Senate wants end to oil credits now, reconvening July 10
State Senate Republicans pitched their latest plan to once and for all end refundable oil and gas tax credits much sooner than later.
Senate President Pete Kelly, R-Fairbanks, said at a Thursday morning press conference in Anchorage that a combination of lower-than-expected oil prices and fewer exactable budget cuts than Republican majority members wanted has made ending the program immediately an urgent matter.
For those reasons Senate Republicans proposing the final version of House Bill 111 have an effective date that retroactively ends the credits for North Slope operators and explorers elsewhere in the state July 1. The differing versions of the bill that passed the House and Senate this spring have Jan. 1, 2018 implementation dates and would end the credit program then.
The senators stressed that the state is currently accruing a credit liability of about $1 million per day; so ending the program six months sooner could save the state nearly $200 million.
Those payments, which under current law are for up to 35 percent of a small producer or explorer’s annual losses, would be transformed to tax deductions that could be applied immediately or held to offset future liabilities. It would be similar to how the North Slope majors that are not eligible for the cashable credits use their carry-forward production tax deductions.
Legislators are unofficially adjourned from the special session Gov. Bill Walker called June 16 to address a litany of budget and fiscal issues. Kelly said the Senate will convene in Juneau again July 10 with the hope of quickly resolving the differences in HB 111 with the Democrat-led House Majority.
The 30-day special session ends July 16.
Both caucuses and the governor have said since before the regular session started in January that ending the credit program was a priority. However, House leaders want structural changes to the underlying oil production tax code that would simplify it while increasing taxes at current, lower oil prices.
“The entire fiscal regime of how we treat our businesses that drill for oil up north may be up for discussion, but not now; the Senate wants to stick to cash payments,” Kelly said. “This is so easy we think we can go down and in a day — that might be a little optimistic — but in a day, we should be able to end these things.”
Kelly then called on House Resource Committee co-chairs Reps. Andy Josephson and Geran Tarr, the Anchorage Democrats who drafted the original HB 111 and are on the conference committee, to the conference table when the Senate reconvenes.
Republican legislators have long emphasized stability and prospective changes in regards to oil taxes, but Senate Resources Chair Sen. Cathy Giessel said the retroactive effective date shouldn’t be a shock to industry because it’s generally been understood the cashable work credits were on their way out.
Additionally, Gov. Walker's vetoes of $630 million in credit payments over the past two years have limited the value of the credits to companies, as it is now unclear when they will be paid, she noted.
Walker vetoed portions of the previous two credit appropriations to save the state from immediate expenses while facing annual budget deficits approaching $3 billion.
“It will have a negative impact on companies, we know that and we regret that but the fact of the matter is the state cannot afford this anymore,” Giessel said.
Caelus Energy cited tax credit uncertainty as part of the reason it decided to defer drilling an appraisal well at its very large Smith Bay North Slope oil prospect.
Giessel also said Senate Republicans are on board with Walker’s proposal in his fiscal compromise to “ring fence” deductions, or require they only be used to offset production from the project through which they were earned.
The ring fencing provision is intended to prevent a company from purchasing a non-producing project and “cannibalizing” the tax deductions earned by the seller for use against taxes earned elsewhere, Giessel explained.
“No deduction without production,” she said without starting a chant.
Rep. Tarr said in an interview that the Senate’s proposal simply masks the credit problem by shifting away from cash payments now to forgone tax revenue in the future, when the 35 percent deductions are applied with her own slogan.
“Quick reaction is — we don’t want to change the name to pay the same,” Tarr said.
The House proposal would set a flat 25 percent production tax rate at prices up to $100 per barrel and offset it with a 25 percent loss deduction.
Democrats say the problem with the current production tax law known as Senate Bill 21 is credits built into the system ramp the tax rate down from the 35 percent statutory rate to less than half that while companies can still get deductions at 35 percent.
For those reasons, the Revenue Department projects the House’s HB 111 would take in about $800 million more than the Senate’s over the next decade.
At current oil prices of about $45 per barrel, the state already takes 77 percent of the profit on an average barrel of North Slope oil, according to Giessel.
Tarr said HB 111 is a key revenue component of the House Majority coalition’s overall fiscal plan.
She also agreed with industry’s regular criticism that the State of Alaska consistently changes oil tax policy making it hard for companies to plan, saying settling oil taxes — and other fiscal matters — for several years would give the Legislature time to focus on other major issues such as health care and education.
“We think now is the time for action,” Tarr said.
Elwood Brehmer can be reached at [email protected].