SENATE BILL NO. 305 "An Act relating to the tax on oil and gas production; and providing for an effective date." 9:22:29 AM Co-Chair Stedman informed the committee about a new CS for SB 305 and a new Senate Finance Committee zero fiscal note. He said there was also a small technical amendment to the new CS. He noted that public testimony had been previously taken on the bill. 9:23:04 AM Co-Chair Hoffman MOVED to ADOPT a CS for SB 305, labeled 26-LS1577\T, Bullock, 3/30/2010, as the version before the committee. Co-Chair Stedman OBJECTED. 9:23:34 AM DON BULLOCK, ATTORNEY, LEGISLATIVE LEGAL SERVICES, reminded the committee about the definition of production taxes and lease expenditures. The production tax value of oil and gas is what the tax is applied to. Starting with PPT and ACES, the production tax value is basically the gross value at the point of production minus allowable lease expenditures under AS 43.55.165 adjusted under AS 43.55.170. Because the lease expenditures are related to the production tax value, whenever oil and gas are separated for tax purposes, lease expenditures must be allocated. They are addressed in the bill. Mr. Bullock explained that currently the allocations are required because of special provisions that relate to oil and gas produced in Cook Inlet, as well as gas produced outside of Cook Inlet and used in the state. The tax is basically "25 percent plus". The 25 percent rate is applied to the production tax value of all oil and gas. The "plus" is a progressive tax that increases in rate as the production tax value rises above $30. The main difference between Version T and the previous version of the bill is that the new version provides for a progressive tax on gas, whereas the previous version just had a progressive tax on oil. Mr. Bullock pointed out that the title of the bill has been amended to reflect the contents of Version T and is narrowed to address the progressive rates. 9:25:51 AM Mr. Bullock addressed the first section of the bill, which amends AS 29.60.850(b), and did not appear previously in Version P, the earlier version of the bill. It says that money that is generated by the progressive taxes on oil and gas is available for appropriation to the Community Revenue Sharing Fund. The Fund was made for the purpose of making community revenue sharing payments to municipalities, reserves, and communities for public purposes. It is not a dedicated fund, it merely identified money that is available for appropriation. Mr. Bullock explained that Section 2 amends AS 43.55.011(e), the main tax provision, to make separate references to the monthly progressive taxes on oil and gas. The progressive tax on oil, gas produced in Cook Inlet, and gas produced elsewhere and used in the state are used to determine the rate, which is the average amount of those three values compared to $30. If that amount is greater than $30, the rate is increased. Mr. Bullock related that Section 3 Amends AS 43.55.011(g) to have the tax rate determined using the production tax values of oil and the production tax values on a BTU equivalent basis of gas produced in Cook Inlet and gas produced elsewhere and used in the state. Gas in and outside of Cook Inlet are subject to caps on the tax. They are considered "tax-favored production". Mr. Bullock explained that Section 4 provides for a progressive tax applicable to gas production that is not included in AS 43.55.011(g) as amended in Section 3 of the bill. It provides that the tax rate is applied to the production tax value of a BTU equivalent of gas. There was no counterpart to this section in the earlier version of the bill. For both progressive taxes in (g) and (p), there is no change in the range from which that tax rate is determined. 9:28:55 AM Mr. Bullock stressed that every time there is a change in the tax scheme, there must be a corresponding change in the installment payments. Section 5 amends AS 43.55.020(a) to describe the determination of the amount of a monthly installment. There is also a makeup payment at the end of the year. The monthly payments should reflect one-twelfth of the liability for the tax for the year. Mr. Bullock said that Section 6 Amends AS 43.55.020(d) relating to a settlement with the royalty owner, by adding references to the production tax on gas. He emphasized that the production tax values are what the tax rates are applied to. Mr. Bullock explained that Section 7 amends AS 43.55.160(a), relating to the determination of the production tax value of oil and gas, by providing the means for determining the production tax value of oil and the production tax value of gas separately. It also reorders some subparagraphs. 9:30:38 AM Mr. Bullock noted that Section 7 in the prior version amended the same section. This version provides for determination of the value with reference to both oil and gas. Mr. Bullock informed the committee that Section 8 relates to the allocation of lease expenditures between oil and gas. Currently, the Department of Revenue has the authority to make the allocation under AS 43.55.165(h). Section 8 of Version T amends that section by requiring that the Department of Revenue consider allocating lease expenditures in proportion to the BTU equivalent barrels of oil and gas produced from each lease or property. The purpose is to provide a reasonable allocation of expenditures between oil and gas. He explained how taxes were on the gross value at the point of production prior to PPT and ACES, which is now the starting point for determining the production tax value. Since lease expenditures are applied to the gross value at the point of production to determine the production tax value, the leases for oil and gas need to be allocated separately. 9:32:21 AM Mr. Bullock spoke of Section 9 as being similar to the provision in Section 8. This section adds a new subsection, AS 43.55.170(d), which has to do with adjustments to lease expenditures. It directs the Department of Revenue to consider allocating adjustments based on the proportion of the BTU equivalents of oil and gas produced. Mr. Bullock turned to Section 11 which makes progressive tax provisions in the bill retroactive to January 1, 2010. There was no similar provision in the earlier bill. Because of the retroactive effect and because installment payments will be made after December 31 and before the effective date, Section 10 requires that should there be an installment payment, that underpayment would be made up at the first installment payment due after the effective date. Mr. Bullock concluded with Section 12 which makes the Act take effect immediately. 9:33:58 AM Mr. Bullock said there were some sections in the previous version that don't have corresponding provisions in the current bill. Sections 3, 4, and 8 in the previous version are no longer needed. 9:35:08 AM Senator Thomas asked if Section 4 is specific to producers with production in both Prudhoe Bay and Cook Inlet. Mr. Bullock clarified that the tax caps apply after the tax is determined. Senator Huggins referred to Section 8 and asked if there was a separate effective date for the allocation of lease expenditures for oil and gas. Mr. Bullock said the department is required to have separate effective dates now. Section 8 introduces a new provision which suggests the department should consider allocating on a BTU- equivalent basis. ROGER MARKS, PETROLEUM CONSULTANT, LOGSDAN & ASSOCIATES, LEGISLATIVE BUDGET & AUDIT, explained that the department had the authority to adopt regulations for a cost allocation method to implement the tax as it currently works. The method the department adopted is the method in Version T. 9:37:48 AM Senator Egan asked about the sunset date of 2022 in Section 5, page 6, line 21. Mr. Bullock said the special tax breaks for Cook Inlet gas and gas produced and used within the state are applicable before 2022. Senator Egan understood that the tax breaks go away in 2022. Co-Chair Stedman WITHDREW his OBJECTION to adopting Version T. There being NO OBJECTION, it was so ordered. Co-Chair Hoffman MOVED to ADOPT Amendment 1: Page 9, line 29 Delete "oil produced during a month from" Co-Chair Stedman OBJECTED. Mr. Bullock explained that the amendment corrects an oversight made when drafting the bill. It removes extraneous language. Co-Chair Stedman WITHDREW his OBJECTION. There being NO OBJECTION, Amendment 1 was adopted. 9:40:32 AM Senator Olson asked about the distinction between Cook Inlet gas and other gas fields above the 68th parallel. He wondered if the Nenana gas field was included. Mr. Bullock responded that the law applies to all gas and oil produced in the state. The special provisions are narrowly focused on gas and oil produced in Cook Inlet and gas produced outside of Cook Inlet and used in the state. Senator Olson commented that those who live above the 68th parallel "feel like a stepchild". 9:41:55 AM Mr. Marks explained the fiscal note by discussing some of the technical changes made in the bill. He related that two progressivity buckets have been established. One represents current oil and gas activity, and the other bucket is export gas. The progressivity surcharges for oil and Cook Inlet and in-state gas would be calculated together. If the two were to be separated, progressivity on oil would increase and there would be a tax increase, which is not the intent of the bill. There was a concern about keeping the bill revenue neutral. Mr. Marks pointed out that in the previous version of the bill there was some discussion of a credit for the difference between the taxes calculated after the bill passed and before. That was deemed to be cumbersome, so the two buckets were rated for progressivity. No current activity would see a tax increase. Export gas would not dilute the oil progressivity factor. The Department of Revenue fiscal note is a zero note because of the changed progressivity structure. Co-Chair Stedman added that it would simplify the process so the industry does not have to do two sets of calculations. Mr. Marks said that was correct. 9:46:24 AM Senator Huggins asked if progressivity on gas in this bill is the same as it currently is. Mr. Marks concurred. 9:47:01 AM Co-Chair Hoffman MOVED to report CSSB 305 (FIN) out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSSB 305 (FIN) was REPORTED out of Committee, as amended, with a "do pass" recommendation and with a new fiscal note by the Senate Finance Committee for the Department of Revenue.