Legislature(2003 - 2004)
04/16/2004 07:08 AM House W&M
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* 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 16, 2004
7:08 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Dan Ogg
Representative Ralph Samuels
Representative Max Gruenberg
Representative Carl Moses
MEMBERS ABSENT
Representative Bruce Weyhrauch, Vice Chair
Representative Vic Kohring
Representative Norman Rokeberg
Representative Peggy Wilson
OTHER LEGISLATORS PRESENT
Representative Paul Seaton
Representative Beth Kerttula
Representative Ethan Berkowitz
COMMITTEE CALENDAR
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 441
"An Act amending the oil and gas properties production
(severance) tax as it relates to oil to require payment of a tax
of at least five percent of the gross value at the point of
production before any price adjustments authorized by this Act,
to modify the mechanism for calculating the effective tax rate,
to provide for adjustments to the tax when the prevailing value
of the oil exceeds $20 per barrel or falls below $16 per barrel
and to limit the effect of the adjustments, to exempt certain
kinds of oil from application of the adjustments, and to waive
and defer payment of portions of the tax on oil when its
prevailing value falls below $10 per barrel; and providing for
an effective date."
- HEARD AND HELD
HOUSE BILL NO. 493
"An Act relating to adoption and revision of a long-term fiscal
plan for the State of Alaska."
- MOVED CSHB 493(W&M) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 441
SHORT TITLE: MODIFICATION OF OIL SEVERANCE TAX
SPONSOR(S): REPRESENTATIVE(S) GARA
02/05/04 (H) READ THE FIRST TIME - REFERRALS
02/05/04 (H) W&M, O&G, RES, FIN
02/16/04 (H) SPONSOR SUBSTITUTE INTRODUCED
02/16/04 (H) READ THE FIRST TIME - REFERRALS
02/16/04 (H) W&M, RES, FIN
03/29/04 (H) O&G REFERRAL ADDED AFTER W&M
04/14/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
04/14/04 (H) Heard & Held
04/14/04 (H) MINUTE(W&M)
04/16/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
BILL: HB 493
SHORT TITLE: LONG TERM FISCAL PLAN
SPONSOR(S): REPRESENTATIVE(S) HARRIS
02/16/04 (H) READ THE FIRST TIME - REFERRALS
02/16/04 (H) W&M, FIN
02/25/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
02/25/04 (H) Heard & Held
02/25/04 (H) MINUTE(W&M)
03/03/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/03/04 (H) Heard & Held
03/03/04 (H) MINUTE(W&M)
03/19/04 (H) W&M AT 8:00 AM HOUSE FINANCE 519
03/19/04 (H) -- Meeting Canceled --
03/24/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
03/24/04 (H) Scheduled But Not Heard
04/16/04 (H) W&M AT 7:00 AM HOUSE FINANCE 519
WITNESS REGISTER
DAN DICKINSON, Director
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Testified during the discussion of HB 441
and answered questions.
REPRESENTATIVE LES GARA
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 441.
CHUCK LOGSDON, Chief Petroleum Economist
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Testified during the discussion of HB 441
ACTION NARRATIVE
TAPE 04-24, SIDE A
Number 0001
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:08 a.m. Representatives Hawker,
Samuels, Gruenberg, Moses, and Ogg were present at the call to
order. Representatives Seaton, Kerttula, and Berkowitz were
also present.
HB 441-MODIFICATION OF OIL SEVERANCE TAX
Number 0145
CHAIR HAWKER announced that the first order of business would be
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 441, "An Act amending the
oil and gas properties production (severance) tax as it relates
to oil to require payment of a tax of at least five percent of
the gross value at the point of production before any price
adjustments authorized by this Act, to modify the mechanism for
calculating the effective tax rate, to provide for adjustments
to the tax when the prevailing value of the oil exceeds $20 per
barrel or falls below $16 per barrel and to limit the effect of
the adjustments, to exempt certain kinds of oil from application
of the adjustments, and to waive and defer payment of portions
of the tax on oil when its prevailing value falls below $10 per
barrel; and providing for an effective date."
Number 0230
DAN DICKINSON, Director, Tax Division, Department of Revenue
(DOR), said that after [HB 441] was introduced in February the
governor commented that he would like DOR to take a long, hard
look at the economic limit factors (ELF), and as Commissioner
Corbus stated at the previous meeting, DOR is not suggesting any
changes at this time. He spoke of a document labeled April 16,
from DOR that all of the committee members should have, and
related that the first four slides in that document provide
background information about the ELF. The first slide, "Alaska
oil production between 1965 and 2020", shows that in the past
Prudhoe Bay oil production was "the name of the game," he said.
CHAIR HAWKER explained the color markings on the graph.
MR. DICKINSON continued to explain that Prudhoe Bay and Kuparuk
constituted almost all of the revenues the state received in the
first quarter century of production from the North Slope. He
said it is important to note that what was appropriate in the
past may not be appropriate in the future. Tax regimes should
reflect what they are taxing, and the situation has changed, he
noted.
CHAIR HAWKER asked when the last tax change was.
MR. DICKINSON replied that the last major change was in 1989 as
a consequence of when the second exponent was added to the ELF,
the field size factor. He said that in earlier testimony the
notion was made that even though there had only been a major
legislative change, there had been frequent regulatory changes.
He opined that that was only half true in the sense that there
have been regulatory changes and a measure of clarity has been
brought through those changes.
Number 0857
MR. DICKINSON, turning to the second slide, said that it follows
up on the first slide and translates barrels to dollars. This
curves shows all of the ups and downs of oil prices.
CHAIR HAWKER asked Mr. Dickinson if he is quoting Alaska North
Slope (ANS).
MR. DICKINSON replied yes. He noted an important aspect not
visible in the slide. Since 1988 prices have been on a
continuous rise, which is offsetting much of the decline in
production. However, the slide clearly shows a decline in oil
revenue as a whole, he said.
CHAIR HAWKER asked why the projected revenues consist of a
smooth line with no jagged highs and lows.
MR. DICKINSON replied that the actual projection will not look
like that. It will be just as jagged. The graph is showing the
average range over the next 15-17 years, he explained.
Number 1129
MR. DICKINSON said that slide three is a summary of all the
fields on the North Slope and the daily production needed to
calculate the ELF. He pointed out that Prudhoe Bay is producing
roughly 1 million barrels a day, which is about 40 percent of
the total production, with an ELF of roughly .9, and the average
productivity is about 493 barrels a day. The critical factors
are the size of the field and the average number of barrels per
well produced, he said. He contrasted several other fields such
as Alpine and Northstar, both of which have a high ELF.
MR. DICKINSON pointed out that it takes Kuparuk 460 wells to
produce about 160,000 barrels a day as opposed to Alpine and
Northstar together, which have 36 wells. The Kuparuk wells are
about one-tenth as productive as the wells that are found in
Alpine and Northstar, and as a consequence, their ELF is .2.
There are three fields that have an ELF close to .9, which means
that their production tax rate would be .9 times 15 percent, or
12.5 percent for the two new fields. All the other fields are
at .2 or below, and so they'll have a production tax rate of
under 3 percent. Most of those small fields have a production
tax rate of zero, he added.
Number 1627
MR. DICKINSON reported that slide four shows the ELF for Cook
Inlet Fields, most of which have considerably lower daily
production rates than any of the fields in the North Slope. It
shows the contrast between the zero ELF in these fields as
compared to the North Slope, he said. Slide five, "Oil ELF of
Select Oil Fields", shows the weighted average for all fields.
The average ELF jumped from .8 up to almost 1, Kuparuk jumped
from .55 to .85, and Prudhoe Bay jumped from .8 up to 1 because
the second exponent was added to the ELF, he explained.
However, the graph then shows how the ELF declines as production
falls. "As the parameters or the input into the ELF equation
fall, because of the exponential relationship between them, you
can drive the ELF down much quicker than you would if you had a
simpler additive or multiplicative relationship," he said. He
pointed to Northstar as an example of a field whose production
will fall roughly in half and at the same time whose ELF will go
from .8 down to under .1, essentially removing that field from
the tax roles. The same pattern is true for Alpine fields, he
noted.
Number 2129
CHAIR HAWKER stated that the ELF formula actually has a double
exponentiation in it. He asked Mr. Dickinson if his point was
that "the double exponentiation was designed to create these
precipitous declines in the ELF in relation to a somewhat lesser
decline or less proportionate decline in actual production."
MR. DICKINSON said he thinks that is correct, and that they were
also designed to make very large fields have a very high tax
rate.
REPRESENTATIVE GRUENBERG asked if the ELF is working as it was
intended when it was established.
MR. DICKINSON replied that there is a lot of debate about what
it was intended to establish. Mathematically there have been no
surprises, he opined. Small fields pay almost no tax and there
is a proliferation of small fields. He questioned if that would
have happened anyway. He suggested that the parameters in the
ELF formula should be looked at closely.
Number 2359
REPRESENTATIVE KERTTULA said, "I think that some of the
interaction that's causing this drop is because when we
instituted the ELF it was really done before Alaskan fields were
mature and we didn't take into account that the new satellite
fields were going to use the existing infrastructure as has
occurred. Is that part of why the PEL [presumed economic limit]
isn't maybe accurate today or as accurate as it should be?"
MR. DICKINSON said he thinks so in the sense that an ELF that
ignores production facilities, which are among the greatest
single determinants of the economics, would seem to be a bit of
a misnomer. "The kinds of satellites that we have now simply
weren't contemplated," he added.
REPRESENTATIVE GRUENBERG asked Mr. Dickinson to explain why the
proliferation of satellites has had an unintended consequence.
MR. DICKINSON turned back to slide three, the summary of the Elf
for 2003, and pointed to the left hand column called "Unit". At
the Colville River Unit (CRU), Alpine is the only field, and all
production goes through one facility, he said. The bottom nine
fields make up the Prudhoe Bay Unit (PBU) where there are seven
integrated production facilities, and the Prudhoe Bay field is
produced through six of those [facilities]. Production from the
smaller satellites is not used to calculate the overall ELF and
each satellite has its own ELF calculated, he explained. "If
you had taken all those satellite developments, put them all
together in a single calculation, what would happen is, the
overall ELF ... there would be a higher ELF and the satellites
that currently have no ELF would jump to an ELF very close to
that of the mother field, the Prudhoe Bay field, at about .89,"
he explained. One of the problems is that the definition that
defines what is and is not a field preceded the addition of the
second exponent. He said that the question that needs to be
answered is: Is granting of this ELF approval more likely to
lead to development and production? And the answer is yes, as
long as there are small satellites that are not part of the
mother field calculations, they will have a low ELF, he said.
If they are viewed as extensions of the mother field or the
focus is on how they are produced, there might be a very
different answer, he concluded.
Number 3025
REPRESENTATIVE KERTTULA, responding to the statement that it is
more likely to lead to development, asked if that was out of
statute or regulation. She asked if that would always lead to
giving a lower ELF because low tax would always lead to more
development.
MR. DICKINSON replied that it is in regulation. In statute it
is called "economic interdependence". He said he believes the
criteria, as applied now, are appropriate and reflect the intent
of the initial ELF.
REPRESENTATIVE KERTTULA asked if zero tax would always be the
best for spurring development, but may not be appropriate.
MR. DICKINSON said that there are several criteria, and one
would have to ask, "Would granting it be sufficient to stop the
project as opposed to not granting it?"
REPRESENTATIVE KERTTULA said she would look at the regulations.
CHAIR HAWKER noted the arrival of Representative Berkowitz.
Number 3257
REPRESENTATIVE SEATON wondered what the definition of a field
is, and asked for clarification of whether a well at different
depths could be considered different fields.
MR. DICKINSON replied that Representative Seaton has discovered
"the dirty little secret in the ELF debate." He pointed out
that the word "fields" does not appear in statute or
regulations. Instead, "a lease or property" is used. A problem
is getting to a fundamental definition of "what it is we're
looking at," he said. There is interplay between the legal and
geological considerations, which is a problem, he opined.
CHAIR HAWKER stated that there is clearly statutory authority
for the segregation of these leases or properties into two or
more parts.
Number 3620
MR. DICKINSON replied that there is clearly statutory authority
provided that the state's economic interdependence is there.
You could argue the definition, but the regulation has attempted
to come close to legislative intent, he said.
MR. DICKINSON, continuing with the discussion of the slides,
referred to the "Spring 2004 Projection of Oil Revenue" slide
[page 7]. He pointed out that the numbers on the fiscal note
reflect DOR's fall forecast, whereas the numbers on this slide
more accurately reflect the spring forecast. He said that the
governor has established a goal of increasing production, "a
goal we all share", for eventual revenues. There are two
possible effects worth analyzing looking at the effect of HB 441
on future revenues, he said. The slide shows the effect of
changing the ELF parameters as found in the bill. The bottom
section is the total revenue of oil and gas found in DOR's
spring forecast, and above that are the additional projected
revenues from HB 441, he said. Prices are well above the long-
term average in 2005 and 2006, and starting in 2007 the price of
$22 a barrel is used, which is the predicted long-run average,
he explained. The first two years show an increase of about 18
percent of the total revenues that would be generated, but by
2020 it is only a 3 percent increase.
Number 4128
MR. DICKINSON continued to explain that the second possibility,
which Alaska Oil and Gas Association (AOGA) spoke about at the
previous meeting, is that a tax increase "could be the straw
that broke the camel's back" because it would crowd out
investment and prevent production. The question would be if
[the state] would end up with less revenue than before, he said.
CHAIR HAWKER asked about the variable and fixed components of
the matrix Mr. Dickinson is using. He asked, "Is production
presumed to be fixed and the only variable, price?"
MR. DICKINSON replied, "Everything in there is exactly what it
is in our spring forecast". It is a price variation the first
two years and $22 a barrel thereafter, and the volumes will
decline.
CHAIR HAWKER said it is an interactive model of both price and
volume.
MR. DICKINSON said yes, and it is comparable to the spring
forecast.
CHAIR HAWKER reported that he is seeing some head shaking in the
room from industry members. He asked Mr. Dickinson if he is
certain that this is a model that reflects both price and
volume.
MR. DICKINSON replied that he believes it does and all that has
been changed are the ELF parameters. He said it is the total
revenue received, so that it does include royalty dollars going
to the permanent fund, "but that would just be the very bottom
layer," he said. Referring to the oil industry's comments from
the previous meeting about breaking down where these revenues
would come from, Mr. Dickinson pointed to the slide to show that
the dollars from Prudhoe Bay start out being very significant
due to high volume and high price and then tend to fade away.
The new fields, Alpine and Northstar, generate high dollars and
then, as the price falls to $22 a barrel, less money is
generated, he said. He pointed out that there is an ELF floor
in HB 441, and if a field is above the floor, the bill has no
effect on the amount collected at a normal price. There would
be very few dollars that come out of Alpine and Northstar for
about ten years until they hit the ELF floor, and then more
dollars would be collected.
Number 4549
MR. DICKINSON reported that the category [on page 7], "Currently
producing low ELF fields", concerns mostly Kuparuk and other
satellite fields, and said that a fair amount of dollars would
be picked up from them. The very top line deals with how much
new revenue would come from new oil, investments that haven't
been made yet, he explained. There is no change in the first
couple of years, but over several years tens of millions of
dollars will be generated from this source under this bill. The
question is, "Are those numbers ones that are likely to
discourage investment at the margin?" he asked.
TAPE 04-24, SIDE B
Number 4626
MR. DICKINSON, turning to slide eight, "New Oil as a Percentage
of Projected Oil", reported that by 2015, one-third of the
production will come from new fields. Slide nine is a
historical record of how much is invested and how much will be
needed just to meet the production forecast, he explained. The
amount goes from under a billion dollars, up to over $2 billion
in order to make the production forecast come out, he said.
"Are the incremental dollars produced under [HB 441] going to
discourage production?" he asked. He said that is the question
that both Representative Gara and the oil industry were framing.
MR. DICKINSON pointed out that one of the shortcomings of the
current production tax is that fact that none of the investments
shown on slide 9 affects the amount of tax paid. It is
calculated on the gross value of the production, which is how
much it is sold for, less the cost of getting it there. All of
the upstream production facilities are not included in that
deduction, he said. "So there's billions of dollars in
investments that are required and we don't recognize it in our
production tax system," he reported. "We are fairly unique in
the world in doing that. Most places encourage reinvestment,"
he added. "It doesn't make sense to simply raise taxes so that
the folks harvesting and not reinvesting are going to pay the
same additional tax burden, and under this bill that would
happen," he opined.
CHAIR HAWKER asked Mr. Dickinson to define and discuss the
"point of production" concept.
MR. DICKINSON explained that the point of production is when the
oil is fully processed into a quality that can be delivered to a
pipeline after the water, gas, and oil are separated out. He
mentioned Representative Gara's discussion about Tarn Field at
the last meeting and noted that the well fluids coming out of
Tarn go through a pipe for miles before getting hooked into a
production facility to be produced. None of the investment in
that process is deductible because it is all upstream of the
point of production and does not form part of the tax
calculation, he explained. Tarn's production point is at the
Kuparuk production facility, and only when Tarn oil goes into
the Kuparuk pipeline is it taxable. The same thing is true for
many of the satellites, he said. About $10 billion worth of
investment on the North Slope that is upstream of the point of
production, he added.
Number 4000
CHAIR HAWKER asked Mr. Dickinson about the amount of time in the
past that he has spent defining point of production.
MR. DICKINSON said it was an issue in several royalty cases and
in several tax cases. "It becomes critical when you're trying
to define the distinction between gas and oil, at what point you
have gas produced from oil," he explained. He said a lot of
dollars are tied up with this definition, which is not always
clear because of problems with language in older statutes.
Technology has moved at a more rapid pace than the legal
documents and the statutory underpinnings, he concluded.
CHAIR HAWKER cautioned that it is not a precise science.
MR. DICKINSON agreed that it is not. He referred next to slide
ten, which shows how the price factor is involved in the ELF.
"The price mechanism in this bill makes a lot of sense if you're
looking for ways of taking advantage, currently, of the
extraordinary high prices we have now," he said. DOR's fiscal
system does not reflect price sensitivity, which is what drives
profits found in many international systems. Before the
volumetric portions of the ELF are applied, the "red line" on
the graph shows how much tax would be added per barrel at
various prices. As prices increase, the state would take more,
he related. At prices in the $17 range, there would be no price
adjustment, at lower prices less would be taken, and at higher
prices, more tax would be taken. On paper that appears
symmetrical, but in realty it is not, he added.
Number 3517
MR. DICKINSON, turning to slide 11, reported that in the
members' packets is a longer version of this slide. He focused
on the second paragraph of the slide that says, "Chief Executive
Lord Browne said that a $20 oil price would allow the company to
meet its capital requirements and pay a progressive dividend,
and that all the free cash generated when the oil price is above
that level would be returned to shareholders through buybacks."
Mr. Dickinson said that what [Lord Browne] is saying is that
[British Petroleum (BP)] can get all of the investments needed
to continue to grow and pay a dividend at $20 a barrel, and
anything above that amount could be returned to the
shareholders. He said that his point is that BP believes that
the prices of oil today are so extraordinary that it warrants a
change in their relationship with their shareholders. He noted
that in 2004, BP has spent $1.25 billion repurchasing their
shares. He stated that companies are looking at these current
prices and saying, "Do our old policies work?" He opined it is
appropriate that the committee also ask those questions.
Number 3207
CHAIR HAWKER asked Mr. Dickinson to talk about the other side of
the equation - if the market were to go way down.
MR. DICKINSON replied that if the market were to go way down,
the state would not get much revenue. Because the upstream
production costs are not considered part of the deduction for
the severance tax and are fixed, but are part of the deduction
for royalties, there is a situation where even though the
company will be making no money on the field, the state will be
taking 105 percent of the profits from that field because the
production tax looks only at what the oil sold for, less a
deduction for some of the costs, he explained. The property
tax, because it looks at the value of the asset and at the
probability that the price will rebound, is not written down to
zero. The income tax will be lower when the price of oil is
low, but because of the way the tax works and because some
companies are integrated, the downstream activities such as gas
stations and refining operations are included and may be
profitable, he related. "Mechanically, speaking, at the low
end, we are a terrible place to do business," he concluded.
Number 2907
CHAIR HAWKER asked Mr. Dickinson to explain more about taxing
the downstream activities and whether only those in the state
are taxed.
MR. DICKINSON replied, "Not just in the state." He pointed out
that there are no ExxonMobil Corporation gas stations in the
state, but Alaska shares in some of the profitability of those
gas stations. Alaska looks at Exxon's worldwide profits, and
then taxes only those products from that pool that are made in
Alaska, he explained. There is an apportionment formula, which
looks at production factors such as property, sales, and
production, and weights them equally, averages them, and comes
up with a factor which is applied to the world-wide income, he
continued. It does not recognize that the assets in Alaska are
primarily production assets, he added.
CHAIR HAWKER called it the "income tax factor in the state's tax
regime."
MR. DICKINSON agreed.
REPRESENTATIVE KERTTULA asked if the cost of the upstream
development is part of the royalty.
Number 2459
MR. DICKINSON replied, "What you have in Prudhoe Bay is what's
called a field cost factor." It is used to figure out the value
of the royalties at a point similar to the point of production,
and then deducts a straight amount of 88 cents per barrel. He
said that the new fields don't have a field cost factor because
of negotiations with the Department of Natural Resources (DNR).
REPRESENTATIVE KERTTULA asked, in terms of the new apportionment
system, what is allowed for deductions on a worldwide basis.
MR. DICKINSON replied that anything that is allowed under the
federal income tax code is allowed for deduction. The upstream
costs are deductible for the purposes of the income tax. "The
important point here is, if ... a multinational company spends a
dollar in operation costs in Alaska upstream, and a dollar in
their operations in Kazakhstan, that dollar will have the same
effect on the Alaska income tax," he noted. All costs are
recognized, he added.
REPRESENTATIVE KERTTULA asked, "All costs everywhere?"
MR. DICKINSON said, "That's correct." The way profits are
calculated worldwide is that worldwide costs are subtracted from
worldwide revenues.
Number 2215
REPRESENTATIVE GRUENBERG asked if one of the three factors is
employment.
MR. DICKINSON said no it isn't, but it used to be, and for non-
oil and gas companies that is the third factor and the
traditional way it was done up until recently in most states.
When the state shifted from separate accounting to modified
apportionment, the payroll factor was removed and replaced with
the production factor, he said.
Number 2133
REPRESENTATIVE LES GARA, Alaska State Legislature, speaking as
the sponsor of HB 441, pointed out that former deputy
commissioner Vogt's opinion at the previous meeting was that one
of the importance's of focusing on the production tax was that
the corporate tax has become irrelevant. He noted that last
year there were about $600 million in production taxes, but only
$150 million in corporate taxes. He posited a hypothetical
situation where BP invests in a very large project in Kazakhstan
and asked if BP gets to deduct those expenses from the Alaska
corporate tax.
MR. DICKINSON said, "They get to deduct those costs when they
calculate their worldwide income, and then their worldwide
income is translated into Alaska tax ... so it's not a deduction
for their Alaska taxes, but it is a deduction that can be
calculated in their worldwide income that feeds into the tax."
He observed that there is a bit of circularity here. "We say,
gee, we shouldn't focus on the income tax because it's a minor
part of the picture, and then we also say, gee, we have a
regressive tax that should become more progressive. There's
nothing written in stone that says we have to get three times as
much from our production tax as from our income tax." He noted
that the production tax could be made more progressive. "Part
of what we've done here is try to make the 9.4 percent apply
across the board to oil and gas companies, as well as other
companies," he added. A consequence of that is a less
progressive system than is possible, he concluded.
REPRESENTATIVE GARA opined that many people feel that the 9.4
percent income tax is much lower in real terms. He said he is
looking at Mr. Logsdon's sheet of what oil company profits on
North Slope oil are, and he asked what last fiscal year's
average annual ANS oil price was.
MR. DICKINSON said $28.15.
REPRESENTATIVE GARA said at $28 [a barrel] corporate profits
were about $2.8 billion from North Slope oil last year. He
supposed that if there was a flat, true corporate income tax
that just reflected Alaska corporate profits, the state would
have taken in $280 million in corporate taxes.
MR. DICKINSON said he has not done the math and wished to look
something up.
Number 1800
CHUCK LOGSDON, Chief Petroleum Economist, Tax Division,
Department of Revenue (DOR), replied that Representative Gara's
figures sound about right at 9.4 percent.
REPRESENTATIVE GARA said he is just trying to figure out what
the true corporate income tax is, and he calculated the amount
to be only about a "5 percent corporate income" if only Alaska
profits were taxed. He asked Mr. Logsdon if that is a fair way
to look at it.
MR. LOGSDON replied, "It would be one way, however, you've got
to be very careful in making that direct comparison." The final
number seen in the books really is affected by a lot of timing
issues. The companies make estimated payments on a quarterly
basis and there are carry-forwards, amendments, and adjustments,
he explained.
MR. DICKINSON added that in 2001, for example, the total was
$338 million [in corporate taxes].
MR. LOGSDON continued to explain that it is difficult to make
that straightforward calculation because there is not a perfect
symmetry between expenditures and revenues statewide, as opposed
to worldwide. That doesn't occur, he said. He pointed out that
when the law was changed in 1981 to go to the apportionment
method, it was recognized that a modified apportionment method
would have less fiscal horsepower than separate accounting.
That was one reason that the rate on severance taxes was
increased to 15 percent for older fields. The change in the ELF
in 1989 caused some evening out over time, he concluded.
CHAIR HAWKER asked Mr. Dickinson to follow up on the point about
the difficulty and fallacy of looking at the numbers for a given
year and presuming that they reflect the actual operation of the
industry for that year.
Number 1300
MR. DICKINSON related that the numbers in the graph are fiscal
year numbers and are different from what happens in a calendar
year when a company has to make four annual payments, which show
up on the state books. From year to year, companies make
estimated payments, sometimes overpaying and sometimes
underpaying, adjusting every quarter. The other interesting
thing that is happening, which makes it very dangerous to look
at corporate numbers from the last three to four years, is that
the three largest tax payers, the three largest lease holders in
the state, have all undergone significant merger activity, he
explained. In a merger the factors change and the pool may
double, but the Alaska factor may remain the same, he added. He
listed several mergers where this has happened. "Trying to do
analysis from the annual receipts over the last several years
isn't necessarily going to lead you to good conclusions," he
opined.
REPRESENTATIVE GARA, referring to the earlier discussion about
whether the PEL has a fair relation to economic reality, asked
about Kuparuk, the second largest field in North America. He
mentioned that Kuparuk pays only about a 3 percent production
tax, and wondered if that suggests to Mr. Dickinson that the ELF
needs to be updated.
MR. DICKINSON noted that on slide four Kuparuk's production per
well is 343 barrels per day and the PEL is designed at 300
barrels a day to pay no tax, so it is very close to that margin.
"I believe that something that focuses on the well productivity
and ignores the assessment needed for the production facility
shouldn't be called an economic limit factor because it doesn't
deal with true economics," he said.
Number 0805
MR. DICKINSON turned to the last slide [page 12], which shows
the ELF under the current system and under the proposed HB 441.
He observed that in HB 441, in the first two years, the price
drives the ELF higher, and after that the two ELFs remain
essentially parallel. What you see is a decline in Prudhoe Bay,
and North Star and Alpine go on unabated. The problem in terms
of oil and gas revenues continuing to fall will continue, he
said. He wondered if companies will invest if they don't know
what the tax system is going to be. He emphasized that the part
of the reform that is needed to get the extra billions of
investment dollars to meet the forecast or to meet the
governor's goal of increasing production, is stability in [the
state's] fiscal environment. He suggested thinking about this
bill in terms of an overall fiscal plan, which will make
investment more likely, he opined.
Number 0519
REPRESENTATIVE SEATON asked for clarification about slide ten.
He wondered if at $36 a barrel the tax per barrel as it is now
would be $4 and it would be $8 under HB 441.
MR. DICKINSON said that is correct. "Roughly speaking where
there is $4 on the lower line, it would be closer to $7 on the
upper line," he explained.
REPRESENTATIVE GARA said he appreciates the fact that Mr.
Dickinson has said for years that the state needs a fiscal plan.
He imagined that a miracle happened and the state came up with a
sustainable fiscal plan that let the oil companies know the
state had enough revenue coming into the state from non-oil
sources and a major change to the tax structure like HB 441 was
made. He asked if that would stabilize the investment climate
in the state.
MR. DICKINSON, turning back to slide seven to show what might
happen if there are new developing fields, said he thinks there
is a fair argument to be made "if you compare that to some
notion of fiscal certainty and you might get a more stable
environment." He said he believes that one that also recognizes
the investments that need to be made and discriminates in the
tax system, encouraging the investment and discouraging the
expatriation of profit, is more likely to have a beneficial
effect on the investment environment.
REPRESENTATIVE GARA said that one of the points that he made the
other day was that some of the largest fields in the country are
some of the zero production fields like Endicott. He said his
point the other day was that it seemed "out of whack" to have no
production tax on these large fields. One of the fields that he
mentioned, he said, was a heavy oil field, West Sak, which
should be paying a zero percent tax. He said he didn't mean to
include heavy oil fields in his statement. However, there are
too many zero production tax fields that are not heavy oil
fields, he emphasized, such as Endicott and Tarn.
TAPE 04-25, SIDE A
Number 0023
REPRESENTATIVE GARA spoke about the indecision to exempt the oil
fields south of Cook Inlet and said he had hoped there would be
more hearings on the bill to resolve that question. Another
question that needs to be resolved is, "Does a zero percent
production tax make sense on heavy oil," he said. Those two
issues are not that complex and won't have a significant impact
on the bill, he opined. Referring to Mr. Dickinson's
presentation, Representative Gara stated, "He's doing exactly
what he has to do, which is, we have to forecast what we think
the projected prices are going to be in the future, so that all
the charts from DOR assume a $22 a barrel real oil price." He
related that the prediction from the Department of Energy that
in the next 20 years oil will be $50 a barrel was unexpected.
CHAIR HAWKER noted that there was a newspaper article to that
effect in the members' packets.
REPRESENTATIVE GARA continued to say that assuming [$50 a
barrel] to be correct, there would be many more years in the
future at high oil prices with an imbalance of higher company
profits and lower state revenue. The revenue generated by HB
441 would be much larger, assuming that the Department of Energy
is correct. He stated, "I've been here for fifteen years and
watched every single oil price projection be wrong, so I think
it's fair to assume that every oil price projection will be
wrong."
MR. DICKINSON recalled an article from fifteen years ago that
predicted that oil prices would be over $100 a barrel now.
CHAIR HAWKER recalled that the great topic of debate 30 years
ago was, "What are we going to do in ten years when the oil runs
out?" He noted that Representative Samuels had raised a
question about the Alaska oil-taxing regime. He asked how other
major gas and oil states approach the same issues.
Number 0405
MR. DICKINSON deferred to Mr. Logsdon for the specifics, but
said that no other state is nearly as dependent on the oil and
gas revenues as Alaska is. The other states tend to have a
broad range of taxes, he added.
MR. LOGSDON replied that Alaska is very similar to the systems
in other states. Thirty-eight states have oil severance taxes
with multiple rate structures, and most have property taxes.
Not too many states have the amount of state land that Alaska
has so the royalties in many other states are often paid to
private landowners, not public landowners, he related. Most
states have corporate income taxes, he added. He said that the
main difference is that not many other states have a Prudhoe Bay
in their back yard on state land and are incredibly dependant on
the money that oil generates.
Number 0600
REPRESENTATIVE SAMUELS asked if other states have the same
mechanisms for calculating their income taxes.
MR. LOGSDON said yes, most of them do. They have some version
of a corporate income tax that uses apportionment factors. The
factors may vary, he added.
CHAIR HAWKER asked if the other states use worldwide
apportionment or something more narrowly focused.
MR. LOGSDON deferred to Mr. Dickinson, but said it is his
understanding that most of them use what is called a "water's
edge" approach.
MR. DICKINSON said that is correct. Only a few states use
worldwide apportionment. He said he is not aware of any other
state that has a separate set of allocation factors for oil and
gas.
Number 0803
CHAIR HAWKER shared his concluding thoughts on HB 441. He said
that the last two days of hearings have identified the breadth
and depth of the complexities of this issue. He summarized the
presentations and thanked Representative Gara for his extremely
productive presentation.
CHAIR HAWKER announced that the hearing on HB 441 was closed and
that the bill would be held over.
HB 493-LONG TERM FISCAL PLAN
Number 1120
CHAIR HAWKER announced that the final order of business would be
HOUSE BILL NO. 493, "An Act relating to adoption and revision of
a long-term fiscal plan for the State of Alaska."
REPRESENTATIVE GRUENBERG, speaking as cosponsor, stated that
there is a new committee substitute (CS) for HB 493, which
requires the legislature in future years to adopt a
comprehensive long-range fiscal plan. The proposed CS attempts
to incorporate comments from Representative Ogg and Chair
Hawker, he noted. He said a concurrent resolution introduced by
Representative Whitaker in the previous legislature was also
looked at and parts were included in the proposed CS.
Number 1220
REPRESENTATIVE WEYHRAUCH moved to adopt the proposed CS for HB
441, Version 23-LS1765\H, Utermohle, 3/18/04, as the working
document.
REPRESENTATIVE WEYHRAUCH objected for discussion purposes.
REPRESENTATIVE GRUENBERG explained that [Section 1] of the
proposed CS lists a number of the constitutionally required
state mandates, including, but not limited to, public health and
welfare, providing for public education, and the utilization,
development, and conservation of natural resources. Other
requirements indicated, as well, are that the state government
must provide for public safety, the construction and maintenance
of public facilities and transportation, and the protection of
the environment, he said. A lot of that language came from
Representative Whitaker's resolution, he noted.
REPRESENTATIVE GRUENBERG referred to page 2, lines 6 and 7, and
said, "to carry out the responsibilities, we must have a
reasonable level of expenditures to finance the operation of
state government." He paraphrased the language in [paragraph 3]
was made more accurate as a result of Chair Hawker's
suggestions, and he paraphrased, "significant disparity between
the revenue sources currently being utilized and the
expenditures necessary to maintain a reasonable level of state
services." In [paragraph 4] the original language "by drawing
against the balance of the budget reserve fund" was added, he
said. In [paragraph 5] it says the budget reserve fund is
rapidly declining and [the state] needs to have a sound fiscal
plan, and in [paragraph 6] it says there's not a simple solution
and that [the state] must have [a plan] that is balanced and
fair to all Alaskans, he related. He noted that the language
was made a little more accurate. [Paragraph 7] says that a
long-range fiscal plan will encourage the discipline necessary
to insure the budget remains balanced and properly planned for
the future, and finally, [paragraph 8] says the implementation
of a comprehensive long-range fiscal plan will help stabilize
the state's economy and level out its historical pattern of boom
and bust cycles, he said.
Number 1408
REPRESENTATIVE GRUENBERG explained that Section 2, which was the
heart of the bill, was beefed up a little bit. The first
sentence remains the same except it is made clear that it is the
current fiscal year and the next four fiscal years, he said.
The next two sentences [lines 27-31] are new, he said.
[Subsection (b) on page 3] was left pretty much the way it was,
except that [paragraph (3)] is broken out so it reads a little
clearer dealing with the permanent fund, inflation proofing,
dividend, and the flexibility to determine the appropriate use
of the remaining earnings of the fund, he reported.
REPRESENTATIVE WEYHRAUCH withdrew his objection to adopting
Version H. There being no further objection, Version H was
adopted as the working document.
CHAIR HAWKER requested that the members take Version H
into consideration for a future meeting.
REPRESENTATIVE GRUENBERG asked that the committee move the bill
today.
CHAIR HAWKER replied that he is personally uncomfortable with
the unspecific language regarding adopting and annually revising
a long-range fiscal plan. He said he is still not certain what
that would be and who would be responsible for that. He noted
that it takes five affirmative votes to move this bill from
committee.
REPRESENTATIVE GRUENBERG suggested that it takes the majority of
the members present as long as there is a quorum.
CHAIR HAWKER deferred to Representative Gruenberg's judgment.
Number 1740
REPRESENTATIVE GRUENBERG moved to report CSHB 493 out of
committee with individual recommendations.
CHAIR HAWKER objected.
Number 1920
A roll call vote was taken. Representatives Weyhrauch, Moses,
Samuels, and Gruenberg voted in favor of the motion to report
CSHB 493 out of committee. Representative Hawker voted against
it. Therefore, CSHB 493 was reported out of the House Special
Committee on Ways and Means by a vote of 4-1.
CHAIR HAWKER noted that this motion is subject to a ruling on
how many members it takes to report a bill out of committee.
REPRESENTATIVE WEYHRAUCH said he plans to check "amend" on the
report because the bill is more similar to a resolution, as
opposed to a statute, he opined.
[Due to a majority of committee members not being present, the
motion to report CSHB 493 was rescinded and voted upon again on
April 21, 2004.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
9:00 a.m.
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