Legislature(2011 - 2012)SENATE FINANCE 532
02/10/2011 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation on Oil and Gas Tax Credits by the Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
February 10, 2011
9:02 a.m.
9:02:40 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lesil McGuire, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Bruce Tangeman, Deputy Commissioner, Department of Revenue;
Lennie Dees, Audit Master, Tax Division, Department of
Revenue.
SUMMARY
^Presentation on Oil and Gas Tax Credits by the Department
of Revenue
9:03:13 AM
Co-Chair Stedman discussed the agenda for the morning. He
explained that today's meeting was a continuation of last
week's January 25th meeting. He noted that the same
presentation would be delivered again for the House Finance
Committee.
9:06:12 AM
BRUCE TANGEMAN, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
introduced himself.
LENNIE DEES, AUDIT MASTER, TAX DIVISION, DEPARTMENT OF
REVENUE, explained his background in accounting and with
the Department of Revenue (DOR). He explained that the
master audit position was created with the (ACES) laws.
9:09:59 AM
Mr. Dees introduced the PowerPoint presentation "Production
Tax Credits" (copy on file).
Mr. Dees continued with Slide 3: "Types of Production Tax
Credits,"
Credits which may be taken against oil and gas
production taxes include:
„Capital Expenditure Credits
„Alternative Tax Credits for Oil and Gas
Exploration
„Net Operating Loss ("NOL") Carry Forward
Credits
„Transitional Investment Expenditure
("TIE") Credit
„Additional Nontransferable Tax Credits
„Well Lease Expenditures Credit
„Cook Inlet Jack-up Rig Credit
9:11:21 AM
Mr. Dees introduced Slide 4: "Timelines for Production Tax
Credits." He described the graph and its various components
regarding the credits timelines.
Co-Chair Stedman asked for details regarding the various
credits. Mr. Dees explained that the first credit listed
43.55.023(a) was for Qualified Capital Expenditures (QCE).
He added that 43.55.023(b) the Net Operating Loss (NOL)
Carry Forward Credit (CFAL) occurs when a company occurs a
net operating loss (a company's expenditures exceed the
amount of revenue) employing a formula using the revenue
from the oil and deducting the incurred lease expenditures.
The section allows the company to take the net operating
loss and convert it to a credit for a future tax liability.
The credit was updated under ACES to a 25 percent credit.
9:14:50 AM
Mr. Dees introduced the Well Lease Expenditure credit or
43.55.023(l), which was fairly new with little activity.
The credit provides companies a 40 percent credit for
expenditures related to intangible drilling costs
associated with the drilling of wells. The credit's
inception was last year. The credit is only available in
areas south of 68 degrees north latitude.
Mr. Dees detailed the Transitional Investment Expenditure
(TIE) credit 43.55.023(i), which under the Petroleum
Production Tax (PPT) allowed a credit for expenditures
incurred between April 1, 2001 and May 31, 2006. The credit
was altered during ACES and was no longer available to
existing tax payers.
9:17:00 AM
Mr. Dees discussed the non-transferable tax credits,
(43.55.024). The $6 million credit is used against tax
liability and cannot be converted to cash or carried
forward.
Mr. Dees addressed the Small Producer Credit, 43.55.024(c).
The credit is granted based on the company's production.
The credit can only be used to offset tax liability and
cannot be carried forward or turned into a cash
certificate. The credit expires in 2016; however, some
circumstances permit extension.
Mr. Dees discussed 43.55025 or the alternative credit for
oil and gas exploration. He noted that the credit
originated in 2003 for companies drilling exploratory wells
and performing seismic work. One requirement was that the
work occurred at a certain distance from an existing unit
or well. Initially the credit was either 20 to 40 percent,
but has since been revised to 30 and 40 percent through
ACES. The credit is referred to as the exploration credit.
9:20:10 AM
Mr. Dees finished with the Cook Inlet Jack-up Rig Credit
which will grant the first three unaffiliated persons using
a jack-up rig in the Cook Inlet and targeting a specific
zone, up to 100 percent of the first $25 million of
exploration expenditures. If the company using the credit
has a successful well, then 50 percent of the credit will
be paid to the state over a period of 10 years.
Co-Chair Stedman commented that the FY12 budget proposes a
total of $850 million in tax credits. He highlighted the
magnitude of the issue.
9:21:42 AM
Mr. Dees discussed Slide 5: "Types of Production Tax
Credits,"
Capital Expenditure Credits - (AS 43.55.023(a)(1))
†20% of qualified capital expenditures (QCE)
†QCE include drilling, construction of
facilities, new equipment, etc.
†Same expenditures may also qualify for NOL
Carry Forward Credit
†Same expenditures do not qualify for
exploration credit
†Must be spread over 2 years (except for
expenditures incurred south of 68 degrees
North latitude - effective July 1, 2010)
†Credits may be cashed or transferred
Mr. Dees discussed Slide 6: "Types of Production Tax
Credits,"
Exploration Credits
†Two Main Types
„Capital Credit for Exploration Activity
43.55.023(a)(2) (20%)
„Alternative Tax Credits for Oil and Gas
Exploration 43.55.025 (30%-40%)
Mr. Dees informed about Slide 7: "Types of Production Tax
Credits,"
Capital Credit for Exploration Activity
43.55.023(a)(2)
†20% of qualifying expenditures
†Qualifying expenditures related to geologic
and geophysical exploration, or in
connection with an exploration well
†Must be spread across 2 years (except for
expenditures incurred south of 68 degrees
North latitude - effective July 1, 2010)
†Same expenditures may also qualify for NOL
Carry Forward Credits
†Credits may be cashed or transferred
9:25:20 AM
Mr. Dees explained Slide 8: "Types of Production Tax
Credits,"
Exploration Credits
†Two Main Types
„Capital Credit for Exploration Activity
under 43.55.023(a)(2) (20%)
„Alternative Tax Credits for Oil and Gas
Exploration under 43.55.025
(30%-40%)
Mr. Dees described Slide 9: "Types of Production Tax
Credits,"
Alternative Tax Credits for Oil and Gas Exploration -
43.55.025
†30% - 40% of qualified expenditures
depending on well location and proximity to
existing wells and unit boundaries
†Qualified expenditures include certain
expenses associated with seismic and
geophysical exploration work, and
exploration well drilling
†Same expenditures may also qualify for NOL
Carry Forward Credit
†Same expenditures do not qualify for Capital
Expenditure Credit
†To receive credit, taxpayer must provide
certain well data to DNR
†Expires 2016
†Credits may be cashed or transferred
9:27:22 AM
Mr. Dees discussed Slide 10: "Types of Production Tax
Credits,"
NOL Carry Forward Credit - 43.55.023(b)
†25% of net operating loss
†Applied against tax liability in following
year
†Credit based on adjusted lease expenditures
which include both operating and capital
expenses
†Includes capital expenditures which also
qualify for qualified capital expenditure
credit under 43.55.023(a)(1) and exploration
credit under 43.55.023(a)(2)
†Credits may be cashed or transferred
Mr. Dees described Slide 11: "Types of Production Tax
Credits,"
Transitional Investment Expenditure (TIE) Credits
43.55.023(i)
†Credit equals 20% of qualifying capital
expenditures:
„ incurred between March 31, 2001 and
April 1, 2006, and
„ not exceeding 10% of the capital
expenditures incurred between March 31,
2006 and January 1, 2008.
†Revised under Aces to cover only producer or
explorer not having production prior to
January 1, 2008
†Credits are not transferable and may not be
carried forward beyond 2013
†Same capital expenditures may not qualify
for exploration credit under 43.55.025
9:29:40 AM
Mr. Dees detailed Slide 12: "Types of Production Tax
Credits,"
Additional Nontransferable Tax Credit- 43.55.024(a)
†Referred to as "New Area Development" credit
†Up to $6 million
†Available for companies producing from
leases or properties outside of Cook Inlet
and North Slope
†Credit can only be applied against tax
liability
†Expires 2016 or 9 years after first
commercial oil or gas production if before
May 1, 2016
†Credits may not be cashed or transferred or
carried forward
9:30:53 AM
Mr. Dees discussed Slide 13: "Types of Production Tax
Credits,"
Small Producer Credit - 43.55.024(c)
†Available for companies producing less than
100,000 bbl/day of oil BTU-equivalent
†Up to $12 million, depending upon level of
production
†Production not restricted by region
†Credit can only be applied against tax
liability
†Expires 2016 or 9 years after first
commercial oil or gas production if before
May 1, 2016
†Credits may not be cashed or transferred or
carried forward
Mr. Dees discussed Slide 14: "Types of Production Tax
Credits,"
Well Lease Expenditure Credit - 43.55.023(l)
†40% of well lease expenditures incurred in
the state south of 68 degrees north latitude
†Must be intangible drilling costs or
geological / geophysical exploration
†Credit may be applied against tax liability,
or certificated and cashed or transferred to
another taxpayer
9:34:57 AM
Mr. Dees discussed Slide 15: "Types of Production Tax
Credits,"
Cook Inlet Jack-Up Rig Credit - 43.55.025(l)
†Credit of 100%/90%/80% of up to $25 million
each of exploration expenditures for first 3
unaffiliated persons drilling wells using
the same jack up rig penetrating and
evaluating prospects in the pre-Tertiary
zone.
†Taxpayer obtaining credit may not claim .023
credit for same expenditures
†50% of credit to be repaid over 10 year
period if well yields sustained production
9:36:30 AM
Co-Chair Hoffman asked if the 50 percent repayment in the
Cook Inlet jack-up rig credit is the only repayment received
by the state. Mr. Dees concurred.
Mr. Dees discussed Slide 17: "Credits Applied Against
Production Tax Liability,"
Credits may be redeemed in two ways:
(1) All Credits may be applied against production tax
liability
„Capital Expenditure and Capital
Exploration Credits split over two years
(except south of 68 degree North
latitude - eff. July 1, 2010)
„NOL , TIE, Small Producer and
Alternative Tax Credits for Oil and Gas
Exploration may all be applied against
tax liability in total in a single year
(2) Some Credits may be converted into a transferable
Tax Credit Certificate
„Capital Expenditure, Capital
Exploration, NOL, and Alternative Tax
Credits for Oil and Gas Exploration are
convertible to tax certificates
„Capital Expenditure, Capital Exploration
and NOL Tax Credit Certificates must be
applied over two years (except south of
68 degrees North latitude - passed 2010)
„Alternative Tax Credits for Oil and Gas
Exploration Certificates can be used in
single year
Mr. Dees detailed the figures on Slide 18: "Production Tax
Credits Applied Against Tax Liability (Fiscal Year)." He
explained that companies with sufficient production and
revenue to contribute tax revenue for the state offset the
payments. Credits are taken before the tax payments hit the
treasury. He encouraged the tracking as a benefit.
9:40:08 AM
Co-Chair Stedman explained that the budget summaries do not
readily exhibit the credits. He expressed concern regarding
the communication and education for existing legislators.
Mr. Dees pointed out that the majority of the credits
applied against tax liabilities fall into QCE, which are
based on the level of capital expenditure dollars incurred
by taxpayers. He explained the timeframe for the credits
incurred as exhibited by the table on Slide 18.
Co-Chair Hoffman asked if extrapolation for 2011 exhibits
the highest year for credits. He wondered if a correlation
with exploration exists. Mr. Dees clarified that capital
spending is the basis for the figures. Mr. Tangeman added
that true figures for the capital will not be known until an
audit is completed.
Co-Chair Hoffman asked if 2011 is estimated to be the
highest fiscal year for tax credits. Mr. Dees replied yes,
based on the forecasted data.
9:43:34 AM
Mr. Dees continued with Slide 19 "Production Tax Credits
Applied Against Tax Liability (Fiscal Year). The bar graph
represents the figures presented in Slide 18.
Senator Thomas asked if the transitional credits exist now
for those producers or explorers without production prior to
January 1, 2008. He wondered if the production for Nikiachuk
would emerge in this information. Mr. Dees replied that a
capital expenditure between the period of April 1, 2001 and
March 31, 2006 would qualify.
Co-Chair Hoffman asked if the largest portion of QCE credits
will not expire until 2017. Mr. Dees stated that the QCE
credits do not expire. The only credits that expire are the
43.55.024 and 43.55.025 credits.
Co-Chair Hoffman asked if the QCE credits are available
indefinitely.
Co-Chair Stedman added that the tables address dollars in
the millions.
9:47:17 AM
Mr. Dees discussed Slide 21: "Timeline for processing of
Transferable Credit under AS 43.55.023(a). He explained that
the first bar in the graph illustrates the taxpayer incurred
expenditures. A company can apply for a credit on a
quarterly or annual basis. The department has a 120 day time
line for processing the claim. Once an application is
processed and the credit certificate is administered,
additional expenditures must be incurred prior to resale.
The processing of applications is ongoing for DOR.
9:51:45 AM
Mr. Dees explained Slide 22: "Timeline for processing a
Transferable Tax Credit Certificate under AS 43.55.023(b)."
He explained that the graph illustrated months in the
timeline.
Mr. Dees described Slide 23: "Timeline for Application for
AS 43.55.025 Alternative Credit for Oil and Gas
Exploration." He explained that the company must apply for
the credit within six months of completion of the drilling
or seismic activity. The graph estimates a nine month
drilling season. The company then has six months to apply
for the credit. The department audits the application for an
exploration and then issues a certificate. An audit can take
a year or more to complete. The credit is the only one
requiring a full audit prior to the issuance of a
certificate. When a company applies for the credit with a
tax liability, they may choose to apply it to the tax
liability and potentially owe the state money following the
audit.
9:55:01 AM
Mr. Dees described Slide 24: "Transferable Tax Credit
Certificates,"
Companies may also claim tax credits by applying for a
Transferable Tax Credit Certificate (TTCC)
†Available to companies (explorers) with no
tax liability to which credits can be applied
†Tax Credit Certificates under 43.55.023(a)
and (b) must be split or applied over two
years (except credits issued for expenditures
incurred south of 68 degrees North latitude
effective July 1, 2010)
†May be transferred to another taxpayer or
cashed with the state
9:56:35 AM
Mr. Dees discussed Slide 25: "Production Tax Credits Under
AS 43.55 Claimed by FY ($M). He explained that the companies
have no tax liability and apply for the certificates to
either convert them into cash or sell them to other
companies. The "Pre-2007" column includes the exploration
credits which occurred prior to PPT in 2003. He explained
that the department has received requests for $1.2 billion
worth of transferable tax credit certificates.
Co-Chair Stedman asked about Slide 18's total of
approximately $1.9 billion. He asked if the total impact
includes a combination of the $1.9 and the $1.2 billion. Mr.
Dees replied yes, although the $1.2 billion listed in Slide
25 illustrates the amount requested, not granted.
Co-Chair Hoffman asked if the state has $3 billion worth of
"skin in the game" since inception.
10:00:09 AM
Mr. Dees illustrated Slide 26: "Transferable Tax Credit
Certificates." He explained that the chart illustrates the
capital expenditure credits and the NOL carry forward
credits.
Co-Chair Stedman pointed out that 2011 does not suggest an
implosion. Mr. Dees agreed that the graph charts only
applications received up to a certain date and a forecast is
not a component of the presentation. The chart shows the
number of applications received through January. Additional
applications will come forward in March of FY11.
10:02:22 AM
Mr. Dees discussed Slide 27: "Transferable Tax Credit
Certificate Activity by Fiscal Year ($M)." Co-Chair Stedman
added that he requested this information because of a
concern that the industry may bank the credits.
Mr. Dees agreed and added that the companies with the
transferable tax credit certificates can now turn the
credits around immediately.
10:03:48 AM
Co-Chair Hoffman asked about correlations between the
increase in the refunds and the increase in exploration. Mr.
Tangeman responded that the department views the difference
in the tax credit used, whether they are tax credits applied
against the tax liability or those turned in for cash.
10:05:13 AM
Mr. Dees discussed Slide 29: "Cash Refunds History."
Cash Refunds Governed by AS 43.55.028:
• To cash must be usable against tax liability
• Must show subsequent (24 months) QCEs or lease bids
equal to cash sought (repealed in 2010)
• Have a zero tax owed in current and past years
• Have no more than 50,000 BOE/d
Mr. Dees discussed Slide 30: "Cash Refunds History." He
explained the breakdown by fiscal year of the amount
refunded by the state for tax credit certificates. These
amounts are shown through 2/4/2011. The history indicates
that the state paid $851.6 million for tax credit
certificates.
Mr. Dees discussed Slide 31: "Cash Refunds History." He
pointed out that $904 million has been appropriated since
the inception of the fund. The balance was $75 million as of
two weeks prior to the meeting.
Mr. Dees discussed Slide 32: "Impact of Production Tax
Credits Total State Stimulus." He detailed the bar graph and
commented that the estimate for 2011 is based on incomplete
information and $450 million will be offset against tax
liabilities. The graph illustrates the total state stimulus
by fiscal year since the inception of the tax credits.
10:09:16 AM
Co-Chair Stedman requested separate information for the Cook
Inlet Jack-Up Rig credit. He stated that the assumption was
for all credits to be active in 2012. Mr. Dees concurred.
10:09:39 AM
Mr. Dees concluded with Slide 33 "Capital Expenditures by
Year ($M). The graph describes the expenditures estimated by
year based on actual tax filings and forecasted data.
Co-Chair Stedman asked about the individual capital
expenditures and fields to further clarity the disclosure
information. Mr. Tangeman stated that the presented
information regarding capital expenditures is limited for
DOR. He recommended Department of Natural Resources (DNR) as
another resource for information.
10:12:53 AM
Senator Thomas struggled with the charts on Slides 18 and 25
and the amount of money spent in different categories. Mr.
Dees explained that the figures on Page 25 reflect
activities from companies that are not taxpayers, but
instead explorers seeking credits through the application
process. He referred to Slide 18, which illustrates activity
from companies that report tax information via filings. He
mentioned that the companies shown on Slide 25 exhibit
applications but not details about expenditures applied for
in the credits. He noted that companies applying for credits
must provide details about the expenditures claimed. He
added that the details are not provided until the auditing
process.
10:17:47 AM
Senator McGuire requested further clarification of the two
categories. She suggested distinguishing between credits
associated with new drilling and activity and those
connected to maintenance and upgrading of facilities. She
understood that even under the credit of new exploration, an
older field would include a mixing of different expenditures
if audited. Mr. Dees agreed and stated that the credits are
available to everyone without the distinguishing factors.
Co-Chair Stedman understood that the audit for 2006 was
complete. He asked about the statutory deadline for the
completion of the 2007 audit. Mr. Dees stated that the
department has 6 years to complete the audit. The intention
is to complete the process much more quickly. Many changes
affected 2007 including those in statute with PPT and
progressivity.
10:21:53 AM
Co-Chair Stedman struggled with the issue presented by
Senator McGuire due to the substantial delay in the audit.
Co-Chair Hoffman recalled several charts regarding Alaska
and the tax structure as compared to other countries and
parts of the nation. He asked if the schedules reflect the
total tax and whether they include credits. Mr. Tangeman
responded that survey reports do include the credit system.
Co-Chair Hoffman asked if tax credits are reflected in the
total tax structures. Mr. Tangeman believed so.
Co-Chair Hoffman requested verification. Mr. Tangeman agreed
to provide the verification.
Co-Chair Stedman recalled similar distortions during prior
testimony.
Senator Ellis commented on legislators' impressions that the
state does not participate and incentivize the industry in
new exploration. He noted that the industry reports little
exploration, but instead spending on the necessary facility
upgrades. He suggested that the industry may be providing a
bill to the state for routine maintenance in comparison to
new development which was the initial goal of the tax
credits. He believed that the tax credits would lead to new
production as opposed to necessary maintenance of existing
facilities. He opined that the fault may be in the statutes
as they do not clearly delineate between new exploration and
routine maintenance.
Co-Chair Stedman added that the PPT process included a 13
cent per barrel exclusion for capital expenditures, which
amounts to $59 million to help protect the state from normal
maintenance on an aging field.
10:27:52 AM
Senator Ellis added that the next step is to invite industry
to meetings. Co-Chair Stedman agreed and stated that
questions and concerns exist.
Senator McGuire appreciated the thoughtful approach of the
chairman. She pointed out that another arbitrary change in
the tax code would provide an unstable fiscal regime. She
explained the various divisions of credits. She advocated
for crafting and redefining credits into maintenance and new
investment in a clearly articulated method. She understood
the questions regarding progressivity.
Senator Thomas asked if the figures presented in Slide 33
were gross numbers. Mr. Dees replied yes, the tax credits
were not applied to the presented numbers.
Mr. Dees pointed out that timing between tax credit
activities and when they are cashed out can be different.
Co-Chair Stedman added that he had a document displaying an
explanation of the FY 12 credit, which is spread over two
years.
10:32:53 AM
ADJOURNMENT
The meeting was adjourned at 10:33 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 021011 Production Tax Credits Senate Finance Committee.pdf |
SFIN 2/10/2011 9:00:00 AM |
Production Tax Credits |
| 2011 02 08 DOR Resps to SenFin Ques 01 25.pdf |
SFIN 2/10/2011 9:00:00 AM |
DOR Response to Revenue Forecast 012511 |
| 2011 02 10 DOR FY12 Credit Estimation Calculation.pdf |
SFIN 2/10/2011 9:00:00 AM |
021011 Production Tax Credit |