Legislature(2017 - 2018)ADAMS ROOM 519
04/26/2018 02:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| HB411 | |
| 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 26, 2018
2:03 p.m.
2:03:38 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 2:03 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Louise Stutes, Alternate
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Jason Grenn
ALSO PRESENT
Elizabeth Diament, Staff, Representative Paul Seaton; Ken
Alper, Director, Tax Division, Department of Revenue;
Representative Geran Tarr, Chair, Legislative Working Group
on Oil and Gas; Representative Geran Tarr.
PRESENT VIA TELECONFERENCE
Doug Gardner, Director, Legislative Legal Services.
SUMMARY
HB 411 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITSW
Co-Chair Foster relayed the agenda for the day.
HOUSE BILL NO. 411
"An Act relating to the oil and gas production tax,
tax payments, and credits; and providing for an
effective date."
2:04:54 PM
Co-Chair Seaton MOVED to ADOPT Amendment 1 (copy on file).
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"(2) on or after January 1, 2019, and
before January 1, 2022, for each month for
which the producer's average monthly
production tax value under AS 43.55.160(a)(2)
of a BTU equivalent barrel of the taxable
oil and gas is more than $101 the tax amount
is the sum of the following:
(A) the difference between the monthly
production tax value of a BTU equivalent
barrel and $10 multiplied by the volume of
oil and gas produced by the producer for the
month multiplied by five percent;
(B) if applicable, the difference between the
monthly production tax value of a BTU
equivalent barrel and $15 multiplied by the
volume of oil and gas produced by the producer
for the month multiplied by five percent;
(C) if applicable, the difference between the
monthly production tax value of a BTU
equivalent barrel and $20 multiplied by the
volume of oil and gas produced by the producer
for the month multiplied by five percent;
(D) if applicable, the difference between the
monthly production tax value of a BTU
equivalent barrel and $30 multiplied by the
volume of oil and gas produced by the producer
for the month multiplied by 10 percent;
(E) if applicable, the difference between
the monthly production tax value of a BTU
equivalent barrel and $50 multiplied by the
volume of oil and gas produced by the producer
for the month multiplied by 10 percent;
(F) if applicable, the difference between the
monthly production tax value of a BTU
equivalent barrel and $70 multiplied by the
volume of oil and gas produced by the producer
for the month multiplied by five percent;
(3) on or after January 1, 2022, for
each month for which the producer's average
monthly production tax value under AS
43.55.160(a}(2) of a barrel of taxable oil is
more than $10, the tax amount is the sum of
the following:
(A) the difference between the monthly
production tax value of a barrel of taxable oil
and $10 multiplied by the volume of oil
produced by the producer for the month
multiplied by five percent;
(B) if applicable, the difference
between the monthly production tax value of
a barrel of taxable oil and $15 multiplied by
the volume of oil produced by the producer for
the month multiplied by five percent;
(C) if applicable, the difference between the
monthly production tax value of a barrel of
taxable oil and $20 multiplied by the volume of
oil produced by the producer for the month
multiplied by five percent;
(D) if applicable, the difference between the
monthly production tax value of a barrel of
taxable oil and $30 multiplied by the volume of
oil produced by the producer for the month
multiplied by 10 percent;
(E) if applicable, the difference between the
monthly production tax value of a barrel of
taxable oil and $50 multiplied by the volume of
oil produced by the producer for the month
multiplied by 10 percent;
(F) if applicable, the difference between the
monthly production tax value of a barrel of
taxable oil and $70 multiplied by the volume of
oil produced by the producer for the month
multiplied by five percent."
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Representative Wilson OBJECTED for discussion.
Co-Chair Seaton asked his staff to explain the amendment.
2:05:42 PM
ELIZABETH DIAMENT, STAFF, REPRESENTATIVE PAUL SEATON,
explained the amendment. She related that the amendment was
offered in response to industry testimony. She indicated
that the amendment changed the effective date from July 1,
2018 to January 1, 2019, which aligned with the tax
calendar year. The bill also lowered the base tax rate from
25 percent to 10 percent of production tax value (PTV). The
base tax was raised through six supplemental tax brackets
rather than the three previous brackets. She reviewed the
tax brackets. The first bracket was 10 percent up to $10,
at $10 an additional 5 percent, an additional 5 percent at
$15, an additional 5 percent at $20, and at $30 the tax
bracket stepped up 10 percent and at $50 the tax rose
another 10 percent and finally at $70 another 10 percent
tax was assessed which brought the tax to 50 percent. The
last major change was a technical clarification that
specified that after 2022 the PTV would be based only on
oil when the gas and oil taxes were split in 2022. The
provision was omitted in the previous version by a drafting
error.
2:07:41 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
introduced himself and indicated he had been asked by the
sponsor to perform modeling on the amendment. He indicated
that the charts projected on the screen were titled "Fiscal
Note Table and Tax Model" (copy on file). He explained that
the chart on the first and second slides depicted the
effective production tax rates comparison - Non-GVR and GVR
Oil, FY 2019 and was a high-level aggregate model allowing
comparison of status quo production tax structure to an
alternate configuration for typical non-GVR and GVR oil
fields. The green line represented amendment 1, the blue
line represented the current tax structure, and the red
line was what Alaska's Clear and Equitable Share (ACES)
effective production tax rates would be in 2019. He
reminded the committee that the amendment reflected the
consultant's, Rich Ruggerio, In3Energy, suggestion to lower
the base rate and add more brackets to the tax structure.
Representative Wilson asked whether any of the three lines
reflected the current bill and how the amendment changed
the bill. Mr. Alper answered that a slide from the sponsors
original presentation included a chart depicting the
original 25 percent base rate. He described that the chart
had a horizontal green line at 25 percent through $70 per
barrel and flared up with progressivity. He stated that the
previous chart was not included because the comparison was
not requested. He noted that the current green line was
located lower at the 10 percent effective tax rate at lower
oil prices. He noted that the chart he was referring to was
placed on the screen titled "Effective Production Tax Rates
Comparison Model - Non-GVR Oil, FY 2019" which was slide 12
on the presentation titled "HB 411 An Act relating to the
Oil and Gas Production tax, tax payments, and credits; and
providing for an effective date." (copy on file)[presented
on April 10, 2018]. He deduced that the intent was to start
the tax at a lower amount and increase the rate in multiple
steps. The current tax rate increased more gradually and
was lower than in the previous version of the bill.
2:10:36 PM
Representative Wilson asked whether the amendment was a tax
increase compared to the original version of HB 411 or
versus the present tax regime or both. Mr. Alper responded
that the amendment was a tax increase against the status
quo represented as the gap between the green line and the
blue line. He restated that the increase was smaller at oil
prices below $90 per barrel. He did not know how the tax
compared at higher prices. Representative Wilson asked Mr.
Alper to compare the tax at higher prices for both bill
versions. Mr. Alper compared the charts side by side and
deduced that the amendment reflected a smaller tax increase
up to roughly $120 per barrel and above the amount the
taxes were slightly higher than the original version of the
bill.
Vice-Chair Gara recalled that at $60 per barrel the
original bill would generate approximately $550 million and
the amendment generated no additional revenue at $60 per
barrel compared to the status quo. He asked whether he was
correct. Mr. Alper relayed that there were two different
analyses. The slides under discussion based on the average
barrel and average cost showed a $220 million increase at
$60 per barrel and the equivalent analysis of the original
version of HB 411 was a $600 million tax increase. The
analysis on the third slide that contained a table and bar
graph included on the fiscal notes indicated a tax increase
of about $200 million at $60 per barrel based on actuals.
He furthered that the analysis was more specific to the oil
companies and their cost structures. The analysis used
their confidential data and was amalgamated to make a
single estimate. Vice-Chair Gara asked how the original
version of HB 111 compared to the amendment at $50 with no
additional revenue and $297 million in additional revenue
at $70 per barrel. Mr. Alper suggested that the issue was
at what price the minimum tax was applicable. He noted that
under the status quo the minimum tax applied at roughly $65
per barrel versus the original version of HB 411 at $40 per
barrel. The amendment applied the minimum tax at $50 per
barrel. He delineated that where the green line and the
blue line was identical no change occurred because of the 4
percent minimum tax. The tax increase began at
approximately $50 per barrel and rose to $200 million at
$60 per barrel, $300 million at $70 per barrel, and
slightly decreased until $150 per barrel increasing to $600
million.
2:15:23 PM
Vice-Chair Gara asked what the numbers were at $50 and $70
per barrel for the original version of HB 411. He recalled
the numbers were much higher. Mr. Alper replied that at $50
per barrel the additional revenue was $292 million, at $60
per barrel it was $605 million, and at $70 per barrel the
increase was $677 million. The original version of the bill
had a much higher tax increase than the amendment.
2:16:28 PM
Co-Chair Seaton referred to the bar chart and table on the
third slide that represented the 25 percent flat tax. He
elaborated that if companies paid lower taxes under a lower
tax rate they would offset their expenses against the lower
tax rate. He wanted to make sure that everyone considered
the complete system and not only the tax rate.
Representative Wilson asked if the change would work the
same for all companies. She wanted to understand the intent
of the amendment. She wondered whether the sponsor was
attempting to reach middle ground from the status quo or
was it dependent on other deductions a company took.
Co-Chair Seaton replied that he attempted to take a
balanced approach, so the goal was the percentage of taxes
paid was balanced by the percentage of deductions. He
believed that it was currently problematic; the tax credit
was 35 percent, but the tax was only 5 or 8 percent. He
noted that changing to the 25 percent tax rate had two
implications: 1) taxes were less at lower prices because
the tax rate was less; 2) if expenses offset taxes, the tax
rate indicated how much a company would save. The intention
was to have the legislative working group examine the
issues further. He voiced that more analysis was necessary
than only determining a tax rate to truly discern the
implications to the state. He relayed that Mr. Ruggerio
informed the committee that the cost of services as the
price of oil changed could greatly impact how the tax
worked. Since the tax was a "profits tax" high expenses
impacted the tax. The net fiscal impact included lower
deductions for a lower tax rate. He emphasized the
necessity to consider all factors to measure impacts to the
companies and the state. He wanted all the factors
discussed at the same time.
2:21:32 PM
Representative Wilson expressed concern that the amendment
was not a proposal that would be discussed by the working
group later but was currently under consideration. She
understood that the amendment was positive for some
companies but possibly not all companies. She inquired
whether the statement was fair. Co-Chair Seaton reported
that he wanted further analysis to understand the full
impact on industry. He reiterated that the impacts factored
in all elements of a tax policy and not just the basic tax
rate that required a complete analysis.
2:23:00 PM
Representative Wilson wondered whether a general assumption
of the amendment would be that taxes were lower compared to
the original version of HB 411 but higher than the status
quo. Mr. Alper indicated that across the board the tax
increase would be smaller than the original version. He
pointed to the table on the third slide and noted that the
tax increase was highlighted in yellow and the number below
the line was the impact of the carry-forward lease
expenditures and credits which reflected the impact on
producers in the future. He recalled that HB 111-Oil & Gas
Production Tax;Payments;Credits, (CHAPTER 3 SSSLA 17-
07/27/2017) adopted the previous session eliminated cash
credits and allowed costs to be carried forward that would
be used to offset future taxes. The future values of the
carry forwards were unknown. He noted that accounted for
the big gaps between the before and after lines at the
bottom of the table.
Representative Wilson WITHDREW her OBJECTION.
Amendment 1 was ADOPTED.
2:25:24 PM
Vice-Chair Gara MOVED to ADOPT Amendment 2 (copy on file).
Page 1, line 1, following "Act":
Insert "relating to the Alaska Net Income Tax Act;"
Page 1, following line 3:
Insert new bill sections to read:
"* Section 1. AS 43.20.011(e) is amended to read:
(e) There is imposed for each taxable year on [UPON]
the entire taxable income of every corporation or oil
or gas producer derived from sources within the state
a tax computed as follows:
If the taxable income is Then the tax is:
Less than $25,000 zero
$25,000 but less than $49,000 2 percent of the taxable
income over $25,000
$49,000 but less than $74,000 $480 plus 3 percent of
the taxable income over $49,000
$74,000 but less than $99,000 $1,230 plus 4 percent of
the taxable income over $74,000
$99,000 but less than $124,000 $2,230 plus 5 percent
of the taxable income over $99,000
$124,000 but less than $148,000 $3,480 plus 6 percent
of the taxable income over $124,000
$148,000 but less than $173,000 $4,920 plus 7 percent
of the taxable income over $148,000
$173,000 but less than $198,000 $6,670 plus 8 percent
of the taxable income over $173,000
$198,000 but less than $222,000 $8,670 plus 9 percent
of the taxable income over $198,000
$222,000 or more $10,830 plus 9.4 percent
of the taxable income over $222,000.
* Sec. 2. AS 43.20.012(a) is amended to read:
(a) Except as provided in (e) of this section, the
[THE] tax imposed by this chapter does not
(1) apply to an individual;
(2) apply to a fiduciary;
(3) for a tax year beginning after December 31, 2012,
apply to an Alaska corporation that is a qualified
small business and that meets the active business
requirement in 26 U.S.C. 1202(e) as that subsection
read on January 1, 2012; or
(4) for a tax year beginning after June 30, 2007,
apply to the income received by a regional association
qualified under AS 16.10.380 or nonprofit corporation
holding a hatchery permit under AS 16.10.400 from the
sale of salmon or salmon eggs under AS 16.10.450 or
from a cost recovery fishery under AS 16.10.455.
* Sec. 3. AS 43.20.012(a), as repealed and reenacted
by sec. 2, ch. 55, SLA 2013, is amended to read:
(a) Except as provided in (e) of this section, the
[THE] tax imposed by this chapter does not apply to
(1) an individual;
(2) a fiduciary; or
(3) the income received by a regional association
qualified under AS 16.10.380 or nonprofit corporation
holding a hatchery permit under AS 16.10.400 from the
sale of salmon or salmon eggs under AS 16.10.450 or
from a cost recovery fishery under AS 16.10.455.
* Sec. 4. AS 43.20.012 is amended by adding a new
subsection to read:
(e) The limitations in (a) of this section do not
apply to an oil or gas producer.
* Sec. 5. AS 43.20.021(c) is amended to read:
(c) For a corporation or oil or gas producer, for
[FOR] purposes of calculating the alternative tax on
capital gains provided for in the provisions of 26
U.S.C. 1201 (Internal Revenue Code), the rate is 4.5
percent [FOR CORPORATIONS].
* Sec. 6. AS 43.20.021(d) is amended to read:
(d) For a corporation or oil or gas producer, where
[WHERE] a credit allowed under the Internal Revenue
Code is also allowed in computing Alaska income tax,
it is limited to 18 percent [FOR CORPORATIONS] of the
amount of credit determined for federal income tax
purposes that [WHICH] is attributable to Alaska. This
limitation does not apply to a special industrial
incentive tax credit under AS 43.20.042.
* Sec. 7. AS 43.20.021(f) is amended to read:
(f) For a corporation or oil or gas producer, for
[FOR] the purpose of calculating the alternative
minimum tax on tax preferences provided for in 26
U.S.C. 55 - 59 (Internal Revenue Code), the tax is 18
percent [FOR CORPORATIONS] of the applicable
alternative minimum federal tax.
* Sec. 8. AS 43.20.030(a) is amended to read:
(a) If a corporation, an oil or gas producer, or a
partnership that has a corporation as a partner, is
required to make a return under the provisions of the
Internal Revenue Code, it shall file with the
department, within 30 days after the federal return is
required to be filed, a return setting out
(1) the amount of tax due under this chapter, less
credits claimed against the tax; and
(2) other information for the purpose of carrying out
the provisions of this chapter that the department
requires.
* Sec. 9. AS 43.20.144(h)(2) is amended to read:
(2) "consolidated business" means a corporation or
oil or gas producer or group of corporations or oil or
gas producers, or both, having more than 50 percent
common ownership, direct or indirect, or a group of
corporations in which there is common control, either
direct or indirect, as evidenced by any arrangement,
contract, or agreement; the requirements of this
chapter apply whether or not the taxpayer is the
parent or controlling corporation;
* Sec. 10. AS 43.20.340 is amended by adding a new
paragraph to read:
(11) "oil or gas producer" means an individual, sole
proprietorship, partnership, join venture,
association, trust, estate, business trust, an S
corporation that has elected to file federal tax
returns under 26 U.S.C. 1361 - 1379 (Internal Revenue
Code), or other similar entity or organization that
(A) is engaged in the production of oil or gas from a
lease or property in the state; and
(B) during the taxable year, was subject to tax under
AS 43.55."
Page 1, line 4:
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Insert "Sec. 11"
Renumber the following bill sections accordingly.
Page 25, following line 9:
Insert a new bill section to read:
"* Sec. 24. The uncodified law of the State of Alaska
is amended by adding a new section to read:
APPLICABILITY. AS 43.20.011(e), as amended by sec. 1
of this Act, AS 43.20.012(a), as amended by sec. 2 of
this Act, AS 43.20.012(e) enacted by sec. 4 of this
Act, AS 43.20.021(c), as amended by sec. 5 of this
Act, AS 43.20.021(d), as amended by sec. 6 of this
Act, AS 43.20.021(f), as amended by sec. 7 of this
Act, AS 43.20.030(a), as amended by sec. 8 of this
Act, AS 43.20.144(h)(2), as amended by sec. 9 of this
Act, and AS 43.20.340(11), enacted by sec. 10 of this
Act, apply to an oil or gas producer filing a return
for a taxable year beginning on or after the effective
date of secs. 1, 2, and 4 - 10 of this Act. In this
section, "oil or gas producer" has the meaning given
in AS 43.20.340(11), enacted by sec. 10 of this Act."
Renumber the following bill sections accordingly.
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Page 25, line 15:
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Page 25, lines 16 - 17:
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Page 25, line 19:
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Page 25, line 20:
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Insert "secs. 14 - 18"
Page 26, line 1:
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Insert "Section 26"
Page 26, following line 1:
Insert a new bill section to read:
"* Sec. 28. Section 3 of this Act takes effect on the
effective date of sec. 2, ch. 55, SLA 2013."
Renumber the following bill section accordingly.
Page 26, line 2:
Delete "sec. 16"
Insert "secs. 27 and 28"
Representative Wilson OBJECTED for discussion.
Vice-Chair Gara reviewed Amendment 2. He explained that the
amendment closed an inequity in the oil and gas tax law.
Currently, the only producers that paid corporate tax to
the state were C corporations and native corporations.
However, S Corporations or other entities did not pay any
corporate tax. The current tax was modest at approximately
7 percent. The amendment imposed taxes on S Corporations
and other entities. He believed that the amendment was
"fair and equitable."
2:27:13 PM
Representative Pruitt asked if Alaska Gasline Development
Corporation (AGDC) would pay a tax under the amendment.
Vice-Chair Gara was uncertain and deferred the question to
Mr. Alper.
Mr. Alper replied that he could not imagine AGDC being a
tax payer. He explained that the amendment amended AS 43.20
related to Alaska corporate income tax and was not related
to oil tax statutes. The intent of the amendment was to
extend the corporate tax to all producers of oil and gas.
He understood that AGDC would purchase the gas at the input
into the future gasline and not from the field. The
companies remained the producers of gas. He pointed to the
definition on page 4 of the amendment that defined an oil
and gas producer. He related that a producer was any
company engaged in the production of oil and gas from a
lease or a property of the state. Unless AGDC purchased
leases and began producing gas, he could not imagine that
AGDC fit the definition of producer.
Representative Pruitt indicated that if taxes were
increased on oil and gas producers the impact would "shave
into" AGDC's share. He asked Mr. Alper to comment. Mr.
Alper replied that he was not involved into the gasline
project and was reticent to make any assumptions. He
reported that the vast number of oil and gas producers on
the North Slope were C Corporations. Any entities that were
not C Corporations and would sell gas to the gas project
would be subject to the 9.4 percent tax at over $200
thousand. The corporate income tax was attached to federal
income tax. The oil and gas companies were taxed based on
the Alaska portion of their worldwide income. Typically,
for most companies it reduced a company's effective tax
rate to below 9.4 percent. A small Alaskan company with no
other projects outside of Alaska would be subject to the
9.4 percent rate. Representative Pruitt asked for the names
of companies that the tax would apply to. Mr. Alper felt
"awkward" to identify names. He mentioned that the three
major producers; Exxon, BP, and ConocoPhillips were multi-
national C corporations. The number 4 producer was Hill
Corp and was a type S Corporation. Many other of the
smaller companies such as Caelus and Bluecrest were
currently organized as partnerships. They would be subject
to the tax. The tax would impact the smaller producers.
2:32:24 PM
Representative Pruitt asked how much oil was produced by
the entities the amendment would impact. Mr. Alper warned
that an answer would be a "wild guess". He suggested that
approximately 10 to 12 percent or 60 thousand to 70
thousand barrels of oil per day would be impacted.
Representative Pruitt conveyed that currently a bond
proposal for tax credits was being debated by the
legislature and the amendment would further impact the
smaller producers. The amendment would specifically target
the smaller producers. He wondered how the tax would be
perceived outside of Alaska. Mr. Alper did not want to
speculate. He understood that taxes were generally
unfavored. He relayed that the intent of the amendment was
to equalize the tax base. He stated that the tax was not
being applied differently - it was merely an opportunity to
equalize the corporate tax system for the oil and gas
industry. He related that he had heard of the issue over
the years. He informed the committee that most states tax
the profits of S corporations and partnerships through
individual income tax and were considered "pass-through
entities". He explained that for accounting purposes pass
through entities' profits belonged to the owners of the
companies and used a K-1 form to report income. The profits
of the non C corporation oil and gas producers would be
taxed if Alaska had an income tax. Representative Pruitt
believed that under ACES the concept of equity was to tax
the large producers at a higher rate and offer credits to
the smaller producers. He suggested that "equity" made the
statement that all producers paid the same amount in taxes.
He wondered whether the scenario created a "difficult
challenge" for encouraging oil development in the state and
was a "huge shift" in how the state defined equity for
producers. Mr. Alper replied that the question was "largely
rhetorical." He surmised that the tax was bracketed and did
not reach the maximum rate until profits amounted to $222
thousand, which rarely occurred for small producers. There
would be a higher effective tax rate paid by the larger
companies because they earned multi-million dollars in
profits and were taxed at the maximum rate.
2:37:29 PM
Representative Thompson asked for clarification relating to
page 1, line 8 of amendment 2 and referred to the words
"every corporation". He asked whether the amendment would
tax every S corporation. Mr. Alper explained that the
amendment added the words "or oil and gas producer" to
existing statute. He furthered that AS 43.20 related to
taxes on corporations. In addition to corporations, the
amendment expanded the brackets to oil and gas producers
and included a legal definition of oil and gas producer on
page 4. Representative Thompson asked if S corporations
were currently taxed. Mr. Alper responded that a tax waiver
existed elsewhere in statute because of their pass-through
nature.
Representative Wilson asked if any other industry in the
state that was a non-C corporation did not pay the
corporate income tax. Mr. Alper responded that the
corporate income tax only taxed C corporations.
Representative Wilson restated her question. Mr. Alper
replied that no other exception was built into the
corporate tax law and state corporate income tax was paid
by C corporations. Representative Wilson thought the tax
only targeted one sector of industry. Mr. Alper commented
that the intent of the amendment was to ensure that all oil
and gas producers paid the equivalent of the corporate
income tax. The oil and gas industry were the largest
component of Alaska's corporate income tax. Representative
Wilson thought that the tax was not a way to reward the
largest industry in the state. She asked if the amendment
was a back-door way to impose an income tax. Mr. Alper did
not agree with the assessment. He believed that the
amendment was a way to increase tax on a specific industry.
He stated that if a state income tax was adopted the
provision would need to be reconsidered to avoid a double
taxation scenario.
2:41:55 PM
Representative Ortiz commented that HB 411 would be sent to
the working group for further analysis rather than
currently changing policy.
Co-Chair Seaton clarified a previous statement that the
smaller companies enjoyed a greater tax advantage through
the tax credits that were disproportionate to the larger
companies. He remarked that large companies had the same
tax advantage using net operating loss credits that were
valued at 35 percent and were subtracted from its taxes. He
noted that currently both large and small producers were
carrying losses forward. Mr. Alper appreciated the
clarification. He voiced that the bulk of the cashable
credits were operating loss credits and reduced every
dollar in taxes by $0.35; the 35 percent statutory tax
rate. He confirmed that the idea of tax credit equity was
included for companies who were not profitable through
production but gained value for spending like producers
through tax reductions. The cashable credit was included to
offer equal treatment to the smaller producers.
2:44:35 PM
Representative Tilton asked whether DOR had an analysis for
amendment 2 and if he could provide it to the committee.
She asked for the dollar value of the tax increase imposed
by the amendment. Mr. Alper conveyed that the division had
written a white paper on the potential taxation of all S
corporations in the state. He recalled that the revenue
would be in the range of $30 million to $60 million per
year when assessed at the corporate rate. He guessed that
if exclusively oil and gas producer S corporations or other
types of non-C corporate entities were taxed, the revenue
impact would be approximately $50 million.
Vice-Chair Gara deduced that the corporate income tax was
only imposed on profits and was based on a smaller
percentage of profits. He asked whether the producers could
deduct production taxes from the corporate income tax. Mr.
Alper replied in the affirmative and expounded that state
and local taxes were a deduction for federal income tax and
the state corporate income tax was based on federal taxable
income. He also distinguished between the production tax
and corporate tax. He instructed that both were a profits-
based tax. The production tax was considered a tax flow tax
where expenses were subtracted in real time. The corporate
income tax included depreciation on capital spending that
was deducted over time.
2:47:24 PM
Representative Guttenberg asked whether the profit was
divided by the shareholders after deductions for S
corporations. He asked who was paying the tax on S
corporations. Mr. Alper answered that the tax was paid by
the entity and was paid before the profits were distributed
to shareholders.
Representative Wilson MAINTAINED her OBJECTION.
Representative Pruitt clarified that he would not be
supporting the amendment because of the message it sent to
the companies. He cautioned that the messages sent by the
legislature resonated throughout the state, nation, and
world. He recalled that previously the state was attempting
to incentivize investment in Alaska but went too far by
"paying out cash". He felt that "giving out cash was very
different" than the establishment of a tax regime that
allowed for a lower tax rate for certain companies that did
not have the same capacity as larger ones. He did not want
to send the message that Alaska was not trying to attract
new investment. He wanted to create an inviting business
climate for other companies interested in investing in
Alaska. He emphasized his opposition to the amendment
because he disagreed with the message that the state was
increasing taxes on companies that invested in the state.
Representative Guttenberg supported the amendment. He
believed that it was the legislature's duty to examine all
sides of the issue. He hoped the bill was forwarded to the
working group to discuss the ideas further. He was
concerned with the idea that it was inappropriate to
discuss taxation. He appreciated the amendment and the
opportunity it provided to discuss and analyze the ideas
and formulate a conclusion. He discerned that the most
important message sent to potential investors was that the
ideas and conclusions were well vetted.
Representative Wilson argued that the bill was focused on
one industry. She maintained that the working group was
tasked with examining every aspect of oil taxation and
passing a bill out of committee meant the issues were
already decided. She opined that the true discussion was
"doing business in the state of Alaska as a business." She
stressed that the legislature kept messaging to the oil
industry that they were never contributing enough. She was
distressed by the amendment because a business chose how it
would organize itself based on the tax structure in a
state. She stated her concern over the messaging and wanted
to vote on the bill.
2:55:04 PM
Vice-Chair Gara suggested that the bill kept the "welcome
mat out" for oil and gas producers because the state was a
stable place to do business and had the lowest oil taxes of
any of the major oil and gas producing states in the nation
and one of the lowest when compared internationally. He
thought the current corporate tax structure was
"arbitrary." He believed that the amendment provided a fair
way to treat companies engaged in the same industry
regardless of how they filed with the SEC (Security and
Exchange Commission) or state tax division. He stated that
the amendment did not include all S corporations because it
would violate the single subject rule. The bill addresses a
"very generous loophole" in the oil and gas production tax
for producers that did not pay any of the state's corporate
tax no matter the size of their profits. He opined that the
loophole was wrong.
A roll call vote was taken on the motion.
IN FAVOR: Guttenberg, Kawasaki, Ortiz, Gara, Stutes,
Seaton, Foster
OPPOSED: Pruitt, Thompson, Tilton, Wilson
The MOTION PASSED (7/4).
2:58:38 PM
Co-Chair Seaton MOVED to ADOPT the Letter of Intent (copy
on file):
It is the intent of the House Finance Committee that
this proposed legislation be forwarded to the
Legislative Oil & Gas Working Group that was
established with the passage of HB 111 during the 30th
legislature for its consideration. The Legislative Oil
& Gas Working Group is requested to utilize all three
consultants available to the legislature to obtain an
array of perspectives. By January 1, 2019 the group is
requested to submit a report and proposed legislation
for an effective long-term tax regime for the State of
Alaska to the presiding officers of both bodies and
the Co-Chairs of the Resources and Finance Committees.
We request the working group consider HB 411 as a
basis for a proposed taxation system and consider
separation of oil and gas for expense and tax
calculation.
Representative Wilson OBJECTED.
Co-Chair Seaton read the letter into the record.
Co-Chair Seaton reasoned that a thorough analysis of the
tax proposals and the interplay of external and internal
factors was imperative to develop an appropriate tax
system. He explained that the bill should reside with the
House Finance Committee until the working group finished
examining the issues.
3:02:43 PM
AT EASE
3:03:12 PM
RECONVNENED
Representative Wilson read passages from a legal opinion
from Legislative Legal Services (LAA) (copy on file):
In Summary, the letter of intent set out above may be
offered for adoption at the time the bill is passed
from committee or passed on the floor. A letter of
intent is a document recognized in the Manual of
Legislative Drafting that is to accompany a bill. A
letter of intent that does not accompany a bill is
not, in my view, provided for in the Manual of
Legislative Drafting.
This office warns, in certain circumstances as set out
below, that a letter of intent should not be used in
place of a directive that should be in the language of
the bill itself.
Please note that in HB 111, ch. 3, SLA 17, the
Legislative Oil and Gas Working Group was directed to
prepare the analysis and report contemplated by the
above letter of intent for consideration by the
legislature during the second regular session of the
30th Alaska State Legislature. The letter of intent
provides a different deadline for submission of the
working group's report of January 1, 2019, is really
and amendment of existing uncodified law and might be
better addressed by amending the law. ?
Representative Wilson voiced that LAA had never heard of
adopting a Letter of Intent without also moving the bill.
She preferred that the Co-Chairs wrote the letter versus
the Letter of Intent as a committee document. She thought
that the action was setting an ill-advised precedence and
was opposed to the motion. She wanted the language inserted
in the bill and voted on by both bodies. She understood
that the motion would pass in committee regardless of her
vote. She wondered whether the path was one that members
wanted to set. She suggested that the chair read the letter
of intent on the floor or send it directly to the working
group.
3:06:45 PM
Co-Chair Seaton responded that the letter was the Letter of
Intent by the House Finance Committee and a vote to adopt
would be necessary on the House floor. He was trying to get
to a point where industry and the public was made aware of
what the legislature was intending and to embark on further
analysis by the group that the industry endorsed. He
elucidated that the legislative working group had not yet
generated a report but had until January of 2019 to act. He
noted that the legislature had access to three consultants
and hoped the group would begin meeting in a timely manner
and utilized all three consultants to obtain a broad
perspective for moving forward. He believed the letter of
intent was directed to the working group and was the best
approach under the circumstances.
3:10:29 PM
Representative Thompson opposed the Letter of Intent. He
believed that the letter would be interpreted as the entire
legislature endorsing the provisions in HB 411 and was
asking them to only consider the provisions in the bill.
He emphatically stated that the message was wrong, and he
did not like the idea. He wanted the working group to
consider all issues regarding the oil tax regime.
Representative Pruitt read the intent of the working group
that was adopted in the prior session. He noted that it was
uncodified law. He read the following from page 20, lines
10 through 14 of HB 111:
LEGISLATIVE WORKING GROUP. (a) A legislative working
group is established to analyze the state's fiscal
regime for oil and gas, review the state's tax
structure for and rates on oil and gas produced in the
state, recommend changes to the legislature for
consideration during the Second Regular Session of the
Thirtieth Alaska State Legislature, and develop terms
for a comprehensive fiscal regime.
Representative Pruitt emphasized that the language already
provided instructions to the working group in uncodified
law that was better than a Letter of Intent. He thought it
set a bad precedent and was leading the group in a certain
direction. He thought it was problematic and characterized
the action as a "work around" because he believed the bill
would not be passed.
3:13:48 PM
Co-Chair Foster asked Representative Wilson to clarify what
she had read from legal services.
Representative Wilson reported that she had requested a
legal opinion asking whether a Letter of Intent was adopted
without reporting the bill out of committee. She clarified
that she received a legal memo from Legislative Legal
Services in response. She summarized the contents of the
memo and stressed that the action was not prohibited but
cautioned that the action was setting the precedent.
Co-Chair Foster invited Doug Gardner, Director, Legislative
Legal Services to comment.
3:15:05 PM
DOUG GARDNER, DIRECTOR, LEGISLATIVE LEGAL SERVICES (via
teleconference), thought the situation was unique in one
respect; the drafting manual provided that a Letter of
Intent should accompany legislation. He believed the
process was logical and addressed any ambiguity in a bill.
In addition, the drafting manual also stated that a Letter
of Intent should not be a substitute for drafting a bill or
adopting an incomplete bill. He described the action as
"unusual" and viewed the Letter of Intent as providing
guidance from the House Finance Committee to an existing
legislative working group. He would have "a very dim view"
and a "very different view" of providing a "floater Letter
of Intent" not accompanying a bill that targeted a
previously passed bill or another piece of legislation that
affected the judicial or executive branches. He qualified
that in this scenario the letter was guidance for an
internal legislative committee and felt that it was an
unusual situation that would likely not happen again. He
did not want the current discussion to be an interpretation
for the next situation in the future. He asked
Representative Wilson if she wanted him to address some of
the specific points in the memo.
Representative Wilson responded in the affirmative.
Mr. Gardner relayed that the critical focus was that there
was already a law in place in HB 111 where it outlined what
the legislature wanted the legislative working group to do
in uncodified law in Chapter 3 SLA 17. He generally
cautioned that the traditional path forward was to pass a
bill that amended the uncodified law. He assumed that both
House and Senate members were seated on the group and a
bill provided unified instruction. He deduced that if the
House Finance Committee passed the Letter of Intent on to
the House floor he supposed that action could be taken
under "unfinished business," which was unconventional. He
was uncertain what actions the Senate would take if it
received the Letter of Intent. He summarized that a
critical view of the Letter of Intent process was that the
guidance should be part of an amendment to the uncodified
law which was a "direct and clean manner." However, because
it was offering guidance to an internal legislative working
group, acting in this manner could be considered. He did
not think it would have a significant amount of influence
on precedence. He thought it was preferable for the
guidance to be in the form of a bill voted on by both
bodies. The Letter of Intent alone was a non-binding
statement and offered very little guidance value if it was
not adopted by the House and Senate or if only adopted by
the House and not adopted in the Senate, he thought the
working group would have a lopsided directive that could
pose a logistical problem. He did not think there was an
easy yes or no answer. He had contacted the Chief Clerk's
office who related that they did not recall it ever
happening before and he was not certain that a similar
action happened in the past.
3:22:19 PM
Representative Guttenberg appreciated hearing the
functioning directives of the working group. He related
that there was frustration that the working group never
met. He stated that the Letter of Intent was an internal
memo. He suggested that if the letter only passed in
committee or did not pass both bodies it was merely a
letter to the working group but would not supersede the
working group's directive by statute. He asked whether he
was correct. Mr. Gardner agreed that Representative
Guttenberg's statement was accurate. He was not trying to
be dismissive of a Letter of Intent but thought that it did
not have to be acted on especially if it was only endorsed
by the House Finance Committee or by one body. He believed
that the letter only carried limited weight, especially
under the circumstances.
Co-Chair Foster mentioned that the floor acted on motions
such as the Sense of the House. He wanted to make a
comparison between the sense of the House or Letters of
Intent attached to budget bills. He asked whether the
current situation was substantially different. Mr. Gardner
agreed with the similarities. He detailed that the Sense of
the House was a non-binding statement that was not legally
binding. He thought if the Letter of Intent was similar in
terms of the weight that it carried.
Representative Wilson thought intent language within a bill
was very different than a Letter of Intent outside of a
bill. She asked whether she was correct. Mr. Gardner
answered that he directed his previous comments exclusively
to a Sense of the House and would not equate the current
situation with a budgetary Letter of Intent.
3:27:59 PM
Vice-Chair Gara thought that the co-chairs were trying to
do something different than they intended. He relayed a
story from personal experience. He suggested that the
letter of intent was offered as an olive branch to other
members of the legislature to resolve the budget and
differences that remained in the current session in a
timely manner and not forward the bill to the floor. The
other option was to move the bill from committee and having
a multi-day debate on the floor that had the potential to
extend session approaching a government shutdown date. He
thought that the letter was a "graceful" gesture and
acknowledgement that agreement between members and bodies
would be difficult to achieve in a timely manner and agree
on items that were attainable. He remarked that the letter
"was an olive branch and not a sword".
3:30:40 PM
Representative Wilson commented that the letter was
divisive and there would be a fight on the floor. She
agreed that the working group should have met and
accomplished the directive. She read from the letter of
Intent:
We request the working group consider HB 411 as a
basis for a proposed taxation system and consider
separation of oil and gas for expense and tax
calculation.
Representative Wilson pointed out that the letter was
changing the directive in HB 111 and would be the divisive
issue. She did not think that was what industry was asking
the legislature to do, which was analyze the current system
and not use HB 411 as the base.
3:33:02 PM
Representative Pruitt appreciated that Co-Chair Seaton had
alerted members of the Letter of Intent in advance. He
agreed with Representative Wilson's point of view. He
wished that the working group had acted however, he did not
want to lay the burden entirely on the group because of the
lack of time. He would agree to a letter that requested the
group act but not to a letter that changed the mandate. He
did not agree with forwarding the letter. He believed that
the Senate would not endorse the letter. He opined that the
letter could impede the working group's progress by
confusing the directives. He thanked the Co-Chair for the
effort but was not supportive of the Letter of Intent.
Co-Chair Foster suggested there were three possible ways to
proceed; vote on the Letter of Intent, set it aside, or
vote on the bill.
3:36:17 PM
Vice-Chair Gara favored the co-chairs approach. He viewed
the bill to start a discussion but would also prefer
changes.
Co-Chair Foster also offered a 4th option which was to set
the bill aside.
Co-Chair Seaton voiced that industry had an expectation for
the working group to accomplish something. He suggested
that nothing got done because the original mandate was too
broad. He thought that the established consensus was to
proceed with a profits tax versus a gross tax. He indicated
that the bill attempted to work with industry and provided
a profits tax developed with the assistance of one of the
consultants. He viewed the bill as a starting point that
offered parameters for analysis; changes could be made from
the starting point.
3:40:36 PM
AT EASE
3:41:51 PM
RECONVENED
Co-Chair Foster asked Co-Chair Seaton if his intent was for
the letter to be voted on the floor. Co-Chair Seaton
suggested to forward the letter directly to the working
group since the intent was directed to the group from the
House Finance Committee.
Representative Wilson opined that the process "made
absolutely no sense" to her. She did not understand why the
bill and Letter of Intent was not reported out of
committee. She felt that supporting the letter translated
to supporting HB 411. She did not understand how the Letter
Intent would make a difference. She agreed that it was
difficult for the working group to have met last year with
the length of legislative sessions. She suggested the
Letter of Intent merely request that the working group
begin meeting on the original mandate and would support the
letter. She felt that if she supported the letter as
proposed she would be supporting HB 411. She wanted to set
the letter aside and ask the working group to begin its
process.
3:45:32 PM
Representative Pruitt highlighted that the letter asked for
a report and proposed legislation. The working group had
originally been directed to review the current tax regime
and develop terms. He did not feel like a change was
needed. He suggested that along with the Letter of Intent a
tally of the committee vote should be included to show that
some members had concerns. Otherwise, a simple letter to
request that the working group begin discussions under the
original mandate would garner full committee support.
Co-Chair Foster noted that the committee had been joined by
Representative Geran Tarr.
Co-Chair Foster surmised that although reporting out a
Letter of Intent was unusual nothing prohibited such
action. He felt that the committee members had expressed
their views.
3:49:08 PM
AT EASE
3:51:47 PM
RECONVENED
Co-Chair Seaton WITHDREW the MOTION to ADOPT the Letter of
Intent for HB 411.
3:52:17 PM
REPRESENTATIVE GERAN TARR, CHAIR, LEGISLATIVE WORKING GROUP
ON OIL AND GAS, provided a verbal report of the progress of
the legislative working group that was established to
analyze the state's fiscal regime for oil and gas. She
indicated HB 111 was not adopted until late July. She
commended Senator Giessel for developing and organizing the
"Oil and Gas 101" training with the consultant Rich
Ruggiero, IN3Energy. She reported that over 100 people
attended that included representatives from industry,
Department of Revenue (DOR), legislative staff, and
legislators. The group's progress was hampered by the fall
special session on the crime bill. The group held "a
couple" of meetings in December and met with the
Competiveness Review Board to develop a working
relationship with the board after it was determined that
the board, established in SB 21 - Oil and Gas Production
Tax [CHAPTER 10 SLA 13 - 05/21/2013] played a meaningful
role. The working group was mandated to disband at the end
of 2017, but Senator Giessel felt the group should continue
to meet. The group published a report and delivered it to
the Senate President and Speaker of the House. The group
met again in early January with the Competiveness Review
Board and had no intention to meet during the current
legislative session. She noted that comments were made
questioning whether the group should continue, which caused
the group's members to question their involvement. She
relayed that the intention of the group was not to evaluate
specific proposals but to make broad evaluations not
restricted by topic. she emphasized that comprehensive
analysis was expected. Some of the proposals in HB 411 were
identified as areas of interest but so were other wide-
ranging topics. She exemplified that the A Star project and
other infrastructure improvements could be a better way to
partner with industry instead of the credit program that
was not as beneficial to the state. She felt the group
wanted to explore a more comprehensive approach other than
just analyzing the tax structure or provisions in HB 411.
She hoped the group would convene very soon. She welcomed
as much involvement by individuals outside of the group.
She maintained that the group offered a way to address
differences in a bicameral process and bipartisan way
rather than something in the context of a bill. She related
that the working group was receiving mixed signals about
whether to proceed and she would like a clear vision on
whether or how to proceed.
3:57:35 PM
Representative Wilson thanked the representative and
apologized for any mixed signals. She hoped the group would
continue in the exact manner they established. She favored
the broad approach.
Vice-Chair Gara thanked Representative Tarr. He clarified
he had never been critical of the working group during
committee discussion.
3:58:35 PM
Co-Chair Seaton explained that the industry wanted the
working group to examine taxation specifically. He noted
that the broader approach was not the expectation of
industry and the purpose of the Letter of Intent was to
narrow the focus to the concerns of industry. He hoped that
all three consultants would be utilized to develop a
proposal related to changes to the tax structure. He wanted
the broad approach to include a detailed review of the tax
structure that resolved specific issues. He indicated that
the Letter of Intent requested that the working group
analyze the provisions in HB 411. He stated that if the
request was beyond the parameters of the group's mandate,
it would be beneficial to advise industry that a detailed
analysis of a tax proposal should come from House and
Senate committees. He expressed confusion regarding the
duties of the working group and would appreciate a
delineation of its responsibilities.
Representative Tarr added that she agreed with his
statements and shared that her concerns focused on the
discussions regarding whether the working group had met or
accomplished anything. She wanted to avoid a false
characterization about the group. She relayed the
difficulty with meeting during legislative session.
Co-Chair Foster relayed the agenda for the following day.
He recessed the meeting to a call of the chair [note: the
meeting never reconvened].
ADJOURNMENT
4:03:16 PM
The meeting was adjourned at 4:03 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 411 Amendment Package.pdf |
HFIN 4/26/2018 2:00:00 PM |
HB 411 |
| HB 411 Letter of Intent.pdf |
HFIN 4/26/2018 2:00:00 PM |
HB 411 |
| HB 411 Amendment J.8 Fiscal Note Table and Tax Model_ DOR_spring18_20180420 (002).pdf |
HFIN 4/26/2018 2:00:00 PM |
HB 411 |
| Letter to House Finance Co-Chairs Vice-Chair From Rep Tarr and Sen Giessel 4 - 26 - 18.pdf |
HFIN 4/26/2018 2:00:00 PM |
|
| HB 411 version 04.27.18.pdf |
HFIN 4/26/2018 2:00:00 PM |
HB 411 |
| HB 411 Legal Memo 4.26.18 Wilson.pdf |
HFIN 4/26/2018 2:00:00 PM |
HB 411 |