Legislature(2017 - 2018)ADAMS ROOM 519
04/10/2018 05:00 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB411 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 411 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 10, 2018
5:04 p.m.
5:04:55 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 5:04 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Representative Paul Seaton, Sponsor; Elizabeth Diament,
Staff, Representative Paul Seaton; Ken Alper, Director, Tax
Division, Department of Revenue; Sheldon Fisher,
Commissioner, Department of Revenue; Representative Andy
Josephson; Representative George Rauscher
PRESENT VIA TELECONFERENCE
SUMMARY
HB 411 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS
HB 411 was HEARD and HELD in committee for
further consideration.
Co-Chair Foster discussed housekeeping.
HOUSE BILL NO. 411
"An Act relating to the oil and gas production tax,
tax payments, and credits; and providing for an
effective date."
5:05:48 PM
REPRESENTATIVE PAUL SEATON, SPONSOR, provided a PowerPoint
presentation, "HB 411: An Act relating to the oil and gas
production tax, tax payments, and credits; and providing
for an effective date" dated April 10, 2018 (copy on file).
ELIZABETH DIAMENT, STAFF, REPRESENTATIVE PAUL SEATON,
introduced herself.
Co-Chair Seaton provided background on the bill. He relayed
that the conference committee from the 2017 session had not
addressed production tax changes in the bill and that the
bill had been revised to reflect that credits were no
longer available to work on the North Slope. He explained
that the presentation would focus on updates to HB 111,
which had been in Senate Resources Committee for the past
year. The conference committee on HB 111 had established a
legislative working group to analyze the state's fiscal
regime for oil and gas and review changes for presentation
to the legislature. He said that the group had only met
twice, with no recommendations made to the legislature to-
date. He shared that the legislature had three sets of
consultants for oil and gas taxes, only one made a single
presentation to the legislature, but none had made a
recommendation. He stated that the HB 411 was nearly
identical to the version of HB 111 that had advanced to the
Senate. He relayed there was a basic rule of thumb
worldwide: about two-thirds of the wealth of an oil regime
went to government take, or non-producers. However,
currently the producers' share was 48 percent in Alaska. He
stated that Alaska was not getting its fair share of oil
wealth from legacy fields or new fields.
5:09:54 PM
Co-Chair Seaton stated that the bill would do three things:
First, it repeals the per barrel credits for Gross
Value Reduction (GVR) and nonGVR oil. These credits
significantly reduce the effective production tax rate
on oil to well below the 35% as set in statute. The
credits change the effective tax rate depending on the
price of oil. As oil prices decrease the proportional
tax reduction increases. This acts as an exaggerated
form of reverse progressivity. Repeal of the credit
simplifies the tax system and is more transparent and
consistent with other regimes.
Secondly, to adjust for the repeal of the per barrel
credits, the tax rate is lowered to 25% of net
profits. This applies to both GVR and non-GVR oil.
Lastly, the bill adds three supplemental tax brackets,
with 5% increases each, at production tax values (PTV)
of $40, $50 and $60 to reach 40% for the portion of
PTV over $60 (PTV = the price minus expenses). At $100
per barrel Alaska North Slope (ANS) the production tax
value (PTV) is approximately $60. This stepped
increase approximates the same revenue of the current
tax structure at high revenue oil prices. This
calculation automatically recognizes different cost
structures of various fields.
5:11:09 PM
Co-Chair Seaton moved to Slide 2:
Consultant Daniel Johnston on Average Worldwide
Government Take:
"?the world average government take even right now is
probably 67 or 70 depending upon how you calculate it.
Wood Mackenzie aggregates their statistics a little
bit differently too [inaudible] but in the Wood
Mackenzie world Average government take statistics
from their study was I think 71%"
Joint House Resources/House Finance Committee March
26, 2006
Co-Chair Seaton continued to Slide 3, which presented a
line graph that reflected the estimated total government
share at various West Coast ANS price levels under the
Senate Finance Committee, committee substitute (CS) for SB
2001; the Senate Judiciary Committee CS for SB 2001; for
House bill 2001; the Petroleum Production Tax (PPT)
Expected; SB 2001 (root version); and PPT.
5:12:25 PM
Co-Chair Seaton turned to Slide 4, which contained the
cover page to a presentation, "Senate TAPS Throughput
Committee, Alaska Hydrocarbons Fiscal Systems, January 31,
2013, PFC Energy." Slide 5 was from that presentation and
showed a bar graph that illustrated the average government
take a $60/bbl for global fiscal regimes. He noted that in
2013, most fell within the 60 percent to 66 percent range.
Co-Chair Seaton moved to Slide 6, which addressed Slides 7
and 8, and poke to the ConocoPhillips slides that had been
presented on HB 111 in Senate Finance Committee:
• Looking at the Conoco Phillips presentation slides,
the change in the producer share from ANS West Coast
2017 at $65 per barrel to 2018 at $65per barrel is
11% of the total value shifted to the producers.
• These slides also show that between 2017 and 2018 at
$65 per barrel 4%was transferred from the State's
share to the producer.
• In 2017 the Conoco Phillips slides stated that the
State always has the largest share at any prices.
• By 2018 this is no longer true for all prices
between $55 and $95 per barrel(ANS WC).
• These slides also do not show the amount of tax
credits subtracted from the State's portion and
added to the producers share, for credits purchased
or from prior years.
5:14:14 PM
Co-Chair Seaton continued to discuss Slides 7 and 8. He
turned to Slide 9, which offered an illustration of
production tax calculation. He noted that the slide
reflected the taxable costs at the market price of $63 per
taxable barrel, which totaled $10.7 billion. He pointed out
to the committee that the bottom far right column revealed
that the gross value was $9.2 billion after transportation
costs, lease expenditures were high at $4,550 billion
resulting in a production tax value of $4.7 billion. He
relayed that the tax, at 35 percent, would have been $1,650
billion but the per barrel credit ate $1,350 billion of
that total. He turned to Slide 10, which provided a brief
history on Alaska's oil production tax. The tax rate had
dropped from 11.8 percent in 1995, to 6.7 percent in 2006.
Though taxes were much higher in the era of high prices,
since 2015 the production tax has been almost entirely
based in the 4 percent gross tax.
5:18:24 PM
Co-Chair Seaton continued to Slide 11, which reiterated the
intent of the legislation:
HB 411 does the following:
• Repeals Per Barrel Credits
AS 43.55.024(i) and AS 43.55.024(j)
• Lowers Production Tax Rate from 35% to 25%
• Establishes additional 5% tax brackets at
$40 PTV (Production Tax Value)
$50 PTV
$60 PTV
The additional tax only applies to the PTV amounts
above each value
Co-Chair Seaton turned to Slide 12, which showed a line
graph generated by the Department of Revenue that presented
a high-level aggregate model allowing the comparison of
status quo production tax structure to an alternate
configuration for a typical non-Gross Value Reduction (GVR)
oil field. He highlighted that all the numbers varied by
field size.
5:22:31 PM
Co-Chair Seaton moved to Slide 13, which offered the same
information for GVR oil. He noted that one of the things
that the industry had not liked about Alaska's Clear and
Equitable Share (ACES) was that when the tax rate changed,
it changed for all the profits earned from the first barrel
up, the bill would apply progressivity brackets.
5:23:33 PM
Co-Chair Seaton concluded on Slide 14 by reading a quote
from the state's constitution:
The legislature shall provide for the utilization,
development, and conservation of all natural resources
belonging to the state, including land and water, for
the maximum benefit of its people.
Co-Chair Seaton asserted that the state's current fiscal
crisis was the result of a tax system that no longer worked
within the oil price range and was as it had been
constructed for a much higher price range.
5:24:38 PM
Co-Chair Foster directed committee attention to the
presentation from DOR.
5:25:35 PM
AT EASE
5:26:59 PM
RECONVENED
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "Analysis of HB
411: Oil and Gas Production Tax" dated April 10, 2018 (copy
on file). He began on Slide 3, which offered detail on the
four major oil and gas revenue sources for the state:
Property Tax
Pipeline, Equipment, Facilities. About 80% of property
tax collections are credited back to local governments
Royalty
Landowner's share, usually 12.5%. Most North Slope
production is on State land. At least ? of royalties
go to the Permanent Fund
Production Tax
Based on net profits; most of the conflict in recent
years is over this tax. North Slope tax is 35% less a
variable "per-taxable-barrel" credit, with a gross
minimum tax "floor"
Corp. Income Tax Taxes the remaining profit after
production tax, based on global asset apportionment.
Rate is 9.4%, but effectively closer to 7%
5:29:33 PM
Mr. Alper moved to Slide 4, which reflected oil and gas
revenue, fiscal years 2012 through 2018; the combined tax
revenues had declined from approximately $10 billion to $1
billion over the past 6 years. He shared that the decline
had been driven by the change in the price of oil and by
the 2014 change in the oil tax: SB 21. He noted that
royalty had gone down by half, whereas the production tax
had decreased by 90 percent. He said this was due in part
to the profit-based nature of the tax. He shared that
higher oil prices were good for the state's economy, but
Alaskan residents suffered by having to pay high fuel
costs. He noted that "restricted revenue," in the context
of oil and gas, meant the 25 percent of royalties that went
directly into the permanent fund corpus under the state
constitution.
5:31:16 PM
Mr. Alper advanced to Slide 5 and addressed recent oil and
gas tax credit reform:
HB 247 Passed June, 2016
? Phased out Cook Inlet and reduced Middle Earth
credits
? Extended Cook Inlet gas tax cap, added $1 / bbl oil
tax cap
? Added sunset / "graduation" provisions to Gross
Value Reduction for new North Slope oil production
? Annual cap on per-company, per-year cash credit
payments
? Resident hire priority for cash credit payments
? Limited transparency with annual report of who
receives cash for credits
? Increase interest rate on delinquent production
taxes for first three years, then reduced to zero
? Technical cleanup and repeal of obsolete language
? Regulation package proposed and adopted, effective
1/1/17
5:33:51 PM
Mr. Alper continued to address oil and gas reform in recent
years (Slides 6 and 7):
HB 111 Passed July, 2017
• Most credits no longer eligible for state repurchase
after 7/1/17, other than refinery / LNG storage
• NOL credit under former AS 43.55.023(b) repealed
1/1/18
• New system of carried-forward lease expenditures
beginning 1/1/18
• Process for how carried-forward lease expenditures
are used in a future year once the producer has
taxable value
o "Ringfence," preventing use until the property
for which losses were incurred commences
regular production
o Taxpayer flexibility on use, limited by minimum
tax o If unused, lease expenditures begin to
lose value after 10 years in most cases
• Align interest rate changes among all tax types and
eliminate three-year interest limitation
• Credits can be carried-back and used against a prior
year tax liability including interest and penalties
for which an audit assessment has not been issued
• Conditional exploration credits granted at time of
application, to ensure place in queue
• Seismic work in Middle Earth no longer eligible for
exploration credits after 2017
• Exploration credits in Middle Earth can be used to
offset the explorer's corporate income tax
• Delayed repeal of tax credit fund after all are
purchased
• Established Legislative working group
5:38:18 PM
Mr. Alper addressed HB 411 on Slide 9, "What Does HB 411
Do?":
The two recently passed oil bills were multi-part and
complex
Although they had some, mostly indirect, tax impacts,
they primarily dealt with tax credits with a focus on
cashable credits.
The major tax components set by SB21 in 2013 were left
unchanged:
• 35% tax on Production Tax Value (PTV, a measure
of Profit)
o $0 to $8 per barrel "sliding scale" tax
reduction (non-cashable credit )
• Gross Value Reduction for production meeting "new
oil" criteria, excluding 20% of gross value from
any tax
o Fixed $5 per barrel tax reduction on GVR-
eligible oil
• Minimum Tax "floor" of 4% of Gross (wellhead)
Value
o Tax due is "higher of" (35% x Net - $8), or
(4% x Gross) for legacy oil
5:40:07 PM
Mr. Alper advanced to Slide 10, "What Does HB 411 Do?":
HB411 is a much simpler bill, but it changes several key
components of the production tax itself:
• Reduces the 35% tax on PTV to 25%
• Three additional tax "brackets" of a tax surcharge:
o 5% of portion of PTV greater than $40 plus
o 5% of portion of PTV greater than $50 plus
o 5% of portion of PTV greater than $60
• Eliminates the $0 to $8 per barrel tax credit
(legacy production)
• Eliminates the $5 per barrel tax credit (new oil
production)
Other components are not changed:
• No change to GVR qualifications or rates
• No change to Minimum Tax rate
5:41:12 PM
Mr. Alper turned to Slide 11, "Initial Observations":
• Very similar to "House" passed version of HB111
o Slight differences in supplemental tax brackets
o Also eliminates the $5 per barrel credit for GVR
oil
• As with House HB111, revenue impact concentrated at
$50-90 oil price
o Reduces the impact of the minimum tax due to
lower "crossover point"
o Tax impact for GVR oil at low prices due to
"hardening floor"
• Tax brackets are materially different from former ACES
"progressivity"
o ACES applied highest tax calculation to all of
oil profits, resulting in very high marginal
(last dollar earned) tax rates
o HB411 brackets only charge higher rate on the
portion of profits above the rate cutoff. Much
lower marginal rate impacts. Similar brackets in
HB110 (2011)
• Brackets tied to BTU-equivalent value, which would be
diluted by NS gas production
• Bill length is deceptive
o 21 of the 25 pages are conforming language
related to monthly estimated tax payment and
calculation of production tax value
5:46:16 PM
Mr. Alper turned to a table on the fiscal note on Slide 12.
Lines 1 through 4 attempted to break the bill into
component parts, examining the fiscal impact of each of the
subsections of the bill over the next ten years, at the
estimated forecast price from the Department of Revenue. He
related that both negatives and positives were reflected in
the numbers. The total revenue impact differed from model
to model. The yellow highlighted love indicated the total
fiscal impact, or revenue change, and did not include
potential changes in investment. New information that that
put a value to the carry forward losses would be
incorporated into a forthcoming fiscal note and was found
on the bottom three lines of the table. He said that the
losses would be worth the amount carried forward,
multiplied by the tax rate, since the tax rate was being
reduced the value of the losses was reduced. He noted that
the bar graph at the bottom of the page reflected the total
revenue change at different prices.
5:50:17 PM
Mr. Alper included another revenue impact comparison on
Slide 13. The slide offered the production tax calculation
at different prices per one barrel of taxable North Slope
non-GVR oil; FY 19 costs per the Spring Revenue Source
Book. He said that the chart assumed fixed prices as costs
rose, which was misleading; if the price of oil increased
then the cost increased as well. He said that the
production tax value (PTV) was multiplied by the 35 percent
tax and the per barrel credit. The per barrel credit
started at zero for $160/bbl and added $1 every time the
price of oil dropped $10. He said that the current credit
was $8/bbl. He discussed the difference between the
proposed calculation and the existing calculation as
detailed on the slide.
5:52:58 PM
Mr. Alper moved to the graph on Slide 14, which offered the
same information on Slide 13, but in graphical form.
5:54:04 PM
Mr. Alper advance to Slide 15, "Effective Tax Rate is Also
a Function of Price." The slide examined the same
information from the two previous slides, but with an
emphasis on effective tax rate on non-GVR oil.
5:55:02 PM
Mr. Alper moved to Slide 16 which showed the same
information on the previous slide as it pertained to GVR
oil. He noted that the biggest difference between slides 15
and 16 was in the status quo. With the GVR the revenue
tended to be lower at all price points but went to zero at
low oil. he said this was because the tax code allowed the
$5 credit to not be tied to the floor. He said if the per
barrel credit were eliminated as proposed by HB 411, the
minimum tax would kick in and the effective tax rate would
increase to nearly 30 percent.
5:56:06 PM
Mr. Alper continued to Slide 18, "Bill in Context of
Ongoing Activities":
HB111 created a working group to look at outstanding
issues
? The group has not had substantive meetings yet,
and has not offered suggestions
LB&A has hired three consultants to analyze our system
? Only one of the three has presented general
information to the legislature, no public
discussions as of yet
The Administration introduced HB331 / SB176, to deal
with remaining balance of cashable tax credits
The Department of Revenue has identified several other
issues that could be addressed by the committee and
consultants
5:58:03 PM
Mr. Alper turned to Slide 19. "Potential Issues for Ongoing
Discussion"[Secretary note: The issues are color coded in
blue and green in the original presentation. For the
purpose of posting to BASIS - the bills each issue is tied
to has been indicated in parenthesis after each bullet
point]:
? Outstanding tax credits due to state no longer
making open-ended purchases ($807 million through 2017
plus ~$150 million pending) (HB 331/SB 176)
? Equity between major producers and new explorers as
we phase out cash credits (HB 331/SB 176)
? Ongoing debate on "fair share" at different price
points (HB 411)
? Imbalance between 35% offset for spending and losses
and a lower effective tax rate on profits (HB 411)
? Large future tax offsets if major recent discoveries
are developed (HB 411)
? Limited "upside" to the state during price spikes
? Long-term viability of Cook Inlet tax "caps"
? High volatility and complex administration of a net
profits tax system
6:01:00 PM
Mr. Alper turned to Slide 20, "Issues for Consideration -
Industry Profitability":
Oil profitability estimates are up dramatically since
18 months ago, whereas production tax forecasted
revenues are not
Fall 2016 forecast for FY2019
? $60 oil price with 442,100 bbl / day ANS
production
? PTV (profit on taxable barrels) forecast $1.8
billion*
? Production tax forecast $248 million (13.9%)
? Statutory credit calculation $54 million
Spring 2018 forecast for FY2019
? $63 oil price with 526,600 bbl / day ANS
production
? PTV (profit on taxable barrels) forecast $4.7
billion
? Production tax forecast $410 million (8.7%,
+$162 million)
6:03:24 PM
Mr. Alper returned to the graph on Slide 15. He pointed to
the left-hand side of the graph, which reflected high
effective tax rates at lower prices because the minimum tax
was dominate. He noted that, working closer to the
crossover point, there was a lower effective tax rate,
which was reflected in the latest forecast.
6:03:42 PM
Mr. Alper concluded Slide 20:
? Statutory credit calculation $184 million
(+$130 million)
* PTV calculation is after paying royalty and property
tax, but before production tax, and state and federal
income taxes
Mr. Alper noted that the committee strongly disagreed with
the administration's interpretation of the statutory
credit. He admitted that there were imbalances because of
where the state fell of the profit curve.
6:04:17 PM
Mr. Alper moved to Slide 21, "Issues for Consideration -
Historic Gross Tax." He stressed that the state was taxing
at lower rates than in the past. He explained that the
Economic Limit Factor (ELF) rate was an unusual formula,
tied to per well productivity:
Before the switch to a net profits tax in 2006,
Alaska's oil production tax, the "ELF" (economic limit
factor), was a gross tax that varied from field to
field.
The average tax rate was:
? 1995: 11.8%
? 1998: 10.5%
? 2001: 8.3%
? 2004: 6.4%
? 2006: 6.7%
Although taxes were much higher in the era of high
prices, since 2015 the production tax has been almost
entirely based on the 4% gross tax
Under HB411 most companies would pay above the 4%
minimum tax at prices above about $40
Mr. Alper moved to Slide 22, "Issues for Consideration -
Tax Stability," and discussed the lack of tax regime
stability in the state over the past 13 years:
Alaska has developed a reputation for an unstable tax
regime, with seven changes in the past 13 years:
1. 2005: Gov. Murkowski aggregates Prudhoe Bay
satellite fields for ELF calculation
2. 2006: Petroleum Production Tax "PPT" changed from
taxing gross revenue to net profits
3. 2007: Alaska's Clear and Equitable Share "ACES"
corrects revenue shortfalls due to bad cost
estimates in PPT
4. 2010: Cook Inlet Recovery Act "CIRA" provided
additional credits outside the North Slope targeted
at southcentral gas supply issues
5. 2013: SB21 was a tax cut primarily impacting higher
prices and providing "new oil" benefits via the
"gross value reduction"
6. 2016: HB247 began tax credit reform, phasing out
Cook Inlet credits and limiting "new oil" benefits
7. 2017: HB111 completed tax credit reform, eliminating
cashable credits and providing for carried-forward
losses
Mr. Alper addressed Slide 23, "Issues for Consideration -
New Fields":
The tax change could have unusual impacts on the
economics of future projects
• HB111 eliminated cashable credits for operating
losses, and replaced them with carry-forward
lease expenditures
• These can be used to reduce future taxable
profits, once the underlying leases are in
production
• Carry-forwards can only be used to reduce taxes
to the minimum tax and not below
• During the 3 to 7 years a field earns the GVR,
the per-taxable barrel credit can further reduce
taxes to zero
• Once the GVR is sunset, the per-barrel credit
cannot be used below the minimum tax
6:07:06 PM
Mr. Alper turned to Slide 24, "Issues for Consideration -
New Fields":
The tax change could have unusual impacts on the
economics of future projects (continued)
• The current system assumes that the minimum tax
will be the actual tax paid, even at higher
prices, until a company is able to "use up"
(recover) all of their development costs as
carry-forward lease expenditures
• For new producers, current law allows the tax to
go to zero but in HB411, with no $5 per barrel
credit, the minimum tax would be paid in those
years resulting in a 4% tax obligation
• After the GVR sunsets, the 4% tax would be paid
under both status quo and HB411 until lease
expenditures are exhausted
• The reduced base rate also means carry forwards
effectively have less value
• Depending on the price in the year oil is
produced, it may take more carry-forwards to
reduce taxes to that minimum tax level
• This could mean it would take fewer years before
the regular tax based on profits would kick in
Mr. Alper elaborated on the slide.
6:08:55 PM
Mr. Alper advanced to Slide 25, "Issues for Consideration -
New Fields," and reviewed a table showing the life cycle
analysis for a hypothetical new field (large field model;
750 million barrels, 120,000 bbl/day peak production). He
shared that the actual production tax paid by companies
would be $1.9 billion higher, based on projected oil
prices. He said that at the forecast price, the producer
internal rate of return (IRR) would drop by half a
percentage point, from 7.9 percent to 7.4 percent. He
concluded that the break even price per barrel of oil under
the legislation would be $75.
6:11:54 PM
SHELDON FISHER, COMMISSIONER, DEPARTMENT OF REVENUE,
offered the administrations perspective on the legislation.
He addressed a slide taken from a prior presentation by
Mike Navarre, Commissioner, Department of Commerce,
Community, and Economic Development. He turned a second
slide from Commissioner Navarre's past presentation on
Slide 27, which reflected a chart that measured in millions
the gross domestic product (GDP) of all other non-petroleum
private industries from 1997 to 2015
Commissioner Fisher addressed conclusions on Slide 28. The
orange line reflected approximately 20 years of production
and GDP of Oil and Gas, the blue line showed the total
unrestricted general fund revenue, and the grey line
represented the unrestricted petroleum revenue. He assessed
that overtime the bulk of the state's unrestricted revenue
came from petroleum revenue. He said that in the 1970s and
1980s, when petroleum was the bulk of the state GDP, it may
have been appropriate to forgo seeking diversification in
state revenue.
Commissioner Fisher turned to Slide 29, "Final
Observations":
? The legislature appears to be reaching consensus on
a partial fiscal plan
relying on a structured use of Permanent Fund earnings
? The apparent remaining budget gap will likely be in
the $500 to $700
million range
? The most appropriate mechanism to fill this gap is
via a broad based tax
tied to the overall state economy
? Oil and gas taxation should be based on fair share
and related economic
development issues, not budgetary need in any specific
year
? Major oil and gas tax changes should be backed by
substantial analysis and
review looking at both unique local factors as well as
global comparables
? Last year the legislature set in motion a process to
revisit these fair share
issues with the intention to use this to inform the
next major tax rewrite
? Until the completion of the process set in motion
last year, it may be
premature to address a substantial tax revision at
this time
He believed that the state would be better off having the
conversation about refining the oil tax regime in an
environment where oil was not the only industry being
looked to for funding state needs. He thought that the
state was on the verge of a partial fiscal plan that
consisted of using permanent fund earnings, in a structured
way, to close part of the gap. He related that the
administration believed that the most appropriate first
step to take would be to implement a broad-based tax that
would address other industries in the state that currently
contribute a modest amount of tax dollars to the state.
6:17:07 PM
Co-Chair Foster listed individuals available for questions.
Representative Grenn relayed appreciation for the
presentation. He noted Slide 29 and the viewpoint that it
may be premature to address a substantial tax revision at
present. He spoke of the unstable tax environment that the
state had created with 7 regime changes in the past 13
years. He wondered how substantial the change proposed by
the legislation would be on the current tax regime, on a
scale of 1 to 10.
Mr. Alper replied he would rate it a six.
Commissioner Fisher pointed out that at prices in the $60
range, there was a substantial difference on Slide 15
between the blue and green line. He believed that it
reflected a substantial change.
Representative Grenn wondered what it would signal to
industry if the legislature passed both HB 411 and HB 331.
Commissioner Fisher reiterated that the administration
valued using permanent fund earnings in a structured way,
and implementing a broad-based tax, before adjusting the
oil tax regime. He believed that the conversation on
altering the regime should be had, one that was structured
and well informed.
6:22:58 PM
Mr. Alper interjected that HB 331 was about addressing an
immediate need. He said that companies that had discovered
an oil resource, that wanted to develop but were facing
financial obstacles due to tax credits, would be able to
clear their balance sheets and begin investing again. He
shared that that would lead to the decision to move forward
and develop their fields in the state. He did not believe
that for companied to think that the current tax regime
would be in place for the next 20 years was realistic. He
thought that concerns about the current tax structure that
would be addressed once the state had the attention to bear
on the issue would lead to a discussion about a sustainable
way forward.
Representative Grenn asked about the ongoing activities
discussed on Slide 18. He wondered about the contributions
from the working group and hired consultants.
Mr. Alper replied that the working group was intended to be
created after the last legislative session, but the work
had been hindered for various reasons. He said that early
attempts to gather a working group together in Huston,
Texas with consultants had been cancelled due to a
hurricane. Legislative special sessions had interfered with
the work as well. He related that he could not speak to
when the focus would return to bringing the working group
and consultants together but that it needed to happen
eventually.
6:26:08 PM
Vice-Chair Gara referenced Slide 22, He argued that the tax
timeline on the slide did not reflect real changes in the
tax regime. He offered his perspective on bullet points 4
through 7. He argued that changes made in the regime over
the past 10 years had been in the industry's favor - or had
nothing to do with taxes.
Commissioner Fisher replied with a saying that "where you
stand depends on where you sit." He echoed Mr. Alper's
testimony that the next time there was a change to oil tax
there should be a conversation about developing a regime
that could be sustained for decades to come. He believed
that the best way to do that was in an environment where
the budgetary pressures had been lessened and with a
carefully studied approach.
Vice-Chair Gara asserted that there had not been a single
tax increase in the past ten years that the oil industry
had not wanted.
6:29:08 PM
Vice-Chair Gara references Slide 16 showing the effective
tax rate as a function of price. He offered a hypothetical
using ANWAR in the equation and expressed concern with the
current oil tax system.
Commissioner Fisher understood that there were concerns
about the current tax system. He believed that now was not
the time to try to resolve the oil tax regime, that it
should be done in a different framework that established a
sustainable and long-term regime.
Vice-Chair Gara stated that the current system applied no
production taxes for new oil for the first 7 years, at any
oil price below $60/bbl, and only 8 percent at $70/bbl,
which was one of the lowest rates in the world. He argued
that highly profitable fields, such a Prudhoe Bay, were
charged approximately 8 percent on profits.
Commissioner Fisher thought that all taxes should be
examined and compared to other jurisdictions. He reiterated
that the conversation should be held for a time when the
fiscal climate of the state was less volatile.
6:32:22 PM
Mr. Alper pointed to a $5 line on Slide 15. He shared that
a decision had been made late in the 2013 legislative
session during the progress of HB 21, which changed a key
portion of SB 21; the gamble had been on higher oil prices,
which was not the reality that materialized.
Vice-Chair Gara felt that the bill could help the state
bring in more revenue and in a fair way. He agreed that a
well-informed debate should be had in the future but that a
25 percent tax on profits was fairly modest.
Commissioner Fisher was not prepared to respond whether a
25 percent was appropriate and how it compared
internationally. He pointed out that it was almost triple
the current tax.
Vice-Chair Gara thought that the tax increase was fair to
the industry.
6:36:44 PM
Representative Pruitt asked whether the department would
categorize the bill as a substantial change to the current
tax system.
Mr. Alper replied in the affirmative.
Representative Pruitt asked whether the administration
supported the bill.
Commissioner Fisher relayed that the administration did not
support the bill or addressing the oil tax regime at the
current time.
Representative Pruitt asked whether the passage of
legislation or continued introduction of legislation, year
after year, made the industry feel the tax regime in Alaska
was instable.
6:39:31 PM
Mr. Alper replied that the introduction of legislation did
not necessarily reflect instability but could indicate
instability. He noted that a steady tax, that went lower
and lower, without legislative changes was another form of
instability. He thought that dramatic changes from year to
year could signify instability. He believed that the
current conversation was identifying the issues that should
be addressed when the tax regime was up for debate.
Representative Pruitt spoke from the perspective of a
company that was in the first stages of permitting. He
asked whether the producer was looking at a possible cost
increases addressed by the legislature and whether they
would be cautious about possible cash outlay.
Commissioner Fisher replied that the higher degree of
uncertainty, the harder it was to decide. He thought that
more stability would result in better outcomes. He thought
that Alaska was currently perceived by the oil industry,
broadly, as having risk of change in the tax regime. He
believed that uncertainty would have an impact on
investment decisions.
Mr. Alper offered a hypothetical where the state
implemented a substantial tax increase and eliminate the
minimum tax. He said from the perspective of the person
investing billions of dollars and doing a cashflow analysis
of an oil field for the next 30 years, that could be a net
positive. He said the system currently being debated was
likely to be a negative on an investment decision, but the
same exact bill with a lower minimum tax could improve that
same investment decision. He contended that this was why a
holistic conversation about the overall tax system, with
informed debate, expert analysis, and global comparable
with all sides represented would preferable.
6:44:32 PM
Representative Pruitt asked whether the administration
viewed the bill as bringing investment and jobs to
Alaskans.
Commissioner Fisher replied that the return would decline
modestly and would make investments more difficult. He
thought a bigger issue was that the passage of the bill
would not end the debate about oil taxes. He did not think
that the bill was a comprehensive solution but was a Band-
Aid that would require further discussion and debate.
Representative Pruitt stated that it was the 85th day of
the legislative session and that the working group had only
met once. He surmised that the administration did not
support the legislation.
Representative Pruitt MOVED to TABLE HB 411.
6:46:46 PM
AT EASE
6:47:17 PM
RECONVENED
Co-Chair Seaton OBJECTED.
A roll call vote was taken on the motion.
IN FAVOR: Wilson, Grenn, Pruitt, Thompson, Tilton
OPPOSED: Gara, Guttenberg, Kawasaki, Ortiz, Foster, Seaton
The MOTION to table HB 411 FAILED (5/6).
6:48:07 PM
Representative Wilson lamented that she did not want to
hear oil taxes again. She asked whether the working group
would be more productive throughout the interim.
Commissioner Fisher answered that he hoped they would be
more productive.
Representative Wilson wondered whether the department had
received feedback from industry about how changes in the
tax regime affected business planning.
Commissioner Fisher understood that industry was seeking
certainty in terms of the tax regime. He admitted that they
also wanted the lowest taxes possible and had a self-
interest associated with the issue. He repeated that the
conversation should occur when there was enough time to
allow all interested parties to feel like the issue had
been settled for the foreseeable future.
Representative Wilson wondered whether a tax increase like
the one proposed in the legislation, if applied to another
industry, would change how business was done.
Commissioner Fisher replied in the affirmative. He stressed
that the regimes that were created should be sustainable
and competitive.
Representative Wilson felt that the current bill hearing
and discussion on oil taxes was a futile effort and a waste
of the committee's time.
6:53:07 PM
Co-Chair Foster asked whether it was the will of the
committee to take a vote on the legislation.
Co-Chair Seaton shared that one of the consultants would be
testifying the following evening. He shared that he wanted
to hear from the consultants and thought it would be
beneficial to hear from industry. He expressed frustration
that the working group felt like a delay group, more than a
working group. He did not believe the legislative work
would continue through campaign season. He believed that
the legislature was looking at a long delay before any
substantive work would be out forward by the working group.
He was surprised to hear that the group would produce
something in the coming year. He noted that HB 11 had
stayed in the Senate for a year, with no action. He
believed that the passage of SB 26 was conditional on
examining oil taxes and that progress would only be made by
including oil taxes in discussion about Alaska's fiscal
crisis.
6:58:44 PM
Representative Wilson asserted that future presentations
would not change the minds of committee members. She agreed
that hearing from the working group would be beneficial but
expressed concern that time was being wasted in revisiting
issues that had already been recently debated.
Representative Grenn agreed with Co-Chair Seaton that the
committee should hear from the consultants and from
industry.
Representative Pruitt asked whether the bill was under
discussion now because the working group was a delay
tactic. He noted that a member currently sitting on the
committee was part of the working group and could speak to
the merits of the group's work. He wondered whether the
committee should discuss disbanding the working group.
7:00:29 PM
Representative Guttenberg interjected that there were
people waiting to testify on the bill before the committee.
He felt that the committee should press on with the work at
hand.
Co-Chair Foster believed that the committee should continue
the work and noted that consultants and members of industry
would be testifying the following day. He said that he
would be directed by the will of the committee.
7:01:42 PM
Representative Ortiz turned to Slide 4. He asked whether
the ongoing discussion about the state's fiscal situation
revolved around the 90 percent reduction in production
taxes.
Mr. Alper agree. He said that the massive reduction in the
production tax was the most obvious indicator as to why the
state went from an era of structural budget surpluses to
large budget deficits year after year.
Representative Ortiz asked whether the legislature had
worked since 2015 to reduce undesignated general fund
spending by 44 percent during the same time that the
production taxes were being reduced.
Mr. Alper answered yes. He asserted that the state had cut
the capital and agency budget dramatically over the last 4
years.
Representative Ortiz moved to Slide 29. He referenced
bullet point three:
? The most appropriate mechanism to fill this gap is
via a broad based tax tied to the overall state
economy
Representative Ortiz asked whether the House had attempted
to put forward a broad-based tax.
Mr. Alper replied that the House had passed an income tax
bill in the previous legislative session that had a $700
million fiscal note; had the legislation become law it
would have brought in $700 million in 2018.
Representative Ortiz thought that the conversation about
oil taxes should be taking place during the current fiscal
climate. He believed that waiting to address the issue was
irresponsible. He pointed out that while the state had cut
the budget by 44 percent, $14 billion in savings had been
spent.
Mr. Alper answered that the total was approximately $15
billion.
Representative Ortiz stated that the remaining savings
would not allow for the state to maintain the status quo.
Mr. Alper answered that the non-permanent fund savings
would be $2.5 billion at the end of the fiscal year. He
said that the expectation was that the legislature would be
forced to use permanent fund earning for the FY 19 budget
because there was not enough other money to fill the void.
Representative Ortiz how the legislature and the
administration could responsibly address the state's fiscal
issues without talking about a change to the oil tax
regime.
Representative Wilson felt that trying to change the minds
of members of the committee was a futile effort. She
thought that the bill should be moved out of committee and
to the House floor for debate. She believed that the
information in the presentation was redundant and that
committee members already knew how they would vote on the
bill. She felt that the committee was wasting time debating
the bill in committee.
7:07:54 PM
Co-Chair Foster requested that committee members refrain
from becoming temperamental.
7:08:22 PM
Representative Ortiz could appreciate that the
administration's position to address the issue of oil taxes
when the fiscal climate was more stable. He wondered how
the administration expected the legislature to proceed with
discussion on the tax regime, broad-based taxes, use of the
permanent fund, and other ways of righting the state's
current fiscal crisis.
Commissioner Fisher relayed that the administration had
supported a broad-based tax and a full fiscal plan. The
administration was more interested in having discussions on
a set of solutions that would be amenable to both bodies.
The administration believed the POMV was a priority.
7:10:13 PM
Representative Guttenberg asserted that he did not plan to
close the fiscal gap on the back of the oil industry. He
believed that it was appropriate to examine oil tax policy.
He felt that the state had a vested interest in knowing how
its resources were being developed and how the wealth from
those resources was being allocated. He relayed that there
had been an ongoing dialog about stability and the affects
of tax regime changes on development for many years. He
thought the legislature had an obligation to explore a
policy that worked for the people of Alaska and the
industry but that the discussion was pointless without
legislation to support it.
7:14:47 PM
Vice-Chair Gara queried whether the Liberty field was an
offshore field.
Mr. Alper replied in the affirmative. He relayed that the
Liberty field would not be subject to the production tax
being offshore. He believed the field was mostly federal
and would not be taxable. He relayed that he was not sure
how much of the field was state versus federal land. He
related that the corporations that operated the field would
not be able to use cost from the field to off-set their
taxes from their Alaska production. He said that the state
did not get a share of the federal royalties from off-shore
water, which was an issue being worked on at the federal
level.
7:17:18 PM
Vice-Chair Gara referred to Slide 16. He believed that none
of the production taxes applied to Liberty.
Mr. Alper responded that Liberty was not an ideal example.
He expected that when the ALASKA NATIONAL WILDLIFE REFUGE
(ANWR) was developed some of the large producers currently
operating in Alaska would bid on the leases and would not
be able to combine credits to go below the floor, only new
producers would be able to pay the zero. He thought that
the point was an important one, one that had not bee
adequately expressed in testimony.
Vice-Chair Gara thought that going into the earnings
reserve was regressive but inevitable. He believed that the
state should get a fair share for its oil, the wealthy
should contribute to the economy through an income tax, and
the permanent fund should be the last option because it
affected poor people disproportionately. He felt that a
fair share for oil should balance the use of the permanent
fund.
Mr. Alper responded that the $700 million figure had been
bandied about with regularity. He believed that the bill
was another illustration of how to reach $700 million. He
recalled that in 2017 the House passed an income tax bill
that would have raised $700 million; increasing the
production tax on oil to 25 percent would raise $700
million at $65/bbl; $1000 from every eligible Alaskan that
received a permanent fund dividend would raise $700
million. He said that the use of permanent fund earning was
not the same a cutting dividend but was a structured use of
wealth; the second decision was how were fund split between
the what was distributed in a dividend and how much was
used for government. He believed that the bill was useful
for having the conversation on how to reach the goal of
raising $700 million.
7:23:03 PM
Representative Pruitt thought that the discussion about the
Liberty field applied to other oil fields. He felt that a
substantial amount of production would be at risk and that
the administration was not considering the whole picture.
7:23:45 PM
Co-Chair Seaton expressed appreciation for the discussion
about slide 16. He wondered whether there were any other
contingencies that relied on the per barrel credit. He
anticipated the amendment process over the following bill
hearings. He noted that there were three sets of
legislative consultants that had yet to present models of
the tax system. He expected that the administration had
consultants that would offer recommendations as well. He
rejected the philosophy that changes to the oil tax system
would be made only when the state faced a fiscal crisis. He
noted changes that had been made in the system during times
of fiscal stability. He believed that a balanced structure
could be crafted by the legislature and that waiting for
administration strategists to weigh in before tackling the
issue would be negligent.
7:28:54 PM
Co-Chair Foster discussed housekeeping.
ADJOURNMENT
7:29:38 PM
The meeting was adjourned at 7:29 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 411 Sponsor Statement 4.7.18.pdf |
HFIN 4/10/2018 5:00:00 PM |
HB 411 |
| HB 411 HFIN Presentation 4-10-18.pdf |
HFIN 4/10/2018 5:00:00 PM |
HB 411 |
| HB 411 Sectional Analysis 4.10.18.pdf |
HFIN 4/10/2018 5:00:00 PM |
HB 411 |
| DOR Tax Present #1 on HB411 HFIN 4-10-18 Final.pdf |
HFIN 4/10/2018 5:00:00 PM |
HB 411 |
| HB 411 NEW FN DOR.pdf |
HFIN 4/10/2018 5:00:00 PM |
HB 411 |