House Finance Committee 1 03/22/17 1:35 P.M. HOUSE FINANCE COMMITTEE March 22, 2017 1:35 P.M. 1:35:37 PM CALL to ORDER Co-Chair
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HOUSE FINANCE COMMITTEE March 22, 2017 1:35 p.m. 1:35:37 PM CALL TO ORDER Co-Chair Foster called the House Finance Committee meeting to order at 1:35 p.m. MEMBERS PRESENT Representative Neal Foster, Co-Chair Representative Paul Seaton, Co-Chair Representative Les Gara, Vice-Chair Representative Jason Grenn Representative David Guttenberg Representative Scott Kawasaki Representative Dan Ortiz Representative Lance Pruitt Representative Steve Thompson Representative Cathy Tilton Representative Tammie Wilson MEMBERS ABSENT None ALSO PRESENT Ken Alper, Director, Tax Division, Department of Revenue; Ed King, Special Assistant to the Commissioner, Department of Natural Resources; Kara Moriarty, President and Chief Executive Officer, Alaska Oil and Gas Association; Dan Seckers, Tax Counsel, ExxonMobil; Damien Bilbao, Vice President of Commercial Ventures, BP; Scott Jepsen, VP External Affairs and Transportation, ConocoPhillips; Paul Rusch, Vice President, Finance, ConocoPhillips; Pat Galvin, Chief Commercial Officer and General Counsel, Great Bear Petroleum; Pat Foley, SVP Alaska Relations, Caelus Energy, LLC; Jeff Hastings, Chairman and Chief Executive Officer, Kuukip SAE and CEO, SAExploration; Representative Lora Reinbold; Senator Peter Micciche; Representative Justin Parish. House Finance Committee 1 03/22/17 1:35 P.M. PRESENT VIA TELECONFERENCE Benjamin Johnson, President, BlueCrest Energy II, LP SUMMARY HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS HB 111 was HEARD and HELD in committee for further consideration. Co-Chair Foster addressed the meeting agenda. #hb111 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." 1:36:35 PM KEN ALPER, DIRECTOR, TAX DIVISION, DEPARTMENT OF REVENUE, continued addressing a PowerPoint presentation titled "New Sustainable Alaska Plan, Pulling Together to Build our Future; CSHB 111(RES)\N by the House Resources Committee, Oil and Gas Production Tax and Credits: Background and Bill Analysis" dated March 21, 2017 (copy on file). [Note: presentation also heard on March 21, 2017 and the morning of March 22, 2017.] He addressed Section 26 of the legislation on slide 62. The section involved several components of the legislation including the uplift and Department of Natural Resources (DNR) preapproval area. He addressed the uplift portion. He discussed a scenario where the state would not buy credits and instead the lease expenditures would roll forward in some way into a future year against future taxes. The question was how to compensate the taxpayer for only the fact that only a fractional portion of the costs would be allowed to move forward and how to compensate the company if they were not going to get value for several years (i.e. time value of money). The uplift section had been added by the previous committee to provide interest. Mr. Alper highlighted a scenario on slide 62 where a taxpayer had a loss of $100 million and carried forward $50 House Finance Committee 2 03/22/17 1:35 P.M. million in lease expenditures, the amount would earn interest, which was tied in statute to 7 percent plus the federal discount rate (currently 8.25 percent and scheduled to increase to 8.5 percent due to recent action taken by the Federal Reserve Board). The 8.25 percent interest would be added to the $50 million for up to seven years for a total of $87 million (roughly the equivalent to a 30 percent net operating loss (NOL)). The scenario reintroduced three variables that could be built into future debate, amendments, or other: 1) the carry forward percentage; 2) the uplift interest rate; and 3) the number of years the benefit could accrue. He explained that the numbers would change dramatically with any change to the variables. He detailed that with a full carry forward at a higher interest rate for a longer time period, the state could eventually be giving double or triple the original value. He relayed that the 7 percent plus the federal discount rate was the same as the interest rate in Section 2 (the interest rate on delinquent taxes) that the bill currently amended to limit to three years. He recommended linking the concepts together directly by tying the uplift rate to the interest rate statute. He suggested language reading "the amount in 43.05.225." Consequently, if one figure changed the other would automatically change. 1:40:09 PM Mr. Alper continued to address slide 62. The department needed clarification on whether the seven-year period accrued to the taxpayer for their first lease expenditure carry forward only. Alternatively, he questioned if a taxpayer have the ability to carry forward a loss from the second year for a seven-year period as well. The department assumed it was the latter, but the bill language was not completely clear. He turned to slide 63 and explained that the remainder of Section 26 related to preapproval of lease expenditures that would be carried forward. Vice-Chair Gara referred to slide 62 and acknowledged that under the current bill version the credit was less than it used to be. However, in most tax systems companies were not paid interest if they had to extend deductions over a number of years or had to roll their losses forward under federal tax for many years. He surmised an 8.5 percent interest payment to a company that was already getting a credit seemed like a profit on top of a credit. He wondered why the option had been chosen versus using the common House Finance Committee 3 03/22/17 1:35 P.M. option of enabling a company to roll forward credits until it was able to deduct them. Mr. Alper believed the question would be best answered by legislative consultant Rich Ruggiero who had created the concept and proposed it to the prior committee. His understanding was that the language more or less modeled some of the language in production sharing agreements with countries with a slightly different tax system. He detailed the idea was a capital recapture where there was no tax until a company made its initial investment back. There was also the government take share of the amount beyond that amount. He explained it was not unusual in those circumstances for there to be a built in profit or multiplier on top of the expenses before the sovereign began to receive its share. He qualified that his response was a bit of a guess, but it was his understanding based on testimony by Mr. Ruggiero. 1:42:51 PM Vice-Chair Gara stated that in prior tax discussions the legislature had always been told that production sharing jurisdictions around the world tended to have a higher tax rate. He continued that Alaska had a lower tax rate and the state was also giving companies interest on top of tax credits. He would need convincing the state was not getting the worst of all worlds. He recognized that the proposed credit was smaller than the one under current law. Representative Pruitt remarked that many times the state compared itself to other countries. However, Alaska was not a sovereign - there was still a federal aspect to the issue. He believed failing to include the federal component and comparing Alaska to a sovereign could be detrimental to the conversation. Mr. Alper answered in the affirmative - the federal tax was the last link in the chain. Whatever the companies end up paying to the State of Alaska ended up being a deduction against what they paid to the federal government. There were pros and cons to the method. He explained that as the state increased taxes, the federal government ended up receiving less; therefore, the net effect on the company was a bit less than simply the extra dollar paid to the state. House Finance Committee 4 03/22/17 1:35 P.M. Representative Guttenberg asked Mr. Alper to expand on the issue related to the state impact. Mr. Alper responded with a scenario where the state raised the tax burden on a large corporation by $1 million. He detailed that the company's profit would be reduced by $1 million as a result. He continued that most large oil companies paid a 35 percent federal income tax - the state's tax would mean the company would pay the federal government $350,000 less and would only be out of pocket $650,000. Representative Guttenberg asked if there were other considerations when undertaking the exercise. Mr. Alper answered that within the state income tax there was the apportionment formula and the interaction of Alaska's state tax with other states' taxes. For federal income tax, the primary difference was depreciation. For tax purposes the federal government treated capital expenditures differently - they were taken over a number of years and amortized or depreciated. Whereas, Alaska's tax system had 100 percent spending recapture in year one. 1:46:05 PM ED KING, SPECIAL ASSISTANT TO THE COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, addressed slide 63 related to lease expenditures. He noted that two provisions added to the bill in the prior committee impacted DNR. The first was the preapproval process for lease expenditures. Based on testimony provided, DNR better understood the intent. One of the department's largest concerns was the broadness of the language, which could be interpreted in a variety of ways. If the language was maintained, the department requested clarity about what the legislature wanted the department to accomplish. Under the current language it was possible that every line item of each lease expenditure ($6 billion annually) would have to be preapproved by DNR, which would be an arduous and expensive task.