Legislature(2005 - 2006)HOUSE FINANCE 519
06/01/2006 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB2001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB2001 | ||
HOUSE FINANCE COMMITTEE
June 1, 2006
9:11 a.m.
CALL TO ORDER
Co-Chair Chenault called the House Finance Committee meeting
to order at 9:12:05 AM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Richard Foster
Representative Mike Hawker
Representative Jim Holm
Representative Reggie Joule
Representative Mike Kelly
Representative Beth Kerttula
Representative Bruce Weyhrauch
MEMBERS ABSENT
Representative Carl Moses
ALSO PRESENT
Representative Ethan Berkowitz; Representative Paul Seaton;
Representative Less Gara; Representative Norm Rokeberg;
Representative David Guttenberg; Representative Ralph
Samuels; Representative Woodie Salmon; Dan Dickinson,
Consultant, Tax Division, Department of Revenue; Robynn
Wilson, Director, Division of Tax, Department of Revenue;
Robert Mintz, Assistant Attorney General, Department of Law
PRESENT VIA TELECONFERENCE
There were no teleconference testifiers.
SUMMARY
CSSB 2001 (FIN)
"An Act relating to the production tax on oil and
gas and to conservation surcharges on oil;
relating to criminal penalties for violating
conditions governing access to and use of
confidential information relating to the
production tax; amending the definition of 'gas'
as that definition applies in the Alaska Stranded
Gas Development Act; making conforming amendments;
and providing for an effective date."
HCS CSSB 2001 (FIN)
CS FOR SENATE BILL NO. 2001(FIN)
"An Act relating to the production tax on oil and gas
and to conservation surcharges on oil; relating to
criminal penalties for violating conditions governing
access to and use of confidential information relating
to the production tax; amending the definition of 'gas'
as that definition applies in the Alaska Stranded Gas
Development Act; making conforming amendments; and
providing for an effective date."
Co-Chair Meyer MOVED to ADOPT committee substitute 24-
GS2094\I, Bullock, 5/31/06. There being NO OBJECTION, it was
so ordered.
9:12:45 AM
ROBYNN WILSON, DIRECTOR, DIVISION OF TAX, DEPARTMENT OF
REVENUE, reviewed changes incorporated into the committee
substitute. Members were provided with a matrix to high
light the major difference between CSSB 2001 (FIN), version
F (Senate version) and committee substitute GS2094\I (CS)
adopted by the House Finance Committee (copy on file). She
observed that the tax rate was 20 percent in the CS and 22.5
percent in the Senate version. The next significant
difference relates to the treatment of Cook Inlet oil and
gas. She observed that previous versions excluded value,
which started with the gas revenue exclusion (GRE). The GRE
was carried over to Cook Inlet oil. Changes in the CS are
intended to simplify the presentation of GRE. Cook Inlet oil
would be handled in the same manner as Cook Inlet gas in
previous versions. She explained that under the CS the tax
would be the lower of: the PPT tax on Cook Inlet or what
would have been paid under the ELF (Economic Limit Factor)
system. Consequently, Cook Inlet gas remains the same. The
credit rate remained at 20 percent in all versions. Private
royalty rates also remain the same. The GRE was not included
in the CS.
9:18:18 AM
Ms. Wilson observed that, under the CS, progressivity begins
at $45 a barrel net value with a slope of .00175 percent
(1.75%) times the net value. The House version [HCS CSSB 305
(FIN) am H) had a trigger of $35 net per barrel, with a
slope of 2.5% percent. The slope is lower, but kicks in
higher. In the Senate version, progressivity kicked in at
$35 barrel net, with a slope of .1%, which is a lower slope.
9:19:23 AM
Ms. Wilson further itemized areas that were unchanged:
· 50% progressivity tax cap stays the same.
· There is no gas progressivity because the progressivity
calculation is based on net and is not deductible.
· Transition provisions have been maintained: 5 day look
back, 2 for 1 on capital expenditures. The 20 % credit
remains.
9:20:37 AM
Ms. Wilson explained that the base allowance has been
changed and is based on production. This is not the case in
the Senate version. The current CS, with regard to base
allowance is the same as HCS CSSB 305 (version B). Unchanged
items were:
· The 10 year rolling sunset on the base allowance has
not changed.
· Safe harbors have not changed.
· The effective date of April 1, 2006 has not changed.
· The 10 month transition period was retained, however
additional languages was added for clarification.
· There has been no change to spill surcharges or the
treatment.
· There has been no change to SB 185 version regarding
abandonment refundable credits. There is no change with
how those credits are used.
· Transferability has not changed.
· Refundable credits have not changed.
Credits for annual loss, the net operating loss that is
converted to a credit at the rate of 20%, now matches the
tax rate. This differs from the Senate version, which was
22.5%. She further noted that the conversion rate should
match the tax rate; that was not the case in the version
that passed out of the House.
There is no provision for uses of RSA core values.
Language regarding U.S.C. Sec. 482 Internal Revenue Code was
not changed.
Oil spill clean up costs were changed slightly, with an
exception for the gravel pad. This will be further
highlighted later in presentation.
The Department of Natural Resources (DNR) receives
exploration data. The producer must give information to DNR
regarding the expiration credits that are claimed. The same
language was in the last several versions of the legislation
and is contained in SB 185. Provisions remain the same.
Ms. Wilson went on to say that the language regarding NPSL
regulations after industry practice (hierarchy of direct
costs), in the House version, was fairly general. The
Senate version adopted modified language to restrict it to
"in Alaska only". This will be highlighted in the walk
through of the bill.
The same language regarding credit flow-through re: FERC
regulated facility, has been maintained. A high energy fund
was established in the House version, but was removed from
the Senate version and not included in the current House CS.
9:25:59 AM
Ms. Wilson reviewed the legislation. She referred to page 3,
section 5, line 9, which contains the 20 percent tax rate.
ROBERT MINTZ, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW,
spoke in regards to section 5. He pointed out that the tax
cap for Cook Inlet oil would be the same as the current rate
for Cook Inlet gas. The language outlining this is found on
page 3, line 8, subsection (j). The new provision,
subsection (i), provides for Cook Inlet gas.
9:27:46 AM
Ms. Wilson observed that progressivity starts on line 3,
page 4. The trigger point on net of $45 is on line 16. She
highlighted subsection (h), which requires amortization of
the lease expenditures to calculate productivity. She
explained that the timing of expenditures is critical, when
establishing progressivity on a net basis. This provision
would take into account expenditures that vary greatly from
month to month on an annual basis. She observed that it was
difficult to draft progressivity provisions based on barrels
of oil equivalent (BOE) on an energy content. She explained
that an amendment would be forthcoming.
9:29:56 AM
Ms. Wilson provided members with a graph demonstrating
progressivity rates for each of the three versions (copy on
file).
Mr. Mintz explained that there would be two different
methods of calculating BOE (bottom of page 6). The intention
is to have two different ways to define BOE depending on
what subsection it refers to. One definition is based on
cubic feet, the other is based on energy content. He noted
that there was an attempt to fix the potential confusion.
9:30:58 AM
Ms. Wilson explained that the graph demonstrates the
progressivity line for each of the three versions discussed.
The top line pertained to the House version passed (yellow).
The middle line is the current CS (blue). The bottom line
pertained to the version passed by the Senate (red). She
noted that the current CS represents a moderate option of
the three versions with the House version being the highest
and the Senate version being the lowest {return}.
Co-Chair Meyer questioned the affect of these rates at the
current price of oil, at $75 with higher progressivity and a
20 percent tax rate. The Senate version has a higher tax
rate of 22.5% with a lower progressivity rate. He asked
which provided the greater return to the state.
9:32:58 AM
Ms. Wilson said she would provide that information.
Ms. Wilson continued review of the CS: line 22, page 4,
section (i), the Cook Inlet gas, tax cap provision (from
pages 4 to page 5, line 8). On the next line is the same
language with regards to Cook Inlet oil. On line 27 is a
new subsection that explains how Cook Inlet credits apply;
PPT taxes are calculated along with progressivity on Cook
Inlet. This is then compared to what would have been
charged under ELF, and the lower amount is applied. It
explains how credits are taken into account and applied.
This section explains how the credit carry forward is
reduced by that credit amount.
In response to a question from Representative Kertula Ms.
Wilson explained that if producers get a break on the tax
rate it would not be fair to get the extra credits. The
aforementioned language is there to address this.
9:37:05 AM
Ms. Wilson noted the need for a technical amendment on page
6, lines 7, 9, and 10 to make one word grammatical changes:
Replace "are" with "is", replace "of" with "or" replace
"under" with "by". She noted an amendment for these changes
would be forthcoming.
Ms. Wilson referenced page 6 lines 22-27, section (l):
This is language regarding regulations adopted by the
department that was inadvertently combined in the drafting.
She noted an amendment will be forthcoming to correct it.
Section (m) is new language, regarding barrels of oil
equivalent, measured on energy units to establish
regulations for sampling and testing.
9:39:25 AM
Ms. Wilson referenced page 9, highlighting the basic tax on
line 8. Mr. Mintz pointed out that wording on page 9, line
10 was changed from "elected" to "substitution" to allow a
substitution under 160(f). AS 43.55.160 (f) provides for a
producer to either deduct actual lease expenditures for one
month or to annualize expenditures and deduct 1/12 calendar
year lease expenditures. The producer is required to
annualize for progressivity purposes. If the progressivity
tax kicks in during the year, it is not an election, it is a
requirement, hence the change of the wording from "election"
to "substitution".
9:40:55 AM
Ms. Wilson referenced page 10, line 5. The credit conversion
of net operating loss at 20 percent is outlined. The phrase
"may be applied irrespective of if the producer pays the
credit" was taken out of this section due to a lack of
clarity: page 8, lines 23 and 24 of CSSB 2001 (FIN). Mr.
Mintz explained that the language was superfluous and caused
confusion. It does not change any intent or meaning by its
removal.
9:42:42 AM
Ms. Wilson related that page 11, line 12, (f) explains the
refundable credit. On line 15 - 17 is the production limit
{0f 50,000 BOE}.
9:43:13 AM
Representative Kelly referred to the $25 million credit. He
noted that Dr. Van Meurs indicated the credit could cause
problems when oil prices are on the decline. He questioned
if the provision was addressed. Mr. Dickinson explained that
the Administration is not comfortable with the $25 million
credit and felt credits should stay with the PPT. A direct
credit would have to come from income tax credits or other
sources. The state of Alaska feels that the full amount
should be paid. Representative Kelly observed that it is a
policy call.
Co-Chair Chenault noted that the issue was not addressed.
9:46:07 AM
In response to a question by Representative Kelly, Mr.
Dickinson explained that the credit was not a key issue of
the PPT or part of the major focus. Ms. Wilson added that
the more potential refund there is the more the risk. The
$10 million refund limit was in one of the versions.
9:47:29 AM
Ms. Wilson explained page 20, line 28 section 24,
determination of production tax value of oil and gas. She
pointed out that the Gas Revenue Exclusion (GRE) was taken
out. Separate accounting would be required for Cook Inlet
oil net value and Cook Inlet gas net value. The section's
purpose is to clarify accounting of the net value.
9:48:22 AM
Ms. Wilson noted changes on page 22. Subsection (c), lines
6 - 14, changes word order and clarifies "ordinary" and
"necessary". It does not change meaning or intent. Mr. Mintz
pointed out a drafting error on lines 12 - 14, which can be
addressed in the form of an amendment that substitutes
"lease expenditures" after "in determining whether costs
are". Mr. Mintz further clarified intent by noting "other
than items listed in (d) of this section" was added on line
31. Subsection (d) is a list items that are not allowed as
deductions of lease expenditures.
9:51:03 AM
Ms. Wilson referred to page 23, and noted that there should
be a comma after oil and gas line 17. The list of
nondeductible items is on page 24. Abandonment is addressed
on lines 28 - 31 and again on page 25. It is substantially
the same language except for lines 11 and 12, which is a
clarification of what and when abandonment would be allowed
as a deduction. The original intent was to disallow the
abandonment costs but not to preclude the expenses for the
purposes of improvement. Subsection (17) on page 25, lines
13 - 19 contains oil spill language that disallows expenses
regarding unpermitted oil discharge. The new language is on
line 14: "is not confined to a gravel pad". She explained
that the accounting would outweigh the benefit of
disallowing expenses associated with small pad spills. She
went on to say that any significant spill is expected to
exceed the gravel pad.
9:53:43 AM
Representative Kerttula asked if there is a definition of
"gravel pad". Mr. Dickinson responded that it is not
defined in statute, but would be defined through regulation.
Representative Kerttula expressed concern regarding the
amount of barrels that could go into a gravel pad. She asked
if the Department of Environmental Conservation had been
consulted. Dickinson explained that within a gravel pad
there is a normal containment system set up and referenced
on line 15 of the bill.
9:55:07 AM
Ms. Wilson discussed page 28, AS 43.55.170, which contains
the base allowance. Lines 10 - 19 has the added production
limit.
9:56:00 AM
Ms. Wilson addressed the transitional provisions on page 35,
line 6 and 14. The language does not change anything, it
just clarifies the 10 month rule; 300 days is the equivalent
of 10 months.
Mr. Mintz explained that the intent is to have a 10 month
period for the producer to pay under the old system and then
true up under the new system. There would be 270 days under
the old system and then the new system true up would start
at the 300th day.
9:59:42 AM
Representative Joule noted that previous deliberations were
without the benefit of a gas contract. He questioned if the
current legislation could be put into context of a gas
[pipeline] contract. He observed that testimony from the
needed authorities can only take place during the committee
process. Mr. Dickinson explained that the contract reflects
the bill the governor submitted in the special session. If
the legislature changes the parameters, the contract would
have to be adjusted.
10:02:14 AM
Mr. Dickinson reiterated that the changes and comparisons
would be available online. He also noted that those changes
could be updated based on the CS if necessary.
Representative Weyhrauch questioned if fiscal certainty
would be achieved by enacting PPT with a 3 - 5 year sunset
date, thereby circumventing the 30 year contract.
Mr. Dickinson observed that the PPT could be changed anytime
the legislature deems appropriate, while a contract would be
binding.
10:04:05 AM
Ms. Wilson returned to page 24 and pointed out the addition
of "gross" before "negligence" on line 9, which differs from
the Senate version. There was another change on line 29 with
the addition of "pad" after "well". Mr. Dickinson added
that operations continually reconfigure wells. The intent is
to pertain to the end of actual operations without inserting
into day to day operations.
10:07:12 AM
Mr. Dickinson discussed Cook Inlet. He provided members with
a spread sheet, Cook Inlet Examples PPT with various
adjustments (copy on file). The chart compares the effect of
three items that have been built into various versions of
the bill: The GRE at 2/3, the lookback test, and the $12
million credit. He asserted that the CS, with the lookback
provision, accomplishes what the other tools were attempting
to without overlapping.
The chart compares the impact of the aforementioned tools,
with the different rate and volume scenarios. Under each
"tool" there are three columns illustrating the impact of
scenarios created under volume and rate. He explained that
average rate was calculated at $2.50; $4.50 represents the
average for the last few years. The $6.50 and $8.50 rates
were added to project rising gas prices for Cook Inlet.
The scenarios were created for big volume fields with high
ELF, big volume fields with low ELF, small volume fields
with low ELF, and small volume fields with high ELF. He
explained that under the 2/3 GRE, Cook Inlet gas prices
would need to be in the $8.50 range in order to see the same
return as under the status quo.
10:13:06 AM
Mr. Dickinson explained that there is a break even at $8.50
for today's prices using the 2/3 GRE.
Under the lookback [provision in the CS], the taxes stay
basically the same. The difference would be the built in
credits to incent production. The producers would pay the
same tax, but they would have their tax lowered if they make
investments.
10:15:00 AM
Mr. Dickinson noted that as prices increase the tax would
stay at $21 million due to the cap. In response to a
question by Representative Kelly, Mr. Dickinson explained
that there is no GRE under the current CS. The cap would not
kick in below $8.50, which is twice that of the current
price.
10:16:39 AM
Mr. Dickinson noted that column three outlines the rates
under the Senate version, which provides for a $12 million
credit for large volume, high ELF producers. He observed
that at low prices the applications of credits would bring
all producers to zero. Taxes would rise as prices rise if
the credit is the only mechanisms controlling taxes. At
$8.50 price, taxes collected would be $180 million. They
would only be reduced with the amount of available credit,
which would be $12 million for the larger producers and $6
million for the smallest producers. He observed that the
$12 million credit would not maintain the current tax rates
within Cook Inlet, if that is the intent. Taxes would still
reflect price increase, although not as directly as without
the credit. The GRE also allows prices to rise with taxes,
but it would only occur at the highest prices.
10:18:37 AM
Representative Holm questioned the difference between the
cap amount and no cap amount with the $12 million credit.
Mr. Dickinson explained that the tax does not get added on
top of credit. The state would collect less tax with the
cap. Representative Holm questioned what rationale dictates
treating one area of the state differently from other areas
in the state.
10:20:11 AM
Mr. Dickinson summarized that the Cook Inlet life cycle is
more mature than the North Slope. Investments are smaller in
magnitude and more conservative. The intent is to arrest the
decline. He added that the product is used for industry and
consumption in the state and is part of the economic picture
of the state. Severance taxes are typically passed on to the
consumers. He contrasted Cook Inlet gas with the North Slope
and concluded that the North Slope product is shipped out of
state.
10:22:32 AM
Representative Holm questioned if the same argument could be
made for oil. He observed that most of the state does not
use Cook Inlet gas. He questioned if it is okay to raise the
price on oil through the PPT process, which is consumed by
other parts of the state. Mr. Dickinson referred to
subsection (j). He observed that Cook Inlet oil has not paid
any production tax for years and the status quo would be
retained. He noted that the cost associated with North Slope
barrel and Cook Inlet barrel are approximately the same.
The difference is that for Cook Inlet, all the production
costs are upstream.
10:24:41 AM
Representative Holm reiterated his question and noted that,
for interior refineries, price is translated back to the
state as a fixed price. Cook Inlet oil is the only oil that
is tax capped, which would result in better prices in that
area. He concluded that if different levels of taxation are
implemented it would impact areas of the state differently.
Mr. Dickinson felt that oil contracts do not have a
reimbursement severance tax amendment whereas the gas
contracts do. The affect of changing the tax rate may not
flow through what refineries do.
Co-Chair Chenault interjected that there is a similar
problem with North Pole and Nikiski and pointed out that
[the price difference] doesn't translate down to the
consumer.
10:27:30 AM
Representative Kelly observed that the original intent was
to "cap" the tax. He also noted that revenues to the state
would be higher in the GRE scenario. He noted under the
current CS, the tax return to the state would be less. He
questioned if there is an unintended consequence. Mr.
Dickinson explained that the tax credits are the difference.
A company has more incentive to invest if they receive a
credit and hence a lower tax.
10:29:33 AM
Mr. Dickinson acknowledged that the tax would be less when
investment is up and the tax would be higher without
investment. Representative Kelly questioned what the result
would be of leaving the ELF in place and capping it in Cook
Inlet. Mr. Dickinson stated that there would be a slow
decline with credits for exploration. He maintained that
the 20 percent incentive should be applied. He further
pointed out that the state would still be receiving
royalties, property tax, etc.
10:32:15 AM
Representative Kelly emphasized his concern about providing
too much incentive with the possibility of going into a
negative tax. Mr. Dickinson reiterated comments regarding
the advantages of incenting companies. Representative Kelly
commented on the affect on the smaller producer. He thought
that the change would involve a discount of $16 million
dollars in addition to credits, providing a greater discount
than anticipated.
10:35:09 AM
Mr. Dickinson emphasized two points:
· The lookback (current CS) only runs through 2020-21.
· Many rules have been created to deal with a small piece
of the tax proposal. There are other changes on the
North Slope that have much greater effects.
Mr. Dickinson referenced sheet #1, focusing on the Cook
Inlet gas. He concluded that the only gross dollar increase
to occur would come from increased volumes. This was based
on a one year period ending March 31, 2006, including the
ELF on property bases, with prevailing value (single value
applied to all leases) and a ceiling set on a per unit
basis. Credits can be deducted once there is a decision to
use PPT or the 11(i) ceiling, however, Cook Inlet taxes can
only be taken to zero and can not be sold or transferred to
other parts of the state unless the credits would have been
available under PPT.
Mr. Dickinson stated that new gas production would be
subject to the same test; it would be applied to any new
unit setting a cap. Credits generated would be creditable
on tax in Cook Inlet only.
Mr. Dickinson stated that Cook Inlet oil would use the same
scheme. There has not been a positive ELF for that oil for
over a decade. Credits would only be available if
previously under the PPT. The credits will adhere to the
gas concerns. Oil and gas would be applied against
operations.
10:40 35 AM
Mr. Dickinson concluded his presentation by saying that if
the mechanism (provisions in the CS) is in place the GRE is
not necessary.
Representative Kelly asked what would happen by removing the
cap. Mr. Dickinson responded that page 2, indicates what
the taxes would be in Cook Inlet if the credits apply. The
current tax is always less than the PPT, without the $12
million dollar credit current. He explained that with the
stand alone $12 million credit there may be less under PPT
than under the current system, at low prices, if enough
producers apply the credit. He pointed out that based on
profitability, if costs stay the same, there would be higher
taxes. At $8.50 the gas taxes would be $200 million under
PPT; and $70 million under the current system.
Mr. Dickinson pointed out that it does not include any
"kick" from progressivity.
10:43:16 AM
Representative Kerttula summarized that the tax could not go
down to zero, but credits could be rolled forward.
Mr. Mintz agreed with Representative Kerttula's conclusion
to the extend that the credits are otherwise allowed to be
carried forward, but pointed out that $12 million credit is
not allowed to be carried forward. Representative Kerttula
asked if there was any time limit on rolling forward
credits. Mr. Mintz affirmed that there is no time limit in
general and the Cook Inlet provisions do not add a time
limit.
10:44:31 AM
Representative Kerttula inquired if there had been an
analysis of the scenario at Pt. Thompson. Mr. Dickinson ob
that it would be a major development costing dollars in the
upstream percentages.
Representative Kerttula asked if the level of investment
stays the same as last year, what would it would cost the
state under the look-back. Mr. Dickinson replied that over
that time period, roughly a billion dollars.
Representative Hawker asked if the cost to the state,
credits related to expenditures of development with
significant increase of taxes paid on existing production.
Mr. Dickinson affirmed it would be through the higher tax.
Representative Hawker emphasized that it would be a massive
increases in taxes with the proposed legislation.
10:47:35 AM
Representative Kerttula asked if there have been
calculations to see exactly what the gain to the state would
be after considering all the credits and deduction. Mr.
Dickinson offered to recap previous discussions. He
emphasized that at current prices, the gain will be massive;
as prices fall there could be a tax decrease.
In answer to a previous question by Representative Meyer,
Ms. Wilson addressed total taxes regarding progressivity.
She referenced a handout: Source ADOR-Draft, Severance Tax
per Barrel with Variations in Tax and Progressive Surcharge
Rate (Copy on File). She noted that the numbers on the
chart are in a draft. The CS is the yellow line; the red
line represents the Senate bill; and the blue line matches
the old House bill for progressivity, with a slightly lower
tax rate. At $70.00 oil the current CS would bring in
approximately $11.00 per barrel total tax; the Senate CS
would bring in approximately $12.00; and the last scenario
would bring in $12.50, which is slightly less than the House
version.
Mr. Dickinson suggested that with the current data, under
the status quo, the tax would be $4.90 at $70 per barrel.
10:52:42 AM
Co-Chair Chenault stated that the committee would recess to
address amendments.
RECESS: 10:53:59 AM
RECONVENE: 5:27:48 PM
Co-Chair Chenault said his intention for the meeting was to
discuss Cook Inlet and take up amendments.
Ms. Wilson provided members with a handout: Cook Inlet Gas
Credit Usage Examples (copy on file). She itemized examples
illustrating use of the base credit. The first example was
based on production in the Cook Inlet, with a PPT tax before
credits of $100. The base credit is applied first, is not
transferable and cannot be carried forward. From the $100
tax a base credit tax of $12 would be removed. The capex tax
is assumed at $110, which is more than the tentative tax,
that is why the usable capex credits would be $88, which
brings the tax down to zero. Under example B, the ELF tax
before credit would be $95. The lower of the two would be
taken. The tax benefit enjoyed would be $5. The actual tax
calculation would be the lower of, which would be $95 in
this example; apply a base credit of $12; and then the
usable capex credits would be $83. Tax credits of $83 would
be used, but there would still be a tax credit of $5. The $5
is deemed to be used by the credits. The total capex credit
used would be the $83 actually used, plus the $5 deemed to
be used; for a total of $88. The effect would be a zero net
tax. When calculating capex credit usable outside Cook
Inlet it would be the $83 capex credits used plus the
difference of $5 (PPT tax of $100 and ELF of $95) would
leave $22 as a carry forward outside Cook Inlet.
5:33:07 PM
Ms. Wilson referred to example A2, which is an example of a
producer who has 50% production in Cook Inlet and 50
% on the North Slope. The PPT is the same, but the base
credit of $6 is allocated on the production, which is found
on page 5 of the CS, 011 (k). The result would be a capex
credit available for use outside of Cook Inlet or as a carry
forward of $16.
Ms. Wilson referred to example B1 when ELF is lower than
base credit. The PPT tax before credits is $38. The ELF tax
before credits is $8. The resulting base credit would be $6,
but only $5 would be utilized. Capex credit used would be $2
under example B1. The difference would be the tentative base
credit used and the actual credit used. Under these
variables and calculations there would be an $8 capex credit
available for use outside Cook Inlet.
5:38:46 PM
Ms. Wilson provided members with a revised chart 3, which
added HCS CS SB 2001 (FIN)(copy on file). The Senate version
is the blue line. HCS CSSB 2001 (FIN) would be yellow. The
version passed by the House would be red.
Mr. Dickinson provided members with a spreadsheet comparing
the Current CS with the versions previously passed by the
House and Senate (copy on file). He concluded that the
current CS would have an effective tax rate of $21.75, which
is the lowest of the three versions.
5:42:46 PM
Co-Chair Meyer referred to statements made on the Senate
Floor that indicated that the House version would have
brought less revenue into the state, but observed that the
House version (that passed out) would have brought more
revenue than the previous Senate version.
Mr. Dickenson said he was aware of those statements and
further noted that he would not be able to back that
statement up if asked.
Co-Chair Meyer asked if perhaps that statement were based on
a scenario where the price of oil was much less than current
prices. Mr. Dickenson noted that the Senate version does
have the higher credit rate, which impacts rate. He further
commented that ECONONE reported that over a broad price
range there was comparability with both bills.
5:44:57 PM
Co-Chair Chenault MOVED to ADOPT Amendment 1. Co-Chair Meyer
OBJECTED for the purpose of discussion.
Mr. Mintz explained amendment 1. He observed that the first
two pages restore a provision in the bill, which would
determine the amount of production for the base of the
progressivity tax. It would establish value based on btu
content rather cubic feet measurement. To avoid confusion
with "barrel of oil equivalent", the term "btu equivalent
barrel" is used.
5:48:36 PM
Mr. Mintz discussed amendments to pages 5 and 6, which
addresses provision regarding the handling of credits and
the relationship between tax credits and the tax cap for
Cook Inlet oil and gas. The first change is to delete
"carry forward to a later period" and insert "use for a
different month". In some cases a credit that can not be
used in a calendar year may be used for previous months
hence the change in wording.
Page 6 line 5 wording is changed to accommodate grammatical
correction.
Page 6, lines 5, 7, 8 and 9 are also technical/grammatical
changes.
Page 6, line 10, following "levied", "under" is deleted and
"by" is inserted. This provides consistency of language
use. Page 6, line 15 deletes "the" for consistency.
Page 6, line 19, makes wording changes deleting "carried
forward to a later period" and insert "used for a different
month" to be consistent with earlier changes.
5:51:01 PM
Mr. Mintz discussed the changes to page 6, line 19; "and" is
deleted and "or" is inserted. The purpose is to clarify
that a credit could be transferred, carried forward or used
on a different lease of property. A given tax credit can
only be used for one thing.
The reference to regulations was deleted. The sentence on
page 6, line 23 following "department" deletes "and be
consistent with the regulations adopted". The sentence was
confusing and unnecessary; page 6, line 24 deletes "under AS
43.55.160 © (4)" for the same purpose.
Page 6, line 31 through pages 7, line 1, deletes all
material because over time the concept of barrel of oil
equivalent has been expanded to more than one place in the
bill ; it was moved to the general definition section of the
bill. Page 14, lines 9 - 10 and line 11 deletes all
material for the same reasons.
5:53:36 PM
Mr. Mintz observed that the drafting errors discussed
earlier regarding "ordinary" and "necessary" would be
addressed on page 22, lines 12 - 14.
Page 23, line 17: this change put a comma back in to correct
an error in drafting. Paragraph 16 provides for the
department to adopt regulations that explain how costs are
allocated between Cook Inlet and the state as well as
between oil and gas and leases and properties within the
Cook Inlet.
On page 25, lines 2 and 5, "barrel of oil equivalent" is
inserted to be consistent with earlier proposed changes.
Further changes providing consistency regarding this are on
page 25, lines 8 and 9.
Page 25, line 14 is a general exclusion saying that, if
discharge is confined to the gravel pad, it is an acceptable
exclusion. A question was raise earlier in discussion
whether "grave pad" was the correct concept to interpret
intent. The amendment proposes to expand the concept to add
pad, platform, or other structure. The concept is, if the
spill is confined to a manmade structure and does not get
out into the environment, then it could be a deductible
cost.
5:57:59 PM
On page 31, line 29 added a new definition for "barrel of
oil equivalent" to the list of definitions at the back of
the statute.
The rest of the amendment renumbers the definitions
currently in place until page 35, which addresses the 10
month transitions provisions issue. The true up would always
take place on the last day of the month after the provision
has taken place.
[This clarifies that what is paid on the true up date is the
amount that is levied under the new tax regime that exceeded
the amount that was paid under the transition provision.]
6:00:03 PM
Representative Kertula referred to the amendment on page 25,
line 14. Mr. Mintz clarified that a pad would include a
gravel pad. Representative Kerttula questioned if an ice pad
would be included and how many barrels would be safe to
spill on an ice pad. Ms. Wilson clarified that the North
Slope generally uses a gravel pad but during exploration an
ice pad is used. (She noted that as far as Department of
Environmental Conservation is concerned a spill is a spill).
Representative Kertula asked what is considered to be
routine costs. She observed that what is not allowed are the
losses or damages that are not confined or exceed routine
costs. Mr. Mintz clarified that "routine costs" would only
be costs incurred as lease expenditures, which are in the
absence of an oil discharge. He further pointed out that the
reason for this language is to avoid the need of excess
administrative work regarding employees cleaning up a spill
and using it as a deduction. It is an attempt to clarify
what should be considered a deductible cost. If a producer
has employees that are being paid to do a variety of
activities, a small spill would not add to the deductible
lease expenditures.
6:04:51 PM
Representative Kertula questioned why barrels would not be
used as a defining measurement for accounting. Ms. Wilson
noted that the original language pertained to catastrophic
oil spills. There was a concern expressed regarding volume.
As a result of discussion regarding that language, the
decision to use the current language was reached.
Representative Kertula questioned how much contingency plans
cost to develop and maintain. Mr. Dickinson said that there
are millions of dollars involved. Representative Kerttula
asked if they are tax deductible. Mr. Dickinson observed
they would be allowed for corporate income tax. For
production tax, those that are upstream would not be
deductible. Representative Kertula maintained concerns.
Co-Chair Chenault clarified that the costs discussed are
associated with current costs of doing business. Mr.
Dickinson agreed that they were associated with
transportation costs.
6:09:05 PM
There being NO OBJECTION, Amendment 1 was adopted.
Representative Kelly MOVED to ADOPT Amendment 2:
Page 4, line 9:
Delete ".175 percent"
Insert: ".25 percent"
Page 4, line 16:
Delete "45"
Insert "35"
Co-Chair Meyer OBJECTED. Representative Kelly explained the
amendment would change both the progressivity rate and the
trigger point.
6:12:53 PM
Representative Holm asked for further discussion,
specifically in regards to Mr. Van Meurs' testimony. Mr.
Dickinson said Mr. Van Muers' testimony stressed the
insertion point, where progressivity starts. He further
noted concerns of the costs of getting heavy oil out of the
ground. Given the fact that the amount of heavy oil will
increase and with that costs will increase. He felt that $50
may be misleading and noted that estimations of $15 to get
the oil out of the ground and then added transportation
costs. He stressed that there must be room for costs to
grow in relations to market value. "If oil from the North
Slope is going to be more costly then it is important that
progressivity not kick in to soon". Dr. van Muers' memo
suggested a progressivity insertion point of $45.
6:15:31 PM
Co-Chair Meyer spoke in support of the amendment, but he
stressed the need to be competitive. He said he could
support the amendment if he could be assured the tax rate
would be 20 percent. If the tax rate is higher, then the
progressivity would have be lower. He felt it was more
important to focus on the tax rate.
Representative Hawker summarized that taxes would be raised
on the most productive state industry. He was not convinced
that an industry can be taxed into productivity. He stressed
the legislation should be viewed individually. He felt that
the current bill must be viewed on its own without having it
hinge on unknown variables such as a gas line.
6:19:07 PM
Representative Kertula noted that even with progressivity
factored in companies would be making more money. Mr.
Dickinson agreed.
Representative Kerttula observed that Daniel Johnston,
Legislative Consultant, Daniel Johnston & Co., Inc., said
that progressivity could start as high as .375 and companies
would still be making money.
Representative Kelly concluded by saying he wants the oil
companies to thrive, but maintained that though what passed
the House was timid it is well with in reasonable range.
6:23:32 PM
Co-Chair Meyer did not think what was passed on the House
floor was timid. He argued that due to the progressivity
piece, the amount coming back to the state would be greater
than that proposed in the Senate version. He went on to say,
he did not think the CS mirrored the Administration's
because the CS has the progressivity piece. In conclusion,
he noted that the PPT tax is not the only revenue received
from the industry. He observed that the state receives
property tax, corporate income tax, production tax and
royalties.
Representative Holm stressed the importance of not hindering
the extraction of heavy oil. He noted that the costs for
heavy oil are not certain. It is known that as there is a
decline the state needs to make sure there are more barrels
produced.
6:27:12 PM
Representative Hawker referred to the comments from Pedro
Van Meurs (copy on file) and noted that industry has never
been taxed into productivity.
Representative Kelly pointed out that the tax would be on
the net. He maintained that the heavy oil situation would
not be affected. He spoke in support of the amendment.
6:29:56 PM
Representative Kerttula pointed out that Dr. Van Meurs' memo
recognizes that at high prices the state will not be getting
a fair share.
A roll call vote was taken on the motion.
IN FAVOR: Holm, Joule, Kelly, Kerttula, Stoltze
OPPOSED: Foster, Hawker, Wehyrauch, Meyer, Chenault
Representative Moses was absent from the vote.
6:31:56 PM
Representative Kelly MOVED to ADOPT Amendment 3. Co-Chair
Chenault OBJECTED. Representative Kelly explained that the
amendment would allow, but not require the Department of
Revenue to issue a cash refund for a transferable tax credit
certification held by the Alaska Retirement Management (ARM)
Board He noted that legislation enabling the ARM Board to
purchase transferable tax credits would be introduced next
session.
Representative Hawker observed that there currently is
language in the bill providing for cash refunds at 100%
(rather than the 92% outlined in the amendment) for the
first $25 million. Representative Kelly explained that
credits may exceed that amount.
6:34:56 PM
Representative Hawker did not agree with the conclusion that
all could be put into the package. Representative Kelly
noted that the purchase and exchange is only permitted by
the state and the oil companies. The amendment would add
the ARM Board. The intent is to be permissible.
Co-Chair Meyer commented on the amendment saying he agreed
with the concept, but did not think the amendment was the
right approach. He further noted that whatever PPT was, the
state would see a large return and he expected some of that
would go towards unfunded liability. He said he would vote
against the amendment.
A roll call vote was taken on the amendment.
IN FAVOR: Holm, Kelly, Joule, Kertula
AGAINST: Hawker, Stolze, Weyhrauch, Foster, Chenault, Meyer
Representative Moses was absent from the vote.
The MOTION FAILED (4-6).
6:38:07 PM
Representative Kerttula MOVED to ADOPT Amendment 4. She
explained that it would limit the carry forward on tax
credits, similar to what is being done with the
nontransferable tax credits for small tax companies. She
pointed out that the amendment sets a ten year limit, but
she is open to changing that if a more reasonable timeframe
is thought to be appropriate. She said it is an effort to
put a reasonable time limit on how long companies have to
use credits.
Ms. Wilson explained that the non-transferable credit
sunsets in two years. She questioned if the amendment would
limit the carry forward "period" and pointed out that the
intent of the credit is to encourage investment. Mr.
Dickinson said that a sustained period of low prices could
result in the need to prolong the carry forward, and that it
would be reasonable to do so.
Representative Kerttula observed that there is no limit on
the timeframe of the carry forward. She observed that it
could be difficult to determine what the credit is for or
where it came from. Mr. Dickinson said that if there is
still oil in 50 years, the bill would be successful. There
will be a point in time when shut down will occur. He noted
that he was not concerned about companies taking advantage
of the credit carry forward.
6:43:00 PM
Representative Kerttula spoke in support of the amendment.
A roll call vote was taken on the motion.
IN FAVOR: Joule, Kerttula
OPPOSED: Holm, Kelly, Stoltze, Weyhrauch, Foster, Hawker,
Meyer, Chenault
Representative Moses was absent from the vote.
The MOTION FAILED (2-8).
Representative Joule MOVED to ADOPT Amendment 5.
Representative Joule explained that the amendment deals with
how the net profits are determined. It allows the state to
require the department to establish regulations for
determining the taxable net profit.
LISA WEISSLER, STAFF, REPRESENTATIVE BERKOWITZ, explained
that there are certain things that need to be addressed
under the net profits tax: allowable costs that can be
deducted, the auditing of those costs and enforcement. The
amendment deals with the allowable costs. Since 2001, the
department is required to give "substantial weight" to
industry standards to determine what costs the operators can
bill the producers. She elaborated that the term
"substantial weight" is not defined and that the regulatory
authority for the department appears to be permissive rather
than mandatory. The amendment would require the department
to adopt regulations to establish a list of allowable costs
to determine net profits. It would still use the industry
standards and operating agreements for guidance.
She stressed the importance of having a list of allowable
costs in regulations. She noted that currently in the
contract anything can be an allowable cost that was written
into the operating agreements and it is not at the purview
of the department.
6:48:39 PM
Mr. Dickinson stated that, under the contract, costs are
divided into three categories. Under a joint venture, if the
standards of the state are met, then the state would audit
to make sure that any items are disallowed. The state will
audit to make sure the costs are correct.
6:51:19 PM
In response to a question from Representative Kertula, Ms.
Wilson said that the wording, "give substantial weight"
provides adequate direction to the department as to
legislative intent.
Mr. Mintz responded that it is a policy call. He noted
concern with the amendment with two different and parallel
concepts of what lease expenditures are.
Representative Kerttula said that under the amendment,
industry practices can be used but the state is not bound by
them.
6:54:39 PM
Ms. Weissler explained that it is important to make clear in
the legislation that the department will be in charge of
establishing regulations. She noted that it was not clear in
the contract. She further pointed out that the wording in
the contract seems to say that the operating agreements
between the producers and the operators will determine
allowable costs.
Mr. Dickinson stressed that under a joint venture they rely
on tension between the parties. The presumption is that a
joint venture is organized for the purposes of exploring,
producing and developing oil. He further noted that there
is much the department can do if the decisions step outside
of that purpose. Things can be removed from the joint
venture category.
Mr. Dickinson pointed out that the Department passed
statutes defining the obligation; developing the regulation
would appear in the contract. The rules would be set forth
there.
Ms. Weissler pointed to language in the current gas contract
and asked if there was anticipation that it would be
different. Mr. Dickinson agreed and noted that it reflects
the bill presented by the Governor.
7:00:02 PM
Co-Chair Chenault asked what would happen if the gas line
did not pass. Ms. Wilson stated that they were "interested"
in getting a good bill that could be administered with or
without a contract. She highlighted the rule for allowable
costs needing to be "ordinary, necessary or direct" it also
addresses a list of things that might be confusing. There
is also a list of things that are absolutely not deductible.
She maintained that that the format allows for the time when
there are unknown expenses, the department must determine if
they fall under the description outlined in the bill:
"ordinary, necessary or direct". She felt this was clear
enough.
She encouraged the committee to retain current language.
Mr. Dickinson stated that without a contract, current law
stands. The current proposed law is not dependent in anyway
on the contract. The legislation will stand alone.
7:03:15PM
Representative Joule recollected rumors regarding the gas
contract, which was intended to "stand alone".
Representative Kerttula reiterated comments in support of
the amendment. Ms. Wilson reiterated that "substantial
weight" is used in writing regulations and provides
direction. She reiterated the difficulties of attempting to
establish a list within regulations of all the allowable
costs.
Representative Kerttula stressed that the entire list does
not need to be included regarding substantial weight. Ms.
Weissler pointed out that there are lists, which include
many allowable costs in state and federal law and did not
feel it would be an unusual task to take on.
7:06:22 PM
A roll call vote was taken on the motion.
IN FAVOR: Joule, Kerttula, Stoltze,
OPPOSED: Kelly, Weyhrauch, Foster, Hawker, Holm, Meyer,
Chenault
Representative Moses was absent from the vote.
The MOTION FAILED (3-7).
Co-Chair Chenault noted that the meeting would reconvene
6/02/06 to further address the bill and amendments.
Co-Chair Meyer asked about Dr. van Meurs participation.
7:09:03 PM
ADJOURNMENT
The meeting was adjourned at 7:08 P.M.
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