HB 111-OIL & GAS PRODUCTION TAX; PAYMENTS; CREDITS  2:11:46 PM CO-CHAIR TARR announced that the final order of business would be HOUSE BILL NO. 111, "An Act relating to the oil and gas production tax, tax payments, and credits; relating to interest applicable to delinquent oil and gas production tax; and providing for an effective date." 2:12:01 PM CO-CHAIR JOSEPHSON moved to adopt the proposed committee substitute (CS) for HB 111, Version 30-LS0450\N, Nauman, 3/10/17, as the working document. 2:12:19 PM CO-CHAIR TARR objected for discussion purposes. She stated the intent of the co-chairs is to give the committee an opportunity to review the CS and, following that, the bill would be held in committee. [A discussion ensued regarding the committee's development and handling of the CS.] 2:19:50 PM LISA WEISSLER, Staff to Representative Andy Josephson, directed attention to a document, entitled "Comparison of HB 111 with Committee Substitute Work Draft (Resources)," dated 3/9/17, to point out the side by side analysis/comparison. The first change is an addition of intent language such that contingent on the passage of a fiscal plan, a substantial portion of the outstanding transferable and production tax credit certificates would be purchased. CO-CHAIR TARR interjected that another vehicle for establishing legislative intent could be brought via a letter of intent; however, having the language included in the bill provides a stronger message in which to outline a means to address the existing debt. MS. WEISSLER said the interest statement in Section 1 became Section 2 in the CS ("Version N"), without change. Section 2 in the original bill raised the minimum tax from 4 percent to 5 percent; Section 6 in Version N would set the minimum tax at 5 percent, when the average Alaska North Slope (ANS) price is $50 or more, and at 4 percent, when the average ANS price is less than $50, and it would remove the variable minimum tax rate. 2:22:46 PM The committee took an at-ease from 2:22 p.m. to 2:24 p.m. due to technical difficulties. [A series of intermittent technical difficulties caused interruptions and some testimony was lost.] CO-CHAIR TARR commented that changing the minimum oil tax to reflect a benchmark rate of $50.00 per barrel was done in response to industry to better reflect the current low-price environment. 2:25:11 PM The committee took an at-ease from 2:25 p.m. to 2:34 p.m. due to technical difficulties. 2:34:04 PM MS. WEISSLER returned attention to the comparison and said there was a mistake in Section 2 of the original bill, which ended the minimum tax for oil in 2022 when the net production tax for gas was slated to change to a gross value tax. Version N makes the necessary correction to apply the minimum tax to oil indefinitely and end it only for gas in 2022. A new section to AS 43.55.011 related to reducing the minimum tax below the floor was not changed. In order to stop industry's use of the per barrel tax credit in months that would reduce their tax, Section 7 of Version N would delete language in AS 43.05.011(q) and add new language in AS 43.05.011 (j) that better addresses the issue of the credits being applied in different months. [Indisc. due to audio recording technical difficulties.] REPRESENTATIVE RAUSCHER asked whether per barrel tax credits are being applied in the same fiscal or calendar year. MS. WEISSLER answered that credits have been allowed during the same calendar year. 2:37:36 PM The committee took an at-ease from 2:37 p.m. to 2:42 p.m. due to technical difficulties. 2:42:34 PM MS. WEISSLER explained that HB 111 initially proposed, in Section [5], to change the North Slope carry forward annual net operating loss (NOL) credit rate, as established under AS 43.55.023(b), from 35 percent to 15 percent for the purpose of matching the production tax rate with the carry forward or NOL rate. Currently, the per barrel credits added in by Senate Bill 21 [passed in the Twenty-Eighth Alaska State Legislature] distort the 35 percent matching rates. Ms. Weissler referred to testimony by legislative consultants related to carry forward losses, and noted that another provision of HB 111 was to eliminate cash credits for NOLs. REPRESENTATIVE RAUSCHER paraphrased a quote from a consultant, stating, "If you're not allowed to recover your costs, that puts Alaska on the bottom of the competition scale around the world." He noted that [the proposed change from 35 percent to 15 percent] represents a significant percentage drop. CO-CHAIR TARR advised that the remainder of the presentation should provide an understanding of how the consultant's recommendation is being followed. MS. WEISSLER restated the original intent of HB 111 was to reduce NOLs to 15 percent and eliminate cash credits, which would be "a very big hit to the independent producers." She said the state seeks to keep independent producers operating in Alaska; therefore, Version N, Sections 9 and 24-26, introduce carry forward deductions. She continued, as follows: We get rid of the net operating loss credits - people carry the deduction forward. Now, typically that would be 100 percent of someone's cost .... The issue that we have here in Alaska is this distortion that we refer to of a 35 percent tax rate with per barrel credits and where the effective tax rate is lower than that 35 percent. And so, speaking in the context of major producers who have tax liability, if they came to a point where they had a net operating loss that was carry forward, where they got an uplift - and the uplift, I should mention, and this will be in Section 26 of [Version] N, is 7 percent above the [U.S. Federal Reserve System] rate - they'll get that interest, they carry forward a hundred percent of their net operating loss. However, when they accrued that loss they would have only been paying an effective tax rate of say 15, 17 percent. And so, to ... correct for that, ... because of our tax system, it's being set at 50 percent of the net operating loss carry forward, and that has the same effect as how the original bill was written, ... taking 35 percent tax rate, 15 percent net operating losses. So, ... that's how this works. For the major producers, it won't have a huge effect ... because they generally have tax liability; they are able to take a hundred percent of their deductions in a year. Now, we'll talk about the independents, who don't have production, or the explorers. ... They'll be able to carry 50 percent of their net operating losses forward, they'll have the uplift - this interest that will address the time value of money - but they are getting 50 percent of their net operating losses, where the major producers, who have a tax liability, are getting a hundred percent. So, this is essentially a policy call in terms of our tax structure. MS. WEISSLER pointed out that this structure has been set up in an effort to level the playing field between majors and independents, and she specified that the provision would apply to operators only on the North Slope, not to those in Middle Earth or Cook Inlet. 2:49:24 PM CO-CHAIR TARR recalled the work session that included information on the carry forward losses. By allowing the losses to be carried forward, at the 100 percent level with the uplift included, in seven years the value would be 200 percent. This action represents a big commitment on the part of the state, she opined, when an initial year investment, with interest, is able to grow by 100 percent in value in seven years. A seven-year timeframe is the acceptable time described for an oil project to come on line. The effort here is to make Alaska attractive to investors and to allow producers to recover 100 percent of their losses and 200 percent of their investment over time. Other considerations are to ensure that the state's tax policy is sustainable, that it will allow the state to meet its obligations, and that it will not result in a financial circumstance of being overcommitted. MS. WEISSLER, in response to Representative Birch, clarified a portion of the language in Version N as described in the comparison document. 2:55:12 PM MS. WEISSLER returned attention to the comparison document, on page 2, and said Section 6, removing the ability for taxpayers to apply for purchase of NOL credits, remains the same and appears in Version N as Section 11. She noted that Section 7, with amendments to sliding scale per barrel credits, is found in Section 14 of Version N. CO-CHAIR TARR further explained that the current lower price environment, which led to a change to the minimum tax, is also reflected in changes to the per barrel credits. Currently, per barrel credits "slide" from $8 to zero, which has been adjusted down [from the highest oil price of $150 per barrel and above, to $110 per barrel and above] to ensure the per barrel credit can be applied in a lower price environment. The original bill would have cut the credit to $5, which was deemed too extreme. MS. WEISSLER explained that a dry hole credit was not previously in HB 111, and now appears in Version N as Section 17. It is designed to assist a company that explored in good faith but realized no production. The language would allow an explorer to take up to a 15 percent purchasable tax credit of exploration expenditures incurred for drilling that results in a dry hole, based on the following specific conditions: payment of all service contracts; return of the lease to the state; proof the explorer has no oil or gas production; and the expenditure is not the basis for another credit claimed under the production tax. CO-CHAIR TARR added that the aforementioned measure was included on the recommendation of the consultant to provide a means for explorers that never see production to cover their costs. MS. WEISSLER explained that Section 8, without change, became Section 18 in Version N, and would amend the tax credit fund to reflect the change that removes the ability for taxpayers to apply for a cash payment for net operating loss credits. Section 9, without change, became [Section 19] in Version N, and would change the limit on cash payment of tax credits from a $70 million cap to a $35 million cap per company and limit purchasable credits to companies with not more than 15,000 barrels per day production, which is down from 50,000 barrels. She pointed out that this provision applies only to Middle Earth [non-North Slope, non-Cook Inlet areas of the state], and to qualified capital expenditure credits and well lease expenditure credits. MS. WEISSLER directed attention to Section 27, "Assignment of Tax Credit Certificates," in Version N, which would repeal the 2013 statute that allowed for the assignment of production tax credits to a third-party assignee. This provision is required because a change in current statute that was intended to apply to gas in Cook Inlet actually applied to the entire state; as a result of the current statute, the state has been placed in the position with banks holding credits, which Alaska must now pay for in cash. REPRESENTATIVE RAUSCHER asked if this measure will be retroactive. CO-CHAIR TARR replied no. 2:59:54 PM MS. WEISSLER continued to Sections 20 and 21, "Tax Credit Information," two new sections in Version N, which would allow certain information related to tax credits to be made public, and to Sections 3-5, "Confidential Tax Information," also new sections of Version N, which would allow certain confidential taxpayer information to be disclosed to legislators in executive session in conformance with a signed confidentially agreement. CO-CHAIR TARR informed the committee the foregoing language was the same as was used [for House Bill 247, passed in the Twenty- Ninth Alaska State Legislature] and was drafted with the participation of the Alaska Oil and Gas Association (AOGA). MS. WEISSLER continued to Section 26, "Net Operating Loss Carry Forward," a new section in Version N which would direct the Department of Natural Resources (DNR) to develop regulations to establish a review process for agency preapproval of lease expenditures that would generate a carry forward annual loss. Finally, Section 28 in Version N would establish a legislative working group to analyze the Cook Inlet fiscal regime. CO-CHAIR TARR added that a Cook Inlet working group is needed to review the tax regime in Cook Inlet; currently, there is a dollar per barrel oil tax, but no gas tax, and the working group will meet on this issue during the legislative interim period. Membership in the working group is open to industry. 3:02:56 PM CO-CHAIR TARR removed her objection to the motion to adopt the proposed committee substitute (CS) for HB 111, Version 30- LS0450\N, Nauman, 3/10/17, as the working document. There being no further objection, Version N was before the committee. 3:04:28 PM REPRESENTATIVE BIRCH asked for clarification on the uplift provision in the bill. CO-CHAIR TARR said the consultant recommended seven years as the average timeframe for a project to come on line. There were other options discussed, and the decision was made to use the same interest rate that is applied to delinquent tax payments. CO-CHAIR TARR said the upcoming hearing schedule on HB 111 would be adjusted as necessary to accommodate forthcoming amendments. [HB 111 was held over.]