Legislature(2015 - 2016)BILL RAY CENTER 230
05/17/2016 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB247 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 247 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
May 17, 2016
9:08 a.m.
9:08:01 AM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 9:08 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 Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Laura Cramer, Staff, Senator Anna MacKinnon; Randall
Hoffbeck, Commissioner, Department of Revenue; Ken Alper,
Director, Tax Division, Department of Revenue; Senator
Cathy Giessel; Senator Mia Costello; Representative Tammie
Wilson.
SUMMARY
2d CSHB 247(RLS)am
TAX;CREDITS;INTEREST;REFUNDS;O & G
SCS 2d CSHB 247(FIN) was REPORTED out of
committee with "no recommendation" with one new
fiscal impact note from the Department of
Revenue; and one previously published zero fiscal
note: FN 5(DNR).
2d CS FOR HOUSE BILL NO. 247(RLS) am
"An Act amending the powers of the board of trustees
of the Alaska Retirement Management Board to authorize
purchase and sale of transferable tax credit
certificates issued in conjunction with the production
tax on oil and gas; relating to interest applicable to
delinquent tax; relating to the oil and gas production
tax, tax payments, and credits; relating to
exploration incentive credits; relating to refunds for
the gas storage facility tax credit, the liquefied
natural gas storage facility tax credit, and the
qualified in-state oil refinery infrastructure
expenditures tax credit; relating to the confidential
information status and public record status of
information in the possession of the Department of
Revenue; relating to oil and gas lease expenditures
and production tax credits for municipal entities;
requiring a bond or cash deposit with a business
license application for an oil or gas business;
establishing a legislative working group to study the
fiscal regime and tax structure and rates for oil and
gas produced south of 68 degrees North latitude; and
providing for an effective date."
9:08:38 AM
Vice-Chair Micciche MOVED to ADOPT proposed committee
substitute for 2d CSHB 247(RLS)am, Work Draft 29-GH2609\Z
(Nauman/Shutts, 5/17/16).
Co-Chair MacKinnon OBJECTED for discussion.
9:09:00 AM
AT EASE
9:10:29 AM
RECONVENED
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, discussed the
sectional analysis for SCS CSHB 247(FIN) (copy on file):
*Section 1: Relates to the Alaska Oil and Gas
Conservation Commission's determination of the
commencement of regular production of oil eligible for
a Gross Value Reduction. Conforms to Section 31
*Section 2: Removes reference to the explorer
incentive credit from the provisions of the Department
of Natural Resources audit statutes
*Section 3: Removes reference to the explorer
incentive credit from the provisions of the Department
of Revenue royalty and net profits payments
*Section 4: Removes reference to the explorer
incentive credit from information the Department of
Natural Resources would obtain to carry out their
responsibilities and functions
*Section 5: Removes reference to the explorer
incentive credit from information that is kept
confidential as the result of an audit
*Section 6: Removes reference to the explorer
incentive credit from the publishing of statistics
*Section 7: Changes the interest rate of delinquent
taxes effective January 1, 2017 to 7% above the
Federal Reserve rate, compounded quarterly for three
years. For the following years of the statute of
limitations, no interest would be accrued
*Section 8: Conforms to the new definition of
outstanding liability found in Section 26
*Section 9: Conforms to the new definition of
outstanding liability found in Section 26*Section 9:
Conforms to the new definition of outstanding
liability found in Section 26
*Section 10: Reduces, then eliminates, the in state
refinery tax credit. Reduces by 50% January 1, 2017
and eliminates the credit January 1, 2018
*Section 11: Conforms to the new definition of
outstanding liability found in Section 26
*Section 12: Removes the sunset on the Cook Inlet gas
tax cap
*Section 13: Removes the sunset on the Cook Inlet oil
calculation, and imposes a tax not to exceed $1 per
barrel of oil
Ms. Cramer noted that the oil tax in Section 13 was
equivalent to the amount of tax on gas in the Cook Inlet.
9:13:16 AM
Ms. Cramer continued reviewing the sectional analysis:
*Section 14: Removes the sunset on the cap for gas
produced in state for use in state
*Section 15: Calculation for Cook Inlet oil and gas
taxes
*Section 16: Reduces the qualified capital expenditure
in Cook Inlet sedimentary basin from 20% to 10%
*Section 17: Reduces the net operating loss in the
Cook Inlet sedimentary basin from 25% to 15%, prevents
the Gross Value Reduction on the North Slope from
increasing the size of the net operating loss when
calculating the net operating loss
*Section 18: Eliminates the net operating loss for the
Cook Inlet
*Section 19: Conforms to the elimination of the
qualified expenditure found in Section 16
*Section 20: Conforms to the elimination of the
qualified expenditure found in Section 16
*Section 21: Reduces the well lease expenditure in the
Cook Inlet from 40% to 20%
*Section 22: Conforms to subsequent changes related to
the tax credit fund (43.55.028)
*Section 23: Establishes a per company limit of $70
million annually for eligible purchases from the
Department of Revenue; prevents an applicant from
dividing into multiple entities; and reestablished the
50,000 barrel per day limit on accessibility to the
fund
*Section 24: Restricts repurchasing for tax credits to
a preference of at least 75% of the applicants
workforce being Alaska residents. Divides the annual
repurchase limit per company into two categories:
first 50% of the annual eligible appropriation can be
repurchased at 100% of the certificate value; and the
second 50% can be repurchased at 75% of the
certificate value
*Section 25: Conforms to Section 24
*Section 26: Creates a definition of outstanding
liability to the state. Allows the Department of
Revenue to restrict repurchase of credits after
notifying the applicant for any liability related
directly to the applicant's oil or gas exploration
development or production
*Section 27: Conforms to the elimination of the well
expenditure credit and the qualified capital
expenditure credit found in Section 41 effective
January 1, 2018
*Section 28: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 29: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 30: Imposes a lifespan on the Gross Value
Reduction for a term of seven years, or three years,
consecutive or nonconsecutive, in which the annual
price on Alaska North Slope crude oil sales averages
more than $70 per barrel
9:16:13 AM
Ms. Cramer continued to discuss the sectional analysis:
*Section 31: Conforms to the Gross Value Reduction
lifespan found in Section 30, and directs the Alaska
Oil and Gas Conservation Commission to determine the
commencement of regular production of eligible oil
*Section 32: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 33: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 34: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 35: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 36: Conforms to the elimination of the
qualified capital expenditure found in Section 41
*Section 37: Limits a municipality from receiving a
credit to only an amount that is proportionate to its
taxable gas
*Section 38: Creates a new definition of the qualified
capital expenditure to conform with the elimination of
the qualified capital expenditure found in Section 41
*Section 39: Requires an applicant engaged in oil or
gas exploration, development, or production to file a
surety bond in the amount of $250,000 to the state;
creates new Alaska Statute 43.70.028, stating that the
surety bond is meant to satisfy claims for labor,
employee benefits, taxes and contributions due to the
state, city, and borough, material and equipment
claims for negligent or improper work or breach of
contract, repair of public facilities
*Section 40: Repeals listed statutes effective January
1, 2017
*Section 41: Repeals listed statutes effective January
1, 2018
*Section 42: Applicability language
*Section 43: Transition language for oil refinery
credits
*Section 44: Transition for the qualified capital
expenditure and well lease expenditure credits
*Section 45: Transition language for the net operating
loss credit
*Section 46: Transition language for lease expenditure
language removed
*Section 47: Regulations language for Department of
Revenue, Department of Natural Resources, Department
of Commerce, Community, and Economic Development, and
the Alaska Oil and Gas Conservation Commission
*Section 48: Retroactivity clause
*Section 49: Effective dates for authorization of
regulations effective immediately
*Section 50: Effective date of January 1, 2018 for
Sections 18 -20, 22, 25, 27 - 29, 32 - 36, 41, 43 -
46, and for the new definition of qualified capital
expenditure
*Section 51: Effective date of all previously unlisted
sections of January 1, 2017
Ms. Cramer pointed out that there were items removed from
the bill version the committee had received from the other
body. The items removed included language related to the
Alaska Retirement Management (ARM) Board repurchasing
credits; language related to disclosure of company info-
related credits; language preventing the gross value at the
point of reduction being less than zero; and language
preventing an annual true-up of the per-barrel credit on
the North Slope for legacy oil. She added that the House
Rules Committee substitute had eliminated the Net Operating
Loss (NOL) credit, and replaced it with the ability to
carry forward lease expenditures. She continued that the
version that was amended on the House floor and passed to
the Senate did not contain the language, so effectively
there was no language in the committee substitute (CS) that
hardened the floor directly or indirectly.
Co-Chair MacKinnon REMOVED her OBJECTION. There being NO
further OBJECTION, the proposed committee substitute was
adopted.
9:20:19 AM
AT EASE
9:20:46 AM
RECONVENED
Co-Chair MacKinnon thanked the Legislative Legal Department
and the Legislative Finance Division for their work on the
CS. She shared that the committee was trying to move as
quickly as possible while ensuring accuracy. She encouraged
the legislature and the public to notify her office of any
errors. She continued that the committee had worked with
the Department of Administration, the director of the Tax
Division, as well as Commissioner Randall Hoffbeck over the
preceding twelve hours to ensure the group had an initial
opportunity to provide a fiscal note. She asserted that the
committee would continue to work to make necessary changes.
9:22:33 AM
AT EASE
9:23:26 AM
RECONVENED
Co-Chair MacKinnon recognized Senator Cathy Giessel and
staff for their work on vetting language for the
committee's consideration. The Senate Resources Committee
had been following the bill and trying to provide feedback
to the committee.
Vice-Chair Micciche MOVED to ADOPT Amendment 1:
Page 5, line 26:
Delete "and"
Page 5, line 28, following "year":
Insert "; and
(3) the aggregate amount of tax credits purchased
under each statutory section or subsection, as
applicable, for the preceding calendar year,
classified to prevent the identification of a
particular taxpayer"
Co-Chair MacKinnon OBJECTED for discussion.
Vice-Chair Micciche discussed Amendment 1, which he noted
was technically incorrect with reference to the location of
the amendment. He stated that it would be incorporated the
redrafting of the bill. He continued that the amendment
would allow the Department of Revenue to put out a report
that categorized and aggregated tax credits to be made
available for the review of the public and the legislature.
Co-Chair MacKinnon WITHDREW her OBJECTION. There being NO
further OBJECTION, it was so ordered. Amendment 1 was
conceptually amended to technically conform to the
committee substitute.
9:25:44 AM
RECESSED
4:15:49 PM
RECONVENED
Vice-Chair Micciche MOVED to ADOPT the committee substitute
for 2d CSHB 247(RLS)am, Work Draft 29-GH2609\AA
(Nauman/Shutts, 5/17/16).
Co-Chair MacKinnon OBJECTED for DISCUSSION.
4:16:52 PM
AT EASE
4:19:07 PM
RECONVENED
Ms. Cramer discussed the document, "Summary of Changes from
Z to AA," (copy on file):
*Section 7: New section, conforms to confidentiality
disclosure requirements under the newly created
Section 9
*Section 8: Corrects drafting error to correct the
interest rate at 7% on delinquent taxes
*Section 9: Confidentiality provision
*Section 24: Adds language for oil graduating from
gross value reduction eligibility to legacy oil
eligibility. Ensures newly classified legacy oil is
able to receive the sliding scale per barrel credit
*Section 25: Adds language for oil graduating from
gross value reduction eligibility to legacy oil
eligibility. Ensures newly classified legacy oil is
able to receive the sliding scale per barrel credit
*Section 28: Clarifies the original intent of this
section. Of a company's annual repurchase limit ($70
million), established in Section 27, the following
restrictions are imposed: up to the first $35 million
is eligible for reimbursement at 100% of the
certificate value; the second $35 million is eligible
for reimbursement at 75% of the certificate value
*Section 29: Conforms to the changes in Section 28
All sections and references to effective dates have
been renumbered and reordered accordingly.
Co-Chair MacKinnon WITHDREW her OBJECTION. There being NO
further OBJECTION, the proposed committee substitute was
adopted.
Senator Dunleavy asked if the committee would be reviewing
fiscal notes for the bill.
Co-Chair MacKinnon answered in the affirmative.
4:21:51 PM
AT EASE
4:23:32 PM
RECONVENED
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
referred to his opening remarks pertaining to the bill made
in earlier meetings. He reflected that there were many
portions of the bill that had retained the House version
language, as well as some changes. He informed that his
department had structured its presentation using the House
version of the bill as a baseline, and then showing changes
to the bill and flagging areas of the bill that were in the
original Senate Resources Committee substitute.
Co-Chair MacKinnon asked to start with a review of the DOR
fiscal note (OMB component 2476).
Senator Dunleavy referred to recent communications he had
observed (on blogs or newsletters) asserting that if the
state took action on oil and gas tax credits, it would
realize a $775 million reduction in spending in the current
year. He did not consider the assertion was true, and
wondered if testifiers could address the matter.
Commissioner Hoffbeck agreed with Senator Dunleavy, and
stated that the $775 million that was referenced was in
credits that had already been earned, was a liability the
state had acquired, and needed to be paid. He continued
that the legislation concerned forward-looking credits and
liabilities.
Senator Dunleavy thought the $775 million was a liability
the state must honor and pay.
Commissioner Hoffbeck concurred.
Senator Dunleavy thought it was important to clarify the
matter, and thought there was confusion on the issue.
4:26:28 PM
KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE,
thought that none of the versions of the bill had
tremendous impact on the FY 17 budget spend. He noted that
the governor's original bill, which had a retroactive
hardening of the floor, would have had brought in more
money yet would not have reduced spending on the tax
credits. He furthered that the aforementioned $775 million
subject to appropriation, was the obligation of the state.
He explained that, presuming the major changes in the bill
took effect in 2017, the credits that were earned in
calendar year 2017 would impact the spend on repurchasing
them in FY 19. He summarized that there was a two-year gap
between the expense and the actual expenditure by the
company.
Mr. Alper continued discussing the bill, and noted that the
fiscal note used a structure that was used for previous
versions of the bill. He commented that he did not fully
understand all the accounting mechanics of the fiscal note.
Co-Chair MacKinnon mentioned the $700-plus million that Mr.
Alper had referred to, and asked if the amount was affected
by the Governor's $200 million veto [in FY 16].
Mr. Alper answered in the affirmative. He furthered that
the expectation of credits earned (normally due in FY 17)
was approximately $575 million. The number expected in FY
16 was $700 million, but only $500 million was funded due
to the governor's veto. The remaining $200 million
obligation would roll forward and increase the $575 million
to a total of $775 forecasted for FY 17.
Co-Chair MacKinnon asked to clarify that it had been the
governor's intent, rather than the legislature, to fund
only $500 million.
Mr. Alper answered in the affirmative. He recounted that
the governor had put a $500 million cap on tax credit
spending, and noted that the $700 million that was in the
budget that passed the legislature was an estimate. The way
the budget had been drafted, the amount presented for
repurchase (of tax credits) was appropriated. The
governor's veto had removed the syntax and replaced it with
the amount of $500 million.
Senator Bishop emphasized that the estimate of $775 million
was a debt owed, and was a debt that would be repaid.
Mr. Alper concurred, and furthered that the governor's
initial submission of the bill had come with a fund
capitalization fiscal note in excess of the amount, to pay
off the obligation.
Co-Chair MacKinnon expressed appreciation for the clarity,
and thought it was confusing when people started discussing
100's of millions of dollars in what the state owed and
what we might owe. She asserted that the state planned on
paying its credits; and that the governor was proposing to
pay the credits, including the $200 million that was
vetoed.
Mr. Alper concurred, and furthered that the changes made in
the legislation (should it pass) would affect state
spending to a substantial degree in future years, however
there was not much that could be done about the $775
million.
4:30:05 PM
Vice-Chair Micciche referred to the 2016 Revenue Sources
Book, which he considered out of date regarding oil prices,
and possibly containing some "spin" on credits and other
issues. He wondered when an update would be available to
reflect the impact of the credit spend and production tax
revenue.
Mr. Alper was confident in the estimate of the $775 million
debt, which had evolved from the fall forecast. He conveyed
that once the state ran out of money in the fund, there
would be approximately $650 million worth of obligation
request applications that were currently before the tax
division. There were many more coming in, including some
large exploration expenditures. He thought the difference
from the forecast would be if the price of oil exceeded the
estimated $39 per barrel, and the carried-forward NOL
credits (not cashable for major producers) would be
dramatically lower than previously estimated and shown on
the fall forecast.
Vice-Chair Micciche asked for elaboration on the term
"dramatically."
Mr. Alper relayed that at the end of FY 16, the tax
division was estimating $657 million in obligation
requests, and at the end of FY 17, the division was
estimating a little over $600 million. He stated for every
dollar the price of oil moved above the estimate of $39,
the amount would reduce by $65 million. He summarized that
if the price was $5 greater than estimated, it would equate
to $325 million less.
Co-Chair MacKinnon asked Senator Bishop for the current
price of oil.
Senator Bishop stated the price of oil was $48.01 per
barrel. He clarified that the price was West Texas
Intermediate (WTI), and was not adjusted for Alaska North
Slope crude oil (ANS).
Mr. Alper confirmed that if the price of oil stayed at $48
per barrel through the end of FY 17, the state would not
have carried forward NOL credits to any substantial degree.
Co-Chair MacKinnon appreciated having the information on
the record.
Mr. Alper continued discussing the fiscal note, explaining
that the structure of the note showed revenue, but the
reduction and expenditure were not reflected on the cover
page, because the numbers were for a budget that did not
yet exist. The front page of the fiscal note showed $10
million to $12 million in new revenue; which mostly came
from a new tax on the Cook Inlet side, as well as from a
sunset of certain credits that would be used against tax
liability. He explained that the $10 million represented
only a small part of the story, and the great bulk of the
fiscal impact was on the reduced expenditures reflected on
the large table on page 4 of the fiscal note.
Mr. Alper continued discussing the fiscal note, which he
considered to be complicated. He directed attention to the
sub-heading "Total Revenue Impact" on page 4 of the fiscal
note, which summed up the new revenue that came from the
various changes in the bill. The line showed ranges of
numbers for subsequent fiscal years, which were represented
on the first page under the bottom line "Change in
Revenues." He highlighted a second subtotal under the
subheading "Total Budget Impact," which represented a
reduction in spending, or a decrease in the state's
obligation to buy credits in future years. He continued
that the next grey subtotal, "Total Fiscal Impact," was the
sum of the two subtotals, or the net impact of the
additional revenue plus the reduction in spending. He
asserted that the bill would reduce state spending and
increase its revenue in the amount of approximately $125
million on average over the next 3 to 4 years, beginning in
FY 18.
4:34:32 PM
Co-Chair MacKinnon stated that she had heard individuals
combining four to five years together and suggested there
was $500 million worth of savings during a four year time
period.
Mr. Alper thought Co-Chair MacKinnon made a fair statement.
Co-Chair MacKinnon wanted to revisit the topic of debt owed
to a group of taxpayers. She wondered how many individual
companies were qualified to receive the amount of funds
being discussed.
Mr. Alper stated that different companies filed
differently, which made the question difficult to answer.
Sometimes an operator filed on behalf of all partners, and
other times the same project might have a dozen different
applicants due to the differing ways of internal
accounting. He thought the tax division wrote 50 to 60
different checks for tax credits in a given year.
Co-Chair MacKinnon was raising the issue because she
thought there was a sentiment in the general public that
only three taxpayers were receiving a huge number of tax
credits from the liability that the state had on its books,
while in reality the people that the state was paying the
$775 million to many more entities. She wondered if the
payees included "the big three" [BP, Exxon Mobil Corp., and
ConocoPhillips].
Mr. Alper clarified that the big three were specifically
excluded from getting cash credits. Alaska statute
stipulated that when a company produced more than 50
thousand barrels a day, it was not eligible to get cash
repurchases for credits. In such cases, the companies
carried the credits forward to use against a future year's
tax liability. When there was the issue of the NOL carry-
forwards (when the price of oil was very low), it was
because the major producers explicitly could not get cash
for their credits.
Senator Dunleavy referred to the $775 million figure, and
wondered how much of it was from Cook Inlet as opposed to
the North Slope.
Mr. Alper referred to the spring revenue forecast and noted
the information was on Table 8.4 of the publication. The FY
17 forecast showed $447 million in tax credits for North
Slope, and $325 million in tax credits for non-North Slope
(predominately Cook Inlet). He stated that although the
Cook Inlet area had comprised roughly 60 percent of the
total in past two years, the numbers were changing and in
FY 17, 60 percent were for the North Slope.
Senator Dunleavy thought the numbers were important if the
bill were to go to the floor for debate.
Mr. Alper stated that in the FY 17 forecast there was an
unusually large number of $120 million in exploration
credits, believed to be due to the impending sunset of the
exploration credit. He thought companies had done some
exploration work the previous year in order to earn the
credits while it was still possible.
4:38:26 PM
Vice-Chair Micciche observed that without the changes
proposed in the CS, the assumed total refunded credit
liability for the state trickled off substantially and then
leveled off around $250 million per year from 2021 through
2025. He asked if Mr. Alper could explain.
Mr. Alper stated that the state's credit forecast was tied
very closely to the production forecast and the lease
expenditure forecast. Data provided twice a year by the
companies would communicate information about wells and
fields, and how much the companies intended to spend. He
continued that the forecasts tended to shrink in the out
years due to uncertainty about future activity. He
referenced $250 million as the "stabilizing placeholder"
that was an estimate; since after three or four years
estimates were very weak in terms of known activities.
Vice-Chair Micciche asked if the changes in the bill (if it
passed with the Cook Inlet credits) would cause a change in
the next forecast for FY 17, then from FY 18 forward there
would be a significant reduction.
Mr. Alper expected that the non-North Slope numbers to be
very close to zero around FY 20. He referred to the "Total
Budget Impact" line on the fiscal note, and directed
attention to the range of numbers starting in FY 20. He
thought for the sake of simplicity, one could equate the
ranges to equal approximately $125 million, which would be
half of the estimated spend of $250 million per year.
Co-Chair MacKinnon asked if there was anything on the
fiscal note that Mr. Alper wanted to highlight.
Mr. Alper noted that there had been a draft fiscal note
that did not include the narrative, and the numbers had
since changed and would need to be moved slightly back. The
change had to do with the bill revision in Section 28 as
previously discussed by Ms. Cramer. He referred to changes
to Version Z of the bill, that stated that of a credit
under the $70 million cap, half would be paid at the full
amount and half would be paid at the 75 percent rate. The
department had worked the interpretation into line "C" on
the second half of the fiscal note. The new CS, or Version
AA of the bill, stipulated that the first $35 million of
the credit would be paid at the full amount, while any
amount in advance would be paid at the smaller amount. He
summarized that the sum of the smaller credits made a
material difference. The difference would equate to
approximately $15 million or $20 million less than what was
shown on the fiscal note.
Co-Chair MacKinnon expressed appreciation for work that had
been done the previous evening.
Mr. Alper recounted working with the Commissioner Hoffbeck
and updating the fiscal note using the language of the new
committee substitute.
4:42:20 PM
Mr. Alper discussed the presentation, "Oil and Gas Tax
Credit Reform; Senate CS to CS HB247(FIN); Department of
Revenue; Initial Review of Changes in Senate Finance CS;
May 16, 2016" (copy on file). He addressed slide 2,
"Introduction":
• This bill is substantially changed from what passed
the House
• We have attempted to describe the changes made in
the current CS, but have only had the document for a
few hours. We apologize for any oversights
• We're using the same format as we did on Friday and
Saturday before this committee, describing the prior
two versions of the bill
• To color-code our text:
• Purple items are as they are in the "House"
version
• Red items are as they are in CSSB130(RES)
• Black items are current law but not in either
version
• Blue items are new to this version
Mr. Alper looked at slide 3, "Major Provisions in SCS-
CSHB247(FIN)":
1. Exploration Credits
• House bill
• Allows existing credits to sunset on 7/1/16
• Keeps "middle earth" extension to 1/1/22
• Repeals older dormant DNR exploration credits
• Extends the "Frontier Basin" credit one year to
protect ongoing AHTNA investment
• Senate Finance CS
• Keeps the first three changes from the House
• Does not include the Frontier Basin extension
Mr. Alper noted that there had been four major changes from
the House version of the bill. He noted that the component
to extend the Frontier Basin credit was not in the CS
before the committee, and was scheduled to sunset on July
4, 2016.
Mr. Alper highlighted slide 4, "Major Provisions in SCS-
CSHB247(FIN)":
2. Cook Inlet (and Middle Earth) Credits
• House bill
• NOL kept at 25% in 2017 but only if producing
by end of 2016. To 0% in 2018
• QCE repealed 7/1/16
• WLE reduced to 20% for 2017 and zero in 2018
• Middle Earth maintained at 25% NOL if under a
POD, along with a 10% QCE
• Senate Finance CS
• NOL reduced to 15% in 2017 and zero in 2018
• QCE reduced to 10% in 2017 and zero in 2018
• WLE reduced to 20% in 2017 and zero in 2018
• Middle Earth same as Cook Inlet with full
elimination of all three credits by 2018
Mr. Alper thought that slide 4 was substantive, and
commented that all versions of the bill had been working
with the same set of components. The Middle Earth credit
regime and its relationship to other credit regimes was a
variable that could be seen to change throughout differing
versions of the bill. He pointed out that the reduction in
the NOL rate was language from an earlier version of the
bill, and the qualified capital expenditure (QCE) credit
language was new. He continued that the well-lease
expenditure (WLE) change listed on the slide was taken from
the House version of the bill, and the arrangement of
Middle Earth credits referenced at the bottom of the slide
was new to the version of the bill being considered.
Mr. Alper continued to discuss the NOL, QCE, and WLE
reductions included in the CS and listed on the bottom of
the slide. He summarized that the elements would be
approximately be cut in half for a year of transition in
2017, and then the tax credit system would go to zero. The
state would no longer be offering credits for capital
expenditures or operating losses in Cook Inlet and in
Middle Earth beginning January 1, 2018. He specified that
the credits earned in 2017 would still show on the books
through FY 19, because of the natural delays of tax filing
and receipt and cashing of credits. The first year with
zero Cook Inlet credits being spent would be FY 20.
4:46:03 PM
Mr. Alper looked at slide 5, "Major Provisions in SCS-
CSHB247(FIN)":
3. Cook Inlet (and Middle Earth) Taxes
• House bill
• Moves up 2022 tax cap sunset to 2019, for Cook
Inlet gas, Cook Inlet oil, and Gas Used in State
(GUIS)
• Imposes a high underlying tax in 2019;
expectation of new system as proposed by "working
group"
• Senate Finance CS
• Eliminates sunset of Cook Inlet Gas and GUIS
tax caps
• This extends indefinitely the Cook Inlet Gas
and GUIS tax at an average of 17.5 cents/mcf
• Adds a new Cook Inlet oil tax cap of $1.00/bbl
• No sunsets, no working group. These are
intended to be long term changes
Mr. Alper discussed the different types of what was
considered "in-state" gas. He specified that gas used on-
well for production purposes was not taxed; as opposed to
gas sold to the Trans-Alaska Pipeline System (TAPS), and
gas sold to the municipal utility in Barrow. He pointed out
that the Cook Inlet oil tax cap referenced on the slide was
new to the CS. He quantified that there was roughly 5
million taxable barrels of oil produced in Cook Inlet per
year, all sold through local refineries and able to make a
$5 million revenue impact after the change.
Vice-Chair Micciche thought the committee had been focused
on credit exposure, and had evaluated the value of the
credits in both basins. He suggested that the state did not
have the money for some of the credits. He referred to the
statement on slide 5, "These are intended to be long term
changes," and recognized that the committee did not have
foresight into what would happen with future legislatures
or future Cook Inlet production.
Mr. Alper stated that recent state history had proven that
the government tended to re-address the matter of tax
credits every few years.
Vice-Chair Micciche thought that stability was important
and did not want to endlessly revisit the subject. He
emphasized that the legislature's focus was managing the
environment of a low oil price with a high fiscal gap.
4:49:46 PM
Mr. Alper discussed slide 6, "Major Provisions in SCS-
CSHB247(FIN)":
4. North Slope Credits, Limits, Carry-Forwards
• House bill
• No NOL credit or carry-forwards after 2016 for
companies producing over 15,000 barrels / day
• Smaller producers still eligible for refunded
NOLs with cap of $70 million / company / year
• Must be from a lease from which the state
receives a royalty, under a plan of development,
and in which the producer has a working interest
• NOL rate ramps down: 32% in 2017; 29% in 2019;
26% in 2021; 25% in 2023
Mr. Alper noted that slide 6 and 7 worked together. He
pointed out that the ramp-down of the NOL rate would reduce
future liabilities as well as the level of future
incentive.
Mr. Alper highlighted slide 7, "Major Provisions in SCS-
CSHB247(FIN)":
4. North Slope Credits, Limits, Carry-Forwards
• Senate Finance CS
• Limit for cashing credits remains 50,000 barrel
/ day
• Cap for refunds $70 million / company / year
• First half of each credit certificate, up to
the cap, is paid at face value. Second half is
paid at 75% of face value or, at the company's
option, can be carried forward into a future year
• NOL rate remains 35%
• In the case of a company with $70 million in
certificates, they will receive $61.25 million in
payment ($35 + 75% x $35), which equals an
effective NOL rate of 30.6%
Mr. Alper stated that the changes to the bill on slide 7
were quite broad. He noted that the third bullet on the
slide was the point at which his presentation diverged from
the most recent changes of the bill as presented earlier by
Ms. Cramer.
Vice-Chair Micciche remarked that the governor's bill, the
bill that passed the House, and the bill that was before
the committee had morphed between a net tax and a gross tax
system. He thought that by eliminating the carry-forwards
and some of the NOLs, which he thought were present in most
business-type taxes, the bill became somewhat of a gross
tax.
Mr. Alper stated that the current tax was a net tax,
although the gross minimum floor imposed the idea of a
gross tax at certain lower prices below a crossover point.
He continued that because of the operating losses, once a
company went below zero it more or less reverted back to a
net tax for carry-forwards. The House version of the bill
had kept the structure of the net tax becoming a gross tax
as it got lower, and then staying gross as it went
negative.
Vice-Chair Micciche recalled that the governor's bill had
not dealt with carry-forwards, and the estimated carry-
forward exposure had been $1.2 billion at the end of FY 20.
He reflected that the CS was closer to the House version of
the bill, with less than half of the remaining exposure in
FY 20 in the governor's bill.
Mr. Alper stated that the governor's bill had dramatically
increased the carry-forward exposure, primarily because the
bill was a firm hardening of the floor. Companies would
have had to pay the full 4 percent, which would have added
another $150 million to $200 million per year to the
exposure. The status quo number (the official forecast for
the end of FY 20) was $585 million. He considered the CS
was a small and not dramatic decrease from the status quo.
4:54:52 PM
Mr. Alper addressed slide 8, "Major Provisions in SCS-
CSHB247(FIN)":
5. Minimum Tax Changes
• House bill
• Adds a 5% "floor" but only if yearly price is
over $70 / bbl. Doesn't harden against additional
credits
• Because NOLs are no longer carried forward by
large producers, floor indirectly hardened
• Revenue impact delayed to 2020 because pre-
effective date NOLs can still be used to go below
floor
• Senate Finance CS
• No increase to minimum tax
• No hardening of floor against NOLs, new oil
per-barrel credits, or other credits
Mr. Alper discussed the hardening of the floor and
historical changes. He pointed out that the CS went back to
default language that was in existing statute. There was no
increase to the minimum tax, and hardening of the floor.
The original governor's bill had looked to harden the floor
against the per-barrel credits of new oil or gross value
reduction (GVR) eligible oil. He stated that although the
per-barrel credit was limited by the floor for legacy oil,
the per-barrel credit could still go to zero for new oil.
Additionally, there was a change to the definition of "new
oil," which he would address further.
Mr. Alper looked at slide 9, "Major Provisions in SCS-
CSHB247(FIN)":
6. New Oil "GVR" Provisions
• House bill
• 7-year "graduation" of GVR oil to become legacy
oil 5-year graduation for 10% additional GVR for
high-royalty fields
• If the average price of oil exceeds $70 for any
three years, the GVR sunsets early, with the
production reverting to legacy oil
• Senate Finance CS
• 7-year "graduation" of GVR oil to become legacy
oil, for all royalty levels
• If the average price of oil exceeds $70 for any
three years, the GVR sunsets early, with the
production reverting to legacy oil
Mr. Alper thought the Senate version (with regard to the
GVR provisions) was very similar to the House version of
the bill, with the exception of the removal of the 5-year
category for the 30 percent GVR. He specified that all oil
that was new, and met one of the 3 provisions to qualify
for the GVR, would qualify for 7 years and then revert to
become legacy oil.
Mr. Alper continued to discuss slide 9, referencing a
technical change Ms. Cramer had mentioned: once the new oil
went from the new to the old category, it also went to the
sliding scale per barrel credit category. He noted that the
three-year early graduation provision remained in the CS.
4:58:08 PM
Mr. Alper highlighted slide 10, "Major Provisions in SCS-
CSHB247(FIN)":
7. New Provisions from House Bill
• "Migrating Credits / True-up": Prevent per-
barrel credits not usable in one month, due to
minimum tax, from being applied in another month.
• "ARM Board Alternative Purchase Option":
Authorizes Alaska Retirement Management Board to
repurchase credits at 60% of face value. DOR
mandated to repurchase at full value within 5
years
• Senate Finance CS
• Neither provision retained
Mr. Alper explained that the Migrating Credits/True-up
provisions were not in the current version of the bill, nor
was the ARM Board Alternative Purchase Option.
Mr. Alper looked at slide 11, "Major Provisions in SCS-
CSHB247(FIN)":
8. New Provision in Senate Finance CS
• Refinery Credit
• Refinery credit repealed early.
• Rate reduced from 40% to 20% in 2017, and
eliminated in 2018
• Credit was scheduled to sunset at end of 2019,
so effectively this removes 2 ½ out of the 5
years of initial eligibility and value
Mr. Alper pointed out that the early repeal of the refinery
credit (on the first bullet of the slide) was a major new
provision of the bill that had not been seen in any earlier
versions. The language took effect in 2015, and was a 5-
year credit of up to $10 million per company for each of
the refineries in the state, for 40 percent of
infrastructure expenditures for major projects. He
mentioned the highly publicized asphalt plant project by
Petrostar, which had discussed using the credit. He noted a
$10 million impact on the fiscal note in 2017, and then a
$20 million impact on what would be affected in 2018 and
2019.
Mr. Alper discussed slide 12, "Major Provisions in SCS-
CSHB247(FIN)":
9. Misc. and Technical Provisions
a) House: GVR can't be used to increase the size of an
NOL
Sen Fin: Same as House
b) House: Municipal Utility Lease Expenditure pro-
ration
Sen Fin: Same as House
c) House: Transparency, can release name of company
and amount of refundable credits received
Sen Fin: Amendment provides amounts but not names
d) House: Increase to 5% over Fed, compounding, with
simple interest after four years
Sen. Fin: Increase to 7% over Fed, compounding, with
zero interest after three years (5% in draft text)
Mr. Alper referenced earlier lengthy discussions about the
GVR provision listed on the slide. He noted that the
department had some concern with the section relating to
compounding interest, specifically what might happen after
the sixth year. He described a hypothetical situation in
which a company contested a state assessment and took it to
court, which he contemplated could result in a lengthy
court case with zero percent interest carrying forward for
the entirety of the legal process.
5:02:02 PM
Mr. Alper displayed slide 13, "Major Provisions in SCS-
CSHB247(FIN)":
9. Misc. and Technical Provisions (cont'd)
e) House: Level of Alaska Hire as prioritization for
repurchase given limited funds, including contractors
Sen Fin: Priority for repurchase for companies with
Alaska Hire greater than 75%, not including
contractors
f) House: Credits can be used to offset other
delinquent obligations to the state related to oil and
gas business
Sen Fin: Same as House, requires notice if credit
funds are used to pay liability on company's behalf
g) House: $250k surety bond with local vendor priority
Sen Fin: Same as House
Mr. Alper discussed the Alaska Hire provision and used an
analogy of a company that had a small number of employees
and had the bulk of its work done by contractors. He
mentioned corporate income tax filers, who may have a great
number of out-of-state workers. He wondered how the
language in the bill would be interpreted, and thought
there might need to be a regulatory fix. He continued that
the language on the slide pertaining to a surety bond had
stayed relatively consistent since it had been first
introduced in the House Resources Committee.
Vice-Chair Micciche referred to Mr. Alper's earlier
comments regarding compounding interest and potential court
cases, and asked about how the interest and the liability
might work together. He wondered if it would be possible to
use credit funds to help with the expense. He wondered if
Mr. Alper's concern pertained to an ongoing case with no
interest burden on the remaining time.
Mr. Alper mused that if a court case dragged on there would
be no interest and obligation, and therefore little
incentive to settle. If the company had forthcoming future
tax credits, provision (f) (on slide 13) could pay the
obligation. In the case that the company won its case, the
state would reimburse it as needed. He continued that the
state routinely paid back companies with interest when a
settlement went in the company's favor. He noted that the
provision would only be relevant if the company had a
cashable credit. Major producers were excluded from the
provision as they did not have cashable credits.
5:05:21 PM
Senator Olson addressed the issue of zero interest earned
in the event of an ongoing court case, and wondered about
the timeline of state audits and the effect on businesses.
Mr. Alper discussed the progress of audits in the tax
division. He stated that the department had gotten behind
in audits two years previously, after Alaska's Clear and
Equitable Share (ACES) tax came in to effect and the
division was busy writing regulations. He noted that there
was an active plan for the division to catch up on audits,
and thought it would be a gradual process. He qualified
that there was no fiduciary interest in the tax division to
accrue more interest.
Senator Olson made the point that businesses were also
subject to the pressures of the fiscal environment.
Commissioner Hoffbeck did not have a strong disagreement
with years 4 through 6 of the audit timeline. He qualified
that the department had issue with litigation that could
extend to years 7 through 10. He echoed Mr. Alper's comment
that with no interest accruing, there was less incentive to
settle the case. He relayed that typically litigation was
driven from the taxpayer side rather than from the state.
Senator Olson referred to Former Governor Walter (Wally)
Hickel, and understood there was a historical perspective
on the matter.
Vice-Chair Micciche stated that there was a consequence he
had not considered, and mused on finding other ways to
motivate payment when there was liability was owed to the
state.
Commissioner Hoffbeck did not want to overstate the matter,
and did not think there was that many economic decisions
made on the amount of accrued interest on litigation. He
considered that people wanted litigation to be complete,
and did not think the potential zero interest years was a
huge issue, but rather a concern that the department wanted
to point out.
5:09:16 PM
Mr. Alper addressed slide 14, "Summary of Fiscal Impact,"
which he stated was a stripped down version of the fiscal
note to illustrate the different versions of the bill. The
slide showed a table entitled "Summary Analysis of Bill
Versions ($millions)." He noted that the slide tracked not
only the total bill impact; but the savings on spending and
the increase in revenue, as well as tracking the NOL carry-
forwards. He commented that should the price of oil be as
low as predicted, there would be $500 million worth of
carry-forwards at the end of FY 20. If the price prediction
was off by $8 or $9 over the course of the next four years,
the number could be wiped out completely.
Mr. Alper continued discussing slide 14; noting that under
the CS the expected total bill impact was $115 in FY 18
million, $140 million in FY 19, and $130 million in FY 20.
He expected the numbers to reduce by $15 million to $20
million, because of the adjustment he described earlier
relating to the $35 million (and how it was calculated) in
Section 28 of the bill.
Vice-Chair Micciche discussed the spring revenue source
book, which he assumed was off by about 25 percent. He
wondered if the actuals continued in the same direction,
the number would be wiped out quite a bit sooner.
Mr. Alper stated that the forecast had a price point below
break-even through the end of FY 18. He thought the FY 18
prediction was about $43 per barrel, and the FY 19
prediction was up to $48. The three years of losses equated
to a fairly large buildup of NOLs. If the price of oil
ended up closer to $46 per barrel for three years, it would
make a significant difference.
Co-Chair MacKinnon thanked Mr. Alper for his hard work
through the preceding hours.
Senator Bishop referred to a new computer program to aid
the tax audit division, and thought it would alleviate the
backlog of audits.
Commissioner Hoffbeck confirmed that the program was up and
running. He relayed that the program would have more
granular data as well as increased accuracy in the audit
filings.
Co-Chair MacKinnon noted that the fiscal note showed $1.2
million already included in the capital budget that was
contingent on passage of the legislation to support some of
the reporting requirements.
Commissioner Hoffbeck concurred.
5:12:47 PM
Senator Olson referred to slide 11, and the reference to
refinery credits. He mentioned projects in his district,
and asked Commissioner Hoffbeck to comment on the
administration's view of the recent changes to the bill.
Commissioner Hoffbeck shared that based on available
information, it appeared that most work to be done on
refineries would be able to be completed within the
timeframe of the modification listed on the slide. He did
not think the new provision would impact most refineries.
Co-Chair MacKinnon recognized the hard work of the
legislative legal department.
Vice-Chair Micciche MOVED to report SCS 2d CSHB 247(FIN)
out of Committee with individual recommendations and the
accompanying fiscal notes. There being NO OBJECTION, it was
so ordered.
SCS 2d CSHB 247(FIN) was REPORTED out of committee with "no
recommendation" with one new fiscal impact note from the
Department of Revenue; and one previously published zero
fiscal note: FN 5(DNR).
5:15:00 PM
AT EASE
5:17:37 PM
RECONVENED
ADJOURNMENT
5:17:53 PM
The meeting was adjourned at 5:17 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 247 SCS work draft version Z.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 Sectional Analysis Version Z Updated.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 SCSHB247 FIN prelim_ds_20160517.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 Amendment 1 Micciche.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 Summary of Changes Z to AA.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 SCS2dCS work draft version AA (002).pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 051716 Review of SCSHB247(FIN) 5-16-16 final.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 Sectional Analysis Version AA Updated.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 Public Testimony Harrington.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |
| HB 247 Testimony Alliance 051616.pdf |
SFIN 5/17/2016 9:00:00 AM |
HB 247 |