SB 145-OIL/GAS PRODUCTION TAX CREDITS: NENANA  3:34:45 PM CO-CHAIR WAGONER announced consideration of SB 145 and said that he had objected to adoption of Version D for discussion purposes. Today the committee would ask questions of the Department of Law, the Department of Revenue and the Division of Oil and Gas. He asked if anyone wanted to testify on SB 145 and finding none, closed the public hearing. SENATOR WIELECHOWSKI asked if a combination of tax deductions and credits add up to be more than 100 percent if the state-wide progressivity rate were to be reduced. 3:37:12 PM JOHN LARSEN, Audit Master, Department of Revenue (DOR), Anchorage, AK, said to properly answer that question, two different scenarios would have to be considered. In the case of costs incurred from a segment that was currently in production, a lease expenditure deduction under a net tax system would be a tax benefit and a combination of lease expenditure deductions, progressivity rate and tax credits could possibly exceed the amount of the investment. However, it wouldn't be possible for costs incurred from a segment that was not currently producing, because there would be no revenues in the segment with which to offset the lease expenditures. Under the proposed language in the bill, there are no credits available for carry forward loss credits or any other credit under [AS 43.55.025]. CO-CHAIR WAGONER asked if there was any production in the geographic area that SB 145 relates to. MR. LARSEN replied no and they commonly refer to that area - south of 68 degrees north latitude - as "Middle Earth." SENATOR WIELECHOWSKI asked if he meant that the state couldn't exceed 100 percent for companies that aren't producing right now as well as existing companies that are producing. MR. LARSEN answered that a company in current production could not exceed the 100 percent, because the lease expenditures for a certain segment are ring-fenced while a tax credit can be exported and applied against any tax liability in the state. SENATOR WIELECHOWSKI said the lease expenditures are ring fenced, but what about the reduction of the tax rate due to the reduced per barrel profits. MR. LARSEN replied the answer was still no. The lease expenditures under the bill basically end right there and won't affect anyone's progressivity. Typically, when lease expenditures exceed the gross value at the point of production, the excess is allowed to be a carry forward annual loss credit under AS 43.55.023(b), but the language of the bill specifically precludes any credits under AS 43.55.023 or any other section of AS 43.55.025. 3:41:42 PM SENATOR WIELECHOWSKI asked if this bill would apply to any oil and gas producing fields north of 68 degrees latitude. MR. LARSEN answered that was his understanding. CO-CHAIR WAGONER recognized that Senator Cathy Giessel was in attendance. SENATOR WIELECHOWSKI asked him to talk about the public information the state would get under this bill in exchange for providing credits. MR. LARSEN answered that the information that would be made public through this bill would be the seismic and well data; the provisions in the bill expedite its release above what is ordinarily prescribed in other statutes. 3:43:10 PM SENATOR WIELECHOWSKI asked where it says "ring-fenced." MR. LARSEN responded that was just how the tax basically worked. SENATOR WIELECHOWSKI asked if a company could write off lease expenditures and capital credits from production elsewhere, resulting in a negative tax. MR. LARSEN replied no; lease expenditures from one segment cannot be exported to another segment - the idea of the ring- fencing. A credit can be used anywhere in the state a tax liability is due to the state. So a producer could apply tax credits from other areas of the state to the tax liability of production in the Middle Earth area if it would have any. The reciprocal is also true that tax credits from the Middle Earth area could be exported and applied against a tax liability from other segments in the state. CO-CHAIR PASKVAN asked him why a company would pick the system under this section as compared to the current structure of credits. 3:46:16 PM MR. LARSEN answered that the benefit in SB 145 would allow a credit under AS 43.55.025 and that would allow a credit of $22.5 million or 80 percent of the total exploration expenditures for a well, no more than two of which could be within any one basin area. Under AS 43.55.025, the producers or explorers are eligible for credits up to 40 percent depending on the location of the exploration, which would apply, given that there is no production within the Middle Earth area. But the remaining sections of AS 43.55.025 have caps or limitations on the amount of the expenditures to which credits could be earned against. SENATOR WIELECHOWSKI asked if the DOR had modeled any scenarios on how this would impact the treasury if there were to be fields of 10/25/100 thousand barrels/day of production. MR. LARSEN answered no. SENATOR WIELECHOWSKI asked if he could do that. MR. LARSEN said he would be happy to do that if he could be a little more definitive about what he wanted modeled. SENATOR WIELECHOWSKI asked if the DOR had concerns about the state losing money with a large oil find. MR. LARSEN answered yes; it was his absolute fiduciary duty for the state as a certified public accountant. 3:50:06 PM SENATOR WIELECHOWSKI asked if the administration supported this bill. MR. LARSEN replied no; this is not the administration's bill and they have no position on it. He asked for parameters for the modeling he wanted him to provide saying that he would forward that to the appropriate people and try to get it done for him. SENATOR WIELECHOWSKI said he would get him something. CO-CHAIR WAGONER, finding no further questions, closed the public hearing on SB 145 and held it in committee.