Week 7 in Juneau: budget discussions quicken pace

JUNEAU—The Legislature passed its halfway mark this week, Day 45 on Thursday, and the pace of work is quickening.

Budget subcommittees in the state House finished their work on agency budgets last week. The House Finance Committee folded those into a draft operating budget bill.

Final amendments to that will be made in the committee. A final budget is set to go to the floor of the House by Wednesday, and then to the Senate by Friday. Meanwhile the Senate’s own budget subcommittees are at work.

The target date to have the House-passed and Senate-passed budgets in a conference committee is March 15, legislative leaders say. It will then sit there, pending final action, as lawmakers turn their attention to proposed revenues to ease a huge budget deficit.

It’s still unclear how much the Legislature will cut the state budget. After the House budget subcommittees concluded their work the total Undesignated General Fund expenditure was $4.093 billion for FY 2017, almost half a billion dollars down from $4.511 billion in the governor’s amended budget for the upcoming year, and almost a billion dollars down from the $5.07 billion UGF expenditure in the current year, FY 2016.

However, there may have to be some funds added back in by the full House Finance Committee. Money for the state’s share of expenditures on the Alaska LNG Project was taken out by a budget subcommittee, for example, but will be added back by the full committee.

Also, the Senate will have its own ideas on the operating budget. Some of the House reductions may be restored or, in some cases, the Senate may cut more deeply. The final outcome won’t be known until the budgets are passed by both bodies and the budget conference committee finishes its work, which will likely be near the session adjournment date.

The 90th day, April 17 this year, is when state law says the Legislature must complete its work but there are provisions that allow for extensions if more time is needed, as happened last year.

The final weeks of the session will be consumed with deliberation over revenue options, the most likely some use of Permanent Fund earnings to help pay for the budget, the first time that will have been done.

There are essentially two approaches to using earnings from the Fund before lawmakers. One, proposed by the governor, would be a fixed annual draw of $3.3 billion for the state general fund, an amount that would allow the fund to still be sustained, and even grow over the long run. The second is an endowment model proposed by Sen. Lesil McGuire, R-Anchorage and Rep. Mike Hawker, R-Anchorage, that would have a percent of the Fund’s total market value appropriated to the state general fund.

In all cases the appropriation would actually come from the Permanent Fund’s earnings reserve account, where income from the Fund is deposited. The earnings of the Fund can be legally appropriated by the Legislature, but funds from the principle of the Fund cannot be spent.

Walker is also offering up a slate of tax increases on business as well as a motor fuel tax increase and reestablishment of a state personal income tax, but none of those measures are expected to pass this year with the possible exception of the fuel tax increase.

Versions of Walker’s fuel tax increase have moved out of both the House Transportation Committee and Senate Transportation Committee and are now in the Finance committees of both bodies. Both committees tempered the governor’s proposal, which is to increase the state’s current 8 cents per gallon tax on motor fuel to 16 cents per gallon, by voiding the increase if crude oil prices return to $85 per barrel.

The present 8 cents per gallon tax is the lowest in the nation and has been unchanged since 1960. Many business groups, such as the Associated General Contractors’ Alaska Chapter, are supporting the increase because it would help make money available for road maintenance and because it would strengthen the state’s arguments in defending generous provisions for Alaska in federal transportation safety programs.

While most of the Legislature’s attention is focused on fiscal matters there is a lot of work being done on proposed changes to the state’s Medicaid program, a state-federal health service program for low income Alaskans, in criminal justice reform and in revamping the state’s oil and gas exploration and development incentive program.

Sens. Pete Kelly, R-Fairbanks, and Anna MacKinnon, R-Eagle River, are leading the Medicaid reform, while the criminal justice reform effort is being led by Sen. John Coghill, R-Fairbanks. Both initiatives have fiscal implications because they would save the state a lot of money over time.

The Medicaid reform bill, Senate Bill 74, was introduced by Kelly last year and further developed in extensive work sessions in a subcommittee, and is now in the full Senate Finance Committee. Kelly and MacKinnon are co chairs of the Senate Finance Committee.

In the House, the Health and Social Services Committee, chaired by Rep. Paul Seaton, R-Homer, has been working on its own version of Medicaid reform, with a bill, HB 227, sponsored by Seaton. Medicaid is a big-ticket cost for the state, estimated at $603 million for the state share in FY 2017. Medicaid is a joint federal and state program. The two governments split costs about 50-50.

Action on reforming the oil and gas incentives is in the House, for now. Extensive hearings, chaired by Rep. Ben Nageak, D-Barrow, have been underway in the House Resources Committee. More of those are planned this week, Nageak said Thursday in a briefing by House leaders. Nageak is co chair of the Resources committee and is in charge of oil and gas bills.

Unless the oil tax credit program is changed, it will impose a $500 million burden on the state’s general fund in FY 2017, according to projections by the House Finance Committee.

The bill in committee is HB 247, sponsored by the governor, and is intended to restructure a complex system of tax credits that has grown more intricate over time, and which has become very expensive for the state. A “companion” bill, also by the governor, is in the Senate, but Senate Resources chair Sen. Cathy Giessel, R-Anch., is letting the House take the lead.

Giessel likely has her own ideas about reforming the incentives – she chaired a working group that met several times over the summer – but is keeping her thoughts to herself, for now, and will wait for the House to send over the bill, if it does.

What has the oil and gas industry stirred up, as well as the industry’s support contractors and service companies, is that HB 247 does a lot more than restructure the tax code. It also imposes a tax hike on producing companies by raising the minimum production tax from four percent of gross revenues to five percent.

“That may not sound like much, a one percent increase, but for companies now paying the minimum tax it’s a 25 percent tax increase,” said Kara Moriarty, executive director of the Alaska Oil and Gas Association, the industry trade group.

It’s made worse by the fact that producing companies on the North Slope are operating deeply in the red with oil prices at about $30 per barrel. Moriarty told the House committee last week that the average per-barrel cost of producing oil on the slope and moving it to market is about $54 per barrel, which means that the companies are losing about $25 for every barrel they produce.

The cost figures are from the Department of Revenue’s fall 2015 revenue forecast, which contains production and cost data.

In separate projections, the Department of Revenue has estimated that if oil prices remain in the $30 per barrel range for an extended period the slope producers’ loss could reach $1.8 billion this year.

Industry tax experts also told the House committee last week that there are obscure provisions in HB 247 that amount to hidden tax increases. One example, cited by ExxonMobil tax manager Dan Seckers, is a section that changes the tax calculation from an annual to a monthly basis.

This has the effect of exaggerating the impacts of short-term volatility and swings in crude oil prices in ways that drive up the tax obligation (the tax is paid as a percent of oil value, which is determined by the price) as compared to an annual reporting which tends to smooth out the swings in prices.

There are other problems in the complex bill, according to companies presenting remarks to the committee. A provision softening strict confidentiality rules around taxpayer reporting so the public can obtain at least some information about tax breaks specific companies are getting, may be drafted too broadly.

Unless the language is tightened the provision could have the effect of making other kinds of confidential taxpayer data public, it was argued.

Despite those issues, and the increase in the minimum tax is the biggest for industry, the overall intent of the bill is to tighten up and simplify a state tax incentive bill that has become so complex that it is easily “gamed” by companies, revenue officials have said.

There are several types of tax credit incentives in the current law and in certain circumstances companies can “stack” them, one atop another, so that as much as 75 percent of the cost of an exploration project is paid for by the state.

In many cases this is actually represents a cash expenditure because companies can turn in tax credit certificates and be refunded by the state.

One effect of HB 247 would be to reduce this, for example putting an annual limit on the amount of cash refund that can go to a company.

One of the biggest changes in the bill would be to complete a reform in the tax credit program that was started in Senate Bill 21 for the North Slope, but not done for Cook Inlet. This was a 25 percent capital investment tax credit that allowed firms to credit one fourth of all capital investments against state production tax liability. 

Since all types of capital investments, for example roads, bridges, airfields, were included in this along with investments targeted at finding more oil, such as new drilling, the cost to the state was becoming prohibitive.

Had SB 21 not been enacted the state would have paid out a billion dollars in refunds or foregone revenues in Fiscal 2014. As it happened, however, the capital investment tax credit was repealed for the North Slope in SB 21 but not in Cook Inlet.

One of the goals of HB 247 is to complete that process by repealing it in Cook Inlet as well. This change alone would have a major impact in reducing state obligations under the incentive program.

Updated: 
03/04/2016 - 4:04pm

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