SENATE BILL NO. 92 "An Act establishing an income tax on certain entities producing or transporting oil or gas in the state; and providing for an effective date." 10:13:44 AM CATHY GIESSEL, SPONSOR, introduced the legislation. She discussed the presentation, "SB 92 version S S-Corporation Tax Structure" (copy on file). She pointed to slide 2: C Corporations are taxed separately from their owners, meaning they pay taxes on their profits and then the shareholders pay taxes again on any dividends they receive. S Corporations pass their profits and losses directly to their shareholders' personal tax returns, avoiding the perceived "double taxation" seen with C Corporations. S Corporations were created in the tax code on January 1, 1958. There are specific requirements and restrictions for an entity to qualify as an S Corporation: • Does not have more than 100 shareholders • Does not have a shareholder who is not an individual (with the exception for various tax- exempt organizations, estates and trusts) • Does not have a nonresident alien as a shareholder • Does not have more than one class of stock (DCCED, Div of Corp, business & prof licensing) There are 11,700 S Corporations registered in Alaska. (Alaska Department of Revenue Indirect Expenditure Report 2024) Senator Giessel pointed to slide 3, "Limited Liability Companies": Limited Liability Company (LLC) were first introduced in Wyoming in 1977, but did not catch on until the 1990s. A limited liability company is a legal business entity, considered its own "person" by law, which exists separate from its members. An LLC shares the limited liability features of a corporation but has the management and tax efficiencies of a partnership. Members' liabilities are limited to their financial contributions meaning an individual members' liability is only extends to what they contribute to the LLC. Limited liability does not shield owners of the LLC from negligence liability. LLCs have an array of tax options. For example, members may file taxes as one of the following, but not limited to: • Single member LLC taxed as Sole Proprietorships (Sole Prop) • Partners in an LLC taxed as a Traditional Partnership (LLP) • LLC taxed as a Corporation, including S Corporations or C Corporations (S-Corp, C-Corp) LLCs can elect to be taxed as S Corporations if they meet the requirements, but they have more flexibility in structure and management compared to traditional S Corporations. So, if an LLC opts for S Corporation status, it's taxed similarly to other S Corporations, but with the added flexibility of the LLC framework. According to the Department of Commerce, Community and Economic Development, as of 2024, there are 67,133 active LLCs registered in Alaska. This number can fluctuate with new formations and dissolutions 10:17:39 AM Senator Giessel highlighted slide 4, "Alaska Linkage to Federal Code": Federal Code Linkage: Alaska generally follows federal tax rules for federal tax purposes but does not have its own state income tax code. Instead, Alaska uses federal tax rules as a basis for compliance and reporting for businesses operating within the state. This means that while there's no separate state income tax code, businesses and individuals must adhere to federal tax regulations for their federal tax filings. Both S Corporations and LLCs enjoy similar tax treatments in Alaska due to the state's lack of a state income tax. Individual Income Tax Repeal: Alaska originally implemented an individual income tax in 1949. However, this income tax was repealed in 1979. The repeal came as a result of the state's new revenue source, the Alaska Permanent Fund, which was established to manage oil revenues. The creation of the Permanent Fund reduced the need for individual income taxes. Senator Giessel looked at slide 5: AS 43.20.021 Current Statutes for companies filing as S Corporations • "Under Alaska's adoption of the Internal Revenue Code [AS 43.20.021], corporations that have elected S Corporation status are generally not subject to tax. • Prior to 1980, the stakeholders' share of income was subject to Alaska's personal income tax. • Since the 1980 repeal of the state's personal income tax, the income is taxed neither at the corporate level nor at the shareholder level" -Legislative Finance Division Indirect Expenditure Report January 2021 Senator Giessel looked at slide 6, "Nine States No Personal Income Tax": • Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming • 14 states have a flat tax rate • 27 have graduated rates similar to the federal tax system. Senator Giessel highlighted slide 7, which showed the current structure for C-corporations, which were taxed based on profits. The shareholders were also taxed via personal tax on profits. Senator Giessel pointed to slide 8, which showed what was proposed in the bill for S-corporations that were engaged in the oil and gas industry. There was a $5 million credit (or deduction) for any taxes under $5 million. At $5 million or more, a company would fall under the top bracket of 9.4 percent. She thought the tax credit was significant went compared to C-corporations tax credit of $222,000. 10:21:24 AM Senator Giessel addressed slide 9, which showed a January 2021 indirect expenditure report from the Legislative Finance Division. In the report, the various taxes and sources of revenue were evaluated. The edition pictured made the suggestion that the S-corporation loophole be terminated. She read the statement from the report: Without a state personal income tax, these corporations receive the legal benefits of incorporation without any state tax liability. Senator Giessel discussed slide 10, which showed information presented by Department of Revenue (DOR) Commissioner Linda Mahoney. She recalled that Co-Chair Stedman and Senator Kiehl were part of the legislature's Fiscal Policy Working Group in 2021, which had proposed taxing oil and gas pass-through entities at the same rate as the current corporate income tax on C-corporations. She emphasized that what the bill proposed was not a new idea. Senator Giessel spoke to slide 11, which showed a page from the state's latest revenue forecast. The page showed petroleum corporate income tax on C-corporations. She mentioned ConocoPhillips and Exxon Mobil. In FY 24, the tax amount was $210 million. In FY 25 it was forecast to be $190 million and in FY 26 it was estimated to be $230 million. She explained that the tax was a substantial revenue for the state. Senator Giessel displayed slide 12, which showed a table comparing Alaska Taxable Income and Tax Owed between C- corporations and S-corporations. She emphasized that DOR was restricted through confidentiality requirements to not be able to disclose how many S-corporations in the state would be liable under the bill for tax revenue. The Senate Resources Committee had asked a Certified Pubic Accountant (CPA) what it would look like to apply the provisions of the bill to a company making $1 billion in profits. She noted that the CPA was available to present the calculations to the committee. 10:26:21 AM Senator Giessel pointed to slide 13, "Hilcorp investment locations." She noted that Texas and Wyoming were the two states other than Alaska that did not have personal income tax. The chart on the slide came from the website of a large S-corporation (Hilcorp) operating in the state in the oil and gas industry. The chart showed the six locations in which Hilcorp did work, and reflected state and local taxes paid, number of barrels per day, gross acres of production, and other information. She noted that Alaska was at the bottom of the chart and had "N/A" listed under "state and local taxes paid." Senator Giessel thought the argument had been stated that if the tax was updated it would be incredibly burdensome for the state's S-corporations because of the challenging and expensive environment. She noted that the average royalty in Texas fields was over 20 percent, while Alaska's royalty rate was 16.6 percent and 12 percent. She thought it had been stated that it was ten times more expensive to work in Alaska, while others had confirmed that total costs were closer to two times higher. She thought many of the companies were invested in all three of Alaska's oil producing regions. She mentioned companies' investment in different parts of the state, and the lack of information available due to DOR's confidentiality restrictions. 10:30:26 AM Co-Chair Stedman thought it would be helpful for the committee to look at the matter from a different perspective than offered by the sponsor. He suggested looking back to the passage of SB 21, a major oil and gas tax reorganization bill passed in 2013. At the time, the legislature had considered the net revenue for the state and federal government. In considering the sharing relationship with the industry, the state's share was comprised of four major components of corporate income tax, property tax, royalties, and severance tax. Corporate income tax had a smaller weighting than the other components. He thoguht corporate income tax was not discussed much as it was mostly static. The three major players in the state had been ExxonMobil, ConocoPhillips, and BP. Co-Chair Stedman continued that as BP phased out of the state, it sold to Hilcorp, which was an S-corporation. The state had hypothetically lost a third of the corporate income tax, which had reduced the state's share and created an imbalance. He pondered the marginal benefit of losing the revenue with the marginal increase in production that Hilcorp brought to the state with its lower overhead and more nimble production. He thought there was an undeniable increase in marginal production since Hilcorp was present. He pondered the net benefit between the lost revenue and new production. He thought corporate income tax was a few hundred million. He pondered how to calculate the net gain and loss. He mentioned the perceived instability from changing the tax structure. Co-Chair Hoffman agreed. 10:36:23 AM Senator Giessel replied that the Senate Resources Committee had asked the Department of Natural Resources (DNR) to come to the table, which it had. The agency had compared (at $68/bbl) the difference in revenue and pointed out there would be a 2 percent decrease in producer take home, which would equate to a .40 cent decrease in take home per barrel at the same oil price with state corporate income tax put in place. She noted that DNR had more extensive slides that the committee would find of interest. She thanked Co-Chair Stedman for his ideas. Senator Kaufman pondered the net total return and whether the bill incentivized or disincentivized production. He agreed with Co-Chair Stedman's perspective. Senator Kiehl thoguht it was difficult to set tax policy by looking at the past. He considered the category of those that paid taxes and taxing those in the same category the same. He pondered if the category should be oil and gas companies or should rather be corporate structure or investment activity. He thought of C-corporations that were investing heavily and would be paying the tax. He posed the question of how to look at the category of taxation. 10:39:20 AM Senator Giessel thought it would be difficult to attempt to reach an equal or fair tax between C-corporations and S- corporations. She reminded that corporations paid the tax as an entity, and shareholders also paid taxes on dividends. She noted that S-corporations received a $5 million credit before any tax liability. She pointed out that it was the purview of the committee to change the bill in any way it wished. She noted that the bill included entities that were in the transportation industry. She used the hypothetical of a C-corporation with subsidiaries, which would be unitized and not taxed separately. She noted that there were more complex facets of the bill than were presented. Co-Chair Hoffman offered a hypothetical situation and considered what the committee would do if Conoco and Exxon became S-corporations. He thought the answer was clear, and in light of the hypothetical consideration, he was in support of the legislation. 10:42:20 AM AT EASE 10:43:46 AM RECONVENED Co-Chair Hoffman relayed that the committee would hear invited testimony from the CPA referenced by Senator Giessel. 10:44:14 AM JOHN LETOURNEAU, CERTIFIED PUBLIC ACCOUNTANT, THOMAS HEAD AND GREISEN, ANCHORAGE (via teleconference), addressed the legislation. He discussed the presentation, "CSSB 92(RES)S: Tax analysis" (copy on file), which was designed to illustrate the hypothetical situation of two similarly situated companies that had the same amount of taxable income but were taxed as a C-corporation and an S- corporation. Mr. Letorneau looked at slide 2, which showed that for $1 billion of federal taxable income, under current law a C- corporation would pay the state $93 million while an S- corporation would pay nothing. Mr. LeTourneau looked at slide 3, which showed the total gross income tax liability paid at the corporate level for C-corporations ($93,990,150) versus S-corporations ($0). Mr. LeTourneau spoke to slide 4, which illustrated the impact of the bill as proposed with the hypothetical $1 billion in taxable income and a C-corporation would pay almost $94 million, and an S-corporation would pay slightly less, with the difference being the impact of $5 million exemption. Senator Kaufman wondered about the term, "loophole." He asked if the present tax policy was a loophole. He asked Mr. LeTourneau to discuss the concept. Mr. LeTourneau replied that in tax parlance, a loophole was a benefit that someone received that another person does not receive. He used the example involving a person choosing a state of residence due to tax reasons. Senator Kaufman wondered why the term "loophole" was used when the committee was discussing tax policy that was already in place. He pondered if the state wanted production, and what was it doing to enhance production and the total return. He did not know if using the term "loophole" was on the right track. 10:48:54 AM Co-Chair Hoffman OPENED public testimony. DOUG WOODBY, SELF, JUNEAU, supported the bill. He reasoned that the bill honored the constitution in telling the legislature to make sure the public received the maximum revenue for its resources. He thought the state needed the revenue badly. He noted that he was a grandfather with grandchildren in the Juneau school system. He thought the public school system was hurting. 10:50:19 AM KARA MORIARTY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ALASKA OIL AND GAS ASSOCIATION, JUNEAU, spoke against the legislation. She discussed the Alaska Oil and Gas Association (AOGA), which advocated for the long-term viability of the oil and gas industry. She relayed that AOGA firmly opposed targeted taxes, and thought the bill imposed a discriminatory and retroactive tax on select entities in the industry. She thought the legislation was trying to tax one company in particular and overlooked the company's efforts to increase production on the North Slope. She thought the bill undermined investor confidence in the state's fiscal stability. She thought the bill needed more modelling and analysis to know the full impact. She argued that the construction of the bill created confusion and ambiguity. She mentioned further technical concerns with the bill. She offered to return to share the concerns in more detail at a future meeting. 10:54:07 AM LEILA KIMBRELL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, RESOURCE DEVELOPMENT COUCIL, JUNEAU, testified against the bill. She relayed that the Resource Development Council (RDC) was a non-profit trade association representing multiple industries. She asserted that RDC had long advocated that responsible fiscal policy, meaningful spending limit, a diverse private sector, and stable tax policies were critical for maintaining competitiveness for all industries. She contended that the bill unfairly targeted certain S-corporations and only one company. She thoguht the bill was retroactive and discriminatory and raised legal and constitutional issues. She thought the legislature should consider how the bill affected future development and the state's long-term competitiveness. She suggested that the bill threatened investment and opportunity in the state and would ultimately result in decreased jobs and revenue for the state. Co-Chair Hoffman relayed that he would reopen the public hearing at a later time. Co-Chair Hoffman CLOSED public testimony. SB 92 was HEARD and HELD in committee for further consideration.