Budget bills on the move; oil tax hike heard in House Finance
JUNEAU — The major budget bills are moving in the Legislature and the state House may have the most controversial bill of the legislative session, a bill raising oil taxes, ready for floor action the week of March 27.
Last week the Senate passed its Permanent Fund restructuring bill, Senate Bill 26, which makes a major dent in the projected $2.8 billion deficit in fiscal year 2018, the budget year that begins July 1.
SB 26 also contains a statutory cap on spending. The bill is now in the House Finance Committee, which is also working on its own version of state fiscal restructuring in HB 115. HB 115 contains Permanent Fund restructuring as well as a personal income tax.
With lawmakers more than two-thirds of the way through their scheduled 90-day session, the pace of activity is picking up. Few expect the session to really end on the 90th day, or April 16, however.
Addressing the state fiscal gap is still the top priority for almost all legislators but there are sharp divisions on how to do it. Legislators generally agree on the restructuring of the Permanent Fund to allow some of its earnings to be used to support the state budget and many, but not all, agree to reductions of the annual Permanent Fund dividend that are incorporated in the most advanced Permanent Fund plans.
The Senate will sharply disagree with the House proposal for a personal income tax now in HB 115 and the House does not like the Senate’s spending cap formula that is in SB 26.
The oil tax bill, HB 111, will be a particular point of contention, although Senate leaders said March 20 that they are open to some changes in oil tax credits but not the increase in the tax rates now in the House bill.
Spending will be another major point of contention. The operating budget passed by the House, which finally arrived in the Senate after six agonizing days on the House floor, generally keeps spending at status quo.
The Senate is now finishing its version of the budget and while final approval is still pending, the Senate Finance Committee is sticking to its plan for a $300 million cut in expenditures of state undesignated general funds for fiscal year 2018.
Details of how those cuts could affect four major state agencies were released March 20, although the numbers could still change. The state Department of Health and Social Service would see its unrestricted general fund appropriations drop from $2.74 billion in the current year budget to $2.69 bullion proposed for next year, a cut of $54.6 million, or 5 percent.
The proposed budget assumes the department will achieve $17.5 million in savings projected for the state Medicaid program due to reform measures enacted last year. Health and social services officials told the Senate budget subcommittee they were on track to achieve the savings, according to documents presented by the subcommittee.
Sen. Peter Micciche, R-Soldotna, chaired the Senate budget committee for the Health and Social Services Department.
Another large agency the Senate is focusing on is the Department of Transportation and Public Facilities, which would have its state unrestricted general fund appropriation cut $8.2 million, or 5.6 percent, to a $137.4 million allocation of state dollars next year.
The DOT budget also includes federal funds used mainly for highway and airport construction, which must be matched with state funds, but those programs are largely unaffected in the pending Senate budget.
There are reductions in state-funded services like highway and rural airport maintenance, and state ferry operations, however. Sen. Click Bishop, R-Fairbanks, chaired the transportation budget subcommittee.
The Senate would cut University of Alaska funding by $16.2 million, or 5 percent, below the university’s current budget, for an appropriation of $308.7 million in state unrestricted general funds.
Under the university’s budget procedures the Board of Regents would allocate the reductions. Sen. Natasha von Imhof, R-Anchorage., chaired the Senate’s university budget subcommittee.
The Senate Finance Committee has not yet finalized its decisions for the state Department of Education and Early Development budget, in which the largest component, about $1.2 billion per year, is the School Foundation Program, which allocated state funds to school districts around the state.
For the department only, not including the foundation program, the pending budget includes a $3.78 million reduction from the current year, or an 8.6 percent cut, to an fiscal year 2018 budget of $379.4 million in state undesignated general funds. Sen. Mike Dunleavy, R-Wasilla, was the budget subcommittee chair.
School funding will be decided by the time the Senate Finance Committee completes its work on the budget, possibly by March 24, according to Sen. Lyman Hoffman, D-Bethel, Senate Finance co-chair for the operating budget.
Reports are that the committee may seek a $50-per-year reduction in the Base Student Allocation, a formula used to allocate state dollars to school districts. That would require schools around the state to make up the deficit from other funds, including from municipalities, or to cut programs.
Other state agencies, such as the Departments of Natural Resources; Environmental Conservation; Fish and Game; Commerce and Economic Development and Labor and Workforce Development experienced only minor reductions or were given funding equal to the current year.
The budget subcommittee for Commerce and Economic Development, chaired by Hoffman, made very minor reductions in the department’s budget but did transfer tourism funding from the operating to the capital budgets, staff in Hoffman’s office said.
Gov. Bill Walker had made substantial reductions in the Commerce and Economic Development budget, compared with the current year, when he submitted his own fiscal year 2018 budget proposal.
HB 111 inches forward
The House Finance Committee dove head first into the Democrat-led majority’s oil tax and credit bill with several lengthy hearings March 20 to 22 reviewing the history of the state’s oil tax and getting detailed analysis from Tax Director Ken Alper in multiple hearings per day.
In short, House Bill 111 aims to, with one exception, directly eliminate cashable tax credits for companies working on the North Slope and increase the minimum production tax from 4 percent to 5 percent at low prices.
HB 111 also adds complexity to the existing 35 percent net operating loss carry forward tax deduction by halving it initially while adding back interest annually, but the end value of the deduction is nearly the same over seven years as under current law, according to Tarr.
The Department of Revenue projects HB 111 would garner between $60 million and $75 million per year in additional near-term tax revenue while also saving the state more than $100 million per year in tax credit payments and deductions.
The bill moved out of the House Resources Committee March 14 on a party-line vote of 5-4.
The tax increases were scaled back in the current version of the bill by the Resource Co-chairs Reps. Andy Josephson and Geran Tarr, Anchorage Democrats, compared to their original proposal.
Industry proponents have slowly accepted the notion that the state generally can’t afford to support oil exploration with tax credits in the form of cash payments while lawmakers try to settle another nearly $3 billion budget deficit.
However, conservative Republicans in the Legislature, who dominate the Senate, have no interest in raising the base tax while cutting the credit program.
Oil company representatives have insisted Alaska needs to have strong traditional deductible tax credits to remain an attractive place for investment if the cash credits are cut.
The bill would also add one new, after-the-fact 15 percent refundable tax credit available to companies that follow a pre-approved exploration program but come up empty, as sometimes happens. The “dry hole” credit is intended to act as a partial safety net for small companies that take the risk to explore on the Slope, which brings with it large potential and uniquely large costs compared to other oil basins.
How often the dry hole credit would be used is unknown.
The slow pace of HB 111 — it’s still in the House more than two-thirds of the way through the 90-day legislative session — could actually prompt Senate Republicans to put forth their own oil tax credit bill, Majority Leader Sen. Peter Micciche said March 20.
“As Alaskans, we just like to say ‘oil taxes,’” Micciche quipped to reporters.
More substantively, he said his caucus admits the state is facing some untenable tax credit exposures.
The bill Senate Republicans apparently have ready to introduce if the House doesn’t send HB 111 over soon would “sharpen the (credit) program,” Micciche described.
Recent large North Slope oil discoveries have generated excitement in the state, but the cost to develop the finds could also lead to large and prolonged tax credit bills, which Gov. Bill Walker has already made clear he does not think the state can afford.