Amended oil tax bill tempers increases, reworks deductions
Democrats in the House Resources Committee are amending their oil tax and credit bill and the changes indicate some advice from the Legislature’s consultant was taken to heart.
The official second draft of House Bill 111, the legislation put forth by Anchorage Democrats and Resource Co-chairs Reps. Andy Josephson and Geran Tarr about a month ago, was made public Friday afternoon.
A chart outlining the anticipated changes published to the Legislature’s website Friday morning shows the House Resource leaders are willing to scale back direct production tax increases in the first version of the bill while actually changing the portion of expenses companies can deduct from future tax liability versus current law.
Josephson and Tarr have said often said they want to stabilize and at least somewhat increase state production tax revenue at current oil prices, but that they are also open to other state incentives outside of large cash payments.
HB 111 would still eliminate future up front net operating loss, or NOL, cash payments to small operating companies but also add a 15 percent “dry hole” cashable credit non-producing companies could claim on expenses from a prescribed exploration program that turned up empty.
The dry hole credit would be conditioned upon the explorer first paying all its service contracts and the relinquishing of related state oil and gas leases. Expenses related to another production tax credit could not be claimed as dry hole expenses.
Legislative oil and gas consultant Rich Ruggiero, a founder of the Houston-based firm Castle Gap Advisors suggested a back-end dry hole credit as a way for the state government to recognize Alaska’s high-cost environment and conditionally mitigate downside exploration risk for companies that ultimately find no upside.
Alaska’s refundable oil tax credit program is unique among oil producing basins, Ruggiero noted in his testimony. Lawmakers on both sides of the oil tax debate have said the last major refundable credit, the 35 percent NOL, is likely to be cut as well do to the state’s multibillion-dollar budget deficit.
At the same time, Ruggiero emphasized the importance of maintaining companies’ ability to deduct substantial portions of pre-production operating losses to balance out some the state’s high development costs.
(Editor's note: This story has been updated to reflect bill language clarifications regarding deductible operating losses made in the Friday afternoon House Resources hearing.)
The amended HB 111 would halve the current deductible carry forward NOL from 35 percent currently to 17.5 percent of annual losses. The original bill cut the “write off” NOL from 35 percent to 15 percent.
The new proposal would also add interest — compounded annually at the Federal Reserve rate — to the 17.5 percent NOL rate for up to seven years. Compounding interest years on top of the held loss deduction roughly doubles the final loss total after seven years back to 35 percent, Tarr said in the Friday Resources hearing, which in the end matches base 35 percent tax rate.
However, the chart published on the Legislature's website to support the bill indicates an increase to the carry forward NOL rate from the current 35 percent to 50 percent and some sources in the Legislature were unclear as to the exact impact of the bill language after the committee hearing as well.
A seven year period of interest accrual was chosen to match the average time it takes to bring a North Slope oil project into produciton, according to Tarr.
According to Ruggiero, the time-sensitive interest “uplift” provides an offset to the lost value over time of a deduction held until production tax liability is incurred. The time limit also incentives companies to produce sooner, which benefits the state and also captures the time-value incentive.
Industry representatives reluctantly acknowledge the cashable credit system is likely on its way out, but have said preserving strong tax deductions are then even more of an imperative.
On the tax rate side, HB 111 would still “harden” the gross tax at low prices and not allow tax deductions to lower a company’s production tax liability below the minimum tax.
The change expected in the impending substitute bill would raise the minimum tax by 1 percent to 5 percent at $50-plus per barrel oil prices and set it at 4 percent below $50, as opposed to the first draft that set it at 5 percent until oil fell to $25 per barrel.
Oil prices in recent days have fallen from above $55 to about $50 as resumed Lower 48 shale production has increased U.S. supply while OPEC participating countries have vowed to cut production in an effort to send prices higher.
Finally, the new HB 111 would still trim the per barrel production credit — which is a tax increase — but not as much as first floated.
The sliding scale per barrel credit is Alaska’s way of adding progressivity to its 35 percent base net profits production tax rate. The larger per barrel credit at low prices lowers the effective tax rate at low prices when companies are presumably less profitable.
The amended bill would keep the $8 per barrel credit at prices below $60 per barrel on legacy oil fields and scale it back $1 for each $10 per barrel price increase until the credit evaporates at prices greater than $110 per barrel.
Originally, HB 111 would have cut it to $5 per barrel at all prices less than $110.
The HB 111 outline lacks detail on how specific the disclosures would be but it calls for some additional tax credit information to be made public, while other taxpayer information would be made available to legislators under executive session meeting guidelines.
It also would direct the Department of Natural Resources to establish a regulatory process for pre-approving lease expenditures that could generate NOLs to be carried forward.
Ruggiero repeatedly described Alaska’s production tax law as “opaque” when compared to other oil-dependent governments and increased understanding of how state dollars — through tax credits — are being spent has been a priority for Gov. Bill Walker, Democrats and even some Republicans in the Legislature.
Industry has said some attempts to access production tax information through legislation could run afoul of federal anti-trust and taxpayer confidentiality provisions.
House Bill 247, which passed last year and gradually eliminates the Cook Inlet tax credit program, requires after-the-fact disclosure of companies that receive direct tax credit payments from the state.
Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at firstname.lastname@example.org.