Legislature(2005 - 2006)SENATE FINANCE 532
08/08/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| HB3001 | |
| Dr. Pedro Van Meurs, Consultant to the Governor | |
| Dan Dickinson, Cpa, Consultant to the Governor | |
| Bill Corbus, Commissioner, Department of Administration | |
| Robynn Wilson, Director, Tax Division, Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
August 8, 2006
9:15 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Lyda Green
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Thomas Wagoner
Senator Ben Stevens
Senator Kim Elton
MEMBERS ABSENT
Senator Donny Olson
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Senator Gary Stevens
Senator Gene Therriault
Representative Mike Kelly
Representative Ralph Samuels
Representative John Harris
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 3001(FIN)
"An Act relating to the production tax on oil and gas and to
conservation surcharges on oil; relating to criminal penalties
for violating conditions governing access to and use of
confidential information relating to the production tax;
amending the definition of 'gas' as that definition applies in
the Alaska Stranded Gas Development Act; making conforming
amendments; and providing for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 3001
SHORT TITLE: OIL/GAS PROD. TAX
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
07/12/06 (H) READ THE FIRST TIME - REFERRALS
07/12/06 (H) FIN
07/26/06 (H) FIN AT 10:00 AM HOUSE FINANCE 519
07/26/06 (H) Heard & Held
07/26/06 (H) MINUTE(FIN)
07/27/06 (H) FIN AT 10:00 AM HOUSE FINANCE 519
07/27/06 (H) Heard & Held
07/27/06 (H) MINUTE(FIN)
07/31/06 (H) FIN AT 10:00 AM HOUSE FINANCE 519
07/31/06 (H) Heard & Held
07/31/06 (H) MINUTE(FIN)
08/01/06 (H) FIN AT 10:00 AM HOUSE FINANCE 519
08/01/06 (H) Heard & Held
08/01/06 (H) MINUTE(FIN)
08/02/06 (H) FIN AT 10:00 AM HOUSE FINANCE 519
08/02/06 (H) -- Testimony <Invitation Only> --
08/03/06 (H) FIN AT 10:00 AM HOUSE FINANCE 519
08/03/06 (H) Moved CSHB 3001(FIN) Out of Committee
08/03/06 (H) MINUTE(FIN)
08/04/06 (H) FIN RPT CS(FIN) 7DP 1NR 1AM
08/04/06 (H) DP: HAWKER, KELLY, WEYHRAUCH, STOLTZE,
FOSTER, MEYER, CHENAULT;
08/04/06 (H) NR: JOULE;
08/04/06 (H) AM: KERTTULA
08/06/06 (H) ENGROSSED
08/06/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
08/06/06 (S) -- Meeting Canceled --
08/07/06 (H) TRANSMITTED TO (S)
08/07/06 (H) VERSION: CSHB 3001(FIN)
08/07/06 (S) READ THE FIRST TIME - REFERRALS
08/07/06 (S) NGD
08/07/06 (S) NGD AT 1:00 PM SENATE FINANCE 532
08/07/06 (S) Heard & Held
08/07/06 (S) MINUTE(NGD)
08/08/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
WITNESS REGISTER
DR. PEDRO VAN MEURS
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 00911-0001
POSITION STATEMENT: Testified on CSHB 3001(FIN).
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 998811-0001
POSITION STATEMENT: Testified on CSHB 3001(FIN).
REPRESENTATIVE RALPH SAMUELS
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Recapped the discussions and decisions in
the House that led to CSHB 3001(FIN).
REPRESENTATIVE MIKE KELLY
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Provided perspective on CSHB 3001(FIN)
BILL CORBUS, Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Testified on CSHB 3001(FIN).
ROBYNN WILSON, Director
Tax Division
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Answered questions related to CSHB
3001(FIN).
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 9:15:00 AM. Present
at the call to order were Senators Fred Dyson, Lyda Green,
Thomas Wagoner, Gary Wilken, Bert Stedman, Lyman Hoffman, Kim
Elton, Con Bunde and Chair Ralph Seekins; Senator Ben Stevens
arrived as the meeting was in progress. Also in attendance were
Senators Gary Stevens and Gene Therriault, and Representatives
Mike Kelly, Ralph Samuels and John Harris.
CSHB 3001(FIN)-OIL/GAS PROD. TAX
CHAIR SEEKINS announced CSHB 3001(FIN) to be up for
consideration.
9:15:49 AM
^Dr. Pedro van Meurs, Consultant to the Governor
DR. PEDRO VAN MEURS, Consultant to the Governor, provided an
economic analysis of the variable PPT rate and noted that the
conclusions are the same as those that were presented yesterday.
DR. VAN MEURS said the idea of "Invest or Pay" has already been
well explained. It is a new concept for figuring the PPT rate
whereby the higher of two alternative rates is selected:
1) based on the investment per barrel ("$/barrel rate") or
2) based on the relationship between qualified investments and
production tax value (the "R rate").
The dollar per barrel rate changes with the level of investment
and it is very sensitive to the production decline curve and the
level of investment measured in nominal dollars.
$1 per barrel - 25%
$6 per barrel - 20%
In between the rate is:
25% - 1% (IF-1)
IF = Qualified Capex/production
The first two graphs illustrate what happens with the PPT rate
if production is maintained at current nominal levels. Dr. van
Meurs said we know that production is declining at the current
nominal levels of investment because that's what has been
happening over the last 10 years.
The top blue line in the graph shows the level of investment and
the bottom pink line indicates production decline. Because the
dollar per barrel in nominal terms would increase over time, the
PPT rate would automatically decline from 22.5 percent to 20
percent. If a business plan wants to get to 20 percent PPT rate,
or if the plan is to continue the current level of investment in
nominal term, then over time as production declines the PPT rate
would be 20 percent.
In real terms the investment shows that in 2006 dollars,
investment would decline to almost half of what it had been over
20 years, but the PPT rate would still be about 20 percent after
10 years.
DR. VAN MEURS said if the investments decline at the same
nominal capex rate as the production, the PPT rate would remain
constant. That is illustrated in the graphs on slides 8 and 9.
In real terms the graphs show investment declining to about $200
million per year for the next 20 years with the PPT rate staying
the same. He commented that that isn't a particularly strong
incentive to increase investment.
9:20:14 AM
The next two graphs show a business plan whereby a company could
accelerate certain capital investments so the PPT rate quickly
declines to the 20 percent rate. After that the 20 percent rate
can be maintained by declining investment at the same rate that
production declines. In real terms that would be a dramatic
decline of investment in Alaska and is consistent with what he
said yesterday.
The R rate is based on the following formula:
[{(R*QC)+(0.2*QC)+[(0.25-R)*PT]}*(1-IR)]+(QC*IR)=0.75*QC
R=rate
QC=qualified capex
PT=production tax value
IR=US tax rate
In principle it links the qualified capex as a percentage of the
production tax value. So if the production tax value and the tax
rate value are constant, then there is a direct relationship
between the qualified investment and the PPT rate.
With a zero reinvestment the rate is 25 percent, and with a
reinvestment of 23.2 percent the PPT rate is 20 percent. A
company that only reinvests 25 percent of its net revenues and
transfers 75 percent to other jurisdictions could reasonably be
considered a "harvester."
The R rate graph shows the reinvestment rate curve and
illustrates that the R rate is directly linked to the percentage
of net revenues that companies reinvest. If they reinvest 23
percent of net revenues the PPT rate is 20 percent. To maintain
a 22.5 percent PPT rate, reinvestment of just 12.5 percent of
net revenues is all that is required. The percentages that are
shown are the qualified capital expenditures as percentage of
the production tax value. The importance is that price is
eliminated as a variable so it holds true whether the price per
barrel is $20 or $100.
DR. VAN MEURS said the idea is to select whichever rate is
higher between the dollar per barrel rate and the R rate so that
gold plating is slowed. He explained that he used Mr.
Dickinson's table, but he added color to illustrate that it is
relatively easy to reach a 20 percent PPT rate as long as oil
prices (net of royalties) are up to $50 per barrel. Modest
increases in investment will quickly bring the rate down to 20
percent.
Under higher prices it's increasingly difficult to stick to the
lower rates because 23.2 percent of net revenues must be
reinvested and at $100 per barrel that becomes significant. At
$50 to $70 per barrel it is relatively easy to get to the 20
percent rate.
9:26:58 AM
The chart on slide 19 illustrates that Alaska contributes up to
$1.20 in PPT loss when a company increases investment by $1.50
per barrel from $3 per barrel. If the 2 for 1 feature is in the
system, which he would support, the company would receive
another $0.15 per barrel so the state contribution would be
$1.35 per barrel and U.S. federal tax would result in a further
reduction of $0.05 per barrel. Thus, a company that increases
investment by $1.50 per barrel only contributes $0.10 per barrel
from "its own pocket" because the rest is tax deductions. Since
government is really paying, it would be easy for companies to
increase investment for a short while.
The chart on the next slide illustrates the same overall pattern
if a company increases investment from $3 per barrel to $6 per
barrel. When oil is at $70 per barrel and after all the
deductions - the base PPT, the 2 for 1 and the federal income
tax - a company would spend about $0.25 of the $3 out of pocket.
Again, government is paying and that is a concern because the
reduction of the PPT rate is basically built in and Alaska's
money is used to come down to twenty percent.
DR. VAN MEURS said the information is basically the same as what
was presented the previous day, but the graphs are up to date
and reflect the actual economic results. He reminded the
committee of the virtue of a simple fiscal system and appealed
to the Senate to take such an approach. He noted that all other
nations in the world have successfully used a simple fiscal
system to encourage investment and increase government revenues.
9:31:16 AM
SENATOR BERT STEDMAN referenced the bar charts on slides 19 and
21 and asked about computing percentages.
DR. VAN MEURS replied he could show the information as a
percentage, but the idea is to show the result of the
combination of the two formulas.
SENATOR STEDMAN asked if at $70 per barrel Alaska would actually
pay for $1.20 of the $1.50 per barrel increase in capex.
DR. VAN MEURS said yes; then there is the 2 for 1 feature that
would add another $0.15 and the federal income tax deduction.
Increasing investment by $1.50 per barrel would result in a
company spending very little out of pocket.
9:33:12 AM
SENATOR CON BUNDE asked if using a fixed rate would reduce the
"gold plating" problem.
DR. VAN MEURS replied that would eliminate it. Internationally
it is recognized that it's a stimulus to reduce the net
investment by about 40 percent, but for the state to pick up 80
to 90 percent of the cost is clearly over stimulating
investment. A project's rate of return wouldn't matter because,
on an incremental basis, everything would look good. That
induces companies to do projects for the purpose of lowering
taxes, which isn't typically seen as a healthy investment
strategy.
9:35:31 AM
SENATOR GARY WILKEN referenced the issues left on the table
yesterday and asked if they wouldn't all be taken care of if
subsection (f) were replaced with a simple formula.
DR. VAN MEURS replied it is that simple.
SENATOR BUNDE thanked Dr. van Meurs for his contribution.
SENATOR STEDMAN noted that later in the meeting he would
introduce amendments.
9:37:47 AM
^Dan Dickinson, CPA, Consultant to the Governor
DAN DICKINSON, CPA, Consultant to the Governor, said before he
responded to questions that were asked yesterday he wanted to
clarify that he agrees with Dr. van Meurs on the math. The
difference is that they look at different aspects. Dr. van Meurs
said a modest increase in investment will lead to a lower rate.
That's correct; under this proposed mechanism there are
situations in which increased increase investment will drive the
tax rate down.
However, he said, the information on the chart labeled "Five
Step Calculation of Tax Rate under Produce or Pay" provides a
different and important perspective. It shows how much of the
production tax value is being reinvested. He noted that Dr. van
Meurs suggested that 23 percent would be "harvesting" and the
state ought to look for something higher. Mr. Dickinson said his
observation is that at $70 per barrel and $1.2 billion in
investment, about 8 percent would be reinvested into the state
and if that could be raised to something closer to 23 percent,
he would suggest that that would be a job that was extremely
well done. He noted that the stair step across the chart shows
the level of investment that the state would receive at any
price if it did attain 23.5 percent reinvestment. He described
the difference in perspective as the difference between the
glass being half empty or half full.
9:42:04 AM
MR. DICKINSON began his presentation with the explanation that
the first graph shows oil at $20/bbl for the next 30 years. The
severance tax is indicated under: the status quo, the Produce or
Pay Plan (POP) with .25 percent Net $40, the governor's 20/20
proposal, the conference committee 22.8/20 proposal
with .175 percent Net $35, and the Senate 22.5/20 proposal
with .100 percent Net $35.
Clearly, at very low prices the status quo is better than
systems based on a net. For several years the POP rate under
consideration today lines up with the conference committee
version before falling away. By 2021, which is about the same
time that there are zero revenues, it aligns with the governor's
bill.
9:44:53 AM
The next graph shows $40/bbl oil for 30 years and illustrates
the tax rate starting in the 23 percent range and moving down to
the 20 percent range.
The next graph shows $60/bbl oil for 30 years and illustrates
that POP starts midway between the conference committee and
Senate versions, but over time as production declines it drops
to 20/20.
9:46:00 AM
The next graph shows the Cumulative Severance Tax from 2007 to
2030 when oil is $30/bbl to $80/bbl. The status quo and the
governor's bill are the least aggressive in terms of revenue.
The current POP proposal is also low at $30/bbb, but over time
and particularly with progressivity, the POP plan begins to
rise. When oil is in the $65/bbl range, HB 3001 generates higher
revenue than any of the other bills.
9:46:50 AM
The next two graphs deal with total take so the state share
includes royalties, income taxes, and property taxes. Again the
state share goes down as the price per barrel goes up under the
status quo and it dips just slightly under the governor's bill.
Because of the progressivity features, the percentage rises for
the other three models, but it rises the most under HB 3001 when
the dollar per barrel prices are at the highest levels. The last
slide is essentially the same, but it includes federal income
taxes so the percentages are higher. The percentages increase
with progressivity and at $80/bbl HB 3001 is seen to have the
highest percentage take.
MR. DICKINSON warned that the modeling system is ill suited to
differentiate between the incentives.
9:49:16 AM
MR. DICKINSON offered a matrix of the different bills under
three price scenarios: $30/bbl, $50/bbl, and $70/bbl.
Under the $30/bbl scenario each of the three proposed net
methods have a production tax value of $13.37. At this price
progressivity is not a factor. Under HB 3001 the base tax rate
is 25 percent and then 3.63 percentage points are subtracted as
investment adjustment for an actual tax rate of 21.3 percent. At
this level the R rate does not become part of the equation and
the effective rate on gross is 4.1 percent.
The final Senate bill has the same taxable value of $13.37 per
barrel. Again progressivity is not a factor so the actual tax
rate is 22.5 percent. The only adjustment that is different is
that all taxpayers qualify for the $12 million rather than just
those that fall below a certain barrel threshold. The net effect
is that the rate on gross is 4.2 percent. The final House bill
has a higher tax rate, but it is similar. The governor's bill
would have the lowest rate on gross at 3.4 percent while the
status quo would have the highest at 7.5 percent of gross.
9:52:42 AM
Under the $50/bbl scenario the calculations are the same. Again,
there is no progressivity. HB 3001 has a 0.5 percent gold
plating correction so the actual tax rate is 21.88 percent and
the effective rate on gross is 12.4 percent. He observed that Dr
van Meurs is correct that the anti gold plating formula does not
include transitional investment expenditures (TIE). For
measuring purposes it would be appropriate to include those
expenditures and doing so would bring the reinvestment to the 75
percent cap.
The effective rate on gross for the different bills is: 12.4
percent under the current proposal, 12.5 percent under the final
Senate bill, 13.3 percent under the final House bill, 10.9
percent under the original governor's bill, and 7.5 percent
under the status quo. The slight difference in the effective
rates for the final Senate version and the current bill reflects
a difference in credits.
The final scenario starts at $70/bbl and subtracts $12 in
operating and transportation costs and $4.63 in capital
investment costs for a production tax value of $53.37/bbl. At
this price the progressivity feature is factored. Under the
current bill the base rate is 25 percent; 3.63 percent in
investment adjustment is subtracted, 1.8 percent gold plating is
added (if TIE is added it is a bit higher), and 3.34
progressivity is added for an actual tax rate of 26.5 percent.
The effective rate on gross for the different bills is: 19.2
percent under the current proposal, 17.2 percent under the final
Senate bill, 20.3 percent under the final House bill, 13.8
percent under the original governor's bill, and 7.5 percent
under the status quo.
9:56:24 AM
MR. DICKINSON observed that the charts show that as the prices
rise, the effect of the anti gold plating feature becomes more
important.
The committee took an at-ease from 9:58:00 AM to 10:00:14 AM.
CHAIR RALPH SEEKINS recognized Representative Ralph Samuels and
Representative Mike Kelly.
10:02:50 AM
REPRESENTATIVE RALPH SAMUELS reviewed the discussions and
decisions that led to the current bill including: tying oil and
gas together or keeping them separate; doing something with the
investment; making the system practical for all parties; using
gold plating; and going to actual production.
He commented that most people are looking at investment in terms
of how it affects state revenues, but dollars to the state
treasury aren't the only consideration; it's any way the money
is spent into the economy. Sheet metal fabricators, the flow
line in Fairbanks, Doyon, ASRC Energy and many others are
affected so the more money that is spent here the better it is
for the economy statewide.
REPRESENTATIVE SAMUELS said some discussion centered on putting
an inflation indexer on capital expenditures, but all the groups
that have supported that notion have been told that they could
petition the government if something isn't right. He said he
stands by that philosophy although he understands there are
practical concerns right now.
10:05:00 AM
Because some companies choose to invest here and some do not,
the next decision was to reward companies that do. He emphasized
that companies that are willing to spend more money here ought
to be encouraged. He noted that he has argued with Mr. Dickinson
that it isn't fair when investment is seen to increase greatly,
but production does not. Clearly, gold plating is an issue, but
that can be stopped. Although production may not increase in
aggregate, it will increase more than if the investment were not
made at all and certainly it will stop the production decline.
Heavy oil was the next issue. Representative Samuels said he
firmly believes that is where the major increase in production
in Alaska will come from so it's important to encourage
investment for that to happen. Thus, the current bill is aimed
more at the heavy oil investment than at some of the explorers.
He noted there are separate programs for royalty reduction and
exploration tax credits.
The House looked at different scenarios and found that getting
to any of the barriers too quickly was problematic. If a company
gets to the 25 percent rate too quickly then incentive is lost.
The same problem exists if the 20 percent rate comes too quickly
because additional investments won't do any good. Previous
testimony indicated you get to the 20 percent rate in about 10
years so the House decided to have a study done in 2011. It
would ask: how much investment there has been compared to what
there is today, where the money was spent, what happened to
production, what happened to heavy oil, what happened to
investment, who invested, and who did not invest. He said the
process is slow and it would probably take five years to get to
the board level where investment decisions are made. In fact
with Prudhoe and Kuparuk three boards must agree before moving
forward on a capital expenditure. He expressed the view that
hitting either of the barriers signifies failure, but the House
believes that by 2011 there will still be incentive to move
within the range. In conclusion he said to pressure corporate
behavior, you must keep the pressure on.
10:09:07 AM
REPRESENTATIVE MIKE KELLY described himself as a counterbalance
to Representative Samuels. From the beginning he has favored: a
higher tax rate, a robust progressivity feature, separation of
oil and gas, elimination of the clawback, a January 1 effective
date, and a floor. To that end he was heavily involved in
developing the bill that passed the House. That bill had a 23.5
percent tax rate, a 2.5 percent progressivity with a $35/bbl
trigger, and a floor.
HB 3001 is an attempt to move forward after two failed attempts
and get over the triple hurdle of satisfying the Senate, the
House, and the Governor. When going over the bill several things
were apparent. First, regardless of where you stand on the rate
curve, the bill doesn't allow the rate to fall below 20 percent.
Also, it has no new credits. The concept is simple and it would
be easy to put into effect. In comparison, he said, the
production-based concept that Dr. van Meurs discussed is much
more complex.
REPRESENTATIVE KELLY said 30 House members passed this bill and
he believes it is worth serious consideration in the Senate.
10:14:57 AM
SENATOR ELTON referenced a previous statement about rewarding
new investment and said he was struck by Dr. van Meurs'
testimony that the state is rewarding new investment and it is
paying for it. He recapped that Dr. van Meurs said that with
each $1.50 in new investment, government is paying for all but
$0.10 and that the new investment can get the tax rate down to
20 percent very quickly. He asked for a response to Dr. van
Meurs' point.
REPRESENTATIVE SAMUELS responded as follows:
I'll fall back on what Mr. Dickinson said. Right now
we have 7 percent of the money gets reinvested in the
state of Alaska. Some people - some companies do come
here and reinvest and others do not reinvest. I
believe that in a snapshot of today, that we tried to
hit the middle ground at 22.5 today. Today's spending
at $3.50 per barrel - the goal was to hit 22.5. Exxon
would be higher than that; they spend less per barrel.
... BP would be about at that and Conoco would be
below that.
If you do increase - I wasn't involved in all the
writing of the formula for the gold plate and if the 2
for 1 credits need to be included in there then that's
fine, but let's do that.
The bill has a set rate. You're at 60 percent already
that the government's paying. We set it at 75. At very
high prices 75 kicks in. ... 75 percent is what the
goal that we set in this gold plating formula was.
We're at 60 right now. ... Counting the deduction,
counting the credit, and counting the implications of
the federal government you're at 60 percent right now
anyway. Just with a set number. That hasn't changed.
We did not add a credit. You're using the credit for
another purpose - to set the rate. ... The criticisms
were, 'We're giving them the 20 percent rate and
they're not going to invest money anyway.' I heard it
over and over again.
So we kind of flipped that on its head and said,
'Well, if you spend the money then we'll give you the
20 percent rate. But you've got to spend a lot.' ... I
can't remember if it was Dr. van Meurs or Dickinson
said it took ten years to get the aggregate over time.
I think we need to look at the aggregate - you can't
look at what's going to happen in one year because
investments are going to go up and down. Every year
you start over again at 25 - it's in the bill. ... If
you don't invest this year, up you go.
The criticism of the small players ... you're going to
have somebody come in here and go, 'We have these huge
capital expenditures right now, but we don't have any
production so we get to sell the credits forward and
we get to do all of these things, but the minute we
have production, we don't need to spend any more capex
and our tax rate is going to go up.' Yea, because your
risk is gone, your capital recovery has taken place,
and we're going to raise the tax rate. If you just set
a number you won't get that.
10:20:21 AM
SENATOR ELTON reiterated he was struggling with the concept of
reinvestment because a company is only investing $0.10 for every
$1.50 it puts back while government is paying the balance.
SENATOR ELTON changed topics and said that when he read the
morning paper he realized there seems to be disagreement between
what Representative Samuels believes is in the bill and what
Director Wilson believes is in the bill in terms of credits that
might apply to the current pipe issue in the Prudhoe Bay unit.
Director Wilson suggests that the investment would be allowed
under this bill and Representative Samuels suggests it would not
be allowed. It's extremely unsettling to have two people who
were fundamentally involved in crafting this proposal come to
such different conclusions, he said.
REPRESENTATIVE SAMUELS responded he would defer to the tax
division on tax issues.
SENATOR ELTON asked if he is suggesting that the tax division is
correct in its characterization.
REPRESENTATIVE SAMUELS replied he did not know if the division
would call it capital expenses or operating expenses.
CHAIR SEEKINS recognized that Senator Gene Therriault had joined
the meeting.
10:22:10 AM
SENATOR DYSON said originally he was told that $0.25 out of
every dollar would come from the company's pocket and he was
pleased to hear that. Now he hears that it might be just $0.10
and he questioned what happened.
REPRESENTATIVE SAMUELS said if transition credits weren't
included in the formula it was probably an inadvertent omission.
They tried to look at every benefit the spending gives - the
deductions, the credits, and the federal implications. They also
looked at the TIE credits that are in the legislation.
REPRESENTATIVE KELLY said he wasn't sure how that got left out,
but the point Senator Dyson raised is important considering how
Senator Elton ended up on how much of the $1.50 is being paid by
the state and how much is being paid by the company. He asked
members to keep in mind that the state isn't going to be writing
checks; the money comes from the stack of cash that the
companies bring and that point isn't being addressed. He
emphasized that in all respects the credits on the table are the
same ones that Dr. van Meurs has been looking at for half a year
or longer. Furthermore, he is really bothered by the implication
that there is a new round of credits in here and they've just
made this thing ridiculously tilted from former versions in
favor of the companies.
SENATOR DYSON said he was not implying a thing, but he would
like an explanation about keeping a company's investment down to
a minimum of $0.25 out of every dollar because he missed it the
first time.
REPRESENTATIVE SAMUELS said that referred to the 2 for 1
clawback credit that were first introduced in Senate Resources.
10:29:55 AM
SENATOR STEDMAN said he just received an update from Econ One
and the last page depicts sharing capital expenditures between
the industry and the state. He asked for some time to distribute
copies to the members.
The committee took an at-ease from 10:30:37 AM to 10:45:07 AM.
SENATOR DYSON asked Dr. van Meurs about the concern that the
House gold plating feature will drive investments up and tax
rates down. He asked if the yellow line, which shows the produce
or pay variable rate/20 with .25% Net 40, is the likely
scenario.
DR. VAN MEURS clarified that is a DOR model that has a number of
assumptions. His testimony was that an inherent tendency would
be for companies to plan operations to lead to 20/20 or close to
that. He suggested that the actual behavior of the oil industry
is that a few years out the curve would be much lower than the
yellow line indicates.
10:48:22 AM
DR. VAN MEURS highlighted that his first graph presented the
scenario that even if investment continued at $1 billion per
year, production would decline by 6 percent and that is entirely
consistent with testimony the oil industry made. The consequence
is that over time that inevitably leads to a 20 percent rate. He
noted that the problem is that the DOR model is standalone and
the current discussion is about incremental decisions. There is
nothing wrong with the standalone model, but it looks different
than an incremental model.
SENATOR DYSON asked for an explanation of the difference.
DR. VAN MEURS explained that a standalone model makes
assumptions about the future, but it doesn't analyze the
investment behavior. In comparison he used an incremental model
to analyze gold plating and that looks at how behavior will
change over time.
SENATOR DYSON asked if he said that the producers might tailor
investments to be front end loaded to get to the 20 percent rate
and then they could reduce investments and still hold on to that
rate.
10:51:52 AM
DR. VAN MEURS replied that's correct. Once a company is at the
20 percent level the formula is reset every year, but it is set
at a much lower level of production so the per barrel rate is
inherently higher at the start. That leads to the conclusion
that the 20 percent rate could be maintained.
SENATOR DYSON recapped the explanation.
CHAIR SEEKINS asked Commissioner Corbus to come forward.
10:52:58 AM
SENATOR WILKEN asked if the administration has a team working on
the situation and if the legislature should do something to set
a process in motion.
^Bill Corbus, Commissioner, Department of Administration
BILL CORBUS, Commissioner, Department of Administration, replied
it would help if the legislature passed the PPT. He related that
the administration is working diligently and is looking at the
issue from a technical and a financial standpoint.
SENATOR WILKEN asked that the administration keep the
legislature in the loop.
BILL CORBUS assured members that that is the intention.
10:55:53 AM
SENATOR ELTON asked if Director Wilson's comments were the
definitive answer with regard to the application of credits to
investments that are now required in the Prudhoe Bay unit.
BILL CORBUS deferred to Ms. Wilson.
^Robynn Wilson, Director, Tax Division, Department of Revenue
ROBYNN WILSON, Director, Tax Division, Department of Revenue,
said she was asked how the costs would be treated under the PPT
and she tried to clarify that it would depend on the kind of
costs. Briefly, they could take two forms. One would be repair
and maintenance and the second would be capitalized
expenditures. For example roof repairs on a building would be
routine maintenance and would not be capitalized. But if the
entire structure of the roof and the roofing needed to be
replaced, that would extend the life of the building and those
expenses would be capitalized under the IRS code. That's the
dividing line, she said, but it's not necessarily a clear line
because of questions of magnitude. Generally though, maintenance
and repair would be operating expenses and under the PPT those
would be deductible if it's a lease expenditure. On the other
hand, a major replacement that would be capitalized for federal
purposes. Those would be a capex under the PPT and would be
deductible and subject to credits.
SENATOR ELTON asked if her answer would be the same for HB 3001.
MS. WILSON replied yes; the variable tax rate that's based on
capital investment is the same definition that is used for the
capex credit.
SENATOR DYSON said there is a dilemma because the idea is to
have incentives so that people keep up on maintenance. He
commented that it's a worry that the inadvertent outcome might
be that maintenance is allowed to slide until a project would
qualify as a credit rather than a deduction. He said he would
like assurance that the intention isn't distorted to the
taxpayers' disadvantage.
COMMISSIONER CORBUS responded the administration will take that
under consideration.
The committee was in recess from 11:00:06 AM to 4:46:23 PM.
SENATOR GREEN reconvened the meeting and announced that the
committee would meet again at 10 a.m. tomorrow, August 9, 2006.
There being no further business to come before the committee,
Senator Green adjourned the Senate Special Committee on Natural
Gas Development meeting at 4:46:31 PM.
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