HOUSE SPECIAL COMMITTEE ON OIL AND GAS January 25, 2000 10:04 a.m. COMMITTEE CALENDAR PRESENTATION ON CITY OF VALDEZ VESSEL TAX TAPE 00-3, SIDES A AND B CALL TO ORDER Representative Whitaker, Chairman, convened the House Special Committee on Oil and Gas meeting at 10:04 a.m. PRESENT Members present at the call to order were Representatives Whitaker, Dyson, Green, Harris, Porter, Kemplen and Smalley. Representatives Dyson and Brice arrived as the meeting was in progress. SUMMARY OF INFORMATION CHAIRMAN WHITAKER announced that the committee would hear a presentation and then could ask questions about the tax on oil tankers recently passed by the City of Valdez. He charged the committee with understanding the rationale behind that action. He then introduced David C. Cobb, mayor of the City of Valdez; David Dengel, Valdez City Manager; and William M. Walker, attorney representing the City of Valdez. MR. COBB began with a brief presentation, followed by a question- and-answer session involving committee members and the three spokesmen. Information provided in the presentation and discussion included: In the past ten years, Valdez's tax base has been declining at the rate of 7 percent per year, a decline that is projected to continue, leaving the city without a stable revenue platform. This is not simply a local manifestation of the same declining revenue problem faced by all Alaskan communities, and by the state itself. Rather, it is unique to three communities impacted by the Trans-Alaska Pipeline System (TAPS): the North Slope Borough, Fairbanks, and Valdez. The manifestation of the problem in Valdez is that the oil industry, source of at least 80 percent of the city's tax revenue, is paying a decreasing amount to the city, which has 15- 20 miles of the Trans-Alaska Pipeline System (TAPS) and the pipeline terminal within its boundaries. The ad valorem tax that the oil industry pays to the State of Alaska originally was based on a straight-line depreciation over the life of TAPS. The state passes on a portion of that to affected communities, those through which TAPS passes. The original agreement was modified by the 1986 TAPS Settlement Methodology (TSM), an agreement between the oil industry and the state that accelerated depreciation of TAPS. That has diminished the amount of revenue going to the affected communities. In addition, the TSM has no statutory floor. That means city revenue from the TSM agreement can diminish to zero while the city still is providing infrastructure used by the oil industry there. In response to the decline in revenue, the City of Valdez has cut costs, reducing its budget by 24 percent and its personnel by 17 percent. It also has raised the rate of property taxes from 6 mills to 20 mills, which shifts more of the total tax burden to non-oil sources. After this effect of the TSM was recognized, the legislature provided $750 thousand to help offset some of the impact. In 1996, discussions began about payment in lieu of a tax to as a long-term solution to the continuing decline of revenue. Meetings and discussions came to naught, and in 1997, Valdez passed an ordinance taxing vessels that call there. At the governor's request, Valdez repealed the tax, and with the other two affected communities, continued to negotiate with the oil industry. The outcome was a two-year agreement in which declining revenue to the communities was reduced to the rate of 4 percent last year and 6 percent this year. That has helped in the short term, but there is still no long-term solution that would stabilize income to the affected communities. In November 1999, Valdez again passed a personal property tax on all vessels more than 95 feet long, a tax that Valdez says is not unlike the personal property tax the City of Anchorage collects on aircraft landing at the municipal airport there. Property taxes on those aircraft are prorated among the jurisdictions where the airline goes. Portland, Oregon, assesses a similar tax on vessels using the Columbia River. The new Valdez tax went into effect January 1, and tax bills will be sent out in March. The assessments are subject to appeal. Taxes are due in July and September. The tax will cost the oil industry an additional 1.2 to 1.5 cents on each barrel of oil. The new tax on vessels will broaden the tax base in Valdez, allowing the city to lower the property tax rate from 20 to 12 mills. That would provide tax relief to non- oil property owners and assure the city of an adequate tax base to support local infrastructure. The tax also would benefit the state, resulting in a net increase of $3.1 million. Proponents say this is a local taxing issue, legal under both state and federal law. They also say that it is the only recourse open to the city because it was not a party to the TSM agreement. Other alternatives mentioned would require action on the part of the state, the ultimate authority involved in negotiation with the oil industry concerning the pipeline. The state and the oil industry could renegotiate or amend the TSM agreement. Possible avenues to a solution might be: (1) modifying the TSM formula for depreciation; (2) establishing a floor to depreciation; (3) modifying the TSM agreement to give Valdez direct tax jurisdiction over the pipeline terminal, as Kenai has over the liquefied natural gas terminal there; or (4) establishing payment in lieu of taxes to the involved communities. CHAIRMAN WHITAKER informed members that the committee will hear other presentations providing different perspectives on the Valdez vessel tax. COMMITTEE ACTION The committee took no action. ADJOURNMENT The committee meeting was adjourned at 11 a.m. NOTE: The meeting was recorded and handwritten log notes were taken. A copy of the tape and log notes may be obtained by contacting the House Records Office at Room 229, Terry Miller Legislative Office Building, 129 Sixth Street, Juneau, Alaska 99801-1182, (907) 465- 2214, and after adjournment of the second session of the Twenty- first Alaska State Legislature, in the Legislative Reference Library.