessarily in the window of time being
presented to the committee.
Mr. Stickel answered that Willow was a very significant
potential development to the state. The forecast included
potential future production and associated development
expenditures on a risked basis that acknowledged the
potential for delays or the probability that a project
would occur.
2:31:17 PM
Mr. Stickel moved to slide 23 showing a history and
forecast of North Slope transportation costs (also called
netback costs). He explained that transportation costs
reflected the cost of getting oil to market and were
subtracted from the value of oil for production tax and
royalty purposes. Transportation costs included feeder
pipelines tariffs, the Trans-Alaska Pipeline System (TAPS)
tariff, and tanker costs to transport the oil to market
typically on the West Coast. In FY 22, the average
transportation cost for ANS was $9.77 per barrel. The
forecast was for $9.92 per barrel in FY 23 and $9.37 per
barrel in FY 24. The department was forecasting the
transportation cost would remain under $10 per barrel until
FY 32. The stable transportation cost was a function of the
stable to increasing production forecast, which was
offsetting impacts of inflation. He added the forecast for
transportation costs decreased a bit from FY 23 to FY 24.
He explained that marine transportation costs had been
fairly elevated in 2022 and 2023 and the department was
expecting the costs to moderate in FY 24.
2:33:14 PM
Representative Stapp asked why there was a projected down
trend in transportation projections. He highlighted that
previous slides showed forecasted increases in capital and
operating expenditures, in addition to inflationary
pressure on production. He thought the state should be
expecting less revenue off of the same per barrel oil of
production if costs to produce the oil were rising.
Mr. Stickel answered that slide 22 showing lease
expenditures represented total expected expenditures for
operating the fields. The department was anticipating some
moderate increases in the cost of operating the fields and
in capital expenditures associated with investments in new
fields. He pointed to slide 23 included values on a per
barrel basis. He detailed that a pipeline tariff
represented the cost of operating a pipeline divided by the
number of barrels going through the pipeline. He explained
that a fairly stable operation cost for a pipeline, the
cost on a per barrel basis decreased. The marine
transportation costs saw increases in FY 22 and FY 23 due
to the overall tightness in the shipping market related to
difficulty in getting marine transportation for a variety
of goods and services. He highlighted that a significant
component in the marine transportation cost was the price
of fuel. He stated as there had been some moderations in
the global supply chain issues, the department was
expecting decreased pressures on operations cost and with
the reduction in oil price would decrease the cost of fuel
for the tankers.
2:35:57 PM
Ms. Glover spoke to slide 24 titled "Petroleum Detail: Tax
Credits for Purchase Detail." Prior to 2016, there were
statutory oil and gas tax credits that allowed a taxpayer
to use credits against their tax liability or the state
could purchase the credits back. The provisions had been
changed in 2016 and 2017 to eliminate the cash provision.
She relayed the state still owed a balance to some
certificate holders. The state had been paying the balance
over time and it was about $384 million at the start of FY
23. There was a statutory formula based on the price of oil
and total production taxes levied. The FY 23 budget assumed
a $330 million appropriation. Oil prices had reduced in the
fall 2022 forecast, which had reduced the statutory
calculation to $281 million for FY 23. She stated the FY 23
budget for the tax credits was a little unique because of a
$60 million supplemental for FY 22. The full amount shown
on the slide was $341 million including $281 million for FY
23 and the $60 million supplemental for FY 22. The blue bar
shown for FY 23 reflected a balance of about $43 million.
She noted the gray bar for FY 24 reflected the credits to
be paid out.
Co-Chair Johnson asked for verification that the gray bar
[in FY 24] on slide 24 reflected the remaining credits
owed. She asked if the budget included the funding.
Ms. Glover replied affirmatively and relayed the $43
million was included in the budget. The state could not
share the information owed to individual taxpayers. There
was a provision in law specifying DOR was to provide an
annual report to the legislature showing each entity that
received money the previous calendar year and the amount
received. She relayed the letter was transmitted earlier in
the month. She explained it provided a good indication of
entities receiving the credits on an annual basis. She
relayed that of the $281 million in the budget for FY 23
and the $60 million in the supplemental budget, the
department had dispersed $196 million in July of 2022.
There had been unique "not to exceed" budget language in
the FY 23 budget based on actual taxes levied. She
explained taxes had not all been levied. She expounded that
after the spring forecast and based on oil prices for
production tax, the department would determine the
remainder, if anything, to be paid out for FY 23.
2:40:19 PM
Representative Josephson stated the plan had been to spur
development, but delay had resulted in third parties
getting control of the certificates. Now that the state was
paying the amounts, he asked if they would be debts the
state owed where a return could not be identified.
Ms. Glover answered that looking at the end report
identifying the recipients was telling information. For
example, she highlighted a recipient that was currently
producing versus a recipient that had only conducted
exploration. She relayed there were provisions in law
allowing the certificate holder to assign the certificates
to someone else within 30 days of the date they applied.
She explained that if a company had assigned its credits to
another entity and it was receiving money back from the
state, the company would pay the assignee. She stated there
was much less owed at present than there had been. The
number was not static and nothing to prevent a taxpayer
from using the credits against their tax liability. She
remarked that some companies did not have a tax liability
because they were explorers and did not yet have
production. She added that with higher oil prices there had
been a need to use some of the credits, which had reduced
the balance. Companies could also sell credits to a party
that could use them against a tax liability. She stated the
number was dynamic.
2:42:53 PM
Representative Stapp asked if the total outstanding amount
was $384 million.
Ms. Glover answered it had been $384 million at the
beginning of the fiscal year and the state had paid $196
million.
Representative Stapp asked if the remaining amount was a
final liability owed by the state.
Ms. Glover answered the amount owed was "almost a maximum
amount"; however, it was not definitive. She explained
there could be audit disputes and there was potential for
the amount to change. New credits could not be earned;
therefore, the only way the balance would increase would be
based on an audit and litigation.
Representative Stapp remarked that inflation was the
state's friend when paying its debts. He asked how far out
the state could "slow pay" the debt in order to lower its
liability.
Ms. Glover responded there was a suggested formula in
statute and the appropriation was controlled by the
legislature. There had been some years where no money had
been appropriated. The department forecast the amount
suggested under statute.
2:45:00 PM
Representative Hannan stated the intention of the
legislature the prior year had been to pay the credits off;
however, it had not been possible due to the way it had
been structured. She asked how it had been determined what
did not get paid. She wondered if payments had been made
equally or if oldest credits due were paid first. The
legislature had heard smallest companies say they had the
largest burden. She wondered what had not been paid.
Ms. Glover answered that it was another piece of
information included in the annual report. She explained
that the credits were tracked by years or buckets based on
when an entity applied. There were statutory provisions on
how the state paid them. The state had paid all of the 2015
credits owed. The state had paid $196 million with the same
percentage going to everyone. There was different statute
for 2017 going forward, which used a ranked order based on
Alaska hire, which created challenges for the department to
administer. She highlighted the report showed the 2017
balance at $131 million and the others were shown by year.
2:47:03 PM
Ms. Glover provided an oil and gas production tax audit
update on slide 26:
• Audit Completion and Catchup Plan:
o All audits through 2017 are complete
o 2018 and 2019 audits complete by 3Q 2023
o 2020 audits complete by 4Q 2024
o Goal is to strive for three-year cycle
• Improvements to Reach Goal
o Continue to leverage technology
o Ability for taxpayers to use customer portal
o Effective two-way communications
o Consistent audit practices and documentation
o Stable Tax Regime
Ms. Glover elaborated on the slide. She noted that the oil
and gas production tax audits were unique in comparison to
the department's other tax programs. She explained that all
of the other tax programs in statute had a three-year
statute of limitations for the state to generate any audit
assessment. The oil and gas production tax audits had a
six-year statute of limitations, which had changed in 2007
when the system had gone from a gross tax to a net profits
tax. There were pros and cons to having the longer statute
of limitations. The downside was audits were issued six
years after a company filed its tax returns, which had
created some interesting dynamics. The department wanted to
be more current on its audits and aligned with the other
tax programs on a three-year cycle. She noted that some
smaller companies were less time consuming than others. The
department audited all of its producers annually, which was
unique compared to the other tax programs.
Ms. Glover addressed the second half of slide 26 regarding
improvements made allowing the department to reach its
goal. The tax revenue management system funded by the
legislature was robust and enabled taxpayers to file
online.
2:50:55 PM
Representative Galvin looked at slide 7 showing relative
contributions to total state revenue which was based
primarily on investment earnings, federal, and petroleum in
thirds. She noted the presentation primarily focused on the
petroleum portion. She asked if a future presentation would
focus on federal funding and investment earnings.
Co-Chair Johnson asked for clarification on the request.
Representative Galvin replied that she was not certain what
the future presentations would be. She requested to hear a
future presentation on the federal and investment earnings
portion of the revenue in more depth.
Commissioner Crum replied that the federal revenue side was
under the purview of OMB. The department was working with
OMB and the Alaska Permanent Fund Corporation (APFC) on a
future presentation.
Co-Chair Johnson reviewed the schedule for the following
day.
ADJOURNMENT
2:56:03 PM
The meeting was adjourned at 2:56 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Fall 2022 Revenue Forecast Presentation 2023.01.26.pdf |
HFIN 1/26/2023 1:30:00 PM |
DOR - HFIN |
| DOR Response HFIN 012623 mtg.pdf |
HFIN 1/26/2023 1:30:00 PM |
DOR Revenue Forecast Response to Questions |