Legislature(1999 - 2000)
02/22/2000 10:10 AM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 22, 2000
10:10 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Joe Green
Representative John Harris
Representative Brian Porter
Representative Tom Brice
Representative Hal Smalley
MEMBERS ABSENT
Representative Allen Kemplen
COMMITTEE CALENDAR
HOUSE BILL NO. 307
"An Act establishing an oil and gas corporate income tax and
making conforming amendments; and amending the tax on
corporations levied under the Alaska Net Income Tax Act to
eliminate the state corporate income tax on taxable income of
less than $10,000; and providing for an effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 307
SHORT TITLE: OIL AND GAS CORPORATE TAX ACCOUNTING
Jrn-Date Jrn-Page Action
1/21/00 1972 (H) READ THE FIRST TIME - REFERRALS
1/21/00 1973 (H) O&G, L&C, FIN
1/21/00 1973 (H) REFERRED TO O&G
2/16/00 2225 (H) COSPONSOR(S): AUSTERMAN
2/17/00 (H) O&G AT 10:00 AM CAPITOL 17
2/17/00 (H) Heard & Held
2/17/00 (H) MINUTE(O&G)
2/22/00 (H) O&G AT 10:00 AM CAPITOL 17
WITNESS REGISTER
REPRESENTATIVE ERIC CROFT
Alaska State Legislature
Capitol Building, Room 400
Juneau, Alaska 99801
POSITION STATEMENT: Sponsor of HB 307.
JUDY BRADY, Executive Director
Alaska Oil and Gas Association
121 West Fireweed Lane
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 307.
TOM WILLIAMS, Alaska Tax Counsel
BP/AMOCO
P.O. Box 196612
Anchorage, ALASKA 99519-6612
POSITION STATEMENT: Testified on HB 307.
DEBORAH VOGT
715 Fifth Street
Douglas, Alaska 99824
POSITION STATEMENT: Testified on HB 307.
DAN E. DICKINSON, Director
Oil and Gas Audit Division
Department of Revenue
550 West Seventh Avenue, Suite 570
Anchorage, Alaska 99501-3557
POSITION STATEMENT: Testified on HB 307.
STEVE MAHONEY, Associate General Tax Officer
ARCO
P.O. Box 100360
Anchorage, Alaska 99510-0360
POSITION STATEMENT: Testified on HB 307.
ACTION NARRATIVE
TAPE 00-14, SIDE A
Number 0005
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil
and Gas meeting to order at 10:10 a.m. Members present at the
call to order were Representatives Whitaker, Dyson, Phillips,
Green, Harris, Porter, Brice and Smalley.
CHAIRMAN WHITAKER noted that in response to a request from
Representative Phillips, there was a memo in committee members'
packets regarding the natural gas requirements of Fort Greely,
Fort Wainwright, and Eielson Air Force Base.
HB 307-OIL AND GAS CORPORATE TAX ACCOUNTING
Number 0094
CHAIRMAN WHITAKER introduced the first order of business, HOUSE
BILL NO. 307, "An Act establishing an oil and gas corporate
income tax and making conforming amendments; and amending the tax
on corporations levied under the Alaska Net Income Tax Act to
eliminate the state corporate income tax on taxable income of
less than $10,000; and providing for an effective date."
REPRESENTATIVE ERIC CROFT, Alaska State Legislature, sponsor of
HB 307, who was ill and unable to attend, confirmed that he was
on teleconference.
Number 0180
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), said AOGA is an industry trade association whose 17
members represent the majority of the petroleum industry in
Alaska. Ms. Brady presented AOGA's comments on HB 307, which
proposes to re-enact Alaska's former separate-accounting tax.
She shared four reasons why AOGA's opposes HB 307: 1) the
present apportionment-based tax does not provide a special tax
break for the oil industry; 2) this is not a good time for Alaska
to be destabilizing the fiscal rules of the game for doing
business in Alaska; 3) HB 307 would tend to have a greater impact
per barrel for new fields than for old ones at today's prices,
which makes it harder for new fields to clear the economic hurdle
to be competitive investments; and 4) income tax is not the whole
story.
MS. BRADY said the oil companies pay taxes on their Alaskan
income at the same rate as do all other companies. She explained
that misunderstanding arises from the calculation of how much of
the business conducted in more than one state should be
attributed to the Alaskan portion of the business. States can
choose between two methods of calculating a company's taxable
income: separate accounting or apportionment.
MS. BRADY explained that separate accounting looks at the
business activities occurring in Alaska and tries to figure out
how much that company would have made without the out-of-state
portions of the business. By contrast, apportionment looks at
the profit of the entire business and tries to figure out how
much of the profit-making capacity of that business is
represented by its in-state activities. All multi-state business
that pay income tax in Alaska compute their Alaskan income using
the apportionment approach.
MS. BRADY testified that critics of apportionment say that if an
oil company finds a way to save a million dollars in its Alaskan
operations, the state will not see the full million dollars in
the income the company reports on its Alaskan tax return. She
said that criticism ignores the fact that if an oil company finds
a way to save a million dollars in Asia or the North Sea, Alaska
benefits by receiving the same percentage of that company's total
income.
MS. BRADY then asserted that destabilizing taxes would discourage
investment in Alaska. She said it would not be wise tax policy
for Alaska to change to an accounting method that would, in
effect, target new oil fields.
MS. BRADY suggested that the actual amount of taxes Alaska has
collected from the oil companies since 1981 may not be all that
different from what it would have been under the former,
separate-accounting formula. She said only the state's's
Department of Revenue has complete information to provide the
real numbers to compare. In conclusion, she urged the
legislature not to enact House Bill 307.
CHAIRMAN WHITAKER said he would assure that copies of Ms. Brady's
prepared remarks were distributed to committee members.
Number 0958
REPRESENTATIVE DYSON referred to a previous discussion with Ms.
Brady, and asked if it was her position that when the state
changed the accounting method from separate accounting to
apportionment in 1981, there had been a conscious decision on the
part of the legislature to raise production taxes to offset the
loss of revenue from income taxes.
MS. BRADY said yes, but she asked that the committee continue
that discussion with Tom Williams, who had been with the
Department of Revenue at that time.
Number 1041
TOM WILLIAMS, Alaska Tax Counsel, BP/AMOCO, explained that in
1981, he was Commissioner of Revenue for Governor Jay Hammond and
was actively involved with the legislature and tax legislation.
He said that in answer to Representative Dyson's question, yes,
it was a conscious decision.
MR. WILLIAMS recalled that in 1980, in the course of litigation
challenging the constitutionality of separate accounting, the
United States Supreme Court stated that the two accounting
methods were "theoretically incommensurable," and it sounded to
those working for the state at that time as if the court would be
ruling against separate accounting, as apportionment had
previously been upheld. The state had collected $2 billion [from
the oil companies] as the litigation moved forward. With that
amount accruing interest, the refund that the state potentially
owed to the oil companies threatened to be greater than the
entire revenues of the state for a year. That was simply too
great a gamble with the public money.
MR. WILLIAMS continued, saying there were two approaches taken in
1981. One was to try to settle the litigation altogether. (The
settlement approach did not work.) The other was to create a
safety net for the separate accounting tax by creating a backstop
tax against which the separate accounting payments would be made.
If separate accounting were to be struck down, the backstop tax
would then become fully due, in effect switching the money from
one revenue source to another.
MR. WILLIAMS recalled that at that time [1981], the legislative
leadership in both bodies as well as the governor came out with a
statement saying that Alaska was then getting a little more than
31 percent of the oil wealth, and that as long as the percentage
stayed above 30 percent, the state would be getting a fair share.
MR. WILLIAMS explained that the state then went to modified
apportionment, which was expected to produce more revenue than
regular apportionment. However, the amount of revenue generated
still was going to be so far below that from separate accounting
that it would not keep revenue to the state above the 30 percent
threshold. So the production tax was increased. The base rate
of the production tax was raised from 12.25 percent to 15
percent, and for large fields like Prudhoe Bay, there was a
change made in the Economic Limit Factor (ELF). That combination
of raising the base rate and applying the full base rate to
fields like Prudhoe Bay was enough to keep the combined
production tax and income tax revenues above the 30 percent
threshold that everyone had agreed on as the minimum level for
the state's share.
MR. WILLIAMS confirmed that the modification had succeeded in
keeping the revenues above 30 percent. However, "It did cost the
state money. But enough out of the billions being projected that
the legislature could swallow it, though not necessarily happily
in some cases." It turned out that the actual loss was a little
higher than Mr. Williams had figured. The Department of Revenue
in 1986 did a review to see how things had actually turned out,
and it was about twice the size of what he had said. "But still,
overall, we protected the revenue."
Number 1414
REPRESENTATIVE DYSON thanked Mr. Williams for a very helpful
answer and asked a second question: If this bill goes forward,
is there a way it could be structured so that the new companies
coming into Alaska are not penalized?
MR. WILLIAMS said it would be very difficult when the tax is
being measured in the way that House Bill 307 proposes to measure
production income. There are major expenses up front, and the
profit per barrel is going to be greatest in the flush period
when field begins producing. Economics eventually start to erode
and eventually they become marginal, and when a company reaches
break-even, it is done. That is inherent in the nature of the
business. He said he didn't "see a fix within [HB] 307."
REPRESENTATIVE DYSON wondered if it would be impractical to say
that the new companies coming in to Alaska could go under the
apportionment accounting for three to ten years or until their
production got to a certain number of barrels and give them some
kind of a phase in, a honeymoon period.
MR. WILLIAMS said one certainly could do something like that, and
in a direct sense, that would deal with the problem expressed.
But he cautioned that transitioning into and out of separate
accounting is a difficult thing to do.
REPRESENTATIVE DYSON asked what the state is receiving now in
relation to the 30 percent threshold.
MR. WILLIAMS said he did not know about the other oil companies,
but he believed that the state still is getting 30 percent from
British Petroleum. He said the Department of Revenue is
obviously the place to get the full answer.
REPRESENTATIVE GREEN asked who else was scheduled to testify so
he could direct questions to the appropriate person. Chairman
Whitaker said he thought Dan Dickinson would be the only other
witness. Deborah Vogt said she would like to testify, and
Chairman Whitaker promised that she would be given that
opportunity.
Number 1697
REPRESENTATIVE SMALLEY asked Mr. Williams if a set of figures
provided to the committee were accurate. [That information had
come from House Bill 307 sponsors and showed oil company income
tax payments to the state from 1982 to 1997, comparing the actual
amount paid under the current approach with what would have been
paid under separate accounting.] Mr. Williams said he did not
know enough about the other companies to know if the figures were
accurate or not. He said he would accept them as being accurate.
MS. BRADY cautioned that in looking at those figures, one should
be aware that they do not show the other half of the equation,
the income from increased production taxes that she had
described. She added that separate accounting is demoralizing,
[it] "drags on a company to a have a method that is in such
dispute that you are constantly fighting over it."
REPRESENTATIVE PORTER said those figures do not take into account
the amount of money that was received by the state as a result of
the increase in production tax, is that correct?
MR. WILLIAMS said it was.
REPRESENTATIVE PORTER then asked if the sheet of figures could be
characterized as "not exactly a fair statement."
MR. WILLIAMS characterized it as an incomplete statement.
Number 1862
CHAIRMAN WHITAKER asked for clarification about exactly which
approach the state uses today, saying he understood that it is
modified apportionment.
MR. WILLIAMS said that is correct, that for the oil industry, the
state uses a modified apportionment approach. He went on to
explain that the standard apportionment approach uses three
factors: property, payroll, and sales, and looks at how much of
those is in-state, then takes the average of the three
percentages and that is the percentage of a company's income
deemed to have arisen from in-state activities. The modified
apportionment approach uses the same property factor, but in
place of payroll it substitutes production, how much of a
company's oil and gas production worldwide was produced in
Alaska. The second modification used on the apportionment side is
in the sales factor. It not only looks at retail sales, but also
at pipeline tariffs which are paid by the producing company.
There are also some technical tweaks to the base, "the total pie,
figuring the size of that pie, but in terms of how you calculate
the slice, the apportionment, those are the changes."
Number 1932
DEBORAH VOGT of Douglas, Alaska, began her testimony by
clarifying that she had retired from state government [as Deputy
Commissioner, Department of Revenue] last June, and was
testifying from her historic memory of the subjects, not as a
representative of the Administration. She said she had no
dispute with what the other witnesses had told the committee
about the two methods - separate accounting and apportionment -
"neither one of which purports to be completely accurate." She
compared the two by giving the analogy of dividing a restaurant
bill according to who ate what (separate accounting) or equally
among the diners (formula apportionment).
MS. VOGT said that in a large sense, it does not make any
difference which way it is done, so long as the profitability is
more or less uniform, so long as everybody ate the same things or
so long as all the factions of the business are more or less
equally profitable. That was one of the things the legislature
had in mind in 1978 when it went to separate accounting for the
oil industry, she recalled. The legislature recognized that
there would be phenomenal profits from the oil production on the
North Slope and that the three-factor formula, as originally
designed, was not going to accurately represent that income.
MS. VOGT pointed out that regarding the sales factor, normally it
is sales to a final, ultimate third party that counts, not the
transfer between branches of the business. Since none of the oil
companies' final sales took place in Alaska, the sales factor was
going to be zero for oil and gas produced in Alaska.
Number 2060
MS. VOGT addressed the property factor. She said that when the
state supreme court decided that separate accounting was
constitutional, the court pointed out that Prudhoe Bay was
reflected on the company's books at approximately 1 percent of
its value. The reason for that was that the oil and gas itself,
the oil in the ground - which is generally the greatest asset an
oil company owns - is not reflected on the company's books. If a
company had an oil well for which it had paid $15 million, and
that was a dry well, the well would be reflected on the company's
books at $15 million. If that same $15 million well sat on top
of several billion barrels of oil, it still would be reflected on
the books at $15 million. She added, "Discovery is not an
accounting event." She said that was one of the main flaws with
the property factor, and that is still a flaw because Alaska
still uses the property factor to account for oil and gas.
MS. VOGT said the payroll factor has been abandoned because oil
production is not a labor-intensive activity; additionally, a
number of Unites States tax laws encourage oil companies to do
business through subcontractors. The oil industry uses many
subcontractors on the North Slope. In another industry, those
people might show up in that company's payroll factor, and that
was one of the reasons the legislature went to separate
accounting.
Number 2134
MS. VOGT described the three-factor formula as it would apply to
a retail company doing business in several states. All three
factors would increase in response to greater profitability in
one particular state, and so the factors would be responsive to
the different levels of profitability within the company. What
the legislature found in 1981 was that those three factors do not
really move when oil becomes more profitable. The system is
simply not responsive to the changes of profitability within the
business.
So Alaska went to separate accounting in 1978.
MS. VOGT recalled the separate accounting litigation that she
handled for the state at the Alaska Supreme Court and United
States Supreme Court levels. One thing she disputed in the
testimony she had heard that morning concerned the duration of
the "cloud of uncertainty" over the separate accounting method.
She said the cloud did not linger after 1986, since the Alaska
Supreme Court had decided in 1984 and the U.S. Supreme Court had
decided in 1986 that the separate accounting method is
constitutional.
MS. VOGT said she certainly agreed with Tom Williams that there
[previously] had been a substantial cloud. In 1978, there were
[U.S. Supreme Court rulings in] two oil company cases that gave
one pause in terms of keeping the separate accounting law on the
books. Tom Williams had referred to the fact that the severance
tax was changed in 1981, affecting the ELF; part of the thinking
[then] was that by the time the ELF "kicked in again" in 1986,
the litigation would be resolved and it would be time for the
legislature to look again at income tax with regard to the oil
industry.
Number 2262
MS. VOGT offered her main point: corporate income tax in
relation to the oil industry has not been reviewed thoroughly
since 1978. Separate accounting was repealed in 1981 under the
threat of litigation, but not because of any great philosophical
determination by the legislature that modified apportionment
would be better. She said she believes it is time for the
legislature to look carefully at the income tax as it relates to
the oil companies. She mentioned an item in a recent issue of
the Juneau Empire that said taxes collected under the modified
apportionment formula would go down if the merger of BP/ AMOCO
with ARCO goes through. She said she did not know if that is a
fact, but that it is something the legislature should look into.
MS. VOGT also disputed the assertion made that morning that
modified apportionment is better for encouraging new business.
Separate accounting is not going to tax any business until that
business actually is making money in Alaska. An oil company is
active in the state for a long time before that company starts
making any money. Modified apportionment is going to start
taxing a business the minute it sets foot in the state. Because
apportionment will bring some of the company's worldwide income
into the state for taxation even though the company may be losing
money in Alaska, Ms. Vogt believes apportionment is really anti-
competitive for new businesses coming into the state.
Number 2348
MS. VOGT said another assertion had been made that morning that
the oil industry does not get any tax breaks compared to other
industries. She pointed out that the oil industry is the only
industry that Alaska taxes on worldwide apportionment. In 1991,
the state retreated from worldwide [apportionment] for all other
businesses except oil, and went to what is known as "water's
edge." Ms. Vogt recalled that Alaska was one of the last states
to use the worldwide unitary approach, which was something that
the United States' foreign trading partners did not like at all,
having individual states looking into the books of foreign
subsidiaries. All of the states retreated to water's edge,
although California still allows the worldwide unitary approach
as an option. When Alaska went to water's edge, it was, she
recalled, at the oil companies' request that they were left on
worldwide while everyone else went to water's edge. Ms. Vogt
returned to the restaurant analogy, pointing out that if Alaskan
activities are extremely profitable, it is better for the oil
industry to have that profit diluted as much as possible; the
worldwide approach, therefore, is better than water's edge. In
her opinion, that is an advantage the oil industry has over other
businesses in Alaska.
MS. VOGT said it would be interesting to hear from the Department
of Revenue how the 30 percent factor has looked over time. It
was her understanding that the state has not received anything
like the 30 percent that was set as a hurdle in 1981. Whether
folks agree that is an appropriate level or not, "that is
something else."
TAPE 00-14, SIDE B
MS. VOGT concluded by saying that she thought it was worthwhile
for the legislature to look carefully at corporate income taxes
as they apply to the oil industry.
Number 2460
REPRESENTATIVE PORTER asked Ms. Vogt if she remembered whether
other oil-producing states use separate accounting.
MS. VOGT said it is her understanding that they still do.
Certainly they did at the time of the litigation. Texas does not
have an income tax. California uses apportionment [as an
option], but some of the other states including Oklahoma,
Mississippi, and others used separate accounting, and she
believes they still do.
REPRESENTATIVE GREEN referred to the declining value of an aging
oil field as the value drops toward the economic limit, as is
happening to the big fields in Alaska. He asked Ms. Vogt if she
thought that separate accounting might work to the state's
detriment now or in the future.
MS. VOGT said he was absolutely correct [in assuming that
eventually it would reach a point at which] production becomes
less profitable. It is possible that separate accounting and
apportionment will cross, and it gets down to one's philosophy.
She said she did not think the oil companies in Alaska had
reached that point, and she did not think they would do so for
some time; however, Dan Dickinson was on the line, and he would
be the better person to answer that question. She asked the
committee to think philosophically about what is appropriate. Is
it appropriate to be taxing a field that isn't producing any
income as if it were producing income? She said that is one of
the advantages of separate accounting: it is only going to tax
the fields that are profitable when they are profitable.
Number 2378
REPRESENTATIVE GREEN mentioned a pie chart [in members' packets]
that showed a breakdown of taxation. He wondered if that
proportion seemed reasonable to Ms. Vogt, if - as Mr. Williams
had said - other taxes have provided a fairly big fill-in of the
difference between the two types of income tax.
MS. VOGT said she had not studied the pie chart, but it certainly
was true that "severance tax went off" when separate accounting
was repealed. She did not think that the other taxes fully
recovered the revenue that was lost due to the repeal of separate
accounting. In her view, however, that is not really the
question. The questions are: What should be done from this day
forward? What is the appropriate level of taxation? How should
the tax structure look? And what is the best tax to have to
encourage diversification, to encourage new industries on the
North Slope?
REPRESENTATIVE GREEN said he certainly concurred with that, and
knew from having worked with Ms. Vogt a few years ago that she is
a very fair person. Whether right or wrong in the past, he
added, "let's go forward." He then asked if it is going to be
better from the state's standpoint to adopt, at this point, one
or the other, or a modified form, or some other form of taxation.
His concern, he said, was whether Alaska would be able to attract
the kinds of investments needed to explore and find new [oil-
producing] areas if Alaska does not establish a stable tax rate
and say "that's it." "When you come to Alaska you've got bad
climate," he commented. You've got long distances, you've got
all these other things, but at least you've got a stable tax
base."
MS. VOGT said she believes separate accounting can be designed as
Alaska had it from 1978-81, so that it is more encouraging to new
development than is modified apportionment. Modified
apportionment will attribute some taxable value to the state,
whether the company is making any money or not. If the company
is making money on a worldwide basis, that company will have
income attributed to the state due to the fact that the company
bought a lease, invested, drilled a well or pursued any activity
like that. Separate accounting certainly can be designed to take
into account those expensive initial expenditures of a company
coming into the state. In a sense it already does, but through
depreciation, amortization and rules within separate accounting,
the state certainly can allow a company to completely recover its
expenditure before any tax is levied, if that is what the
legislature wants to do.
MS. VOGT said that as far as tax stability is concerned, she had
been involved in corporate income taxes and other taxes with the
state for more than 20 years, and she does not believe that the
industry has ever said that this is a good time to look at
changing the tax structure - except in 1981, when it was a good
time to repeal separate accounting.
Number 2160
REPRESENTATIVE PORTER said he was a bit confused; he was under
the impression that the committee had heard previous testimony
that leasehold property was not considered property under the
apportionment method.
Ms. Vogt said she thinks that it is. If one drills a well, that
is certainly property. She does not think buying a lease is
property under modified apportionment.
MR. WILLIAMS said leases are in the property factor before there
is production from them. It was his recollection that leased
property is capitalized at eight times the annual lease rental.
For instance if a company had a tract that was bought in the
1969 lease sale for $50 million, it is not reflected as $50
million dollars worth of property in that company's property
factor. It would only be eight times the annual rental of a
dollar an acre times the number of acres. In relation to total
worldwide property in the hundreds of millions, or thousands of
millions, something in the hundreds of thousands or tens of
thousands is a pretty thin slice, but it is not zero.
CHAIRMAN WHITAKER asked Ms. Vogt if she had a copy of her
testimony. She said she did not, but offered a copy of her
outline, explaining that she had not followed it very closely.
REPRESENTATIVE CROFT confirmed that Mr. Dickinson had given a
good description of how the value of a leasehold is calculated.
Number 2006
DAN E. DICKINSON, Director, Oil and Gas Audit Division,
Department of Revenue, said he did not have prepared testimony,
but was available to answer questions.
CHAIRMAN WHITAKER invited Mr. Dickinson to comment regarding the
testimony he had heard.
MR. DICKINSON commented on a question Representative Porter had
raised. Mr. Dickinson said there are many figures that have been
generated by the Oil and Gas Audit Division that deal with
separate accounting versus modified apportionment. An important
thing suggested by Representative Porter is that the severance
tax, or production tax, is deductible for purposes of the income
tax. So when one says that here is what the company or the
industry would have paid for income tax, it is very important to
know whether that includes the changes that were made in 1982 and
the changes that were made in 1989 or the production tax, because
they, in turn, will affect the income tax. When making
comparisons, he cautioned, one needs to make sure that it is an
apples-to-apples comparison.
CHAIRMAN WHITAKER asked Mr. Dickinson whether he could provide
that apples-to-apples comparison historically.
MR. DICKINSON said the Oil and Gas Audit Division is putting that
together. As Tom Williams said, there was a very thorough
analysis done some years ago. Each oil field is a tax
partnership and files returns showing the expenses for that
field. The division has those numbers through 1997, and just
received those for 1998. The division would have to estimate the
intervening years. Because there is a two- or three-year lag,
estimates have gone out for the intervening years, which is why
there are so many numbers out there.
Number 1882
CHAIRMAN WHITAKER asked to what year the division has completed
the audits and can provide accurate data.
MR. DICKINSON said through 1997, and that the division should be
able to provide good data through 1998 fairly soon.
CHAIRMAN WHITAKER said it would be helpful and appropriate if the
division could provide the committee with the data through 1997.
He said it probably would not be necessary to wait for the 1998
figures because it should be possible to see the trend at that
point [by the end of 1997].
MR. DICKINSON said the division could put that together.
However, he cautioned, for the most recent four or five years,
the division have to asterisk the actual figures because there
are still ongoing disputes with taxpayers. He suggested showing
the disputed figures to the taxpayers and letting them comment so
that legislators could get a sense of the range between what the
state thinks ought to have been and what the taxpayers think
should have been.
CHAIRMAN WHITAKER said that would be helpful.
[MR. DICKINSON and CHAIRMAN WHITAKER discussed when that
information would be available to the committee, and settled on a
deadline of four to six weeks hence.]
REPRESENTATIVE PORTER added that he would like to see what the
figures would look like with or without the severance/production
tax increase that occurred in 1982.
MR. DICKINSON said that would be relatively easy to do, and
confirmed that he was going to provide not just a comparison of
income under modified apportionment and separate accounting; it
would also show the effect of the increased severance/production
in 1982 and to the ELF in 1989.
Number 1654
REPRESENTATIVE BRICE asked if severance tax is deductible from
the income tax. He also asked whether it is a one-to-one
deduction.
MR. DICKINSON explained that under modified apportionment, the
production tax paid in Alaska is deducted when one calculates the
worldwide expenses of the corporation. As Alaska's production
tax increased, income taxes went down, but it was not by a factor
of one to one.
REPRESENTATIVE BRICE articulated a quandary. The committee had
heard that production tax was increased to offset the loss when
the state changed from separate accounting to modified
apportionment. But if those taxes are deductible from the
corporate income tax, is the state still receiving the true
value? Is there a gap there, or is the result revenue-neutral?
MR. DICKINSON noted that royalties, oil and gas properties tax,
and the production tax all are deductible for purposes of income
tax. In fact, he said, if the state take is lumped together,
that is the largest single expense leading to the calculation of
the income on which the state bases the income tax. One
definitely affects the other, and it is logical that if payments
to the state are on the order of one third, that could be
expected to be reflected in the profitability or the income of
(inaud.)
Representative Dyson asked Mr. Dickinson of he could give the
committee his view of how close the state is to getting the 30
percent profits from the field that was talked about in the late
1970s-early 1980s.
MR. DICKINSON said that material is available and the division
could certainly put something together for the committee.
REPRESENTATIVE DYSON explained that what would be valuable would
be to see today's percentage in relation to whatever people were
talking about in 1980.
MR. DICKINSON said the division can find the 1980 analyses and
try to make comparable ones within 4-6 weeks.
Number 1315
MR. DICKINSON then pointed out that discussion had centered on
modified apportionment as it exists versus separate accounting as
proposed in HB 307. The universe isn't necessarily defined with
only those two poles. In fact, the state changed modified
apportionment, and there is nothing particularly magic about
having three factors weighted together. In fact, most states
weight the factors separately. In the Lower 48, sales are
usually weighted higher than the other factors. If one takes a
thorough look at the whole issue, the whole fiscal system and the
whole income tax issue, it shouldn't be just in terms of the
aforementioned two options, but should look at a number of ways
that modified apportionment might be made better.
CHAIRMAN WHITAKER observed that Mr. Dickinson had just opened an
entirely new can of worms. He asked Mr. Dickinson if he would
propose that the Administration make recommendations to do as Mr.
Dickinson had just suggested.
MR. DICKINSON replied that it was his personal suggestion, but
that the Administration has not made a recommendation.
Number 1182
REPRESENTATIVE CROFT offered closing comments regarding what had
been covered thus far. He noted that an "interesting switch" had
occurred when Representative Porter asked Mr. Dickinson about the
(unaud.). He said he thought it was appropriate to talk about
what the state lost and what it then gained from the increase in
the production tax in 1982. But, he continued, there is a
tendency to dwell on changes that were made seven years later.
He said he does not think it is appropriate to offset everything
the state has done since [1982] to try to prove that the state
did not lose anything from separate accounting. The numbers
available now from Mr. Dickinson show about a $4.6 billion loss
and that the changes to the oil production or severance tax
brought in about 2.8 [billion dollars], for a net loss to date of
about $1.8 billion or a little more. Representative Croft said
he would love to see solid numbers.
REPRESENTATIVE CROFT recalled that Judy Brady in her testimony
had suggested that there may be a problem with separate
accounting in that it penalizes the highly profitable stage of an
operation, and she called that the early part. He said he is
more worried, however, about a theoretical oil and gas company
that has service stations and refining but very little
production, and that wants to use Alaska for its production. If
such a company comes up to Alaska and spends a lot of money to
drill and explore, under separate accounting Alaska would not
charge [that company] a cent until it started to make money; in
contrast, under modified apportionment, Alaska gets a portion of
[the company's] Illinois service stations and California
refinery, even while [the company] is losing money up here.
REPRESENTATIVE CROFT said it seems that modified apportionment
discourages exploration because it taxes a company when it is not
making any money. Ms. Brady's point was that when a company
starts to make a lot of money, in the middle of the drilling of
the field, separate accounting demands its 9.4 percent of that;
Representative Croft said he thinks that is appropriate. He said
he is more worried about that early-early part, when separate
accounting asks a relevant question: Are you making any money?
REPRESENTATIVE GREEN emphasized that he thinks separate
accounting asks the relevant question. Even if the state does
have [another big oil strike], it still is asking the wrong
question. When a company is not making much money in this state,
and when in a few years the state loses some money under separate
accounting, he thinks that is fair.
Number 0898
REPRESENTATIVE CROFT referred to Deborah Vogt's comment that
there never seems to be a good time to change the tax rate. He
said he thinks it is part of the legislature's job to take a look
at these things periodically. The impact of "don't change the
tax rate" seems to him to be a scary idea of abrogating the
legislature's ability to look at these things. He said he
believes the legislature should periodically review the tax rate
to make sure that it is fair, and that the state is getting its
fair share.
REPRESENTATIVE CROFT then spoke to Representative Porter's
question about what system other states use. He said that to the
best of his knowledge, Oklahoma and Louisiana use separate
accounting, Texas does not have a corporate income tax, and
California essentially uses both. More important, the United
States government uses separate accounting to figure out how much
is owed for United States income taxes. It is basically, in the
United States, the preferred method for taxing oil and gas income
for the reason that the apportionment factor does not accurately
reflect the profit of the oil and gas industry. When one puts
together sales, property and payroll, it just does not give an
accurate image of what a producing state is making for the
company.
REPRESENTATIVE DYSON said he was intrigued by Representative
Croft's analysis that separate accounting makes it less risky and
more attractive for people wanting to explore and develop. He
asked to hear the other side's perspective on that.
TAPE 00-15, SIDE A
MS. BRADY expressed appreciation for the opportunity to present
another perspective.
STEVE MAHONEY, Associate General Tax Officer, ARCO, said that in
practicing tax law for more than 20 years, he has filed tax
returns in just about every state in this country, both for oil
and gas companies and other companies. He referred to
Representative Dyson's question regarding noncompetitiveness. He
pointed out that AOGA is made up of 17 very diverse companies.
Those members have different operations domestically and foreign,
different operations in Alaska and in other states. Most
important, some of those within the 17 companies do not have
production like some of the larger companies, yet all 17 agree
that they would like the current modified apportionment to be
retained. AOGA has not asked not to increase taxes, he said.
Not one of AOGA members has said that. "What AOGA has said is
that this type of income taxation is complicated, convoluted,
misunderstood, and creates all sorts of uncertainties for the
future," he added.
Number 0176
MR. MAHONEY addressed noncompetitiveness. He said if a company
does business in two states, and if, say, the activity is 50-50
in two states and the company earns $1, it has $1 of income.
Under modified apportionment, presumably, that company would get
50 cents' worth of income in one state and 50 cents' worth of
income in the other state; each state taxes based on the rate
that they want to apply. If, however, the company is doing all
of its business in Washington State and decides to become a
producer in Alaska, in the first several years of that activity
the company truly does not have any Alaska revenues. It does
have activity in the state. Well, if it has activity in the
state, the way modified apportionment or apportionment works,
activity goes away from the State of Washington. Therefore, the
company's tax in the State of Washington goes down, even though
it does pay some tax in Alaska.
MR. MAHONEY continued with his example. He asked: Does the
company's net tax liability go up? Most likely not, he answered,
except for the difference in rates [between the two states]. The
activity is weighted between the two. So it is not anti-
competitive. The company does not pay more taxes than it would
have otherwise. In the State of Washington (just as a
hypothetical example), the legislature is determined that its
best interest is served by having a company that is multi-
dimensional, is multi-state, can operate and undertake activities
in other states, and is healthy and vibrant; Washington taxes a
portion of all of the income of all of the income of that
corporation. Washington is willing to let go of a piece of the
pie because it knows the pie grows as the company develops in
other places, and Washington gets a lesser portion of a bigger
pie.
Number 0315
REPRESENTATIVE DYSON referred to the more narrow question of a
company considering investing, exploring and developing in
Alaska, and the fact that under separate accounting, it would
incur no tax liability until it started producing.
Representative Dyson said he thought Representative Croft was
saying that it is "an incentive for new guys to bring their bag
of marbles and come and play." He said he appreciated the point
that Mr. Mahoney raised, that modified apportionment may decrease
an existing tax liability in other places where the company is
operating; however, he asked Mr. Mahoney if he could speak to or
refute Representative Croft's position that separate accounting
appears to be attractive because a company incurs no liabilities
until it starts making money.
MR. MAHONEY replied that zero is better than some number as far
as tax liability is concerned. The question is the overall.
Modified apportionment is a very simple calculation. A company
takes its federal income tax, makes a few adjustments, then
multiplies it by a percentage of activity in the state.
Everybody understands it. Separate accounting does not provide
that.
REPRESENTATIVE PORTER referred to testimony that Oklahoma,
Louisiana and California - all producing states - use separate
accounting. He asked: If apportionment is much more beneficial
to the industry, why do these states not use it?
Number 0520
MR. MAHONEY explained that separate accounting is defined in
different ways in different states. There are different
formulas, different methods, and so on. For example, Louisiana
has separate accounting but allows for percentage depletion,
which is the largest deduction the oil industry has ever had on
an income tax return. That depletion allowance was part of a
negotiation between the state and the oil industry as to what
would make the industry work in the state, what would promote
development, and what would get the state its fair share.
Mississippi has separate accounting. For those two state, it
works.
MR. MAHONEY continued. He said oil and gas are really no
different from timber, mining, or any other natural resource
industry. All of the other states in the Union that apply income
taxes -including Texas, through its franchise tax, which is a
franchise tax based on income - have determined that
apportionment is the methodology that works best in the long term
to get the largest pie and to get the state's piece. The federal
government does not use separate accounting. The federal
government taxes all of the income in the whole world as if it
were U.S. income, and then applies credits for other taxes paid.
[HB 307 was held over.]
ADJOURNMENT
Number 0670
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:43
a.m.
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