Tax credit rewrite hits fifth iteration amid impasse
Make that five distinct versions of oil and gas tax credit legislation this session.
The House Rules Committee took its swing at hitting the “sweet spot” on a tax credit bill when Rules chair Rep. Craig Johnson, R-Anchorage, released the latest iteration of House Bill 247 on April 26, day 99 of the 90-day session.
The Rules bill makes the most drastic cuts to the credit program of the various legislation introduced in committees. It could save and generate up to $365 million annually by fiscal year 2021, according to a Department of Revenue analysis. That is second only to the original bill put forward by Gov. Bill Walker’s administration, which is projected to improve the state’s balance sheet by about $500 million at most.
Milder committee versions of credit revisions put forth in the House and Senate would cut $50 million to $150 million from the program after several years of phased reductions.
Regardless of prospective savings, Johnson and administration officials have noted the state is still on the hook in fiscal 2017 for about $775 million in refundable credits companies are expected to earn prior to any program changes taking effect. The vast majority of that sum also still needs to be added to the operating budget.
An impasse between the Majority and Minority caucuses in the House centered on the tax credit overhaul has essentially stalled all other important work in the Legislature, even in the Senate where that Majority holds 16 of 20 votes.
Without an amenable credit bill, the Democrat-led Minority will not approve a draw from the Constitutional Budget Reserve savings account, which requires a three-quarters vote from both chambers of the Legislature, needed to pay for the fiscal year 2017 budget.
Visible progress on the budget and this session’s biggest single project —establishing a sustainable budget draw from the Permanent Fund Earnings Reserve account — has slowed as well.
Minority members have stressed that the state should not continue to pay upwards of $700 million per year to the oil industry while significantly cutting education and rural assistance programs to shrink a $4 billion deficit. They have gained support from some Republicans as well, notably Homer Republican Rep. Paul Seaton, who is leading a caucus of Majority members bucking the leadership.
More conservative — at least in regards to this issue — Republicans have noted that any money the state still has to spend is thanks to the oil industry, which historically has funded nearly 90 percent of the state’s budget.
Seaton mostly sided with Minority Democrats when amendments to the House Resources version of HB 247 were considered. He also led the push to oppose a Finance Committee version HB 247 on the House floor earlier in April. Enough House Majority members didn’t think the bill that reached the floor cut the program far enough that the bill would not have passed.
House Speaker Rep. Mike Chenault then moved the bill to the Rules Committee for another try.
House leaders on both sides have said an oil and gas tax credit compromise could trigger quick action on those remaining bills needed to finish the session.
Industry representatives from companies and trade associations insist any change to the state’s tax credit system or underlying tax structure will hurt production and increase job losses in the industry at a time when the average cost of production and transport for North Slope oil — about $46 per barrel, according to the Department of Revenue — exceeds market prices.
The Labor Department estimates Alaska has lost about 1,800 oil and gas industry jobs over the past year.
Walker said at an April 27 press briefing that he met with the Slope majors on April 25 to discuss the issues each side has with the proposed changes. The administration has also met with independent companies to find ways to incentivize their growth while reducing the expense to the state throughout the process, he said.
“We’re in some big changes as far as what we can and can’t do, and what was business as usual not that many years ago is going to be very difficult this year,” Walker said. “We’re looking very closely at how to advance and make (tax credit) changes with a minimal impact, but we know there will be impact across the board with all companies.”
Statewide, the Rules Committee version of HB 247 would annually cap the credits each company is eligible to receive at $85 million, on par with limits proposed in House Finance and Senate Resources committees.
It would also end the transfer or sale of credits to companies with a production tax liability. Transferring credits between companies without production tax liabilities, namely small producers and explorers, would still be allowed.
The Rules version is also the first since the administration’s to make public the companies getting refundable credits and how much they receive each year.
Industry has railed against a more transparent credit program contending it could quickly devolve into disclosing confidential tax information that might even violate federal law.
Minority legislators rebut that the state does not require companies to accept the credits they are eligible for; therefore allowing companies to choose if they want to take the incentives and subsequently disclose some information.
The Rules Committee took the ramping down of Cook Inlet capital expenditure credits in other committees a step further and eliminated them entirely by calendar year 2019.
In the interim, only companies with oil or natural gas production from the Inlet basin by the end of 2016 would be eligible for the slowly vaporizing credits.
Tied to that is language in the bill calling for a new Inlet oil and gas tax regime, and possible credit program, to be implemented by January 2019.
Legislators have discussed the need to reexamine Cook Inlet oil and gas taxes in several years throughout the credit debate.
While they do pay the state’s 12.5 percent royalty share, Inlet producers pay no oil production tax and a minimal production tax on natural gas. However, Inlet production is largely viewed as a means to a secure energy supply for Southcentral and not as revenue stream for the state. Oil production is about 17,300 barrels per day in Cook Inlet.
The latest HB 247 would also eliminate the Cook Inlet Net Operating Loss credit at the end of 2017.
There are two major changes for companies on the Slope pertaining to the Net Operating Loss, or NOL, credit and the Gross Value Reduction credit for “new oil.”
The Rules Committee eliminated the 35 percent NOL credit right away at the end of 2016 for large producers and explorers.
Small producers pulling less than 20,000 barrels per day would get the NOL credit through 2019.
At that point the refundable NOL credit would shift to a more traditional deduction against future tax production tax liability. Changing the NOL credit to a deduction would truly “harden” the 4 percent production tax floor because deductions can take a liability to, but not through, the minimum tax like the refundable credit could.
Legislators and their tax consultants have said Senate Bill 21 was intended to have a minimum 4 percent production tax, but oil prices low enough to allow NOL credits to pierce the floor were not even considered during the SB 21 debate of 2013.
The administration’s proposal hardened the floor, but also raised it to 5 percent. House Finance reset the production tax floor at 2 percent. The other versions from the House and Senate Resources committees did not address the minimum tax for fears that hardening the floor would increase net operating loss obligations in future years.
Revenue Commissioner Randy Hoffbeck said April 27 that there are concerns about how the Rules Committee addressed the NOL — that it would allow large producers to eventually deduct losses at low price points but leave explorers to absorb their full losses until they have production.
Shifting the NOL to a simple tax deduction would also seemingly quell some of the fears about publicly reporting what companies are getting refundable tax credits.
With the NOL credit as a refundable credit, it would be fairly simple to calculate a company’s yearly performance if its application of a 35 percent NOL credit is made public. Pulling the NOL from the list of refundable credits closes that avenue; a company’s deductions remain confidential.
The 20 percent Gross Value Reduction for oil produced from new development would also sunset after 10 years of production. Currently, there is no statute of limitations on the GVR for new oil.
Elwood Brehmer can be reached at email@example.com.