Legislature(2015 - 2016)BILL RAY CENTER 230
05/13/2016 09:30 AM Senate FINANCE
| Audio | Topic |
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| Start | |
| Presentation: Oil and Gas Tax Credits | |
| 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
May 13, 2016
9:34 a.m.
9:34:23 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:34 a.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Donny Olson
MEMBERS ABSENT
Senator Lyman Hoffman
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue; Ken
Alper, Director, Tax Division, Department of Revenue.
PRESENT VIA TELECONFERENCE
SUMMARY
PRESENTATION: OIL and GAS TAX CREDITS
^PRESENTATION: OIL and GAS TAX CREDITS
9:34:57 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
emphasized the importance of a committee process that was
working, and believed that HB 247 had changed dramatically.
He felt that some of the changes improved the bill. He
acknowledged the long-term impacts of carry forward credits
that several versions of the bill had addressed. He
stressed that the House Rules Committee version of the bill
advanced the legislation but needed additional work to
garner the governor's support. He spoke to the spring
forecast, and the concern over whether it adequately
addressed the issues associated with industry expenditure
reductions. He relayed that the Department of Revenue (DOR)
examined the data through March and found the information
accurate. He noted that the department used information
provided by the industry. On the capital expenditure side,
the department forecasted less than the actual spend.
Commissioner Hoffbeck continued his opening remarks, noting
that the revenue figures were low. The forecasted price was
less than $40 bbl. and the actual price was $45 bbl. He
reported that if the prices remained at the level the
average price for FY 16 would be $42 to $43 bbl. He noted
that every dollar above the forecasted amount equated to
roughly $25 million in revenue. He remarked that "the
critical issue" at the $45 price point was that the issues
associated with carry forward credits were eliminated. He
explained that industry operated at a profit at $45 bbl.
under the state's tax structure, and was not eligible for
carry forward loss credits. He supported fixing the carry
forward issue in legislation even though the price of oil
was predicted to move within a range of $35 to $65/bbl. in
the current fiscal year. He relayed the administration's
positon that production tax was a severance tax and not an
income tax. He explicated that the state maintained a
specific oil and gas income tax where losses could be
carried forward. A production tax or severance tax was a
"charge based on severing a non-renewable resource from the
state." He shared that "the administration was firm in its
position" that the tax rate should not drop below zero. The
state should not pay an entity to produce its resources.
The governor said he would accept a 4 percent floor that
allowed losses to decrease the floor to zero in a given
year but the losses could not be carried forward to produce
a negative tax. He relayed that the administration would
judge the bill accordingly.
9:40:48 AM
Senator Dunleavy asked whether the administration believed
the majority of the tax credit issue was centered on Cook
Inlet. Commissioner Hoffbeck replied in the affirmative
except for the net operating loss credit (NOL) that applied
to both areas. Senator Dunleavy wanted to make sure the
public understood that the tax credit issues were focused
on Cook Inlet. He thought it appeared as if the legislature
was focused solely on the North Slope, when in fact much of
the tax credit issue was from production in Cook Inlet.
Commissioner Hoffbeck responded in the affirmative.
Vice-Chair Micciche thought Senator Dunleavy had asked a
good question, and referred to SB 21 (Oil And Gas
Production Tax) [Chapter 10 SLA 13 - 05/21/2013]. He
believed that some individuals "rhetorically" connected SB
21 with the state's "cashable credit exposures." He
reported that HB 280 (Natural Gas: Storage/ Tax Credits)
[Chapter 16 SLA 10 - 05/12/2010] known as the Cook Inlet
Recovery Act created the credit issue and not SB 21. He
asked for a response. Commissioner Hoffbeck discussed
legacy issues. He answered that the majority of the "cash
flow credit" issues that concerned the administration
stemmed from most of the previous tax regimes. He listed
the previous tax systems as: the Cook Inlet Recovery Act,
Alaska's Clear and Equitable Share (ACES), Petroleum
Production Tax (PPT), and the Economic Limit Factor (ELF).
Vice-Chair Micciche thought it was important for the public
to understand the issue. He understood that SB 21 repealed
the 20 percent Capital Expenditure (Capex) credit enacted
with ACES, which he characterized as "detrimental" to the
state. He offered that 2013 was the record year for tax
credits under ACES when the state paid approximately $918
million due to capex credits. He wondered whether
Commissioner Hoffbeck wanted to comment on the topic. He
noted that the ultimate goal was to address the "$4.1
billion" budget deficit which drove reconsideration of the
tax credit system. Commissioner Hoffbeck deferred to Mr.
Ken Alper, Director, Tax Division, Department of Revenue,
for the answer.
Co-Chair Kelly referred to Vice-Chair Micciche's comment
that the state's current tax credit liability amounted to
$700 million. He clarified that the amount was actually
$500 million due to the governor's veto of $200 million
last year, which he considered a "false reduction." He
believed accuracy was important when discussing the credit
numbers. He noted that the repayment of the $200 million
was pending and still owed by the state.
9:44:58 AM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
addressed previous comments. He stated that the tax credit
liability for cash, based on the forecast for FY 17 was
$775 million and included the $200 million referenced by
Senator Kelly that carried over from FY 16. The FY 16
forecast was $700 million and fully funded by the
legislature. He confirmed that the governor vetoed $200
million. He related that the peak year for "repurchases"
would be FY 17, if the full amount of $775 million was
fully funded. In relation to Senator Micciche's remarks, he
recounted that FY 14 was the peak year for credits against
liability of over $900 million. He added that the figure
represented a "hybrid" due to the cross-over between ACES
and SB 21. The fiscal year included the last year of the 20
percent capex credits under ACES and the first year of per
barrel credit under SB 21. He added that between the
cashable credits and credits against liability the state
paid over $1.5 billion in total credit liability in FY
2014.
Vice-Chair Micciche stated that he was referring to FY 13,
and offered that the reason he had used $775 million figure
was to try to maintain accuracy due to the "way the press
covered this issue." He stated that the highest year of
credits was due to the ACES capex credit and was not
related to the current situation. He believed the ACES
capex credit was over generous.
Co-Chair Kelly concurred with Vice-Chair Micciche and
announced that some of the "stacked" tax credits were
expiring or eliminated. He stated that if the press was
creating a "boogeyman" of credits he wanted to use the
accurate amounts. He voiced that the credits were
approximately $500 million dollars. He was reminded of the
"mantra" stated by some that the state was paying out more
than collecting in production tax. He remarked that no one
discussed the collection of oil royalty, property, and
income tax as well. He referenced Commissioner Hoffbeck's
remarks regarding severing a non-renewable resource from
the state, and commented that he ignored the fact that the
oil was paid for in royalty.
9:49:23 AM
Senator Dunleavy remembered that Commissioner Hoffbeck
testified that the administration had no intention of
revisiting SB 21. Commissioner Hoffbeck answered in the
affirmative. Senator Dunleavy referred to the forecast and
wondered if the department was collecting data to determine
whether a decrease in activity would result in a decreased
use of credits.
Mr. Alper responded in the affirmative and explained that
the credit forecasts were "tied" to the information the
industry provided regarding its projected work. The out
year forecasts were typically low due to the industry's
uncertainty of work in the future. The department's
forecast was "fairly accurate" and the lease expenditures
were tracking very closely with the FY 16 forecast. He
indicated that if the lease expenditures were on track for
FY 16 the credits expectation was closely matched for FY 18
due to the one and one half to two year lag between when
the money was spent and the requests for reimbursement.
9:51:18 AM
AT EASE
9:52:12 AM
RECONVENED
Co-Chair MacKinnon relayed that she reviewed the "Indirect
Expenditure Report" dated January, 2015 [published by the
Legislative Finance Division] and viewed the data regarding
the credits and the expiration dates from the Division of
Oil and Gas. She asked whether the state "blanket credited
the industry with every federal credit available" that a
company can use against taxes. Mr. Alper clarified that Co-
Chair MacKinnon was referencing corporate income tax and
asking whether the state internalized the federal tax code
into the state's corporate tax code. He stated that the
income from companies that were applied to "the
"apportionment formula and applied to Alaska by a certain
percentage was also internalizing" the federal tax credits.
He did not consider himself an expert on corporate income
tax and offered to provide more details. Co-Chair MacKinnon
asked whether Mr. Alper could provide the committee with
information on the implications on how much money or lack
of money the state received under the corporate tax. Mr.
Alper agreed.
Mr. Alper discussed the presentation "Oil and Gas Tax
Credit Reform - CSHB 247(RLS)\C" (copy on file). He
commented that although the bill had changed the committee
was familiar with the range of options and issues in HB
247. He noted that each slide addressed a specific issue
and how the governor proposed to address the issue and how
the House Rules Committee version dealt with the issue. He
drew the committee's attention to an additional document
titled, "Comparison of Provisions of HB 247 - Oil and Gas
Tax Credits" (copy on file) which provided a comparison of
provisions of various versions of the bill including the
proposed Seaton-Wilson compromise, which the committee
might discuss in the future but was not included in the
PowerPoint.
9:55:20 AM
Mr. Alper discussed slide 2:
Major Provisions in Rules Committee Substitute:
Exploration Credits
· Governor's bill
o Allows existing credits to sunset on 7/1/16
o Keeps "middle earth" extension to 1/1/22
o Repeals older dormant DNR exploration
credits
· Rules CS
o Also keeps the change made in several
earlier versions to extend the "Frontier
Basin" credit to protect ongoing AHTNA
investment
o Extends this language six months due to
additional delay in acquiring a rig
Mr. Alper commented that the Frontier Basin credit was
related to Middle Earth credits and extended the credit
another 6 months.
Co-Chair MacKinnon asked for clarification about the bullet
"keeps "middle earth" extension to 1/1/22," and wondered
whether the credit already expired but the governor's bill
extended it. Mr. Alper clarified that the credit was passed
in 2003 that contained an original sunset date of 5 years
and was extended by previous legislatures two more times.
The last extension applied statewide and expired July 1,
2016. He furthered that an amendment embedded within SB 21
extended the credit exclusively to Middle Earth until 2022.
Senator Bishop asked whether he was referring specifically
to the "023025 credit." Mr. Alper specified that the credit
was the "025A" [43.55.025(a)] credit; the primary
exploration credit. He added that the Frontier Basin credit
was also contained in 025 (a) subsection 6 and was the 80
percent credit that sunset in July, 2016 that was extended
in the current version of the bill.
9:58:30 AM
Co-Chair MacKinnon cited the term "super credit," in
relation to the Frontier Basin credit and wondered what the
credit was and why the credit was maintained by the
governor when "in all other instances" he wanted to
eliminate or reduce credits. Mr. Alper answered that the
term "super credit" was first used in relation to the Cook
Inlet Jack-up Rig credit when the Cook Inlet Recovery Act
and SB 309 (Oil & Gas Tax Credits/ Payments) [Chapter 15
SLA 10 - 05/10/2010] was adopted. He detailed that the
Jack-up Rig credit provided 100 percent support for the
first well drilled with a deep water jack-up rig in Cook
Inlet. The "extra" incentive credit was referred to as a
super credit because the scope was beyond what the state
had previously offered. The Frontier Basin bill in 2012 [HB
276 (Oil/Gas Prod.TaxCredits/Rates/Value) [Withdrawn by
Sponsor 04/15/2012] was ultimately folded into a larger tax
incentive bill [SB 23 (Tax/Credit: Film/Oil & Gas/Gas Stor.
/Corp) Chapter 51 SLA 12 05/30/2012] and "emulated" the
jack-up rig provision in an attempt to finish work in
targeted areas in the basin. He qualified that the super
credit was rarely used and was not much better than
utilizing the 40 percent exploration credit stacked with
the net operating loss credit. The super credits were not
stackable and the jack-up rig credit required payback. He
related that the AHTNA Corporation was utilizing the jack-
up rig credit in the Glenallen area while attempting to
find a gas supply for local utility needs. The project was
permitted and was "in the works" for several years but due
to circumstances beyond the corporations control work was
slowed. The previous committees decided the extension
request was reasonable at a cost to the state of $1 million
to $2 million.
10:01:28 AM
Co-Chair MacKinnon referred to the Cook Inlet Jack-Up Rig
credit that was successfully used to find gas. She wondered
whether the state expected to receive the 50 percent
payback over ten years and if it was included in the
forecast. Mr. Alper replied that the jack-up rig credit was
not actually used in Cook Inlet. The companies employed the
exploration credit or the Well Lease Expenditure (WLE)
credit stacked with the NOL credit and received 65 percent
state support. The 100 percent jack-up rig credit required
50 percent payback, a higher information hurdle, and a more
limited expenditure barrier and was avoided.
10:02:35 AM
Mr. Alper addressed slide 3:
Major Provisions in Rules Committee Substitute:
Cook Inlet (and Middle Earth) Credits
· Governor's bill
o Eliminated 20% QCE and 40% WLE, kept 25% NOL
o Kept 2022 "tax cap" sunset
· Rules CS
o NOL kept at 25% in 2017 but only if
producing by 1/1
o QCE repealed 1/1/17
o WLE reduced to 20% for 2017-18 and repealed
in 2019
o Keeps 2022 tax cap sunset but "working
group" section explicitly calls for new tax
system to take effect in 2019
Mr. Alper stated that the Cook Inlet credit system was
really the old ACES system. He explained that the 2022 "tax
cap" sunset was replicated from the PPT era maximum taxes
that applied to Cook Inlet. He added that the expectation
was that a future legislature would resolve the Cook Inlet
tax issue. He described the House Rules CS as being a
slower ramp-down to what the governor had wanted.
Mr. Alper looked at slide 4:
Major Provisions in Rules Committee Substitute:
North Slope Credits, Limits, Carry-Forwards
· Governor's bill
o Kept 35% NOL rate (not current
administration policy)
o Capped repurchase at $25 million / company /
year, large company exclusion, 10 year
sunset
· Rules CS
o 35% NOL for 2017-19 transition period, only
for small producers and pre-production
developers
o Capped at $75 million / company / year
o After 2020 all companies must "carry
forward" lease expenditures to use against
future revenue
o Effectively keeps the 35% tax value for
carry-forward
Mr. Alper informed the committee that based on the spring
forecast exposing the "potential extent of major producer
operating losses" the governor wanted to eliminate or
reduce NOL credits. He delineated that the original version
disqualified a large company with more than $10 billion in
annual revenue from receiving cash credits and required
that the NOL credits were carried forward to future years
for use against its taxes. He believed the House Rules CS
took a different path that had not been seen before. He
indicated that "small producers" were defined as companies
producing less than 15 thousand barrels per day. The NOL
loss had traditionally been used by companies that did not
have revenue due to the pre-production development stage
and was reverting back to that specific use. He stated that
after 2020 the NOL credit was eliminated. He revealed that
converting the NOL credit into a carry forward credit
created "dissonance" between the incumbent producer and a
new producer several years away from production. The
incumbent producer was able to use the carry forward
expenditure against revenue when the price of oil increased
but new developers not in production had to hold the carry
forward lease expenditures for future years. He shared the
concern that the "playing field leveling" effect was lost
by not offering credit support.
10:08:49 AM
Vice-Chair Micciche stated that he used different
terminology, and thought the playing field was leveled. He
opined that the credits prior to the change were
advantageous to smaller companies and the current
provisions provided a level playing field for all
companies. He asked whether Mr. Alper agreed. Mr. Alper
answered that in the past when the prices were high, "it
truly was a level playing field to have cash credits
because the major producers were offsetting their expenses
and paying fewer taxes by spending money." He furthered
that when the price dropped, the playing field was tipped
in favor of independent producers who were receiving cash
for their credits and the major producers were required to
carry their losses forward. He felt that the new provision
was a "rebalancer" but once the prices increased the
advantage went to the producers since they receive revenue
offset by lease expenditures.
Co-Chair Kelly referred to the 35 percent NOL credit that
expired in ten years. He asked whether the companies that
had credits when the expiration date matured would write
the losses off, or if the losses were still eligible for
repayment. Mr. Alper asked whether Co-Chair Kelly was
referring to the governor's original proposal. Co-Chair
Kelly replied in the affirmative. Mr. Alper responded in
the affirmative. He clarified that the idea was considered
a "first in first out" situation and on the tenth year the
company would lose the credits. Co-Chair Kelly asked
whether the provision was eliminated. Mr. Alper responded
in the affirmative and stated that the House Rules
Committee version eliminated the sunset and the carry
forwards were unlimited. Co-Chair Kelly asked whether the
administration wanted the provision reinserted in the bill.
Mr. Alper replied that the administration's preference was
to eliminate operating losses for the major producers'
carry forward and allow use of the losses in a single year
to limit reducing the tax to zero.
10:12:38 AM
Commissioner Hoffbeck affirmed Mr. Alper's statements. He
indicated that credits could be used in an individual year
to zero out taxes but that any excess credits above that
would be lost. Co-Chair Kelly asked whether the provision
would be in place within ten years. Commissioner Hoffbeck
replied that it would be effective immediately.
Vice-Chair Micciche noted that Mr. Alper had referred to
things beyond the control of the state, and the definition
of a level playing field, price, and whether or not a
company was producing. He was concerned that the state had
spent hundreds of millions on companies that never produced
oil and even left the state. He felt the scenario left a
"significant exposure" for the state. He believed the
current system was inequitable. He asked for Mr. Alper's
comments. Mr. Alper voiced that it was reasonable to say
the policy of the state in previous years was to encourage
new players especially on the North Slope. The open-ended
refundable credits were designed to give advantages to
developing companies that had not yet generated revenue
similar to the advantages producing companies received. He
believed abuse occurred and the state absorbed some losses
that were unrecoverable. He thought the danger was that the
state had already substantially invested in new producers
and new discoveries and did not want to "pull the rug out"
under companies that were farther along in development with
the help of the state "subsidy" while trying to reduce the
state's exposure.
Co-Chair Kelly asked whether most of the excess losses
occurred under ACES and not under SB 21. Mr. Alper
responded that the abuse occurred under a mix of tax
systems due to the longevity of the system that was in
place. He recounted that under ACES the NOL credit was 25
percent and the capex credit was 20 percent. The state was
paying for 45 percent of North Slope companies'
expenditures for ongoing development work up through 2013.
Subsequently, under SB 21 the NOL credit was raised to 45
percent for 2 years through the end of 2015. He delineated
that the increase was designed as a "hold harmless" to
conciliate producers. All of the current credits due were
based on the 45 percent NOL. The credits were reduced on
January, 2016. He indicated that two circumstances were
unique to the gross value reduction (GVR) and new oil
benefit in SB 21; a company was able to artificially
inflate the size of an NOL credit resulting in a benefit
larger than 45 percent. He believed that the result was not
intentional but the administration was attempting to reduce
the benefit through HB 247.
10:17:30 AM
Co-Chair Kelly thought Mr. Alper had mostly described
credits from the previous tax regime (ACES). He wondered
how large the NOL credit grew under the GVR. Mr. Alper
replied that if a company had a cash flow loss, the NOL
would be a percentage of the loss. He expounded that the
GVR was a "subtraction mechanism" where losses were
subtracted from revenue and taxes were paid on a smaller
figure. The loss to the state was in the $25 to $50 million
per year range. Co-Chair Kelly mentioned that some of the
tax credits that were losses to the state were also from
PPT and ELF and "far fewer were related" to SB 21. Mr.
Alper clarified that the NOL credit was part of the oil tax
regime since PPT. The idea of reimbursing the companies for
a percentage of lost revenue was a "consistent feature"
since the inception of a net profits tax.
Mr. Alper presented slide 5,
Major Provisions in Rules Committee Substitute:
Minimum Tax Changes
· Governor's bill
o Increased "floor" to 5%
o "Hardened" minimum tax against NOLs, $5 per-
barrel credit for new (GVR) oil, small
producer, and exploration credits
· Rules CS
o Keeps current 4% floor and doesn't harden
against additional credits
o Because NOLs end (2017 for majors, 2020 for
others), floor indirectly hardened because
no NOLs to use
o Revenue impact delayed to 2020 because pre-
effective date NOLs can still be used to go
below floor
Mr. Alper explained that currently the tax floor was harder
under SB 21 than under ACES. Under ACES, the 20 percent
capex credit was able to reduce taxes to zero and was
eliminated. The equivalent large credit was the per barrel
credit and was limited by the floor. The department
discovered that if a company had a loss in year one it
could be utilized in year two to reduce taxes below the
floor. The governor's original proposal hardened the floor
against the carry forward scenario as well as the other
credits listed on the slide.
Co-Chair MacKinnon asked whether the education credits
could be stacked against the floor. Mr. Alper stated that
the education credit could be used against multiple taxes
and the governor excluded the tax under the 5 percent hard
floor. The House Rules version eliminated the governor's
hardening proposals. The bill indirectly hardened the floor
by eliminating the NOL credit. With the removal of the NOL,
a major producer may carry forward the current year's
expenditure's into the next year to reduce their tax
liability but only up to the 4 percent floor. He summarized
that "it was an indirect hardening of the floor for the
major legacy producers."
10:22:08 AM
Commissioner Hoffbeck interjected that with a 35 percent
net operating loss a producer could reduce its tax
liability to zero from the 4 percent floor. Under the
current version, a company was able to carry forward its
expenditures and write-off 35 percent of the marginal tax
rate but was prohibited from use until the amount was above
the minimum tax, which was at the price of $75 bbl. He
stated that maintaining a 4 percent tax floor was a benefit
to the state. The provision deferred the liability to a
point of time in the future when oil prices increased.
Senator Bishop thought that the provision "partially
eliminated double dipping." Mr. Alper was unsure about the
concept of double dipping. Senator Bishop thought the
governor's version did not allow for the 35 percent carry
forward forcing the expenditure in the same year. The
current version allowed a carry forward and a liability
owed sometime in the future. Mr. Alper clarified that the
governor's proposal disallowed NOL use to reduce liability
below the floor but allowed the credits to roll forward
until the price of oil was higher. The House Rules
Committee Substitute (CS) had allowed for future deduction
of expenditures and could lower a company's taxes to the
floor. He specified that the provision was "a back door
way" of accomplishing the same thing by "subtracting
expenditures instead of preventing the subtraction of
credits."
10:24:37 AM
Co-Chair Kelly was under the impression the floor was lower
than 4 or 5 percent. Commissioner Hoffbeck assured him that
the floor was no lower than 4 percent depending on the
version of the bill. Mr. Alper stated there was a distinct
"inflection point" of $80 bbl. where the hard floor "kicked
in." He qualified that currently the point was set at $75
bbl. due to the decrease in industry spending. Co-Chair
Kelly asserted that industry's lower spending was a result
of revenue losses which resulted in the reduced spending
that lessened its liability to the state. He believed his
perspective was a "general over-arching discussion that we
disagree on and that is okay." Mr. Alper clarified that the
expenditure assumptions were down and the department had
included the lower numbers in the forecast.
Co-Chair MacKinnon asked whether the current statute had
the floor set at 4 percent. Mr. Alper answered that the
floor was 4 percent if the price of oil was above $25 bbl.
and step laddered down to 3 percent between a price of $20
bbl. and $25 bbl. and 2 percent between $17.50 and $20.
bbl. In addition, certain credits reduced liabilities below
the floor. Under SB 21, the "per taxable credit" could not
be utilized below the floor.
Co-Chair MacKinnon asked about previous statements that the
governor was not going to change SB 21 and wondered whether
the governor's proposal increased taxes. Commissioner
Hoffbeck affirmed that the 4 to 5 percent hardened floor
proposal increased taxes and was one area the bill
attempted to change SB 21. He communicated that the floor
provision was not intended as a direct attack on SB 21 but
as an alteration to the tax regime in general. He related
that the governor decided against including provisions such
as "maturing of new oil" because he wanted to avoid
changing SB 21.
10:28:42 AM
Co-Chair Kelly asked Commissioner Hoffbeck if he knew how
much the total dollar amount of the 4 or 5 percent hard
floor was. Commissioner Hoffbeck voiced that the difference
was approximately $50 million.
Mr. Alper clarified that $50 million represented the amount
of increase to the floor. The amount varied with the price
of oil; i.e., at $75 bbl. the amount was $75 million and at
$40 bbl. the amount totaled under $50 million. He added
that one percent of magnitude equated to roughly $50
million. The other portion of revenue derived from
hardening the floor changed between the fall and the
spring, which grew to $150 million from $50 million because
the amount of operating losses earned by the major
producers increased dramatically, but the floor was
hardened and the state was able to "scoop back more
revenue" through a lower price of oil in the original bill.
Co-Chair Kelly asked whether the total amount of revenue at
a 4 percent hardened floor was "about $150 million." Mr.
Alper explained that roughly 160 million taxable barrels of
oil were produced on the North Slope each year. If the well
head value was $40 bbl. multiplied by 160 million equated
to $6.4 billion multiplied by 4 percent the total was $250
million that amounted to the base number notwithstanding
the extent that some amount was lost or added back, which
represented the "cap."
Senator Dunleavy thought the idea behind SB 21 was to
curtail the decline of oil production in order to increase
the state's revenue. He wondered whether the administration
had shared the philosophy, and if the administration shared
concerns that changes to the current tax credit structure
for the North Slope would interfere with the goal of
increased production. The issue was the "crux" of his
concern. He wanted more production resulting in more
revenue. Commissioner Hoffbeck thought that "any money that
was taken off the table would have an impact." He thought
the issue was whether the impact was in "relative
proportion to the amount of money" removed from the system.
He expressed concern that the level of credit support was
unsustainable. The administration wanted to establish a
sustainable credit system at the level the state treasury
could meet its credit obligations. He expressed a greater
concern over projects in process that relied on the credit
support to date and needed the additional credits to
complete the project. He wanted to avoid credits for
"speculative" projects and eliminate credits that never
benefitted the state. He acknowledged that "pulling back on
the credits would have some impact" but felt that it was a
"necessary step." He revealed that the administration was
concerned that some projects were becoming credit-dependent
and would never benefit the state.
10:34:12 AM
Senator Dunleavy wondered whether Commissioner Hoffbeck was
aware that developing a new oil field was a long-term
process, up to ten or fifteen years. He believed the state
needed to maintain "rolling exploration and production" to
preserve oil production levels and he thought any
interruption at present could impact the state in 10, 15,
or 20 years. He wondered whether the department had
calculated the impact in the future. He was concerned about
the long-term consequences to the state. Commissioner
Hoffbeck reported that the administration held "active
discussions with developers and producers" when drafting
the bill in an attempt to accommodate their issues if
possible. He communicated that the bigger driver to the
success of oil development was the price of oil rather than
tax credits. He thought it would take a "price recovery" to
bring more fields "online" at a "balance point." He
disagreed that the state could afford a credit program that
could "force" the fields into development at a low oil
price environment. He recommended patience and stated that
no matter what the state did to incentivize production the
industry was shuttering rigs and slowing development until
oil prices recovered.
Co-Chair Kelly referred to remarks by the commissioner that
some of the credits would never payoff on some projects. He
restated that oil brought other income besides production
tax. He asked whether the projects actually cost the state
a net loss of money or was not profitable relative to a
production tax. He asked the commissioner to define
"payoff." Commissioner Hoffbeck reported that the
department examined projects utilizing credits against just
the production tax and all unrestricted and restricted
revenues. He discovered that the credit support versus the
size of some project's field development had a negative net
present value to the state. He added that the size of the
field was a factor.
10:38:58 AM
Mr. Alper spoke to royalties. He referred to the National
Petroleum Reserve Alaska (NPRA) and the Greater Moose Tooth
fields and relayed that the areas were federal leases with
federal royalties and the state received only 50 percent of
the royalties. He stated that the state received only 27
percent of any near off shore oil development and no
royalties on fields like CD5 owned by Arctic Slope Regional
Corporation (ASRC) that was on private land. He expounded
that there "was currently no filter inside the credit
programs." He believed it was important to ensure the state
gained revenue "on the back end" of credits that provided
large amounts of state support. Co-Chair Kelly asked
whether the situation was widespread or restricted. Mr.
Alper deduced that the problem was small but growing.
Senator Olson held that the state could encourage
production. He mentioned looking at the situation from "a
more global perspective," and wondered whether other tax
regimes were successful in increasing production by
"manipulating" its tax system. He was concerned that the
state would appear unstable by changing its tax system so
often. Commissioner Hoffbeck expected that enalytica
[Energy Consultants contracted by the legislature] had
analyzed the question more than DOR had. He reported that
oil companies were "laying down rigs" all over the world in
the current low price environment. He deduced that at a
stable $50 bbl. price point some rigs would come back into
production but the price needed to increase before new
investment began again. Senator Olson asked whether the
commissioner was "optimistic." Commissioner Hoffbeck
thought prices would recover slowly.
10:42:37 AM
Senator Dunleavy pondered that the cost to do business on
the North Slope was more expensive than in the Lower 48.
Commissioner Hoffbeck agreed. He wondered whether tax
policy mattered with regard to retaining some investment
through the period of low prices and in avoiding a
situation where industry "rethinks its investment" and left
the state due to changing tax policy. Commissioner Hoffbeck
believed that stable tax policy was important. He
maintained that the current system was not stable because
it was unaffordable for the state. He asserted that "a
change had to be made" after recognizing that "the amount
of money made was not commensurate with the outlay." He
stated that "credits were not price sensitive." The credits
went up as the price of oil dropped. He remarked that until
the state implemented a "stable regime" long-term stability
was unattainable.
Co-Chair Kelly declared that "words mattered," and referred
to Commissioner Hoffbeck's comment that the treasury could
not sustain the current tax policy. He thought that many
legislator's would "disagree" with the concept. He deemed
that if the Cook Inlet credits were removed from the debate
the disagreement would increase. He stated that "60 percent
of the credit problem" was rooted in Cook Inlet. He did not
believe that the treasury could not support the system. He
referred to a slide from a previous presentation (while
recognizing that the numbers were not current) and recalled
that $7.4 billion was invested in credits and gained the
state $61 billion in revenue. He felt that $7.4 billion was
acceptable and the notion that the figure was "too high was
debatable." He determined that "most people would buy into
an investment like that." He understood that the state was
no longer able to afford the equivalent level of investment
but that the concept was "the same" and the credits had
"attracted companies to the North Slope." He believed that
the idea that the state would "run out of money" paying for
credits under the current tax system was "not a true
statement."
10:46:39 AM
Commissioner Hoffbeck contended that the majority of the
large amount of revenue generated "was at a point in time
the state had very little exposure" to credits. He stated
that "the credit exposure had grown over the last few
years" during a period of low revenue. He questioned the
"correlation." Co-Chair Kelly asserted that the $7.4
billion was the departments figure. Commissioner Hoffbeck
agreed but offered that the over $60 billion in revenue was
attributed to past tax regimes. Co-Chair Kelly agreed but
felt that the "principle" behind the credits remained that
"credits stacked up against revenue was a pretty good
investment" and was less so in the current environment.
Senator Bishop wanted to confirm Commissioner Hoffbeck's
statement that credits were not price sensitive.
Commissioner Hoffbeck confirmed his statement.
Vice-Chair Micciche voiced that "production for the sake of
production had very little value" for the states "bottom-
line." He stated that the problem was "net negative
production across a broad spectrum of pricing." He added
that Kuparuk and Prudhoe Bay were developed in the absence
of credits. The development was based on "price and
geology." He referred to a statement by the commissioner
regarding the high price of producing oil on the North
Slope. He believed that the costs were variable depending
on each oil field. He referred to some non-conventional
exploration in the Lower 48 that was more costly than
production on the North Slope. He thought the issue was an
"appropriate" discussion to engage in and felt that some
issues needed to be reexamined. He wanted to proceed with
"accurate numbers," and wanted to "understand the exposure
to the state." He discussed the spring forecast and
requested an "update." He asked whether the department had
run numbers under new assumptions due to the higher price
than forecasted. He thought there were adjustments that had
to be made, and wondered whether the department could
provide updated figures. Mr. Alper cited the commissioner's
statement that the state gained roughly $25 to $30 million
for every additional dollar above the forecasted price. He
indicated that for FY 16 the price was approximately $2 or
$3 higher than the forecasted price. In FY 17, the
forecasted price was $39 bbl. He offered to send the
committee a report updated for the spring that showed
general fund unrestricted revenue forecasted over the next
ten years based on the price of oil. He indicated that he
carried around a stack of fiscal notes reflecting the
different versions of the bill. He furthered that each
fiscal note had two subtotals; one was revenue and the
other figure was savings to the state. He attempted to
provide accurate figures through the various and multiple
version of the bill. He offered to provide a comparison of
all of the version's fiscal notes for review.
10:53:37 AM
Vice-Chair Micciche announced his goal as "willing to
compromise." He wanted to purge the discussion from
rhetorical language, and use real numbers in order to help
Alaskans understand the issue. He wanted information
regarding the state's exposure related to price and value
that would result in a "forward looking" process that
fostered healthy production in the future. He wanted to
have an honest discussion with Alaskans and "make good
decisions using those facts" and thought DOR was helpful in
providing the information. Mr. Alper concurred that "honest
facts and figures" were important. He stated that the bill
was not able to change the state's credit liability in FY
17 of $775 million. The bill could affect the state's
exposure for FY 18 and beyond.
Co-Chair MacKinnon believed that the administration
"compounded the problem" by vetoing $200 million
appropriated the previous year for the credit liability.
She thought the "conversation had become convoluted" when
the $775 million figure was quoted that "should be closer
to $500 million to $600 million." She shared her
frustration over the veto and related that the legislature
had met the obligation. She believed that the veto had
negative consequences for many companies. She recounted
discussions with the Office of Management and Budget (OMB)
director, Pat Pitney, regarding the negative effects for
the state and industry and believed the veto compounded the
problems. She held that the governor vetoed the money with
good intentions. She voiced that the legislature attempted
to point out the consequences of the veto with the
administration. She asserted that the $775 million figure
"exasperated the conversation" and "compounded the
frustration" regarding the credit figures. She referred to
a variety of media outlets shaping the conversation based
on its perspective of the situation. She spoke about "the
baggage" the legislature had to carry in regards to the
administrative decision and past legislative decisions
concerning the tax structure and decades old credits. She
thought the issue was creating instability in the industry.
She maintained that the money diverted from the one-time
expense versus investing in long-term production would
impact the state. She agreed with Vice-Chair Micciche's
comments that the state should not support incentives
resulting in negative impacts for the state. She believed
that the governor and the media were pointing to the net
negative credits and not reporting that the legislature was
prepared to provide "corrective reforms." She alluded to
NOL credits on slide 5. She cited an announcement by BP
regarding decreased production in FY 17 by 40 thousand bbl.
She asked for clarification regarding whether the decrease
would happen in FY 17. She asked whether the department
knew the amount of net operating losses based on the lower
production.
11:00:14 AM
Mr. Alper answered that the BP rig laydown was reflected in
the spending and production forecast. He thought that the
decrease would happen over two years but would speed up the
decline curve. He conveyed that the carry forward NOL was
forecasted at $357 million in FY 17. Every dollar shift in
the price of oil would alter the total by $65 million. He
added that at the breakeven price of $46 bbl., the NOLs
were zero.
Co-Chair MacKinnon asked whether the legislature should
change major policy that supported long-term investment and
revenue to the citizens of the state versus proposing
alternative tax policy to stabilize a "particular moment in
time." She noted that legislation proposing taxes on other
industries was stalled. She referred to the oil and gas tax
issue labeled as the "log jam" in regards to concluding the
legislative session. Mr. Alper noted that the
administration shared the committee's frustration regarding
lack of movement on the governor's fiscal package. He
concurred that the matter was something of a logjam. He
noted that the other six revenue bills only added up to
$150 million and did not balance the budget. He thought the
oil tax issue had a substantially larger impact on the
state and could help balance the budget. He voiced that the
"NOLs could be gigantic or non-existent," but the state
needed to protect itself for the time when the price of oil
recovered and the state gained revenue. The administration
worried that the carry forwards would "eat tomorrow's
revenue" when the price of oil recovered and the bill
attempted to address the situation.
Co-Chair MacKinnon emphasized the point because the
administration wanted to eliminate credits that provided
the state $61 billion from 2007 to 2015. Mr. Alper stated
that the great bulk of oil production that payed taxes was
from "wells drilled long ago" regardless of policies of
past legislatures. He commented that to the extent that SB
21 did not anticipate low oil prices, ACES had not
accounted for high oil prices. He thought that the $7
billion in production tax revenue and the $9 billion in oil
and gas revenue windfall in a single year was well outside
anyone's forecast and provided the savings to help the
state through the current fiscal crisis. He referred to a
slide that illustrated that the state spent $38 in credits
for every dollar of new oil and felt that was "unfair" on
the high side and the figures of $7 billion in credits
producing $60 billion in revenue was "unfair" on the low
side and the real answer lied somewhere in between.
11:05:44 AM
Co-Chair Kelly was disturbed by Mr. Alper's comment that
carry-forward losses would detract from future revenue when
prices recovered. He asserted that the state wanted to
increase production even when the price was low. He did not
want to discourage companies from producing in a low price
environment so when the prices recovered there "was a whole
bunch of money." He concurred that initially the state
would receive less but revenues would increase in the
future. Commissioner Hoffbeck thought that that the
governor's plan focused on the sustained "reality" of the
low price environment of $35 to $60 bbl. price range for
the long-term future. He believed that some of the
adjustments were necessary because some of the credits did
not work within the price point range.
Co-Chair MacKinnon asked whether the commissioner
understood why she was concerned over the veto and the
public's perception of the oil tax credit issue that
compounded the problem by not paying all of the credits
when due. She remarked that the administration was asking
the legislature to adopt something that might reduce a
revenue shortfall in the future but also reduce production.
Commissioner Hoffbeck recognized the situation she
described. He shared Mr. Alper's remarks to the House Rules
Committee that the $775 million was an "anomaly" and was a
high water mark" and credits in that amount were not
anticipated to happen again. He communicated that the
administration wanted to correct an unforeseen issue in SB
21 created by prolonged low oil prices.
11:09:41 AM
Senator Bishop referred to six different proposals on oil
tax policy in the legislation, and wondered when enough was
enough. He believed the issue related to stability, and
wondered who could guarantee that tax policy was not going
to be readjusted again in another six months for something
unforeseen. He thought that if the state "did not have the
guts" to ride out the tough times with the current tax
policy, the state should not enter into a 30 year natural
gas project at 25 percent ownership with its own inherent
cyclical commodity prices.
Senator Dunleavy thought that the present conversation was
getting confusing. He felt that Commissioner Hoffbeck had
spoken in a way that would provide newspaper headlines. He
referred to the commissioner's comments that stated the
majority of the credit issues concerned Cook Inlet and
previous tax regimes and that the governor was not altering
SB 21, yet he had just spoke of fixing an anomaly in SB 21.
He believed that the commissioner was "muddling" the
conversation. He strongly suggested dealing with the Cook
Inlet credits in a separate bill. He thought that multiple
issues were being discussed and getting "balled up."
11:13:56 AM
Commissioner Hoffbeck responded that the issue of dealing
with carry-forward had developed during the session with
the spring forecast and that the governor's original bill
did not deal with the carry forward issue. He added that
the governor initially did not intend to adjust SB 21.
Senator Dunleavy commented that the issue should be a
"numbers issue" for the state.
11:14:59 AM
AT EASE
11:21:33 AM
RECONVENED
Mr. Alper continued to discuss slide 5, recounting the
subject of NOLs. He clarified that after the effective date
of the House Rules CS, the NOLs changed to the lease
expenditure construct. The carry forward NOLs would be
utilized against minimum tax payments until they were
depleted. Therefore; the revenue impact from the hard floor
was not apparent until 2020.
Co-Chair MacKinnon asked whether the provision was
intentional. Mr. Alper answered that the NOLs as a carry
forwards were current law and through the creation of the
new system with an effective date of 2017 the result was
"how the system absorbed those things that would already be
existing."
Co-Chair Kelly asked whether Mr. Alper could reiterate his
last comment. Mr. Alper restated that under current law
companies earned NOL credits and major producers had to
carry the NOLs forward, utilize them against future taxes
and reduce liability below the floor. He explained that on
January 1, 2017 the House Rules CS abolished NOL credits
per say. The costs that generated the credit was the
element that carried forward instead of a credit. The costs
could not be reduced below the floor but were calculated
into future taxes. Before the effective date of the bill,
it would take two years before any impact on revenue from
the change would be realized.
11:24:15 AM
Mr. Alper turned to slide 6, "Major Provisions in Rules
Committee Substitute":
New Oil "GVR" Provisions
· Governor's bill
o No changes
· Rules CS
o 10-year "graduation" of GVR oil to become
legacy oil
o (Note- concept of "graduation" started with
House Finance CS; various versions in the 5-
7 year range)
Mr. Alper relayed the concept that new oil should not be
new oil forever. The CS provided sunsets for the various
benefits for new oil such as; reduced taxation through the
subtraction mechanism from the GVR, the per barrel credit,
and the ability to reduce tax liability below the floor.
The CS included a 10 year graduated sunset period.
11:25:43 AM
AT EASE
11:26:29 AM
RECONVENED
Mr. Alper discussed slide 7, "Major Provisions in Rules
Committee Substitute":
6. Misc and Technical Provisions
a) Gov: GVR can't be used to increase the size of an
NOL
Rules: Kept as written
b) Gov: Municipal Utility Lease Expenditure pro-
ration
Rules: Kept as written
c) Gov: Transparency, can release amount of credits
received and the work done to earn them
Rules: Limited to refunded credits, and dollar
total only
d) Gov: Interest Rate increase from 3% over Federal
Reserve, simple to 7% over Fed, compounding
Rules: Increase to 5% over Fed, compounding
Mr. Alper repeated that the GVR limit produced a $25 to $50
million impact in revenue generation. He explained the
Municipal Utility Lease Expenditure as the non-taxable
activity of a municipal utility that owns its own gas
field, burned the gas in its own turbine but was permitted
to sell any excess to a third party; which was considered a
taxable sale. Currently, the utility was allowed to
subtract 100 percent of its lease expenditures even if it
only sold 10 percent of its gas; the provision offered a
pro-ration fix. In addition, he noted that the House Rules
CS permitted a limited release of information containing
the company's name and the dollar amount of cashable
credits received.
11:29:09 AM
AT EASE
11:29:23 AM
RECONVENED
Mr. Alper continued to discuss slide 7. He stated that
because the House Rules CS eliminated the cashable credits
in three years the transparency provision vanished upon
expiration. He reminded the committee that the delinquency
tax rate was reduced in SB 21 from 11 percent compounded
interest to 3 percent simple interest for all taxes. He
revealed that the 3 percent with simple interest instead of
compounded was an error in the bill. The Rules CS
instituted a rate of 5 percent over the federal rate. The
department favored the provision which currently totaled 6
percent with compounded interest. He elaborated that when
an audit revealed additional taxes were owed it resulted in
lost opportunity costs for the state. The state had to
cover in savings what it did not receive in taxes and
viewed the 6 percent interest as payback for the company's
shortfall.
Mr. Alper spoke to slide 8, "Major Provisions in Rules
Committee Substitute":
6. Misc and Technical Provisions (con't)
a) Gov: Alaska Hire tied to percentage of credit
that can be refunded
Rules: Alaska Hire as prioritization for
repurchase given limited funds
b) Gov: Credits can be used to offset other
delinquent obligations to the state such as
royalties
Rules: Credits can be held back, but if contested
must get company's consent to use to pay
obligation
c) Gov: No bonding or other formal means to protect
local vendors from bankruptcy
Rules: $250k surety bond with local vendor
priority
Mr. Alper communicated that the House Rules CS allowed the
companies that met the 80 percent Alaska-hire threshold to
receive the highest priority in ranking for credit
repayments in a situation of limited funds by the state. He
noted that the House Rules CS maintained the credit offset
for delinquent obligations under the restrictions that the
non-oil related obligation was reversed and must be
relevant to the company's oil and gas business.
Mr. Alper continued to discuss slide 8. He relayed the
administration's support for the surety bond provision to
protect local vendors.
11:35:43 AM
Mr. Alper reviewed slide 9, "Summary of Fiscal Impact,"
which gave a summary analysis of the different bill
versions in chart form. The versions included were the
governor's original HB 247, the Senate Resources [CS SB 130
RES] version and the House Rules CS. He observed that the
governor's bill contained more "aggressive" effective
dates, especially related to hardening the floor versus the
other versions that offered more delayed and gradual
implementation. He noted the House Rules CS impact of $175
million by FY 2020 that represented the hardening of the
floor, "ramp down" of the Cook Inlet credits, and the caps
on credit repurchasing. He thought that one "weakness" of
the governor's bill was the very large NOL carry-forward,
and described it as borrowing money from the future. He
characterized hardening the floor without restructuring the
NOL credits as accepting more revenue now but paying it
back in the future. He emphasized that by softening the
floor hardening the carry forwards were decreased. However,
the CS still projected $685 million in FY 20 in lost
revenue to the state from the NOL carry forwards.
11:37:51 AM
AT EASE
11:38:05 AM
RECONVENED
Vice-Chair Micciche commented on "borrowing from the
future" and thought it was important to also note the NOL
carry forward of $508 million predicted in the Senate
Resources version and the over $1.2 billion in the
governor's bill in FY 20. Mr. Alper concurred, and
qualified that the amount reflected his previous statement
regarding the hardening of the floor provisions in the
governor's bill.
Co-Chair MacKinnon pointed to the document provided by the
department titled, "Comparison of Provisions of HB 247 -
Oil and Gas Tax Credits" (copy on file).
ADJOURNMENT
11:39:12 AM
The meeting was adjourned at 11:39 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 247(RLS) DOR Overview for SFIN 5-13-16 final.pdf |
SFIN 5/13/2016 9:30:00 AM |
HB 247 |
| HB 247 - HB247-SB130 side by side w rules 5-13-16.pdf |
SFIN 5/13/2016 9:30:00 AM |
HB 247 SB 130 |