Legislature(2005 - 2006)
04/08/2005 08:30 AM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HJR12 | |
| HB235 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 8, 2005
8:30 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Norman Rokeberg
Representative Ralph Samuels
Representative Paul Seaton
Representative Peggy Wilson
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 12
Proposing amendments to the Constitution of the State of Alaska
relating to the repeal of the budget reserve fund.
- HEARD AND HELD
HOUSE BILL NO. 235
"An Act excepting from the Alaska Net Income Tax Act the federal
deduction regarding income attributable to certain domestic
production activities; and providing for an effective date."
- HEARD AND HELD
OVERVIEW AK CORPORATE INCOME TAX
- SCHEDULED BUT NOT HEARD
PREVIOUS COMMITTEE ACTION
BILL: HJR 12
SHORT TITLE: CONST. AM: BUDGET RESERVE FUND REPEAL
SPONSOR(S): REPRESENTATIVE(S) HARRIS
02/18/05 (H) READ THE FIRST TIME - REFERRALS
02/18/05 (H) W&M, STA, JUD, FIN
04/01/05 (H) W&M AT 8:30 AM CAPITOL 106
04/01/05 (H) Heard & Held
04/01/05 (H) MINUTE(W&M)
04/08/05 (H) W&M AT 8:30 AM CAPITOL 106
BILL: HB 235
SHORT TITLE: DECOUPLING FROM FED TAX DEDUCTION
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
03/29/05 (H) READ THE FIRST TIME - REFERRALS
03/29/05 (H) W&M, FIN
04/08/05 (H) W&M AT 8:30 AM CAPITOL 106
WITNESS REGISTER
TOM WRIGHT, Staff
to Representative John Harris
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered information on HJR 12.
REPRESENTATIVE JOHN HARRIS, Sponsor HJR 12
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Offered information on HJR 12.
DAN DICKINSON, Director
Tax Division
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Offered information on HB 235.
CHUCK HARLAMERT, Juneau Section Chief
Tax Division
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Offered information on HB 235.
JUDY BRADY, Executive Director
Alaska Oil and Gas Association
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 235.
MICHAEL HURLEY, Chair
ConocoPhillips Alaska, Inc.
POSITION STATEMENT: Offered information on HB 235.
ACTION NARRATIVE
CHAIR BRUCE WEYHRAUCH called the House Special Committee on Ways
and Means meeting to order at 8:30:14 AM. Representatives
Weyhrauch, Samuels, Seaton, and Moses were present at the call
to order. Representatives Rokeberg, Wilson, and Gruenberg
arrived as the meeting was in progress.
HJR 12-CONST. AM: BUDGET RESERVE FUND REPEAL
CHAIR WEYHRAUCH announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 12 Proposing amendments to the
Constitution of the State of Alaska relating to the repeal of
the budget reserve fund.
REPRESENTATIVE SAMUELS moved to adopt the proposed committee
substitute (CS) HJR 12, Version 24-LS0485\G, Cook, 4/4/05, as
the working document.
8:31:59 AM
CHAIR WEYHRAUCH explained that Version G changes HJR 12 such
that it establishes a capital construction fund that uses the
constitutional budget reserve (CBR) essentially for "capital
projects."
8:32:49 AM
TOM WRIGHT, Staff to Representative John Harris, Alaska State
Legislature, related that the sponsor likes the idea of a
capital construction account.
8:33:31 AM
CHAIR WEYHRAUCH highlighted that Version G still doesn't provide
a budget cushion.
8:34:03 AM
REPRESENTATIVE SEATON pointed out that Alaska has a
constitutional provision requiring that a third of the budget be
in capital for which there has been no way in which to do it.
Since [Version G] provides that mechanism, he said he supports
the idea of a capital construction fund.
8:34:42 AM
REPRESENTATIVE WILSON reminded the committee that Alaska's
deferred maintenance lists amount to over $1 billion.
Therefore, the [capital construction fund will provide relief
for many communities in need].
8:35:38 AM
REPRESENTATIVE SEATON turned to subsection (b), lines 11 through
15, which says:
Money may be appropriated from the capital
construction fund for maintenance of facilities of the
State or a subdivision of the state. Money may be
appropriated from the fund for payment of the
principal and interest on general obligation or
revenue bonds issued for the construction of capital
projects by the State of a subdivision of the State,
including a public corporation.
REPRESENTATIVE SEATON said the aforementioned subsection could
be problematic because it doesn't specify whether the procedure
is to have an ongoing annual source of revenue for capital
construction. Therefore, it seems that one legislature could
appropriate all the funds and obligate those funds for decades
to come.
CHAIR WEYHRAUCH surmised that the aforementioned concern is "no
doubt a risk."
8:37:29 AM
CHAIR WEYHRAUCH, in response to Representative Wilson, said the
funds would come from the CBR and there wouldn't be any
refunding of the CBR with settlement money.
REPRESENTATIVE WILSON charged that such an amount won't be
adequate because it will require reliable sources to regenerate
the fund.
8:38:23 AM
REPRESENTATIVE SAMUELS mentioned that he has spoken with the
sponsor regarding HJR 12 including a percent of market value
(POMV) methodology to ensure cash flow during market
fluctuations. He related that Mr. Wright has indicated the
aforementioned can be worked on in the next committee of
referral. Representative Samuels said his concerns were similar
to those of Representative Seaton in that "all you're doing is
issuing bonds off it." Representative Samuels opined that he
would be more comfortable with language that allows use of the
POMV.
MR. WRIGHT related the sponsor's intent is not to spend "one
lump sum." The sponsor is also interested in the POMV
methodology, he added.
8:39:55 AM
REPRESENTATIVE SEATON related he is in favor in the POMV and
limiting it to capital projects.
8:40:59 AM
REPRESENTATIVE WILSON opined that the $2 billion currently
available in the CBR should be set aside for emergency purposes
because the state needs that protection.
8:42:47 AM
REPRESENTATIVE GRUENBERG opined that many Alaskans would support
the concept of a "capital permanent fund" that protects the
fund's principal. He turned to the appropriation limit in
Article IX, Section 16, which has a one-third requirement and
said it isn't unworkable and should be repealed. He noted that
the proposed fund has no source of funding aside from the
transfer of funds from the CBR. He inquired as to the
possibility of endowing this proposed fund with a certain
percentage of funds from certain things. Representative
Gruenberg then related his belief that the POMV approach is
attractive, but it's essential to ensure the fund's principal
not be invaded. He highlighted if the intent of this proposed
fund is to "finance bonds," setting forth the language to allow
the principal to be used to capitalize or finance those bonds is
appropriate. He reiterated that in order to "sell" this
constitutional amendment to the legislature and the public it
should be entitled, "capital permanent fund."
8:47:32 AM
REPRESENTATIVE SAMUELS highlighted that if the POMV mechanism is
used there will be no principal earnings or interest. He asked
what will serve as the state's cash flow if oil drops to $15 per
barrel.
MR. WRIGHT explained that options for a cushion during the
transition are still being discussed. Such options could
include placing a portion of [the proposed fund] into a
statutory budget reserve. However, in the event that oil drops
to $15 per barrel, the CBR wouldn't serve as a cushion to cover
the deficit and thus the state would be forced to find
alternative measures for revenue. He related his understanding
that currently if oil prices fall below $35 per barrel, the
state will have to dip into it's reserve accounts.
8:49:15 AM
REPRESENTATIVE ROKEBERG recalled, with the exception of three
years during his time with the legislature, it has utilized the
CBR to balance the budget. He proposed a hypothetical situation
in which the state had a $1 billion deficit, and said that
neither the CBR or any amount of taxation could cover that debt.
Therefore, he didn't believe there are many alternatives without
some type of reserve. Representative Rokeberg inquired as to
the discussions the sponsor has had with regard to the cushion
and the necessity to fill fiscal gaps in the future.
MR. WRIGHT related that the sponsor is also concerned about the
transition period that would occur until the state adopts a
fiscal plan. The main purpose of HJR 12 is to force the
legislature to develop a long-range fiscal plan. He offered
that a statutory budget reserve could be utilized during a
transition period. However, there are alternative options such
as the earnings reserve from the permanent fund, which are
available by a simple majority vote albeit a political decision.
8:51:59 AM
CHAIR WEYHRAUCH explained that HJR 12 would have simply
eliminated the CBR with a vote of the public, while Version G
offers several options into which the CBR could be appropriated.
He informed the committee that he wanted to discuss
Representative Rokeberg's proposal to repeal Section 17(c) in
order to move both resolutions in tandem.
8:53:41 AM
REPRESENTATIVE ROKEBERG said that although he supports the
concept of a long-range fiscal plan, he expressed concern with
the proposal of including the CBR as an integral part of such a
plan for the future. He referred to the concept of "triggers"
in which the state could manage cash flow around the CBR by
having a tax regime which was triggered when the CBR hit a
particular floor. Some have even suggested having a ceiling for
the CBR such that once it reaches that ceiling the collection of
[certain] taxes would stop. From a political standpoint,
perhaps more public buy-in could be generated [with the
aforementioned]. In order to accomplish something such as the
aforementioned, he opined that there must be a corpus of a fund
to reassure the state it can pay its "bills when appropriate."
The CBR provides that core cash amount, and therefore he related
his reluctance to get rid of it, particularly in the context of
creating a long-range fiscal plan.
REPRESENTATIVE GRUENBERG said he doesn't support eliminating
[Article IX], Section 17(c) because it provides balance between
the minority and majority. He related his belief that
Representative Rokeberg's concept is an interesting use of the
CBR. He suggested that [HJR 12] and Representative Rokeberg's
concept be reviewed together as part of the committee's planning
for the state.
8:56:47 AM
REPRESENTATIVE SEATON suggested that [Section 18, subsection
(b)], line 11 should be amended to read, "Money may be
appropriated by the POMV method from the capital construction
fund."
CHAIR WEYHRAUCH indicated that all amendments should be brought
before the committee at the next meeting.
REPRESENTATIVE SEATON added that he will offer an amendment to
[Section 18, subsection (b)], line 12 through 15, to delete
"bonding" so the fund is only used for capital construction and
maintenance.
8:59:15 AM
REPRESENTATIVE ROKEBERG, in response to Representative Wilson,
said $400 million was needed as a cash flow cushion.
REPRESENTATIVE WILSON opined that a fiscal plan is essential in
order for the legislature to be responsible and set enough aside
for cash flow reasons.
CHAIR WEYHRAUCH related his belief that this resolution doesn't
address [cash flow issues] but rather diverges from it.
9:01:29 AM
REPRESENTATIVE SEATON recalled that previous testimony from the
Department of Revenue related other options to address the cash
flow account without the CBR.
REPRESENTATIVE GRUENBERG commented this resolution should
explicitly state this money can be used for bonding, therefore,
he discouraged any deletion of the term.
CHAIR WEYHRAUCH added that the committee needs to review
potential alternatives to meet the long-term fiscal problem.
9:02:55 AM
REPRESENTATIVE SEATON related his problem with paying off
obligation bonds is that one legislature has the potential of
tying up the entire revenue stream for the next 20 years. The
idea of the capital construction fund is to have the ability to
use an amount to be used for projects and maintenance. If one
legislature can bond for large projects and dedicate the funding
stream to pay off the debt, then there is a one-time capital
bond and a mechanism to pay off the bonded indebtedness. These
are two different philosophies.
REPRESENTATIVE GRUENBERG said that is not the way he interprets
the language. He related his belief that the bonds wouldn't be
dedicated revenue bonds, but rather they would be used for
"financing." Therefore, one legislature couldn't tie-up the
vast majority of the fund in perpetuity but rather those bonds
could serve as a financing source for projects. The state uses
a similar system for floating general obligation (GO) bonds or
other financing or lease bonds, he added.
9:05:30 AM
REPRESENTATIVE JOHN HARRIS, Alaska State Legislature, speaking
as the sponsor of HJR 12, related this CS does not offer the
same "bipartisan spirit" originally proposed. The purpose of
HJR 12 was to eliminate the CBR, its three-quarter vote and
reverse sweep principle. He offered that a constitutional fund
could be established as a cash flow mechanism by allocating $500
million from the CBR. Furthermore, the legislature could also
capitalize on the earnings on the fund with a POMV methodology
if it so chooses. The [idea behind this] is to generate $100-
$150 million annually for capital. He noted that he has another
draft [version] to bring to the committee.
9:08:33 AM
REPRESENTATIVE WILSON inquired as to how the [capital
construction] fund would be replenished on a regular basis.
REPRESENTATIVE HARRIS pointed out that the POMV would do that.
He explained that high interest rates will allow the fund to
grow. Furthermore, the legislature could deposit money into the
account [during times of surplus] similar to what is done with
the permanent fund. If the state receives some infusion of
cash, it's probably not a bad idea to place it into a
constitutionally protected fund such that the legislature can
use its earnings regularly.
9:10:27 AM
REPRESENTATIVE WILSON related that she had the notion that it
would grow more than from the interest. Perhaps a certain
percentage of the [earnings] from the gas pipeline could be
placed into the fund. She suggested that the fund should have
additional revenue sources in order to meet the states ongoing
needs, which amount to more than $100 million annually for
maintenance alone.
9:11:27 AM
CHAIR WEYHRAUCH, in response to Representative Rokeberg, relayed
that the intent of the resolution is to provide the money for
revenue bonds. However, it's problematic because the entire
principal could be obligated at one time, which he didn't
believe to be good policy.
REPRESENTATIVE ROKEBERG mentioned that this resolution could be
problematic in that it obligates future legislatures.
Representative Rokeberg highlighted the difficulties the CBR has
faced due to its short-term horizon of the cash management
principles. Therefore, the proposal [encompassed in Version G]
is that a longer term horizon policy similar to the Alaska
Permanent Fund's policy could be utilized. Therefore, a
statutory constitutional draw could generate higher yields.
REPRESENTATIVE GRUENBERG opined that if there's a constitutional
capital fund then there will be political choices annually as to
whether the legislature wishes to deposit excess funds solely
into the permanent fund or into a combination of the two funds.
CHAIR WEYHRAUCH added [that the legislature could also
appropriate those excess funds] into a statutory reserve fund.
REPRESENTATIVE HARRIS opined that the aforementioned situation
"is a good problem to have."
9:15:54 AM
REPRESENTATIVE GRUENBERG opined this is an important issue, and
therefore he urged the chair to take the time necessary to focus
on this matter.
HB 235-DECOUPLING FROM FED TAX DEDUCTION
9:17:18 AM
CHAIR WEYHRAUCH announced that the final order of business would
be HOUSE BILL NO. 235, "An Act excepting from the Alaska Net
Income Tax Act the federal deduction regarding income
attributable to certain domestic production activities; and
providing for an effective date."
9:17:32 AM
REPRESENTATIVE SEATON moved that the committee adopt CSHB 235,
Version 24-GH1137\F, Kurtz, 4/7/05, as the working document.
[No objection was stated, and Version F was treated as adopted
and before the committee.]
9:17:46 AM
DAN DICKINSON, Director, Tax Division, Department of Revenue,
noted that the committee should have a packet of information
from the department. He explained that effective January 1,
2005, Alaska's tax laws relating to corporate income tax had
fundamentally changed so that under federal law taxpayers may
exclude a portion of their qualified production activity income
(QPAI) when calculating the gross taxable income. The QPAI
includes income from extraction, production, and manufacturing
within the U.S. In Alaska the affected industries include: oil
and gas production, refining and marketing, construction, fish
and fish processing, and mining. In 2005, the deduction is 3
percent of QPAI, thereafter the deduction rises over time to 9
percent. He explained that when calculating federal income tax
one subtracts his or her expenses from his or her revenue.
[With the new tax laws] now a portion of income earned can also
be deducted from one's actual expenses. This impacts Alaska
because Alaska automatically adopts federal income tax laws,
although the legislature has the ability to not adopt any
specific rule. For example, the state hasn't adopted the
federal depreciation methods. The impact to Alaska is more
dramatic compared to most other states due to the dominance of
natural resources in Alaska. He highlighted that one of the
problems is that under the rules established by the legislature,
when calculating taxable income of Alaska's major industry, the
oil and gas industry, the calculations begin with the worldwide
income of the oil and gas corporations. Mr. Dickinson opined
that although the federal law only applies to the QPAI within
the U.S., the department believes that due to Alaska's tax
structure the calculation would have to include worldwide
activity.
MR. DICKINSON turned to the impact of these rules. In fiscal
year (FY) 04, if the full 9 percent QPAI deduction had been in
place, there would've been $24.7 to $27.4 million less in
revenue collected under Alaska's corporate income tax. He
estimated the projected corporate revenue loss over the next
decade to be approximately $100 million as a consequence of this
deduction. Mr. Dickinson specified that without HB 235
decoupling Alaska from the federal law, the department will face
the burden of determining the QPAI-like activity outside of
Alaska.
9:24:45 AM
REPRESENTATIVE SAMUELS asked what are the circumstances used to
differentiate between a foreign and a domestic corporation.
MR. DICKINSON explained that for tax purposes the term "foreign"
often describes anything outside Alaska, however, in this
context it's used in a broader sense. A domestic corporation is
one headquartered in the U.S. while a foreign corporation is one
headquartered outside the U.S.
9:25:25 AM
REPRESENTATIVE WILSON asked what percent of Alaskan corporate
income is foreign.
MR. DICKINSON replied, "None of it, we only tax income in
Alaska. But the way we calculate it is we look at the worldwide
income and figure out what percentage of that is Alaskan and
that's of course all we can tax."
CHUCK HARLAMERT, Juneau Section Chief, Tax Division, Department
of Revenue, clarified that the percentage of the aforementioned
base assigned to Alaska is hard to calculated because the state
has 12,000 taxpayers. He related that in 2003 Alaska's largest
three taxpayers generated roughly two-thirds of their profits
overseas. Therefore, he estimated that approximately two-thirds
of the QPAI activity is non U.S.
9:26:48 AM
REPRESENTATIVE GRUENBERG related his belief that this is an
"attractive bill." He asked if there are any other new wrinkles
in federal law that should be decoupled.
MR. DICKINSON highlighted that although the law passed in 2004
is "massive" and proposes many changes, this is the only one the
department suggests is appropriate to decouple.
9:27:44 AM
MR. DICKINSON returned to his presentation. He explained the
reasoning for the federal tax policy was to advantage
manufacturing or activity within the U.S. relative to that which
is foreign. He said the governor views this as an unfunded
federal mandate. However, some will argue that the state will
be the beneficiary of this federal initiative because when
companies, such as oil companies, bring money back home Alaska
will benefit. However, he highlighted the need to realize that
it's not just exploration and production that's advantaged but
also refining and marketing of any refined products that create
QPAI. He clarified that the total revenue of the company
affected because the [companies] earn income in every state.
The administration believes "that the system that existed before
January 1, 2005, worked just fine" and now Alaska needs to take
steps to decouple from the federal tax law on this point.
MR. DICKINSON turned to a chart entitled, "Projected State
Revenue Loss from QPAI Deduction", which shows after 10 years of
[this new federal tax law] the loss will average approximately
$100 million. He continued with a page entitled, "Status of
QPAI in Other States", which details that other states are
attempting to decouple on this particular issue. In fact,
Massachusetts has actually passed decoupling legislation.
9:31:46 AM
CHAIR WEYHRAUCH asked if the QPAI is only that within the U.S.
MR. HARLAMERT responded that under the federal law the
aforementioned is exactly the definition; the federal government
can and does draw a line around U.S. Therefore, for federal
purposes, the QPAI for oil companies includes exploration and
production as well as all the refining and marketing whether the
crude came from a domestic well or abroad because refining is
manufacturing. However, Alaska cannot simply adopt a federal
discriminatory provision because of an established ruling by the
U.S. Supreme Court. Alaska cannot discriminate against
interstate or foreign commerce. He specified that the basic
definition of discrimination is the different treatment, for tax
purposes, of economic interests in a state versus those out-of-
state.
9:33:04 AM
CHAIR WEYHRAUCH surmised then that the state's position is it's
required, by the constitution, to look at potential QPAI
worldwide, not just in Alaska.
MR. HARLAMERT replied, "Absolutely."
9:33:11 AM
REPRESENTATIVE ROKEBERG asked if the aforementioned ruling was a
U.S. Supreme Court Case.
MR. HARLAMERT replied, yes.
9:33:15 AM
REPRESENTATIVE GRUENBERG related his belief that the CS merely
combines subsections (a) and (b).
MR. DICKINSON indicated agreement. In further response to
Representative Gruenberg, Mr. Dickinson replied that the state
would have the same effective date as the federal mandate,
January 1, 2005, and therefore there would be no revenue loss.
9:34:18 AM
MR. HARLAMERT, in response to Representative Gruenberg, replied
that there are states that automatically adopt the federal law
and have to affirmably accept it, while other states don't
automatically adopt and have to affirmably adopt rules. In
general, it's sound tax policy to conform with the federal
government, particularly with regard to minor timing
differences. He acknowledged that the aforementioned does turn
over some of the state's policy making authority to the federal
government, and therefore the state needs to decide which
policies are appropriate. The department, he noted, has never
asked the legislature to address minor timing differences. This
QPAI deduction, line 26 for corporate federal tax returns, is a
permanent difference.
REPRESENTATIVE GRUENBERG clarified that the department would not
recommend "flipping it around."
MR. HARLAMERT answered, "No, we would not."
9:36:39 AM
REPRESENTATIVE SEATON posed a situation in which a fishing
company pays corporate tax. He related his understanding that
if the state decouples, there is nothing in this legislation
that would reduce the fishing company's corporate tax break from
the federal government.
MR. DICKINSON confirmed Representative Seaton's understanding,
and added that this legislation has no effect on federal taxes.
REPRESENTATIVE SEATON surmised that if the state doesn't
decouple, the corporate tax for the state would be reduced by 9
percent over the years.
MR. HARLAMERT said it depends on the individual company because
the QPAI calculation could be a subset of overall taxable income
or it could exceed net taxable income. However, the federal
statute limits the deduction to the percentage to the lesser of
QPAI or taxable income, so it will never exceed 9 percent of
taxable income. Although it could exceed 9 percent of [a
company's] tax because it reduces tax and then has credits, the
percentage reduction of net tax liability will be greater than
the percentage reduction of taxable income. He added the
question is difficult to answer, and thus the department has
estimated a rough range of percentages. In further response to
Representative Seaton, Mr. Harlamert explained that [coupling]
essentially allows a multistate or multinational business entity
to take the QPAI wherever it's earned, regardless of geological
boundaries, and have the exact impact and deduction in the
calculation of Alaska income. At the federal level it's an
incentive because it can be restricted to U.S. profits while at
the state level it cannot be restricted. Therefore, it offers
no incentive.
9:39:49 AM
JUDY BRADY, Executive Director, Alaska Oil and Gas Association
(AOGA), said AOGA opposes this legislation for two reasons.
First, the justification for this legislation has been
misstated, and therefore the fiscal impacts have been
significantly overstated. Second, the [oil] industry views this
legislation as yet another tax increase to the [oil] industry.
She explained that Congress passed the federal Jobs Act
creating, among other things, a tax incentive to bring more
manufacturing and production to the U.S. because Congress
believed that many companies were disadvantaged overseas.
Furthermore, this federal legislation applies to all companies
that manufacture and produce in the U.S. and doesn't just target
the oil and gas industry. This tax incentive makes it
unequivocal that the QPAI has to come from manufacturing
activity occurring in the U.S., not overseas. The purpose of
[the Act] was to give advantage to companies in the U.S. This
legislation, HB 235, proposes to undo the automatic adoption of
Section 199 and prevent it from taking effect for state income
tax purposes. In the fiscal note for this legislation, the
Department of Revenue claims that letting Section 199 take
effect for Alaska purposes would cost the state between $95
million and $105 million from now until fiscal year 2013.
Furthermore, the department charges that it could cost more than
$500,000 annually to administer Section 199 if it takes effect.
However, AOGA believes the aforementioned estimates are
"severely overstated because of a faulty premise in DOR's
analysis." She said this premise is stated in the fiscal note
as follows:
In order to avoid impermissible discrimination against
economic activity outside of the state, taxpayers will
be allowed the QPA [Income] deduction on their Alaska
return for all production wherever the activity
occurred in Alaska, another state, or in a foreign
country. Production activity conducted in-state,
domestic out-of-state, or in a foreign country will be
awarded an equal deduction.
MS. BRADY opined that if the aforementioned statement was true
AOGA would not oppose this legislation. In assessing the state
revenue impact of letting Section 199 take effect, the
Department of Revenue looked at potential "production activity
income" everywhere in the world, because Alaska's corporate
income tax is worldwide. However, the Department of Revenue did
not look just at the "qualified production activity income" as
defined by Congress, which is only that income which comes from
production activity inside the U.S. Ms. Brady said:
Despite what DOR asserts to the contrary in its fiscal
note, when Alaska passively adopts a limited federal
deduction, it does not legally or logically follow
from this fact that DOR must, or even can, under the
Foreign Commerce Clause of the U.S. Constitution,
completely remove the limitation in the course of
administering the deduction for state tax purposes.
And there is, in fact, ample precedent when a
geographically limited federal provision remains
limited in precisely the same way when it is applied
under the Alaska income tax. For instance,
expenditures for enhanced oil recovery (EOR) give rise
to a federal tax credit that Alaska also allows, and
the federal tax credit is limited to expenditures for
EOR projects in the United States - administering the
EOR credit for state purposes, DOR does not impute a
hypothetical credit for EOR projects outside the U.S.
Instead, DOR uses the same domestic territorial
limitation as the federal credit has. We [AOGA] do
not see how the domestic territorial limitation in the
new QPA income deduction would be any different for
the one for EOR in terms of its potential for
impermissible discrimination. In other words, since
the DOR isn't applying the EOR credit on a worldwide
basis, it is inconsistent for DOR to say it must apply
the QPA income deduction on a worldwide basis.
Because of its faulty premise about how broadly the
QPA income deduction must be applied for state
purposes, DOR's estimated revenue impacts are
overstated by at least a factor of two or three times,
depending on how much QPA income it foresaw from non-
U.S. production activities ... they [DOR] believe that
about 40 percent of the production activity ... or
two-thirds is non-U.S. Similarly, the estimated
administrative cost of $500,000 is entirely a result
of this same faulty assumption. The IRS will audit
taxpayers' QPA income from activities in the U.S., and
there will be nothing left for the DOR to audit and
enforce. The $500,000 a year then should disappear,
in terms of a fiscal issue.
MS. BRADY continued:
We [AOGA] also disagree with DOR's conclusion in the
fiscal note that the anticipated beneficial effects of
the QPA income deduction at the federal level cannot
be replicated at the state level. At least with
respect to oil and gas, the two principals of
qualified production activity in the United States are
the deep-water Gulf of Mexico and Alaska. With only
two hot spots for the action to occur in, it seems
likely that Alaska would be ahead of the game when the
incentive works if it attracts new production to the
U.S. We believe that given DOR's contrary conclusion
about any benefit accruing to Alaska as it becomes
more competitive, it seems improbable that DOR made
any serious attempt to estimate and include increases
in state tax revenues from the new production
activities ... because this is indeed a tax incentive.
Thus, both on policy grounds as well as potential
fiscal impacts, the justification that DOR has given
for this legislation has been overstated and
misstated.
And the second reason is that ... to the industry this
represents yet another tax increase on the oil
industry from this administration. It is a tax
increase because Section 199 of the Internal Revenue
Code was automatically adopted for state purposes as
of January 1, when it took effect. This section, in
other words, is already the status quo. HB 235
proposes to change the status quo by undoing the
adoption of the section, and raising income tax for
our industry and every other industry in the state
having qualified production activity. I think most of
you have seen DOR's just released spring revenue
sources book, which talks about the need for literally
tens of billions of dollars of new investment to keep
oil production steady, and they have decreased the
kind of production they think they're going to get in
the next years. What we all know, and fortunately for
us, Alaska is one of the two places in the United
States and one of the 30 or 40 places in the world
that's considered to have good rocks. We still have
good enough potential reserves so that large
companies, like Shell ... are still interested in
coming up here.
MS. BRADY concluded by highlighting that companies are always
looking to determine where their investment money will have the
most advantage.
9:50:44 AM
CHAIR WEYHRAUCH indicated that AOGA's letter would be entered
into the record.
9:51:30 AM
MICHAEL HURLEY, Vice Chair Tax Committee, ConocoPhillips Alaska,
Inc., in response to Representative Rokeberg, answered that the
federal government accounts for the EOR credit at the federal
level, audits it, and then that's part of the total federal
income which is apportioned to Alaska versus other states.
9:53:13 AM
REPRESENTATIVE SEATON related his understanding that AOGA
believes [the impact of decoupling] would result in $33 million
in corporate income taxes as opposed to the aforementioned
projected $100 million.
MS. BRADY replied that AOGA's valuation is based on what it
believes the production outside Alaska, outside the U.S., and
Inside the U.S. However, antitrust laws prevent companies from
knowing [exact amounts].
REPRESENTATIVE SEATON reiterated that if one takes DOR's two-
thirds of non-U.S. QPAI would result in [a loss of] $33 million
rather than $100 million.
MS. BRADY added the aforementioned amount would be over a 10-
year period.
9:54:45 AM
MR. HURLEY, in response to Representative Rokeberg, added that
the Department of Revenue includes the foreign impact, which
makes the state revenue loss less by roughly two-thirds. In
further response to Representative Rokeberg, Mr. Hurley said
it's hard to estimate [the exact figure] but from ConocoPhillips
Alaska, Inc. perspective it would be at least half.
9:56:05 AM
REPRESENTATIVE ROKEBERG related his understanding that
ConocoPhillips Alaska, Inc. has less international activity than
other oil companies. According to Ms. Brady, the enactment [of
HB 235] would be the removal of an incentive for the industry to
invest in Alaska, but the effect is "de minimis." He asked
whether this is a "hard number" issue or a policy call.
CHAIR WEYHRAUCH commented that the first part of AOGA's
testimony was hard number and the second part was policy call.
MS. BRADY mentioned that oil companies are concerned with both
the cost of business and policy issues in an area.
9:58:14 AM
REPRESENTATIVE WILSON inquired as to the impact if every state
decouples.
MS. BRADY relayed that the federal law is intended to make
places more attractive to do business in the U.S. rather than
overseas. She related her belief that the oil industry gets hit
the hardest because the oil industry pays most of the tax. Even
$30 million over a 10-year period is a lot of money. She
highlighted the need for all sides to address this matter from
the perspective of competition.
10:00:47 AM
REPRESENTATIVE SEATON expressed concern that Alaska doesn't have
the ability to discriminate, and therefore Alaska will be giving
tax breaks for QPAI earned in any U.S. location. The fishing
industry provides many examples of this, he noted.
MR. HURLEY said Representative Seaton's analysis is correct
because the purpose is to keep manufacturing and production
within the U.S.
10:02:08 AM
REPRESENTATIVE ROKEBERG highlighted that within the U.S. 14
states export oil and gas. He recalled that AOGA's testimony
was that adoption of this legislation would raise taxes and
deviate from the status quo. However, he opined that this
legislation would maintain the status quo that existed prior to
January 1, 2005, and therefore not raise taxes.
MS. BRADY replied the deduction is in place now.
10:04:12 AM
REPRESENTATIVE GRUENBERG highlighted the importance of the
governor's opinion that this deduction hoisted upon the states
is the same effect as an unfunded federal mandate.
ADJOURNMENT
10:04:52 AM
There being no further business before the committee, the House
Special Committee on Ways and Means meeting recessed at 10:04
a.m. to April 11, 2005.
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