House Resources bill would raise oil taxes, curtail credits
Oil and gas taxes have made their anticipated appearance in Juneau.
Anchorage Democrats and House Resource Committee Co-chairs Reps. Geran Tarr and Andy Josephson laid out their plan to correct what they see as a major imbalance in the state’s oil and gas tax credit program given the sub-$65 per barrel price regime oil markets have been mired in for more than two years.
The tension that Alaska’s ever-present oil tax debate carries spilled over to the bill’s initial introduction and committee referral during the Wednesday House floor session.
Usually a formality bordering on an afterthought, debate broke out as to whether the leaders of the committee followed legislative rules in submitting House Bill 111 as Resources Committee-sponsored legislation as opposed to sponsoring the bill as individual legislators. Minority Republicans on the Resources Committee did not want to be associated with the Democrat proposal.
In the end, the Democrat-led House coalition used its majority position to overrule the Republican objections in a vote on the matter to uphold Speaker Bryce Edgmon’s decision to allow the introduction of the bill.
The meat of the bill generally reflects the portion of last year’s tax credit reform bill, HB 247, which passed the House and was all but rejected in the Senate — the scaling back of North Slope credits and raising the 4 percent minimum tax.
What’s new in the bill is that it reduces the per barrel credit to $5 per barrel for all production at prices less than $110 per barrel. Today, the state reduces the production tax on each barrel produced by $8 when prices are less than $80 per barrel, with the credit decreasing by $1 for each $10 the price rises from $80.
Tarr has long emphasized the point that current oil and gas production tax system was not evaluated for its impacts on the state and industry at the lower prices seen today.
When the tax was debated in the Legislature in 2013 and upheld in an August 2014 voter referendum oil prices were stable in excess of $100 per barrel.
Therefore, according to Tarr, the legislation is needed to resolve the “unintended consequences” of the current tax and credit system: namely the ability for small producers and explorers to earn refundable tax credits without sufficient tax revenue from the major producers to offset them because of today’s lower price reality.
The combination of Gov. Bill Walker’s $630 million worth of vetoes to tax credit payment appropriations over the past two fiscal years and continued use of the credit system is likely to leave the state with a total oil and gas tax credit bill of about $900 million at the end of the 2018 fiscal year, which begins July 1, according to Tax Division Director Ken Alper.
Walker vetoed the vast majority of this year’s $460 million credit payment approved by the Legislature and said he could not approve the spend without comprehensive action to solve the state’s ongoing budget deficits of nearly $3 billion.
“Really, what we’re trying to do in this piece of legislation is minimize the downside risk to the state,” Tarr said in a Wednesday press conference about the bill.
To accomplish that goal, HB 111 would reduce the refundable net operating loss credit, or NOL, from 35 percent of a company’s losses to 15 percent. It would also restrict refundable NOL eligibility to companies producing less than 15,000 barrels of oil per day.
Currently, refundable, or directly cashable credits are available to explorers and companies producing up to 50,000 barrels per day.
It would also halve the amount of refundable credits a company can be paid by the state in a given year from $70 million to $35 million. The $70 million cap was instituted in last year’s credit bill, HB 247.
For producers with production tax liability, the legislation would increase the minimum tax, often referred to as the tax floor, from a 4 percent gross tax to a 5 percent. The gross tax applies at low prices, and under current law a 35 percent tax on net profits kicks in at about $70 per barrel when it becomes larger than the minimum tax.
Raising the tax floor 1 percent would generate additional revenues of 50 cents per barrel to the state when the gross taxable value of oil is $50 per barrel.
The state deducts the cost of getting North Slope crude to market — usually West Coast refineries — when calculating the production tax.
That transportation cost currently averages about $10, according to the Department of Revenue.
Josephson and Tarr also insisted they are interested in a durable production tax system that works for the state and industry in all price scenarios, not just what is in their bill.
“This is far from something we are married to. It’s a template; it’s a starting point,” Josephson said.
How the bill will fair is anyone’s guess.
Industry advocates and companies large and small have said cutting credits or increasing taxes in any way at a time when market forces are already straining bottom lines will lead to further industry cutbacks, in both capital spending and labor.
Senate Republican leaders, who hold a strong majority in the body, have said their sole goal for oil and gas tax policy is to increase production and they successfully neutered most of the provisions relating to the North Slope in last year’s prolonged tax credit debate.
Additionally, while last year’s debate focused mainly on refundable tax credits and thus left the major producing companies on the sideline, the changes to the minimum tax and the per barrel production credit will undoubtedly bring them into the fray.
Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at email@example.com.