Oil tax bill moves on party vote

Debate on the House Majority’s oil tax and credit bill focused less on its broad monetary implications and more on late changes to that minority Republicans argue were not adequately vetted before the legislation was moved out of the Resources Committee March 14.

The Democrat-led House Bill 111, introduced by Resource Co-Chairs and Anchorage Reps. Geran Tarr and Andy Josephson, was sent to the Finance Committee for further examination after a 5-4, party line vote.

The conversation preceding the vote was blunt but cordial. Republicans insist a provision directing the Division of Oil and Gas to set up a process to evaluate and pre-approve North Slope exploration and development expenses that lead to a company incurring an operating loss it can carry forward as a future tax deduction is ambiguous and could lead to the state consistently meddling in a company’s business.

Anchorage Republican Rep. Chris Birch said the committee spent a bunch of time discussing fiscal uncertainty and HB 111 exacerbates those concerns.

He reiterated a willingness to discuss the state’s fading refundable oil and gas tax credit program, which the bill eliminates with one exception, but added much of it focuses on raising revenue instead of reducing the state’s expense.

“This effort has been all about raising revenue and I think it’s at a point where we need to attract investment and as the good admiral from Alyeska Pipeline (President Tom Barrett) mentioned, it’s all about oil through the pipeline,” Birch said. “We need to be very wary of the uncertainty that we’re formulating here. I urge caution. We can do better.”

The current tax system appears to be working, he added, as evidenced by recent large oil discovery announcements and an uptick in pipeline throughput.

Republicans also noted the preapproval provision was added to an amended version of the bill on March 10 and the Department of Natural Resources was not able to weigh in on the idea before the committee voted on it.

Additionally, the DNR fiscal note for the bill, which outlines expected department expenses and staff needed to implement legislation, states that those costs can’t yet be calculated because the associated regulations have yet to be written.

Resource Committee Democrats for the most part said the state needs to be able to have a one-time review of plans for work that — through held tax deductions eventually translating to less production tax revenue — make the state a significant investor in North Slope oil projects.

Tarr said the bill language regarding the expenditure preapproval is general to allow the details to be worked out through the regulatory process, which provides for a more direct dialogue between the state’s experts and industry and should lead to a more effective system.

There is not intent for the state to examine every expense made on the North Slope, she emphasized, saying the idea is for a single, preconstruction meeting for Department of Natural Resources officials to see if companies are employing the most time and cost effective exploration and development methods.

Tarr said she envisions a process similar to a board of directors presentation that company management often has to make internally already.

“This is going to create the need for some new regulations and some real cooperation from the department,” Josephson added. “I think what fundamentally we were concerned about was costs associated with future development that would be entirely unforeseen by the state.”

Rep. Dean Westlake, D- Kotzebue, whose massive district includes the North Slope, voted in favor of HB 111 but is not keen on the expenditure preapproval requirement. He described it as the state “micromanaging” work plans already developed experts in their field.

Juneau Democrat Rep. Justin Parish said the state should have “some discretion” to which companies it gives tax deductions to if it is going to be an investor in a project through those deductions earned as a result of Slope activity.

“We should know what we’re investing the people’s money in and we don’t have a right to under current law and I just see that as an overwhelming problem,” Parish said.

Healy Republican Rep. Dave Talerico said the provision pushes DNR into evaluating financial issues, while the Revenue Department has the state’s money expertise.

The state should let HB 247, last year’s bill to cut oil and gas tax credits, take full effect before changing the system again, he said, adding that he appreciates the work the Resource chairs put into the bill.

Mostly absent from the discussion was that DNR would have to set up some kind of system to evaluate the “dry hole” credit added to the bill on a consultant’s recommendation. The Democrat-sponsored, after-the-fact refundable credit would have the state reimburse a company for 15 percent of its expenses incurred from an approved but unsuccessful exploration program as a way to offset exploration risk on the high-cost Slope.

On the tax side, the version of HB 111 on its way to House Finance is milder than what was first introduced.

Josephson called it a “very moderate bill,” particularly when compared to House Bill 133, a production tax increase proposal from Rep. Les Gara, D-Anchorage.

Josephson and Tarr, who said from the outset of this year’s tax credit discussion, that they were open to others’ ideas, mitigated reductions to the key sliding scale per barrel credit for production from the large North Slope legacy oil fields in the latest version of HB 111.

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.

Currently, the $8 per barrel credit holds until prices exceed $80 per barrel.

Originally, HB 111 would have cut it to $5 per barrel at all prices less than $110.

HB 111 would also 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, according to Tarr.

A seven-year period of interest accrual was chosen to match the average time it takes to bring a North Slope oil project into production, she said.

Republican amendments to increase the interest additions and number of years interest would be added to deductible losses claimed were left out.

Industry, and the Legislature’s consultant, emphasized the need for companies to be able to significantly deduct pre-production expenses from their eventual production tax to keep project’s financially viable on the Slope if refundable net operating loss, or NOL, credits are going to be cut.

Josephson also said that the bill includes intent language to push the state to pay down the backlog of earned, cashable tax credits it has accrued if a larger deficit reduction plan is adopted by the Legislature.

While intent language lacks teeth and the state has met its statutory duty to pay the credits, Josephson has said repeatedly he wants the state to get the credit obligation — forecasted by Revenue to approach $1 billion in about a year — off its books and restore financial faith in the State of Alaska.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
03/15/2017 - 12:10pm