Week 13 in Juneau: House bogs down over oil tax credits

The Legislature is scheduled to adjourn Sunday, April 17, but hardly anyone in the state capitol building now thinks that will happen. Too many balls are still in the air.

Two big issues include the adoption of a procedure to draw funds from Permanent Fund earnings to help fund the state budget, and a scaling down of the state’s oil and gas exploration and development tax credit program, both which are highly controversial.

The move toward adjournment was upset on the floor of the state House last Tuesday, April 12, when a key priority, the oil tax credit reform bill, House Bill 247, came up for final approval.

A revolt by a dissident faction in the Republican majority led to seven and sometimes eight Republicans voting with Democrats on amendments to the bill.

The bill was held over until Wednesday but after another amendment the House sent the bill back to the Rules Committee to allow time to sort things out.

Meanwhile, the Senate Finance committee is working on its version of the bill, Senate Bill 130, but the future of even that is uncertain until the House majority gets itself sorted out.

Permanent Fund earnings and oil tax credits are the most volatile issues right now but trailing close behind those is a third ball in the air, a set of tax increases on fuel, minerals and fisheries, which have now been rolling into one bill in the House Finance committee, House Bill 249.

Gov. Bill Walker says he want all three of these, Permanent Fund earnings, oil tax credit changes and new taxes, before legislators gavel out.

Tax changes in HB 249 on fuel, minerals and fish, are less than what the governor had asked for, however. Other new taxes proposed by Walker, on alcohol, tobacco and cruise ship passengers, have been no movement, along with Walker’s centerpiece tax plan: reinstituting a state personal income tax.

Oil tax credit reform has meanwhile become the “get-out-of-town” question for the Legislature. The House Minority, which includes 12 Democrats and one independent, is demanding a bill that reduces cash outlays for credits.

The House Minority has clout because the 13 votes are needed for the House to reach a three-quarters vote for a withdrawal of funds from the state Constitutional Budget Reserve to balance the budget.

The Republican majority has 27 members but not the 30 needed for three quarters. This is not a problem in the 20-member state Senate, where the majority has more than the 15 votes needed.

The “super-majority” votes are needed to withdraw the CBR money because with oil prices still sharply down the state will earn less than a third of the oil revenue needed to fund the budget.

The deficit, estimated at over $4 billion this year, must be covered by withdrawals from state savings, mostly in the CBR account.

It’s still unclear just what the House Minority wants in the oil tax credit bill. Reducing the cost of the credits is a goal of all legislators but the House Minority may want what the governor is seeking, a $500 million per year reduction (the program now costs about $600 million a year).

The credit reform bills that have advanced to the Finance committees on both sides leave parts of the tax credits intact because many legislators want to keep explorers at work finding new oil at a time when oil prices are very low. Those versions do achieve savings, but not as much as in the governor’s bill.

Meanwhile, until there’s resolution on the tax credits the other big issue, Permanent Fund earnings restructuring, is unlikely to move, and the stalemate could result that could keep the Legislature in session for an extended time.

Ironically, legislators may be close to an agreement on a mechanism to use the Permanent Fund’s income to help the state budget, but even an agreed-on plan will not move until the other issues, mainly the oil tax credits, are resolved.

In both the House and Senate Finance committees there are proposals to merge Permanent Fund earnings bills introduced by the governor, with one approach and by legislators with another approach.

The governor’s plan involves a reorganization of revenues moving into the Permanent Fund with a set amount for annual withdrawal, which could be adjusted from time to time.

The legislators’ approach, mainly in a bill sponsored by Sen. Lesil McGuire, uses a percentage-of-market-value formula that would establish annual payouts from the Fund. The so-called POMV is a procedure commonly used by large endowments.

A key argument for the governor’s approach is that with a set amount, established at $3.3 billion yearly, the Legislature and state agencies would be able to do budget planning and not be tempted to increase spending if oil revenues increased.

A weakness of POMV is that if oil revenues increase and the Permanent Fund and its revenues grow, the money flowing to the earnings reserve account and then to the state general fund would increase.

Legislators, pressured by constituents, would be hard-press not to increase spending.

The new compromise preserves the POMV payout but builds in guidelines on withdrawals. Last week Attorney General Craig Richards and Revenue Commissioner Randy Hoffbeck told the House Finance committee that this is in the spirit of what the governor wants and that he would support the new, combined bill.

A major factor in legislators’ minds is how the different approaches would affect the Permanent Fund dividend payment. Under the governor’s approach the dividend would be funded by oil royalties instead of from cash earnings of the Fund, the present procedure.

Walker likes the idea of giving citizens a direct stake in the state’s natural resource income.

McGuire’s bill originally proposed that too, but there was pushback from legislators who wanted to preserve the dividend’s connection with financial performance of the Fund, so that citizens would remain watchdogs on the Fund management.

The Senate State Affairs committee changed SB 114 so that both objectives are accomplished, so that the dividend would be funded both by royalties and Fund earnings according to a formula.

Walker and McGuire both proposed a dividend of $1,000 for the first year (the PFD was $2,072 last year) but the idea for funding with royalties would have resulted in gradual decreases of the PFD, at least in the near term, as oil production continues to decline.

The new funding mechanism will result in a more stable dividend over time in the $1,000 range although there is always chance it could go higher, or drop, depending on oil production and financial performance of the Fund, according to an analysis by the Department of Revenue’s Economics Research Group.

Were it to pass, the hybrid bill would make about $2.74 billion available to the general fund in Fiscal Year 2017, the budget year starting July 1, according to the analysis by the Revenue Department.

That would increase in nominal dollars (with no inflation adjustment) to $3.74 billion in 2040. Adjusted for inflation that would be $2.19 billion that year, the analysis said. 

The Fund’s principal, meanwhile, would grow to $80.9 billion in nominal dollars by 2040, or $47.45 billion when adjusted for inflation, according to the analysis.

Although the framework for a compromise Permanent Fund earnings bill is in place there are still some pieces missing, according to legislative staff who have worked on the bills.  For example, there seems agreement for some form of trigger that decreases a POMV draw if state oil revenues climb the language is not yet in the bill.

The State Affairs committee version of SB 114 had a provision that reduced the annual draw to $1.5 billion if state oil revenues climb to $2 billion annually (they are about $1.2 billion this year) and to zero if oil revenues climb to $3.5 billion.

That has yet to be adopted for the new versions of SB 148, which now contains the language of SB 114, or HB 245, which is now exactly the same as the new SB 148.

On another issue, some form of “reopener” or “look-back” provision is also being discussed for the new bill but not yet adopted in either the House or Senate. The governor’s original bill has an automatic review every four years while McGuire’s SB 114 has an annual review.

There is also no requirement for “inflation-proofing” in either bill. Under current law the Legislature appropriates an amount each year from the earnings reserve to be injected into the Fund principle to offset inflation. This procedure has been in place since the Fund was created but to a certain extent it has outlived its need.

It was needed in the early years when the Fund was mostly invested in bonds and other interest-bearing assets, Angela Rodell, the Fund’s executive director, told the House Finance committee.

Now the Fund’s assets are broadly diversified and many investments, such as equities, tend to inflation-proof themselves, she said.  Rodell urged legislators to continue with some form of inflation proofing, however, just so the Fund principle will continue to grow once the earnings are tapped.

Updated: 
04/15/2016 - 1:58pm

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