Legislature(2025 - 2026)SENATE FINANCE 532
01/24/2025 09:00 AM Senate FINANCE
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| Audio | Topic |
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| Start | |
| Presentation: Revenue Forecast – Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
January 24, 2025
9:01 a.m.
9:01:13 AM
CALL TO ORDER
Co-Chair Hoffman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Mike Cronk
Senator James Kaufman
Senator Jesse Kiehl
Senator Kelly Merrick
MEMBERS ABSENT
Senator Donny Olson, Co-Chair
ALSO PRESENT
Senator Cathy Giessel; Senator Robert Yundt; Adam Crum,
Commissioner, Department of Revenue; Dan Stickel, Chief
Economist, Department of Revenue; Dale Yancey, Tax
Director, Department of Revenue.
SUMMARY
PRESENTATION: REVENUE FORECAST DEPARTMENT OF REVENUE
Co-Chair Hoffman discussed the agenda.
^PRESENTATION: REVENUE FORECAST DEPARTMENT OF REVENUE
9:02:15 AM
ADAM CRUM, COMMISSIONER, DEPARTMENT OF REVENUE, introduced
himself and relayed that the department would be discussing
the fall 2024 revenue forecast.
9:02:43 AM
DAN STICKEL, CHIEF ECONOMIST, DEPARTMENT OF REVENUE,
discussed a presentation entitled "Fall 2024 Forecast
Presentation - Senate Finance Committee" (copy on file).
Mr. Stickel looked at slide 2, "Agenda
1.Forecast Background and Key Assumptions
2.Fall 2024 Revenue Forecast
•Total State Revenue
•Unrestricted Revenue
3.Petroleum Forecast Assumptions Detail
•Oil Price
•Oil Production
•Oil and Gas Lease Expenditures
•Oil and Gas Transportation Costs
•Petroleum Revenue by Land Type
Mr. Stickel showed slide 3, "Forecast Background and Key
Assumptions."
Mr. Stickel referenced slide 4, "Background: Fall Revenue
Forecast
Released December 12, 2024
•Historical, current, and estimated future state
revenue
•Discussion and information about major sources of
state revenue
•Official revenue forecast used for final budget
process
•Located at tax.alaska.gov
Mr. Stickel noted that past revenue forecasts were
available at www.tax.alaska.gov. He explained that in the
fall the department published the Revenue Sources Book
(RSB), which was an over-100-page publication with detailed
information on the state's revenue sources and a variety of
data going back for ten years. There was a ten-year
forecast for different revenue sources. He noted that the
publication utilized data from the state's accounting
system and also from numerous other state agencies
including the Department of Natural Resources (DNR) and the
Alaska Permanent Fund Corporation (APFC). He noted that the
publication fulfilled two statutory requirements.
Mr. Stickel turned to slide 5, "Fall Forecast Assumptions
The economic impacts of financial and geopolitical
events are uncertain; DOR has developed a plausible
scenario to forecast these impacts.
•Key Assumptions:
o Investments: Stable growth in investment
markets, 7.90% for remainder of FY 2025 and 7.65%
for FY 2026+.
o Federal: The forecast incorporates stimulus
funding as of December 1, 2024, includes updated
estimates of potential IIJA funding. FY 2027+
assumed to grow with inflation.
o Petroleum: Alaska North Slope oil price of
$73.86 per barrel for FY 2025 and $70.00 per
barrel for FY 2026.
o Non-Petroleum: Continued economic growth. 1.6
million cruise passengers, five-year recovery for
fisheries taxes, minerals prices based on futures
markets.
Mr. Stickel emphasized that the forecast was a discrete
forecast that highlighted one set of numbers within a range
of potential outcomes, and there was a range of
uncertainty. The forecast oil price for FY 25 included five
months of prices with a projection for the remaining
months. He discussed projections for non-petroleum revenue.
The forecast assumed future operation of existing mines
without new mines coming on.
9:07:45 AM
Mr. Stickel considered slide 6, "Relative Contributions to
Total State Revenue: FY 2024," which showed a graphical
depiction of total revenue from all different funds. In FY
24, state revenue totaled $16.3 billion with the largest
contributions being federal receipts, investment earnings,
and petroleum revenue. All other revenue sources amounted
to about 7.4 percent of the total. He pointed out that the
other industries that contributed a smaller portion of
state revenue did make large contributions to employment
and the overall economy of the state.
Mr. Stickel displayed slide 7, "Relative Contributions to
Total State Revenue: FY 2025," which was a similar graphic
slide to the previous. He pointed out that for FY 25, there
was $16.8 billion forecast for state revenue, with 92
percent of the revenue share being federal, investments,
and petroleum.
Mr. Stickel showed slide 8, "Fall 2024 Revenue Forecast."
Mr. Stickel looked at slide 9, "Unrestricted Revenue
Forecast: FY 2024 and Changes to Two-Year Outlook," which
showed a table that showed some of the key changes to the
unrestricted revenue forecast compared to the spring
forecast was released in early 2024. For oil prices, the
forecast decreased by $4.14/bbl for FY 25 to $73.86/bbl.
The FY 26 forecast was reduced by $4/bbl down to $70/bbl.
The new forecasts included updated information from the
futures market, and some additional FY 25 actual data. He
recounted that the previous day DNR had indicated the oil
production forecast for FY 25 was decreased by about 10,000
barrels per day (bpd) to about 467,000 bpd. For FY 26,
there was a reduction of about 12,600 bpd down to 469,500
bpd. He pointed out that there had been an earlier version
of the presentation that erroneously did not include the
brackets around the change in ANS oil price for FY 26,
which denoted a reduction in the forecast.
Mr. Stickel addressed the Permanent Fund (PF) transfer,
listed at the bottom of the table, and noted that due to
the way the transfer was calculated, the FY 26 amount was
known. Performance at the end of 2024 exceeded expectations
and the amount increased by about $9 million. For total
Unrestricted General Fund (UGF) revenue, the reduction was
about $220 million for FY 25 and about $232 million for the
FY 26 forecast. Reduction in oil price outlook was the
primary driver for the changes.
9:11:38 AM
Co-Chair Stedman asked about the oil price and production
volume. He reflected on the recent change of federal
administration and whether the department anticipated any
forthcoming changes compared to a month previously.
Mr. Stickel reflected that oil prices had been trending
slightly above the fall forecast. He noted that there was a
forthcoming slide that looked at current prices and
outlook. He reflected on the new administration and thought
there was a lot of optimism regarding potential
opportunities, which had not been factored into the
forecast.
Co-Chair Stedman discussed volume and noted that the state
was having a warmer-than-expected winter, which tended to
slow production. He made note of the 12,000 bpd production
decrease and wondered why there was a downward trend. He
asked if the warm winter would potentially impact the
forecast for spring.
Mr. Stickel did not have the production tracking at hand.
He thought the state was largely on track with the fall
forecast for production.
Co-Chair Stedman asked if the warm weather would affect
production.
Mr. Stickel noted that generally warm weather tended to put
a damper on production due to reservoir dynamics and gas
handling.
Co-Chair Stedman explained that members were concerned with
the revenue projections meeting some of the expenditure
wishes of some colleagues in the building. He thought
producing a balanced budget might be tough.
Commissioner Crum reflected on current production values
and was happy to share information with the committee.
9:15:25 AM
Mr. Stickel addressed slide 10, "Total Revenue Forecast: FY
2024 to FY 2026 Totals," which showed total state revenues
from all sources for FY 24 as well as the forecast for FY
25 and FY 26. He noted that when looking into total state
revenue, it was broken into four categories that were
consistent with how the categories were used for budgetary
purposes. The UGF could be appropriated by the legislature
for any purpose and were typically the primary focus of
budget discussions. He discussed Designated General Fund
(DGF) revenues, which were technically available for
appropriation but customarily used for specific purposes.
There was a lesser level of discretion around the revenues.
He used the example of the Vehicle Rental Tax, which was
deposited into a special sub-account of the General Fund
and appropriated to fund tourism development and marketing.
Mr. Stickel addressed other restricted revenue, or funds
which were truly restricted with little discretion for
appropriation. He used the example of the Commercial Vessel
Passenger Tax, which federal law dictated the state had to
use in direct support of the cruise ship industry and
passengers. He discussed federal revenue and noted that the
federal government put provisions around how the state
could use different federal receipts, so it was shown as
restricted revenue. In total, the state received $16.3
billion in total state revenue for FY 24, with a forecast
of $16.8 billion for FY 25 and $15.7 billion for FY 26.
9:17:43 AM
Mr. Stickel advanced to slide 11, "Unrestricted Revenue
Forecast: FY 2024 to FY 2026 Totals," which pulled out the
UGF portion of revenue from the previous slide. He noted
that the unrestricted revenue would be the focus for the
remainder of the presentation. He pointed out that the
largest portion was the investment revenue, which
contributed $3.7 billion in FY 24, and was forecast to
contribute $3.8 billion for FY 25 and $3.9 billion for FY
26. The largest portion of the investment revenue was the
percent-of-market-value (POMV) transfer from the PF to the
General fund that began in 2019. Petroleum revenue
generated about $2.5 billion of unrestricted revenue in FY
24 and was forecast at $1.8 billion in FY 25 and $1.7
billion in FY 26. Non-petroleum revenues were forecast to
contribute a little under $600 million per year in FY 25
and FY 26.
Mr. Stickel noted that the next few slides would walk
through the unrestricted revenue types, beginning with
investment revenue.
Mr. Stickel looked at slide 12, "Unrestricted Investment
Revenue: FY 2024 to FY 2026 Totals," which showed a table.
He highlighted that the PF transfer alone was expected to
contribute between 59 percent and 64 percent of
unrestricted revenue over the next ten years. In addition
to the transfer, there was a small amount of other
unrestricted revenue, representing primarily earnings on
cash balances of the General Fund, which amounted to a
little under $150 million in FY 24. He expected a decline
to about $88 billion in FY 26, based on an expectation of
lower interest rates on cash.
Mr. Stickel showed slide 13, "Unrestricted Investment
Revenue: Percent of Market Value (POMV) Transfer Forecast,"
which showed a bar graph depicting the estimated POMV
transfer forecast from FY 25 to FY 35. The transfer was
estimated to be over $3.5 billion each year over the ten-
year forecast, steadily increasing to nearly $5 billion by
2035. The forecast was based on an assumption of a 7.65
percent long-term annual return for the PF, and 5 percent
market calculation. The five percent calculation was based
on the average ending market value for the first five of
the last six fiscal years, which made it a fairly stable
revenue source. He thought it was important to note that
the transfer included funds for both government services
and the Permanent Fund Dividend (PFD). Statute did not
dictate how the split was made.
Co-Chair Hoffman asked about the major source of revenue to
operate state government prior to passage of SB 26 in 2019.
Mr. Stickel relayed that prior to 2019, oil and gas was the
primary source of revenue. There were several years that
the state was running budget deficits, which led to the
change to incorporate a portion of investment revenue to
fund government services.
Co-Chair Hoffman thought the practice was a major change
for the state.
Mr. Stickel agreed.
Co-Chair Hoffman noted that prior to 2019, no revenue was
spent from the Earnings Reserve Account (ERA).
9:21:45 AM
Co-Chair Stedman commented on slide 13. He noted that
Commissioner Crum was on the PF board. He shared that some
members had concerns related to the PF asset allocation
being too heavily in illiquid investments, which restricted
the fund's ability to generate cash. He understood that
there was a requirement for the PF to maximize growth and
returns. He made note of the 5 percent payout.
Commissioner Crum affirmed that he sat as a trustee on the
Alaska Permanent Fund Corporation. He spoke to the
liquidity risk, which he described as a constant point of
discussion with trustees and staff. He shared that the
total return of 7.9 percent in FY 24 was barely making the
inter-generational equity goals of the original intent of
the fund. He noted that the fund used a long-term
assumption of 2.5 percent for inflation, along with the 5
percent draw, so there was a real return of 7.5 percent. He
mentioned the statutory requirement to maximize risk-
adjusted returns. He cited that there was a realized gains
versus unrealized gains issue with an asset allocation like
the one the fund presently had. He thought the two-account
system of the ERA and the corpus limited how much was spun
out. He mentioned APFC Trustee paper 10 from the previous
year, which illustrated the benefits of combining the two
accounts.
Commissioner Crum relayed that the PF had been in "dire
straits" the previous fall. He mentioned a recent analysis
by Callan, which showed the risk of not having available
earnings in FY 27 and beyond for the POMV had decreased
somewhat but would be a risk going forward. He imagined the
topic would be a large point of discussion at APFC's
upcoming quarterly meeting in February. He noted that APFC
Executive Director Deven Mitchell had been doing public
outreach on the topic.
Co-Chair Hoffman clarified that the requirement to join the
two funds required a constitutional amendment. The change
would take 14 votes in the Senate and 27 votes in the House
in order for the matter to come to a vote of the people.
9:27:03 AM
Co-Chair Stedman appreciated the comments. He thought the
question of whether five percent was the appropriate rate
would be a topic of conversation going forward. He
discussed increasing risk exposure by chasing returns.
Mr. Stickel referenced slide 14, "Unrestricted Petroleum
Revenue: FY 2024 to FY 2026 Totals," which showed a table
with a breakout of the different sources of unrestricted
petroleum revenue. He highlighted four main sources
including oil and gas production tax, which was expected to
bring about $563 million in FY 25 and $441 million in FY
26. He addressed petroleum corporate income tax, which was
on qualifying oil and gas corporations doing business in
the state. The department forecast $210 million for FY 25
and $250 million for FY 26. He spoke to the oil and gas
property tax. Any property tax levied by municipalities was
allowed as a credit against state tax. The state generated
a little over $130 per year from the property tax, with
over $500 million generated for municipalities.
Mr. Stickel continued to address the revenue sources on
slide 14, with the largest source from royalties and
related revenues, which brought in about $1.15 billion in
FY 24. The royalties and related revenues were forecast at
$942 million for FY 25 and $898 million for FY 26. The
funds represented the state's portion of oil and gas
production as the owner of leases on state land.
Additionally, there was a significant amount deposited into
the PF and the School Fund.
Co-Chair Hoffman referenced Mr. Stickel's citation of $500
million in property tax for municipalities. He noted that
the funds were only available for those municipalities that
were incorporated. He asked if the municipalities had to be
on the gas line such as the North Slope, Fairbanks, and
Valdez Boroughs to have access to the taxes.
Mr. Stickel answered affirmatively. He relayed that
municipalities had the ability to levy property tax on
property within the municipalities. He noted that the North
Slope Borough was a major recipient of property tax.
9:31:32 AM
Mr. Stickel turned to slide 15, "Unrestricted Non-Petroleum
Revenue: FY 2024 to FY 2026 Totals," which showed a table
with a breakout of unrestricted non-petroleum revenues, the
largest component of which was taxes. The largest portion
of taxes was the non-petroleum corporate income tax, which
was forecast at $210 million for FY 25 and $230 million for
FY 26. The FY 26 amount showed a bit of an increase from
prior years, after lower taxes during Covid-era losses. He
expected corporate income taxes collection to increase as
well as corporate profitability. He mentioned other taxes
including excise taxes, fisheries taxes, the Insurance
Premium Tax, and the Large Vessel Gambling Tax. He pointed
out the negative $1 million in Mining License Tax in FY 24,
due to some large refund payouts and weak minerals prices
(particularly for zinc) in 2023 which led to lower payments
in 2024.
Mr. Stickel cited that the total non-petroleum taxes were
forecast to generate a little over $440 million for the
next two years. He addressed the "Other" category which
generated a little over $140 million per year the following
two years. The category consisted of a variety of licenses
and permits, charges for services, non-petroleum rent and
royalties, and miscellaneous revenues such as dividends
from state-owned corporations.
Senator Kiehl acknowledged that the work on the data for
the presentation had been completed some weeks ago. He
thought that the state did not have its own corporate
income tax code but rather based its take on federal taxes.
He was curious about the newfound alignment in Washington
D.C. He asked about DOR's comfort level with the forecast
for increased corporate income tax when the conversation
seemed to be about corporate income tax cuts.
Mr. Stickel affirmed that the state used the federal tax
code for a starting point for corporate income tax. For
non-petroleum revenues, the state apportioned total federal
income to the state, but the tax rate was set by the
legislature. He thought that interestingly, if the federal
government were to cut the corporate income tax rate and it
led to additional economic activity, it could increase the
tax base for Alaska's corporate income tax. He thought
based on the latest information DOR had a decent amount of
confidence around the forecasts. He pointed out that
corporate income tax was one of the more volatile revenue
sources that had a range of uncertainty.
Senator Kiehl thought what the federal government charged
as a rate did not affect the state's take. He was concerned
with what into the taxable line. He thought a great deal of
the work that Congress tended to do on the tax code had an
effect on how much income ended up subject to tax at all.
He was interested to see whether the matter was simple or
not.
9:36:34 AM
DALE YANCEY, TAX DIRECTOR, DEPARTMENT OF REVENUE, reflected
that during the first Trump Administration the federal
corporate rate was reduced from 35 percent to 21 percent,
but the rate change did not impact the state, which was
using worldwide income, which was apportioned to Alaska. He
thought if the rates were reduced further, it would not
affect the state. He noted that the state did "rolling
conformity.He agreed that if the federal government
changed what was in the base, it could affect the state.
Mr. Stickel showed slide 16, "Petroleum Forecast
Assumptions Detail."
Mr. Stickel displayed slide 17, "Petroleum Detail: Changes
to Long-Term Price Forecast," which showed a line graph
showing the ten-year forecast for Alaska North Slope (ANS)
crude oil prices from the fall forecast to the spring
forecast for 2024. He noted that based on the latest
futures market projections, there had been a slight
reduction in the price outlook for all years in the
forecast. There was a reduction of $4.14/bbl For FY 25 and
a $4/bbl reduction for FY 26, with smaller reductions for
each of the following years. He noted that DOR had
generated the price forecast on December 1 and used the
last five trading days of November as a sample from the
futures market to generate the revenue forecast. He
explained that DOR used the futures market because it
provided a transparent and timely methodology for doing the
forecast.
Mr. Stickel highlighted slide 18, "Petroleum Detail:
Nominal Brent Forecasts Comparison as of January 21, 2025,"
which showed a line graph that compared DOR's forecast with
various other sources earlier in the week. The comparison
included Brent future's prices from the federal Energy
Information Agency, the most recent future market
projections, and an average analyst forecast from
Bloomberg. He noted that DOR compared to Brent prices
because Brent was an international benchmark that was
widely forecast and tended to trade at a valuation quite
similar to ANS crude. He thought it was a bit of good news
that oil price had increased a bit since the fall forecast.
He thought for the next year or so, the state's forecast
would be slightly conservative by about $5/bbl to $10/bbl.
Beyond the next year or so there was general consensus that
oil prices would remain in the roughly $70/bbl range, plus
or minus $5/bbl or $10/bbl.
9:40:27 AM
Mr. Stickel looked at slide 19, "Petroleum Detail: UGF
Relative to Price per Barrel (without POMV): FY 2026,"
which showed a graph. The slide put dollar values to the
concept that oil price might not be exactly what was
forecast. For FY 26 the graph was based on an ANS price
forecast of $70/bbl, which equated to $2.4 billion in UGF
revenue excluding the PF transfer. The slide showed how the
revenue number would change at different prices. The graph
showed that for each dollar change in the oil price equated
to about $35 million of UGF revenue. At higher prices, the
delta changed to about $75 million per barrel and at lower
prices it changed to about $25 million per barrel. He noted
that the slight curve on the graph had to do with the
progressive element of the state's production tax system.
Co-Chair Stedman considered the previous chart and price
estimates. He pondered what position the state would be in
with the CBR balance if the price would hit the mid-60s in
two fiscal years. He discussed three-year forecasts versus
longer term ten-year forecasts.
Mr. Stickel relayed that his group provided a detailed
sensitivity analysis to the legislature and the
administration so as to understand what impact different
oil prices had on revenues. He referenced Appendix A1 in
the RSB, which provided the same information from slide 19
for FY 27 and FY 28. There was a more detailed version that
could be provided to anyone with an interest.
Co-Chair Stedman hoped to get members interested in looking
at a three-year and five-year projection. He thought it
would be a lot more difficult if oil prices were around
$65/bbl.
Co-Chair Hoffman relayed that several departments had
indicated that the target for a "safe" CBR balance was
around $5 billion. He asked Commissioner Crum if the
department had an amount it considered as a comfortable
balance in the CBR.
Commissioner Crum mentioned daily cashflow purposes. He
noted there was a working agreement between DOR, the Office
of Management and Budget (OMB), and Department of Law as to
the absolute floor of the account, which was in the $400
million to $500 million range. He noted that long-term
projections included comprehensive analysis including the
following fiscal year. He asked if an analysis including
four years out based on total expenditures would be
helpful.
Co-Chair Hoffman answered "yes."
9:45:27 AM
Co-Chair Stedman pondered concerns with the spending
appetite in the building, and thought it might not be
correlated with the revenue expectations. He thought taking
a good look at a reasonable five-year expectation might
help balance expenditures more easily.
Co-Chair Hoffman believed the matter would become clear on
the following Monday when OMB presented a proposed budget.
He thought one proposal had a deficit of more than $1.5
billion, which would take a substantial amount of the CBR
balance, a prospect he was not interested in.
Commissioner Crum appreciated the clarification. He noted
that the projections being discussed were not regularly
presented in an aggregated format. He agreed to work with
the committee and OMB to compile the information on
forecasted revenues as requested.
Mr. Stickel addressed slide 20, "Petroleum Detail: North
Slope Oil Production Forecast," which showed a line graph
that was a summary of information presented by DNR the
previous day. The graph showed the North Slope oil
production forecast for the next ten years, as well as a
high case and a low case. He summarized that the story for
the next several years was one of stability, and production
would remain in the 460,000/bpd to 500,000/bpd range as
natural declines in the mature existing fields were offset
by additional drilling in the fields. Once beyond 2027 and
2028, stability was overlaid by additional production
expected from new fields coming online, Pikka and Willow
being the largest.
Mr. Stickel advanced to slide 21, "Petroleum Detail:
Changes to North Slope Oil Production Forecast," and showed
how the forecast changed between the spring 2024 and fall
2024 forecasts. There were reductions to the annual
production outlook for FY 25 through FY 27 in particular.
For FY 31 and beyond, there were some increases in the
forecast based on confidence of the new fields coming on.
9:49:13 AM
Mr. Stickel looked at slide 22, "Petroleum Detail: North
Slope Allowable Lease Expenditures," which a graph. The
graph depicted data on costs of production reported on
production tax return, which were deductible in the net
profits portion of the production tax calculation. He noted
that DOR liked to look at lease expenditures as an
important barometer of industry investment and spending in
the state. He pointed out that in FY 24, capital
expenditures on the North Slope were $4.2 billion, and
operating expenditures were an additional $2.9 billion. He
cited that FY 24 saw significant spending and new spending
on new fields. There was a forecast of an additional
increment to investment in FY 25 based on continued high
levels of spending at the new developments and continued
drilling at existing fields. Over the long term, he
expected continued robust spending with capital
expenditures stabilizing at a little under $3.5 billion per
year. On the operating expenditures side, there were modest
annual increases forecast throughout the time horizon based
on a combination of inflation and field operating costs.
Mr. Stickel pointed out that there was a risk adjustment
made to lease expenditures, similar to that of the
production forecast. For new developments, if there was an
80 percent probability assigned to production, the same
probability would be applied to the lease expenditure
forecast. If all of the fields came online as hoped, there
was potential for additional investment in the state above
and beyond what was shown, as well as additional
production.
Senator Kiehl appreciated the forecast. He looked at the
trend line for capital expenditures going back and asked if
the level tended to stabilize or if it went dramatically up
and down.
Mr. Stickel relayed that there were two factors related to
capital expenditures, including oil price. In a high-price
environment, there was cost inflation as well as increased
funds for spending. In a low-price environment, companies
would cut back on spending. He considered the existence of
major projects and higher levels of capital expenditures.
He thought for several years the state would see high
levels of capital expenditures regardless of price.
Senator Kiehl thought it was important for the committee to
think about the impact of the fluctuations on what funds
the state had to work with. He thought the legislature
should consider how to ride out the peaks and valleys.
9:53:58 AM
Co-Chair Stedman considered per-barrel credits and thought
the state had the ability to calculate the level closely
for years. He pondered that with other mechanisms there was
now greater difficulty in accurately estimating the credits
based against revenue without going to the department for
further information. He thought there seemed to be "de-
linking," which he thought was concerning. He asked for
explanation and reasoning as to the lack of clarity. He
referenced current expansion on the North Slope.
Mr. Stickel relayed that the state had a complex oil and
gas tax system, which had been referred to by consultants
as one of the most complex in the world. He summarized that
for the North Slope, production tax consisted of a net
profits tax, and a gross minimum tax floor. He discussed
the two types of taxable per-barrel credits. Companies
could apply the credits to reduce the tax down to the
minimum tax floor. He explained that around $70/bbl oil
prices, the state was in a situation where some producers
in the state would be paying above the minimum tax floor;
and some companies would be paying at or below the minimum
tax floor, meaning the companies could not receive the full
$8/bbl taxable credit. When attempting to calculate the tax
in aggregate, it would be a very different number than
looking at company-specific calculations, due to the
difference in company portfolios and investments.
9:58:09 AM
Co-Chair Stedman asked for more detail on the carry-forward
credit, and how it worked on a higher level. He considered
having a future presentation in more detail.
Mr. Stickel explained that when a company was making
investments in the state, there were three possible
situations: a company could be at or above the minimum tax
floor, a company could be paying at the tax floor but had a
profit, and a company could be in a net operating loss
(NOL) situation. For those with slope-wide profits below
zero and new entrants, any investments beyond the zero
gross value would generate a carry forward annual loss,
which could be used to offset future tax liabilities. There
were several provisions around the carry forward annual
losses.
Co-Chair Stedman considered development that was underway,
which he thought appeared to be accelerating. He
anticipated substantial expenditures in the billions, and
capital expenditures which might be carried forward. He
pondered increasing oil production and pipeline volume, but
without much increase in revenue. He pondered explaining to
the public and understanding mechanisms at work. He thought
the members needed to understand the cycle of multiple
stages of investment. He wanted to minimize misinformation
and confusion when there was not big revenue increases
expected for several years.
10:02:37 AM
Mr. Stickel agreed that Co-Chair Stedman was correct in
that there was a time lag in revenue received for new
projects. He noted that there was a gross value reduction
(GVR) provision that offered a tax benefit on the
production tax for the first three to seven years, that was
a significant benefit for new production. Depending upon
where the production was located, the royalty impacts
differed widely. He noted that an upcoming slide would
speak to the topic in more detail.
Commissioner Crum referenced Co-Chair Stedman's point about
the cash-flow positive aspects of a project and relayed
that DOR had an example on its website with an in-depth
analysis of the Willow project. He noted that the project
was massive and had over $1 billion in annual capital
expenditures but would not be cash-flow positive to the
state until the early 2030's. He thought it was important
to note that the project was cash-flow positive for other
areas in jobs and property taxes. He thought Willow was a
good example for the general public and noted that the
report would be updated. The project as a whole would be
expanding based on recent presidential action.
Co-Chair Stedman clarified that the discussion was centered
on the timing of cash flows and project economics. He noted
that changing the levers of the tax structure would change
the economics of a project. He was concerned that members
understood the economics of the working fields so as to not
draw irrational conclusions.
10:06:50 AM
Mr. Stickel He htough
spoke to slide 23, "Petroleum Detail: North Slope
Transportation Costs," which showed a bar graph. He
explained that transportation costs reduced the value of
oil for both tax and royalty calculation purposes. He noted
that transportation costs included all the costs of getting
oil to market, which took place mostly on the West Coast of
the United States, including feeder pipeline tariffs,
Trans-Alaska Pipeline System (TAPS) tariffs, and tanker
transportation costs. The TAPS tariff and tanker costs were
the largest components. In FY 24, the average cost of
transporting oil to market was $10.53/bbl. He relayed that
DOR expected costs to be fairly stable over the ten-year
forecast, reducing a little after FY 25 and remaining just
under $10/bbl. Marine transportation costs had increased
over the last several years due to inflation and fuel
prices, but were expected to stabilize. He expected the
TAPS tariff to decrease over the ten-year forecast based on
higher pipeline throughput. He explained that by having a
larger number of barrels going through the pipeline, the
cost per barrel for production decreased.
10:08:59 AM
Mr. Stickel referenced slide 24, "State Petroleum Revenue
by Land Type," which had a table that addressed how the
state benefitted in revenue from oil and gas production
with respect to different types of land. He described the
basic concept as not all oil was the same. He relayed that
historically most production in the state was on state land
with a standard 12.5 percent royalty and referenced Prudhoe
Bay and Kuparuk. A lot of new production was from other
lands with different ownership rates. State taxes
(including production tax, corporate income tax, and
property tax) were applied to all production in the state
regardless of land ownership, and up to three miles
offshore. Royalty rates varied depending upon ownership.
Mr. Stickel continued that for federal land and the Natural
Petroleum Reserve-Alaska (NPRA) (including fields like the
Moose's Tooth Unit and the Willow development), the federal
government received the royalty for the land and shared
half the royalty back to the state. The funds to the state
had to be used to benefit the local communities impacted by
the development, so the share of royalty from NPR-A was a
pass-through.
Mr. Stickel continued that for federal waters three to six
miles offshore, the Alaska National Wildlife Refuge (ANWR)
or other land, the state received a share of the revenue
without any restrictions under current law. There was a
small portion of production from North Star and in Cook
Inlet that were in federal waters within three to six miles
off-shore. For federal waters beyond six miles offshore,
there was no direct state revenue, however, were production
to take place there could be potential positive impacts on
state revenue with increased pipeline throughput and state
economic benefits.
Mr. Stickel continued that for any private land (mostly
Alaska Native corporation-owned land) the state did not get
any direct royalty interest but did apply a tax on the
private royalty interest. The tax was five percent of the
private royalty value for oil and one and two-thirds
percent for gas.
Co-Chair Hoffman thought the comments by Co-Chair Stedman
related to the appetite [for spending] in the building were
quite relevant and could apply to the Dunleavy
Administration. He commented that the legislature had not
heard from the administration regarding new revenue
sources. He thought the past indicated that the
administration would not venture into the subject. He
wondered about the administration's position for the
following two years, or if the subject had been discussed.
Commissioner Crum was unaware of any new legislation put
forward by the governor related to new revenue sources.
Mr. Stickel turned to slide 25, "THANK YOU":
Dan Stickel
Chief Economist
Department of Revenue
[email protected]
(907) 465-3279
Dale Yancey
Director, Tax Division
Department of Revenue
[email protected]
(907) 269-1033
Co-Chair Hoffman thanked the commissioner and his staff.
Co-Chair Hoffman discussed the agenda for the following
meeting.
ADJOURNMENT
10:14:01 AM
The meeting was adjourned at 10:14 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 012425 S.FIN Fall 2024 Forecast Presentation.pdf |
SFIN 1/24/2025 9:00:00 AM |
Department of Revenue Budget Overview |