House budget slashes credits, inflation-proofing, adds $19M for UA
The House is getting ready to vote on the operating budget and three perennially contentious issues were addressed in Finance Committee amendments to Gov. Bill Walker’s budget proposal.
The House Finance Committee spent much of Feb. 26 and Feb. 27 debating amendments to Walker’s $4.5 billion 2019 fiscal year operating budget proposal.
Finance co-chair Rep. Paul Seaton, R-Homer, said public testimony on the House version of the budget would be taken March 1-3 and the budget would move to the floor for a vote by the middle of the month.
The governor’s budget is generally on par with the current year budget, which has been a source of discontent for Republicans who insist further substantial cuts are needed before taxes proposed by the administration and the Democrat-led House Majority are considered.
Tax credit payments slashed
While much of the debate was over small monetary or technical changes as is often the case, an amendment by Seaton would change how the state calculates the required minimum annual payment of oil and gas tax credits.
Seaton, one of three House Republicans to caucus with the mostly Democrat majority coalition, pushed to appropriate $49 million to the Oil and Gas Tax Credit Fund instead of the $206 million statutory minimum payment calculated by the Department of Revenue.
Seaton’s amendment passed 6-5 with House Majority member Rep. Jason Grenn, I-Anchorage, voting with the minority against it.
Seaton’s amendment also removed $27 million from the governor’s budget intended to make the state’s first yearly payment on a 10-year bond package to pay off nearly $1 billion in outstanding and expected tax credit certificates.
The administration’s bonding proposal is separate legislation that the governor’s budget assumes will pass.
Legislation passed over the previous two years effectively ended the tax credit program but unpaid credits from 2015 to 2017 remain on the state’s books.
Until Walker vetoed $200 million worth of the credits in 2015, the state had always paid the year’s balance of credits in full.
The sticking point is over when state officials calculate producers’ oil production tax liability for the purposes of generating the statutory minimum payment amount for the tax credits.
By law, the state is obligated to appropriate back to the Tax Credit Fund 15 percent of production taxes when oil prices are forecast to average less than $60 per barrel or 10 percent of the taxes when oil is more than $60 per barrel.
The Walker administration arrives at the minimum credit payment by determining the 35 percent net profits tax and then arriving at the minimum payment amount before factoring tax credits, including the key per barrel tax credit, which drastically lowers the effective tax rate.
Seaton and some, but not all, members of the House Majority members of the Finance Committee, contend the minimum tax credit payment should not be figured until after the credits are applied, thus lowering the minimum payment because the state does not actually receive the production tax amount the administration calculates.
Seaton said the intent of the Legislature and former Gov. Sean Parnell’s administration was to base the minimum payment formula on the “net” taxes received and not the “gross” tax amount before other credit deductions when the legislation was passed.
Rep. Tammie Wilson, R-North Pole, argued that while she has been one of the few Republicans in the Legislature comfortable with paying the formulaic minimum credit amount because that’s what has been in law all along, changing the formula now would appear as if the Legislature is trying to bend its own laws whenever it can to benefit the state and further damage the state’s reputation as a reliable business partner.
Anchorage Republican Rep. Lance Pruitt noted the administration has used the gross minimum tax credit formula for several years and the Legislature agreed to pay the Tax Credit Fund $77 million last year based on the administration’s formula.
Revenue Commissioner Sheldon Fisher said the administration has consistently applied the gross formula and Tax Director Ken Alper noted that in prior years the delta between the two calculations was only $10 million to $20 million. This year it’s more than $150 million based on slightly higher oil prices and reduced company spending that results in a much greater pre-credit profits tax calculation.
“It is the same calculation that got us to $30 million in fiscal year ‘17 that got us to $206 million in fiscal year ’19,” Alper testified.
Amendments by Seaton also passed to remove language from the governor’s budget to move nearly $2.4 billion from the Earnings Reserve Account of the Permanent Fund into the corpus of the Fund.
Legislators have declined to inflation-proof the corpus the previous three years to maximize the value of the Earnings Reserve in preparation for utilizing the Earnings Reserve for government services via a percent of market value, or POMV, draw — which is likely to happen this year because other state savings accounts aren’t sufficient to cover the projected deficit.
“The one thing we can’t do is we can’t devalue the corpus; we have to protect it,” Pruitt said.
The Alaska Permanent Fund Corp. Board of Trustees passed a resolution last fall urging the administration and the Legislature to pass a law that would automatically inflation-proof the Fund without needing direct appropriations.
While a bill to that effect did not materialize, the governor’s budget would backfill the corpus with a $1.45 billion transfer to cover 2016-18 inflation-proofing payments and another $943 million for fiscal year 2019, the upcoming budget year being debated.
However, another amendment forwarded by Seaton reduced the POMV draw on the Fund from 5.25 percent in the governor’s budget to a more conservative 4.75 percent, which the House Majority has advocated.
Walker included the POMV-style calculation in his budget bill in order to propose a fully funded budget, which he is required to do, in the event legislation formalizing the POMV draw is not passed.
The administration and the Republican Senate Majority have pushed the higher draw to reduce deficits in the near-term, with the plan to lower it to a five-year rolling average 5 percent draw after three years at 5.25 percent.
Legislative Finance Director David Teal said 5 percent is “aggressive but not out of line,” while the 4.75 POMV draw “is sustainable and should keep pace with inflation.”
There was bipartisan support for increasing the University of Alaska budget by $19 million; an increase arrived at by the University of Alaska Budget Subcommittee.
State fiscal support for the UA System has fallen from $378 million in 2014 to $317 million currently. Walker proposed holding it flat at $317 million.
UA President Jim Johnsen said in a speech Feb. 20 that the system offers 50 fewer programs and has 5,000 fewer students and nearly 1,200 fewer employees today than it did three years ago as a result of the cuts.
Johnsen and the Board of Regents have said over that time that they expect the university budget to be cut but asked for smaller cuts to better manage internal reforms that would save money over the long-term.
Rep. Steve Thompson, R-Fairbanks, said the $19 million increase is a compromise between what the regents requested and what the governor proposed when also considering the peak budget amounts.
“Our future’s in our young people that are graduating from our university,” Thompson said Feb. 26.
Elwood Brehmer can be reached at elw[email protected].