Legislature(2003 - 2004)
03/17/2004 09:06 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
March 17, 2004
9:06 AM
TAPES
SFC-04 # 44, Side A
SFC 04 # 44, Side B
SFC 04 # 45, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:06 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: SENATOR HOLLIS FRENCH; SENATOR RALPH SEEKINS;
SENATOR BERT STEDMAN; SENATOR GARY STEVENS; SENATOR TOM WAGONER;
PHELAN STRAUBE, Staff to Senator B. Stevens
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
Conference of Alaskans resolutions
Presentations Offered by Senators
SENATOR HOLLIS FRENCH presented a discussion on oil taxes,
specifically the economic limit factor (ELF). He referenced a
presentation as follows.
The "ELF" in Alaska's Oil Taxes
· There are four main taxes paid by the oil industry:
· Royalty - 12.5%
· Property - 20 mills which equals 2%
· Corporate income - 9.4%
· Production - 15% before ELF
Senator French noted these percentage amounts are simplified
estimates.
Senator French explained that the property tax is paid to the
localities that have the oil pipeline running through them such as
the North Slope and the Fairbanks North Star Borough. This tax
provides revenue to the localities and the State.
Senator French noted the production tax, or severance tax, is
typically 12.5 percent for the first five years of a lease, and is
then raised to 15 percent.
The 'ELF' in Alaska's Oil Taxes
· The 15% production, or severance, tax varies because of
the ELF, or economic limit factor.
· At its simplest, the ELF is a number between zero and
one. Multiplying the production tax by a field's ELF
lowers that field's tax burden.
Senator French informed that because the economic limit factor is
always less than one, all of the production taxes paid to the State
are less than 15 percent.
The 'ELF' in Alaska's Oil Taxes
· Kuparuk's ELF is about .2 now.
· .2 times 15% equals 3%.
· Thus, Kuparuk pays a 3% production tax.
· Prudhoe's ELF is .86.
The "ELF" in Alaska's Oil Taxes
· The formula is actually quite complex.
AS 43.55.013. Economic Limit Factor.
(a) [Repealed, Sec. 18 ch. 116 SLA 1981].
(b) The economic limit factor for oil production of a
lease or property shall be computed according to the
following formula:
(1-[PEL/TP]) exp ([150,000/(TP/Days)] exp [(460 X
WD)/PEL])
where:
PEL = the monthly production rate at the economic limit;
TP = the total production during the month for which the
tax is to be paid;
WD = the total number of well days in the month for which
the tax is to be paid;
Days = the number of days in the month for which the tax
is to be paid; and
exp = exponent.
Senator French explained that the last two factors in this formula
are used as exponents, creating a dramatic "drop-off" in the tax as
the oil field approaches its economic limit factor. For example, if
approximately 300 barrels a day were produced per well in an oil
field, the economic limit factor of that field would be zero.
The "ELF" in Alaska's Oil Taxes
· ELF was designed to encourage small field development.
· There are twenty fields now producing on the North Slope.
· Twelve pay no production tax at all.
Senator French informed that twenty separate oil fields are
operating on the North Slope. Each of these fields is using the
North Slope's infrastructure, yet twelve pay no production tax.
The "ELF" in Alaska's Oil Taxes
· The Tarn field made 951,221 bbls in January 2004.
· Tarn has a 0.08 WLF meaning it pays a 1.2 % production
tax now
· Tarn's ELF will go to zero in 2007.
The "ELF" in Alaska's Oil Taxes
· Tarn is produced via Kuparuk's facilities.
[Aerial photographs showing said facilities.]
Senator French stated that he worked at the "enormous" Kuparuk oil
production facility for eight years. He highlighted the size of the
facility, and various structures within the facility. He explained
that each of the orange "houses" shown in the photograph of Kuparuk
holds an oil well or water or gas injection well. Several years of
investment was required to establish this major North Slope oil
field.
The "ELF" in Alaska's Oil Taxes
· Tarn required only two drill sites and three ten mile
pipelines
[Photograph of section of Kuparuk facility.]
Senator French emphasized the simplicity of the Tarn facility.
The "ELF" in Alaska's Oil Taxes
· The Tabasco field, also produced through Kuparuk's
facilities, did not require even a drill site. It was
drilled in seven wells off an existing pad at Kuparuk.
· Tabasco makes 2500 bbls of oil per day and pays no
production tax.
· This modest field will make the producers 1,000,000 bbls
of oil this year.
Senator French indicated a booklet from BP/Arco showing the overlay
of the reservoirs belonging to separate oil fields.
The "ELF" in Alaska's Oil Taxes
· As new fields come on to production, and pay no
production tax, the overall production tax rate declines.
· The average production tax will fall from 13.5% in 1993
to 4% in 2013.
Senator French stated that the future of North Slope oil production
would be small satellite oil fields, which would have low or no
production taxes due to the economic limit factor.
The "ELF" in Alaska's Oil Taxes
Oil Development in America's Arctic 1977
[Map of area of Northern Alaska bordered by the National
Petroleum Reserve - Alaska on the West and the Arctic National
Wildlife Refuge on the East and indicating pipelines, pads,
roads and gravel mines in existence at that time.]
The "ELF" in Alaska's Oil Taxes
Oil Development in America's Arctic 1989
[Map of area of Northern Alaska bordered by the National
Petroleum Reserve - Alaska on the West and the Arctic National
Wildlife Refuge on the East and indicating pipelines, pads,
roads and gravel mines in existence at that time.]
The "ELF" in Alaska's Oil Taxes
Oil Development in America's Arctic 1999
[Map of area of Northern Alaska bordered by the National
Petroleum Reserve - Alaska on the West and the Arctic National
Wildlife Refuge on the East and indicating pipelines, pads,
roads and gravel mines in existence at that time.]
Senator French explained that between 1977 and 1989 the Kuparak
facility was expanded. The economic limit factor was last expanded
in 1989. Between 1989 and 1999 a "huge expansion" of the
infrastructure of the North Slope occurred as multiple oil fields
came to the North Slope. The comparison between the oil development
on the North Slope between 1977, 1989 and 1999 is important because
it exhibits that the future of the North Slope would not include
huge infrastructure developments, but smaller fields built off of
existing drill sites, or new drill sites that utilize the existing
infrastructure. No reason could be exhibited to construct a huge
oil production infrastructure if a ten-mile pipeline could be
constructed that would utilize an existing facility.
Co-Chair Wilken asked the distance from the edge of the National
Petroleum Reserve - Alaska (NPRA) to pump station #1.
Senator French replied that the distance is approximately 80 miles.
Co-Chair Wilken asked if it is 80 road miles.
Senator French affirmed.
Senator Bunde determined that the distance is 60 miles or more.
How the bill works
· Two principal reforms:
· The first simply establishes a minimum 5% production tax.
All fields must pay the minimum 5%.
· This provision alone would raise $75 million at $22 per
bbl.
Senator French noted that if this proposal were implemented, as the
price of oil increased, the production tax would increase, and as
the price of oil decreased, the production tax would decrease.
How the bill works
· The second major reform bases the production tax on the
price of a barrel of oil.
· As the price rises, so does the tax. As the price of oil
falls, so does the tax.
· The till sets $16 to $20 oil as the norm.
Senator French referenced an article taken from the Petroleum News
dated December 30,2001 titled "Department of Revenue suggests oil
production tax might need to be changed". He informed that this
article explains the economic limit factor, and qualified that the
ELF proposal he is suggesting was considered in 2001.
How the bill works
· Above $20, the production tax would be multiplied by the
price per barrel divided by 20.
· Below $16, the production tax would be multiplied by the
price per barrel divided by 16.
Senator French explained that this proposal would establish $16
through $20 per barrel as the normal price of oil.
Co-Chair Wilken asked if the prices of a barrel of oil being
referenced are based on West Texas crude oil prices with the North
Slope adjustment.
Senator French clarified that the production tax is calculated
using the oil wellhead value, excluding transportation costs.
How the bill works
· Example: At $30 oil, the new formula would divide 30 by
20 yielding 1.5.
· Thus, a field with 10% production tax would pay an
adjusted 15% production tax.
· The production tax cannot exceed 25% under the bill.
Senator French clarified that if the price of a barrel of oil was
$75, the production tax would be held at 25 percent.
How the bill works
· Example: At lower oil prices the production tax would be
reduced. If oil goes to $12 per barrel, the formula would
divide 12 by 16 to yield .75. Thus the production tax on
an oil field would be reduced by 25%.
· A 10% production tax would be reduced to 7.5%.
How the bill works
· If oil prices fall below $10 per barrel, the bill would
waive half the production tax and would defer the other
half until prices rise above $16 per barrel.
· There is also an inflation adjustment, that would
gradually raise the $16 to $20 "norm". The idea is to
acknowledge that costs to industry rise over time.
How the bill works
· Finally, the bill exempts "heavy oil" from any of its
measures. Heavy oil, like that contained in the West Sak
reservoir, requires more expensive drilling and
production measures.
Senator French stated that the progress being achieved in producing
West Sak oil should not be hindered.
Production Tax Revenue
· In 2003, the State took in $599 million in production
taxes.
· The average price that year was $28 per barrel.
· The average ELF was .50, meaning the average production
tax rate was 7.5%.
Senator French qualified that the 2003 average price per barrel of
oil was provided by the Department of Revenue.
Production Tax Revenue
· Looking forward, the Department of Revenue forecasts an
average price of $22 per barrel.
· By 2013, the average ELF will fall to .27, meaning the
average production tax will fall to 4.05%.
· 2003: $599 million.
· 2013: $180 million.
Senator French emphasized the difference in State revenue that the
decreasing production tax would create.
Production Tax Revenue
· Under this bill, the State would gain:
· An additional $110 million at $22/bbl.
· An additional $400 million at $30/bbl.
· An additional $500 million at $32/bbl.
Industry and Alaska's Benefit from NS Petroleum Against Oil
Prices (1987-2003)
[Graph indicating the share of gross North Slope petroleum
Value each of the aforementioned years for State, Industry and
NS Oil Wellhead Value.]
Senator French explained that in 1989 the State's share of the
total value of oil produced on the North Slope was approximately 40
percent, and the oil industry's share was approximately 60 percent.
In 2003 the State's share was below 30 percent and the industry's
share had risen above 70 percent. Over time the industry is taking
more of the gross value of the North Slope oil, whereas the State
is receiving less.
Forecasted Decline in Severance Tax Revenue: Current Law
[Graph indicating revenue in millions for the years 2005
through 2020 utilizing statistics provided by the Department
of Revenue.]
Senator French pointed out that the State would receive between
$400 million to $450 million from oil production taxes in 2005. In
2020 the State revenue from oil production taxes would be less than
$100 million.
Senator B. Stevens referenced the "Industry and Alaska's Benefit
from NS Petroleum Against Oil Prices (1987-2003)" chart and asked
if the data on the chart is based on Department of Revenue's
forecasts and known oil production levels.
Senator French affirmed.
Senator B. Stevens commented that the chart resembles the revenue
forecast chart.
Comparison Between Oil Company Profits and State Revenue:
Current Law
[Bar graph indicating the comparison in billions based on the
price of oil and current law utilizing statistics provided by
the Department of Revenue.]
Senator French noted when oil prices are $22 per barrel the
industry's share of revenue is $1.7 billion, and the State's share
is approximately $1.5 billion. As oil prices increase the
difference between the industry's share and the State's share
grows. For example, when oil prices are $30 per barrel the
industry's share is $3.4 billion, and the State's share is $2.1
billion. The State's oil production share includes all oil taxes
and oil-related revenue: corporate income, royalty, property taxes
and production taxes.
Co-Chair Wilken asked how the oil industry's revenue share was
determined.
Senator French responded that the amounts were calculated by the
Department of Revenue.
Projected Severance Tax Revenue Under Current Law and Fair
Share Bill at Forecasted Prices
[Graph indicating revenue in millions from the current law and
the proposed method for the years 2005 through 2013 utilizing
statistics provided by the Department of Revenue.]
Senator French emphasized that this proposal would not attempt to
reverse the decrease in production tax revenue, but rather would
lessen the decline.
Senator B. Stevens referenced the "Comparison Between Oil Company
Profits and State Revenue: Current Law" chart, and asserted that
the investments of the oil industry are not being represented. He
disagreed with the assumption that the State deserves the same rate
of return as the oil industry given that the State has not invested
in oil production. He asked if his assumption was fair.
Senator French replied that he understood how Senator B. Steven's
assumption could be reached. Senator French added that he also
resists that assumption, which is why he has not suggested that the
State's oil revenue share be equal to the industry's share. It is
coincidence that when oil prices are $22 barrel both shares are
similar, and that when oil prices are $30 a barrel the shares are
widely different. He clarified that the industry should benefit
from higher oil prices as a result of the investment risk it has
taken.
Senator B. Stevens wanted to know the industry's revenue share when
the price of oil is $12 per barrel.
Senator French explained that this proposal would offer the oil
industry tax relief when the price of oil is low.
Senator B. Stevens mentioned that he was concerned with the tax
level when the price of oil is at status quo. He asked if the
"Comparison Between Oil Company Profits and State Revenue: Current
Law" chart represents the status quo.
Senator French affirmed that this chart assumes current law.
Co-Chair Green asked the amount of the oil revenue shares received
by the industry and the State when the price of oil is $12 and $16
per barrel.
Senator French would attempt to obtain that information.
Senator Olson asserted that the investment of the oil industry is
not of importance because the level of their investment does not
determine the price of oil.
Senator B. Stevens clarified that the State has not invested "one
dollar" in the oil production facilities discussed in this
presentation. It is unfair to expect that the State should receive
a rate of return equal to that of the oil industry when the oil
industry has been investing in the production of oil and the State
has not. The State's rate of return is based on the tax structure.
Every business in the State would leave if similar revenue sharing
were required in all industries.
Senator B. Stevens acknowledged that this proposal does not suggest
an equal sharing of revenue between the industry and the State, but
emphasized its failure to recognize the investment of the oil
companies, or the competition between oil development in the State
and the rest of the world.
Co-Chair Wilken established that Senator B. Stevens is questioning
the return of investment.
Senator B. Stevens affirmed.
Ratio of Industry Take to State Revenues from ANS Production
[Graph indicating the ratios for the years 1978 through 2003.]
Senator French stated that in 1989 the economic limit factor was
established and the State's oil revenue share and the industry's
share were similar; in 1987 the shares were the same. Over time the
industry's share has increased, and in 2003 their share is more
than two and one-half times that of the State. The shares should
not be equal; however, it is obvious that the State is receiving
less and less of the oil revenue.
Conclusion
· It is better to address this issue now, when there is no
immediate crisis.
· It is better to take an incremental approach, rather than
a wholesale "shelf the ELF" approach.
· It is better to give the oil industry certainty during
the planning and design phase of the gas pipeline.
Senator French emphasized that a measured approach to this proposal
would be better than a hurried approach.
Senator French stated that oil taxes were last adjusted in 1989,
and they would inevitably be adjusted again. The oil industry would
be best served if a tax adjustment were made now before the gas
pipeline project begins.
[Photograph of the Kuparak facility]
Senator French detailed that he worked at the Kuparak oil
production facility for eight years, and worked on an oilrig for
four years. He explained that he is "an oil person" and "a friend
of the [oil] industry". This proposal would not cripple the oil
industry, nor drive the industry out of the State. This proposal is
a measured approach suggesting an adjustment and not "a wholesale
revision" to a fifteen-year-old tax structure.
Senator Hoffman referenced the article in the Petroleum News and
asked why the Prudhoe Bay oil field, as the largest oil field in
the State, should be exempt from the economic limit factor.
Senator French replied that the economic limit factor of Prudhoe
Bay is 0.86, and would drop to 0.75 in 2010. The Prudhoe Bay
reservoir is the largest oil reservoir in North America, producing
approximately 12 million barrels of oil in January 2004. This
proposal would not eliminate Prudhoe Bay's ELF factor, but would
impose the ELF on all of oil fields utilizing the Prudhoe Bay
facilities.
Senator Hoffman asked what the increase of oil revenue to the State
would be if the ELF was not adjusted, and did not apply to Prudhoe
Bay.
Senator French answered that he was unsure, but he would find an
answer.
Senator Dyson commented that this presentation is "excellent", and
well thought out. He asked how this proposal would impact
independent oil producers wanting to route their oil through
Prudhoe Bay's facilities.
Senator French replied that this proposal would inform the
independent oil producers of the production tax that would be
expected. From the present and into the future, nearly every field
developed on the North Slope would have "zero production tax
status" if this proposal is not adopted. If implemented, this
proposal would increase the independent oil producers' costs by
five-percent.
Senator Dyson anticipated this proposal would encounter objections.
He asked if historical data could be obtained that would determine
the "economic signals" this proposal would send.
Senator French understood that the oil industry would not support
this proposal. The oil industry would minimize their investments as
a result of the implementation of this proposal, thus they would
consider it a signal that there is currently too much oil
investment. He explained that the oil industry would never support
a proposal that would raise their taxes unless their support would
prevent a more damaging proposal from being implemented.
Co-Chair Green asked if inflation rates affect the price of oil.
Senator French responded that this proposal assumes the normal
price of oil to be $16 to $20. Over time that normal rate would
increase considering that costs relating to the production of oil
would rise with inflation.
Co-Chair Green wanted more information on the relationship between
inflation rates and the price of oil.
Senator French thanked Senator Green for her question.
Senator Dyson outlined an instance when Prudhoe Bay formed a legal
case based on the uncertainty that existed in developing technology
in a hostile environment where oil drilling had not occurred.
Prudhoe Bay won the legal case. Any development organization that
would risk such a significant investment in "the world's largest
poker game" wants assurance that the rules do not change as they
continue to invest. The oil industry would argue that in order to
continue to attract oil production and development, the State must
not change the rules by raising taxes.
Senator French replied, "Things change over time." He added that
rules affecting the oil industry were changed in 1989.
Senator B. Stevens questioned whether Senator French was familiar
with the Wood-Mackenzie benchmark study.
Senator French answered that he has not reviewed it recently.
Senator B. Stevens informed that this study ranks Alaska against 61
other oil-producing areas.
Senator French responded that he has heard those statistics.
Senator B. Stevens continued that Alaska ranks "the most expensive"
on weighted average costs of the 60 oil fields that are comparable.
In addition, the State ranks 55 out of 61 on the average rate of
return.
SFC 04 # 44, Side B 09:53 AM
Senator B. Stevens related these statistics to his concern that
this proposal could deter future oil exploration, thus negatively
impacting the State's revenue from oil royalties. The State
benefits from the oil industries' production of oil, even though it
has not invested in the production, by receiving one-eighth of the
oil revenue. If the State takes any measures to impede oil
companies from investing in Alaska, the oil companies would invest
in an area where their rate of return would be higher.
Subsequently, the State would lose revenue from oil royalties and
production taxes.
Senator French explained that the Tabasco oil field is a small oil
field, which produces 2,500 barrels of oil per day, and one million
barrels annually. Their revenue from oil is $35 million. Senator
French asked the Committee what they would be willing to pay to
have access to that amount of oil and the resulting revenue. If
this proposal were implemented the oil producers would consider
that their costs were raised, but also that they could have been
raised more. The oil producers benefit from the State's stable
political environment, an infrastructure, and a large production
facility that could be utilized. Given these benefits and the high
revenues, the oil producers should be willing to accept a five-
percent cost increase to continue producing oil in Alaska.
Senator Hoffman stated that in 1989 the economic limit factor was a
very contentious issue. Certain arguments that are being used to
argue against this proposal are the same arguments that were used
in 1989 to argue against the economic limit factor. The Alaska
benchmark study was used to fuel opposition of the ELF and the
threat that new fields would not be developed if ELF were
implemented. A vast number of oil fields have been developed on the
North Slope since the implementation of the economic limit factor
in 1989 as is exhibited by "The 'ELF' in Alaska's Oil Taxes" charts
showing the growth in oil development between 1989 and 1999.
Senator Hoffman continued that the oil industry emphasized the risk
of oil development in Alaska when opposing the economic limit
factor. Now the oil industry would be opposed to eliminating the
ELF because it ensures stability in the market.
Senator Hoffman pointed out that Alaska's economy has changed, and
it is time to "take a second look" at the economic limit factor in
an attempt to find solutions to balance the State's deficit. He
restated his consideration of whether Prudhoe Bay should benefit
from the economic limit factor.
Senator Olson asked what impact this proposal would have on the
large oil fields.
Senator French responded that the basic formula of the economic
limit factor would not change: a larger field would pay a larger
production tax. This proposal would set a minimum production tax
for the smaller oil fields.
Senator Bunde asserted that "profit" is not a "dirty word." He
continued, "Fifty-percent of something is way better than one
hundred-percent of nothing."
Senator Bunde stated that the economic limit factor may not be
appropriate for Prudhoe Bay, but suggested that it might be
appropriate for Bristol Bay. Investment might be encouraged in the
relatively new Bristol Bay oil field if the economic limit factor
were applied. The cost of bringing Alaskan oil to market is $12.50,
whereas it costs only two or three dollars to bring oil from
certain other areas to market. The State must compete with these
other areas for oil development. An oil producer might not want to
accept an additional increase to the high cost of producing oil in
Alaska. He predicted that there would be disagreement about this
proposal.
Presentation by Senator Ralph Seekins
Percent of Market Value
SENATOR RALPH SEEKINS informed that the Senate Judiciary Committee
held hearings across the State on SJR 18 and SJR 19 beginning in
the summer of 2003 and throughout this legislative session. Most of
the discussion centered on SJR 18, which involves the percent of
market value (POMV) program for the Permanent Fund. Many people did
not initially understand the POMV program. As they began to
understand the program, they started to support it.
Co-Chair Wilken clarified that SJR 18 contains the POMV proposal,
and does not specify how the earnings of the Permanent Fund should
be spent.
Senator Seekins stated that SJR 18 proposes a new discipline for
managing the Permanent Fund. Senator Seekins explained that he was
appointed to the Permanent Fund Board of Trustees in 1991. This
experience was educational because the Board considered how the
Fund was invested, and how the Fund's returns could be maximized.
After approximately 30 days of acting as a Trustee, he understood
that the Board of Trustees could "play god" with the Permanent
Fund, and the size of the Permanent Fund Dividend.
Senator Seekins referenced a chart provided by the Permanent Fund
Corporation titled "Realized income v. market value" [copy on
file]. He explained that in 1996 the Board of Trustees rationalized
that the current generation had not been receiving enough return
from the Permanent Fund so the Dividend should be increased. It
proceeded to sell stock to produce realized gains and a larger
Dividend. The mission of the Board of Trustees is to invest the
Fund to maximize returns within the boundaries established by the
legislature. The volatility of the marketplace and political
volatility, which has been exemplified by past abuse of the Fund by
the Trustees, should be considered when contemplating the
management of the Fund. Under the current investment program six
individuals could decide the size of the contribution of the
Permanent Fund to the State of Alaska and the size of the Dividend.
The POMV program would not allow this political volatility because
it involves a fixed formula. The implementation of the POMV program
would ensure that the mission of the Board of Trustees would be
fulfilled.
Senator Seekins continued that he was removed from the Board of
Trustees after four years. The governor at that time, Governor Tony
Knowles, sent Senator Seekins a letter stating, "I am replacing you
because I cannot feel confident that you will invest the Fund
according to my political philosophy." Senator Seekins assumed that
the individuals that Governor Knowles appointed to the Board of
Trustees shared the Governor's political philosophy. The Permanent
Fund should not be invested for any purpose other than that of
maximizing the Fund's returns for the citizens of Alaska. Senator
Seekins stated that the POMV plan would "insulate the Fund from
political interference and political volatility."
Senator Seekins suggested that a constitutional amendment is needed
to change the management of the Permanent Fund. The POMV program
would intrinsically inflation proof the Fund, minimize the impact
of market volatility, and eliminate political volatility. He
expressed his unequivocal support of a constitutional amendment to
implement the POMV management plan.
Senator Seekins commented that the question of how the Permanent
Fund should be spent is constantly raised whenever the POMV plan is
discussed, which causes the issue to become "a political land
mine".
Senator Seekins informed that many people question why the
management of the Permanent Fund needs to be changed if it remains
functional. Senator Seekins explained that Ford Model T cars are no
longer sold at car dealerships because they are antiques that are
exposed to liability and do not meet the needs of drivers. The same
reasons explain why the current management of the Permanent Fund
needs to be changed.
Senator Seekins referenced a document published by the Alaska
Legislative Affairs Agency titled "The Citizen's Guide to Alaska's
Constitution" and highlighted the insight it provides. He used the
document to reference the section discussing Article 2 of Alaska's
Constitution, which focuses on the Convention Delegates. He read
the following.
Convention Delegates created a strong legislature with the
power and resources to act decisively and effectively. In
doing so, the Delegates trusted the legislature to act
responsibly. While many state constitutions reflect profound
suspicion of the legislature, Alaska's Constitution declares
confidence in the legislative body: it is small, it meets
annually, its members are paid a salary, and it may arrange
for its own supporting services. Most importantly, the
legislature has broad discretion to fashion the details of
government structure and operation, details which are
specified in the constitutions of many other states.
Senator Seekins submitted that the legislature has acted
responsibly in the use and management of the Permanent Fund. Two-
thirds of the corpus of the Permanent Fund has been deposited in
the Fund through appropriations from the earnings reserve account
and through inflation proofing, including the inflation proofing of
appreciating assets. The Fund's current balance of $28 billion can
be attributed to the responsible actions of the legislature. The
objective of the current legislature is to enact the will of their
constituents, not to plunder the Permanent Fund.
Senator Seekins pointed out that when he served on the Permanent
Fund Board of Trustees, the only question he was ever asked was the
amount of the Permanent Fund Dividend. The amount of the Dividend
affects the quality of life of many of Alaska's citizens, yet for
other citizens the Dividend is simply a bonus. He expressed concern
in eliminating the legislature's flexibility to determine the use
of the earnings of the Permanent Fund. If the Permanent Fund
Dividend were placed in statute the public would be given assurance
of their Dividend, and the legislature could continue to determine
the use of the remainder of the Permanent Fund's earnings. All of
the funds the legislature appropriates are spent on government
services that directly serve Alaska's citizens.
Senator Seekins referenced a handout dated March 17, 2004, which
roughly outlines his proposal. In this proposal a new formula would
be placed in statute that would determine the amount to be annually
appropriated from the Permanent Fund, and the amount to be
appropriated for Dividends and for education. Under the current
version of SJR 18 only five-percent of the Permanent Fund could be
appropriated to the general fund. A reasonable dividend would be
required under this proposal similar to the current method used to
determine the Dividend, and the remainder of the appropriation
would be earmarked for the education budget, which affects more
people in the State than any other program. Any additional funds
would be used to replenish the Constitutional Budget Reserve (CBR).
Senator Seekins informed that the principal of the Permanent Fund
is composed of royalty deposits, special deposits and inflation
proofing. As of June 30, 2003 the principal of the Fund was $22.5
billion. Beginning with the June 30, 2003 balance and adding the
royalty deposits and an amount equal to the average increase in
Consumer Price Index (CPI) for all urban consumers in the Anchorage
metropolitan area the new balance of the Fund would be estimated.
To address concerns that the principal of the Fund would diminish
if this proposal was enacted, no appropriation could be made that
would cause the balance of the principal of the fund to go beneath
the new balance estimate. The estimates would be calculated
annually.
Senator Seekins stated that the current market value of the
Permanent Fund is approximately $28 billion, and the current
principal is approximately $23 billion. It would take two or three
"disastrous years" for the Fund to be reduced to the principal, and
many warnings would be received notifying of the loss of earnings.
Senator Seekins referenced another document that outlines how the
legislative proctors would incorporate the Permanent Fund Dividend
into State statute. He voiced concern in enshrining any endowment
in the State Constitution, and expressed the need for competition
between funds on an annual basis. He emphasized the ability of his
proposal to instill the POMV plan, and address the intent of the
legislature regarding Dividends and other State funding through
statute, rather than through the constitution.
Senator Seekins distributed a work draft, CS SJR 18, 23-ls1856\A.
Co-Chair Green asked if this proposal is dependent on the passage
of a POMV plan and whether this proposal avoids the disposition of
the earnings of the Permanent Fund.
Senator Seekins affirmed.
Co-Chair Green questioned whether the funds available after the
Dividend appropriation would be allocated at the discretion of the
legislature. She asked if the remaining funds must be allocated to
the education budget.
Senator Seekins responded that this proposal would simply replace
the existing statutes regarding the management of the Permanent
Fund and the Dividend appropriation. The statues could be changed
by the legislature in times of an emergency. The legislature has
the responsibility of changing or maintaining statutes.
Senator Bunde referred to Senator Seekins' emphasis on the
importance of allowing the legislature the flexibility to react to
current conditions when appropriating the earnings of the Permanent
Fund. Senator Bunde questioned how flexibility is maintained when
funds would be committed to education programs if this proposal
were passed.
Senator Seekins understood Senator Bunde's inference. He stressed
the proposal's focus on intent, and vocalized his attempt to avoid
a "new constitutional clash".
Senator Bunde remembered that the legislature has abstained from
appropriating the Permanent Fund earnings available in the past,
partially due to public watchfulness. The legislature has been able
to change statute, and would continue to have the ability to change
it. The legislature's past diligence should eliminate criticism of
this method of enshrining the Dividend and the POMV plan.
Senator Olson asked why the POMV plan must be passed before this
proposal could be implemented.
Senator Seekins responded that this proposal would not work until
the POMV plan was implemented.
Senator Olson questioned whether the POMV plan would enable the
legislature to access the principal of the Permanent Fund.
Senator Seekins replied that the principal would be protected
because the annually estimated balance of the Permanent Fund would
have to be maintained. The legislature could not appropriate funds
that would threaten that balance.
Senator Bunde observed that without the POMV plan Permanent Fund
earnings could not be used for government programs because the
funding availability fluctuates from year to year.
Senator Seekins concluded that the current Permanent Fund
management system does allow the principal to be threatened through
the discriminatory selling of equities.
Senator Bunde asked if this proposed legislation would be
introduced.
Senator Seekins answered that he would attempt to introduce this
legislation.
Presentation by Senator Ben Stevens
Statewide Sales Tax
Senator B. Stevens distributed work draft legislation, SB 366, 23-
LS1051\S, which he indicated would be introduced in the Senate
during the next floor session.
Senator B. Stevens stated that the proposed legislation is "an act
relating to the levy and collection of sales and use taxes, to the
levy and collection of municipal sales and use taxes, and to
municipal sales and use taxes on alcoholic beverages; and providing
for an effective date." This proposal is being offered as a
possible source of revenue for the State. Senator B. Stevens
explained that he is introducing this proposal because although the
Senate has considered this concept in the past, it had not been
discussed recently.
Senator B. Stevens highlighted this proposed legislation beginning
with Section 9 on page 3, which would allow municipalities to
implement this tax without a vote. He also referenced page 4, lines
15 - 17, which outline the taxes this bill would implement.
Chapter 44. Sales and Use Tax.
Sec. 43.44.010. Levy of sales and use tax; tax rate. (a)
A sales tax is levied on the sale, lease of rental of tangible
personal property and on the sale of services.
Senator B. Stevens continued that this legislation would institute
a four-percent statewide sales tax, which would be added to
existing municipal sales taxes. For example, Juneau has a five-
percent municipal tax. This bill would add a four-percent tax, for
a total tax of nine-percent. However, the State would reimburse the
municipality for the local tax and one-percent of the State tax,
thus, the Juneau municipality would receive a six-percent
reimbursement. Under this proposal the State would always collect a
minimum tax of three-percent. This bill encourages the local
implementation of a municipal sales tax. Those communities without
a municipal sales tax, such as Anchorage, would not receive a one-
percent reimbursement.
Senator B. Stevens commented that this bill is broad and inclusive.
The exemptions from the statewide sales tax are listed on page 4,
beginning on line 23. Any exemptions under State and federal law
would also be exempted in this legislation. He listed certain
exemptions.
Co-Chair Wilken noted that this legislation could not be scheduled
for a formal hearing until the following week, but the Committee
could discuss the proposal before then.
Senator Bunde asked for the reason why municipalities without a
sales tax would not receive a one-percent reimbursement.
Senator B. Stevens responded that the sales tax issue is
contentious to those municipalities that rely on the sales tax for
revenue. These municipalities typically have a high sales tax rate
and a low mil rate, or no mil rate. A statewide sales tax in
addition to a high municipal sales tax could cause certain
communities to become less competitive regarding the sale of goods
and services. The statewide sales tax would entice communities
without an existing tax to create a municipal tax to be less
financially reliant on State appropriations.
Senator Bunde commented that this reimbursement does not change the
relative difference between those municipalities with a sales tax,
and those without. The National Conference of State Legislatures is
discussing a fair tax act that would require citizens to pay the
sales tax of their home state when purchasing out-of-state goods.
Senator B. Stevens responded that he was aware of the fair tax act.
He added that a statewide sales tax brings forth a multitude of
questions and uncertainties.
SFC 04 # 45, Side A 10:41 AM
Senator B. Stevens continued that 45 states have a statewide sales
tax, and these states generate approximately one-third of their
total budget through the revenue from the sales tax. These states
have managed to balance other taxes, such as county and municipal
taxes, and the statewide sales tax.
Senator Hoffman commented that certain states exempt out of state
visitors from the state sales tax. He asked if this sales tax would
apply to those out of state visitors. He also asked how much
revenue this tax would generate.
Senator B. Stevens replied that this sales tax would not exempt
anyone because it would be a consumption tax.
Senator B. Stevens stated that he was unsure the amount this tax
would generate because the Department of Revenue has not yet
reviewed this bill. Using last year's figures, a three-percent tax
would have raised $330 million, but that amount does not include
the one-percent reimbursement to the municipalities.
SENATOR TOM WAGONER informed that the City of Kenai and the Kenai
Peninsula Borough each have a sales tax. He asked which entity
would receive the one-percent reimbursement if this legislation
were implemented.
Senator B. Stevens replied that the reimbursement should be
distributed based on the percentages of each sales tax.
Senator Wagoner clarified that the area of the Kenai Peninsula
Borough outside of the City of Kenai would receive the full one-
percent reimbursement.
Senator B. Stevens affirmed.
Senator Seekins asked if the sales tax levy would be limited to a
certain amount of each sale.
Senator B. Stevens responded that the current proposal does not
contain a limit because of time constraints in drafting the bill.
He suggested a limit at $60 per purchase.
Senator Seekins asked how the sales tax would affect items for
resale.
Senator B. Stevens was unsure. A provision needs to be developed to
eliminate resale purchases from the sales tax.
Senator Seekins clarified that Senator B. Steven's intention is to
tax the final retail transaction.
Senator B. Stevens affirmed.
Senator Hoffman questioned whether the $60 limit would be per item,
or per invoice.
Senator B. Stevens answered that the tax would be limited to $60
per transaction. For example, if a $10,000 item were purchased the
state tax would be $60.
Co-Chair Green referenced a book, which detailed that many states
have a defective sales tax structure in place because it is based
on data from the 1930's. She read.
In 1960 41% of U.S. consumption dollars were spent on services
provided by attorneys, accountants, landscapers, pool
cleaners, etc. By 2000 that percentage had risen to 58%, and
yet most of those states are not taxing those services.
As a result of this tax structure, the sales tax on consumables and
tangibles continues to rise. The book suggested the validity of a
tax that equally applies to many items rather than a high tax on a
few items.
PHELAN STRAUBE, Staff to Senator B. Stevens, commented that this
legislation is based on the streamline sales tax model, which is a
national model that has eliminated the faults of past sales tax
structures. Services would be taxed under this legislation.
SENATOR GARY STEVENS asked if this tax would be enforced by local
municipalities or by State bureaucracy.
Senator B. Stevens responded that if this legislation were
implemented the State would assume the responsibility of collection
for the municipal sales taxes. The municipalities would inform the
Department of Revenue of their sales tax structure, and the
Department would collect the municipal and statewide taxes. The
municipal sales tax and the one-percent reimbursement would then be
distributed to the municipalities.
Senator B. Stevens stated that this legislation would relieve
municipalities of the efforts and costs associated with the
collection and enforcement of their sales tax.
Senator G. Stevens was unsure why the local structures that are
already in place to collect and enforce municipal sales taxes would
need to be replaced by a new State structure. He agreed that
municipalities would benefit from not having the expenses related
to collecting their taxes.
Senator B. Stevens replied that this legislation was designed using
suggestions from a national model.
Mr. Straube explained that the national model was used because in
other states where municipalities maintained the responsibility of
the collection and enforcement of local taxes, it was difficult for
businesses to interact with jurisdictions each with different rules
and enforcement policies.
Senator Hoffman noted that natural gas, the primary heating fuel in
many areas, would be exempted from this bill; however, diesel fuel,
the primary heating fuel in rural Alaska, would not. He asked if
the intention of this bill was to tax rural Alaskan's for their
heating fuel, and not urban Alaskans.
Senator B. Stevens replied that there is no intent in this
legislation to unfairly tax basic human needs. The absence of
heating fuel as an exemption is an oversight.
Senator Wilken clarified that heating fuel is used in Fairbanks.
SENATOR BERT STEDMAN asked the sponsor to explain the conceptual
aspects of this legislation. Currently the State's income and tax
structure is separate from the municipalities. This distinction
allows the municipalities and boroughs flexibility to respond to
their State appropriated budget through adjustments to property and
sales taxes. He suggested that this flexibility would be minimized
with the implementation of a State sales tax because the
municipalities with a high sales tax would be forced to raise
property taxes in response to a budget shortfall. He noted that one
of the communities in his district has an eight-percent sales tax.
Senator B. Stevens responded that the municipalities have the
ability to implement and raise both a sales tax and mil rate.
Typically municipalities with a high sales tax rate have a low mil
rate, and those with a high mil rate have a low sales tax rate, or
no sales tax. This legislation would benefit municipalities without
an existing sales tax because with the adoption of a sales tax the
local mil rate could be reduced. This legislation is not intended
to lessen the discretion of the boroughs and municipalities
relating to local revenue.
Senator Stedman informed that the Southeastern Alaska district he
represents has experienced a substantial decline in the industry
base of timber and fishing. The mil rates have increased, and in
some areas the assessments have declined. As a result, the boroughs
and cities have lost their ability to maneuver within their revenue
streams, forcing them to consider tax increases. This legislation
would not only affect the State, but also cities and boroughs with
declining economies.
Senator Bunde questioned whether this legislation could allow
different exemptions to be implemented on the State and local
levels.
Senator B. Stevens answered that different exemptions would not
allowed. This legislation would eliminate exemption variances among
the municipalities, and create one statewide set of exemptions.
Senator Bunde commented that in Juneau and other areas of the State
there is a sales tax exemption for senior citizens. He warned that
eliminating those exemptions could create a "landmine".
Senator B. Stevens realized that this legislation would be highly
criticized, but he was willing to hear those criticisms. The senior
citizen exemption may already be included in State law, in which
case it would be included in this legislation. He referenced the
book that Co-Chair Green discussed, and emphasized the importance
of not making too many exemptions.
Co-Chair Wilken suggested that the Committee members compile their
concerns, and this bill would be brought before the Committee
formally in the near future.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 11:01 AM
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