Senate passes its version of oil tax credit reform
Now the oil tax debate in the Legislature can really start.
The Republican-led Senate passed House Bill 111, this year’s oil tax credit legislation, on May 15 by a 14-5 vote along caucus lines.
On May 16, a concurrance vote in the House failed 17-22, setting up a conference committee process for the bill.
The Senate version of the bill ends the cashable tax credit “experiment,” Anchorage Republican Sen. Cathy Giessel said in the floor debate, along with preventing companies producing oil in the state’s largest fields from using deductible credits to take their tax obligation below the 4 percent gross minimum tax.
Amendments by Anchorage Democrat Sen. Bill Wielechowski to increase the minimum tax, decrease deductible tax credits and require producers to disclose additional financial information to the state were shot down.
“By hardening the (tax) floor, by moving what was a cash credit to an obligation, it is an increase on companies,” Giessel said.
It is less of a tax increase than the version of HB 111 the Democrat-led House Majority sent to the Senate. That House legislation also increased the production tax at oil prices less than $100 per barrel largely by eliminating the per-barrel credit on the large legacy oil fields, which is currently employed to significantly lower the effective tax rate, while lowering the base tax rate from 35 percent to 25 percent.
Senate Republicans have said all session that they were open to cutting the state’s remaining refundable tax credits for explorers and small producers, mostly on the North Slope, but that rewriting the underlying production tax was off the table.
Gov. Bill Walker and the House Majority share the Senate Republicans’ sentiment about ending the refundable tax credit program while the state still struggles with budget deficits exceeding $2.5 billion per year.
But House Democrats also contend that the current oil tax code supported by Republicans was written when oil prices were greater than $100 per barrel and doesn’t provide the state adequate revenue at $50 to $70 per barrel, which most industry experts expect will continue into the foreseeable future.
The House’s version of HB 111 would raise between $80 million and $100 million per year in new North Slope production taxes in the near term, according to Department of Revenue projections.
House Resources Co-chairs and primary authors of the original HB 111, Anchorage Democrat Reps. Geran Tarr and Andy Josephson, commended the Senate for culling out the state’s remaining cashable tax credits, which Tarr said was “long overdue” in a caucus release, but said the Senate’s bill was rejected because it largely ignores the state’s current fiscal situation.
“The Senate Majority took our good bill that was developed in the open, with advice from the experts and the input of Alaskans, and replaced it with a bad bill that continues many of the flaws that have placed Alaska in our current precarious financial position,” Josephson added. “The best course of action is to take this bill to a conference committee where an acceptable compromise can be reached that protects the state during these low oil prices, while still keeping Alaska competitive as a place for future oil industry investments.”
The Senate version saves the state from paying out future refundable tax credits, expected to accrue at about $150 million per year, which the House bill does, too, but doesn’t change the base production tax.
Still, the industry isn’t thrilled about it.
“Today, the Alaska Senate passed the seventh change to Alaska’s oil tax structure in 12 years. It eliminates cash payments to companies and adds $1.2 billion to the State of Alaska’s treasury over the next 10 years,” Alaska Oil and Gas Association CEO Kara Moriarty said in a formal statement.
“Alaska’s oil and gas industry has played a large part in contributing to the state’s fiscal solution for more than 40 years. With this bill, the industry will contribute even more to the state’s fiscal solution.”
While the state will keep the projected $1.2 billion it would have spent on some tax credits in its coffers as Moriarty noted, the formerly refundable credit certificates will be converted to deductions companies can apply against future production taxes in the bills passed by both bodies.
Allowing a company to deduct expenses and losses against a tax liability is common for profits-based taxes such as Alaska’s oil production tax, but it does mean there will be foregone future production tax revenue.
The Department of Revenue estimates turning the credits into deductions, along with some existing carry-forward lease expenditures, could allow Slope operators to generate up to $1.4 billion in production tax deductions over the next 10 years based on the Senate’s legislation.
How much revenue the state is willing to forego and whether or not there will be an increase to the base production tax paid by producers will be the basis for the HB 111 House-Senate conference committee debate, presuming the House Majority holds together and rejects the Senate’s version of its bill.
Other outstanding bills
With the exception of the capital budget, which passed the Senate May 12 and is now in House Finance, the House and Senate each passed versions of this year’s major pieces of legislation by May 17.
Conference committees have been appointed and met on the operating budget and on Senate Bill 26, Gov. Walker’s Permanent Fund bill; however, significant action to resolve the bodies’ differences in the pieces of legislation has not taken place, at least publicly.
The Senate folded legislation to allow the state to comply with the controversial federal Real ID Act into a bill establishing training for police officers to better manage situations involving individuals with non-apparent disabilities. The bill, House Bill 16, passed the Senate May 15 despite concerns from some that adding the Real ID provisions could violate a clause in the Alaska Constitution requiring legislation be limited to a single subject.
The move was made to fold the two together in order to allow the House to bypass the committee process for a standalone Real ID bill — a process that could have caused the state to miss a May 17 federal deadline to try to comply with Real ID — and instead simply concur via floor vote with the Senate’s version of HB 16, which the House passed previously.