Oil tax credit bill moves on to Senate Finance

Gov. Bill Walker’s plan to end the state’s roughly $800 million obligation to small oil and gas industry companies is suddenly on the move.

The Senate Resources Committee quickly moved Senate Bill 176 out of committee March 23 with little fanfare, particularly given the consternation the oil and gas tax credit program has stirred in the capitol the past couple years.

SB 176, which authorizes the state Revenue Department to issue bonds to pay off the liability in a lump sum rather than continuing to pay it down incrementally over the coming years. It would also require credit holders to accept up to a 10 percent discount on the amount they’re owed to cover the cost of the state’s borrowing and avoid spending additional state money on the all-but defunct tax credit program.

Credit holders could also opt for a lesser discount rate in the 5 percent range if they agree with the Department of Natural Resources to negotiate a higher state royalty in future oil and gas production or commit to reinvest a portion of the payment back in Alaska projects.

The bonds would be paid off over 10 years. The annual debt payments would be up to $115 million, according to the Revenue Department, and would be smaller than the largest projected payments the state would make paying off the debt under the current statutory formula.

Revenue Commissioner Sheldon Fisher characterizes the legislation as a way to restart activity in the state’s oil and gas basins. Numerous small companies working in Cook Inlet and on the North Slope have delayed projects and cited the delayed tax credit payments as the cause.

The state’s largest producers — BP, ConocoPhillips, ExxonMobil and Hilcorp — are not eligible to receive cash for their credit certificates, but instead can deduct the amount from their annual production taxes and can purchase the certificates from small companies to use them to lower tax payments.

Several investment banks also lent money against the credit certificates on the presumption the state would always pay off the accumulated credits in full at the end of each fiscal year, which happened every year until Walker vetoed $200 million worth of the credit payments in 2015.

Those banks, according to industry and state officials, have largely quit lending in Alaska, a situation the administration hopes to remedy.

A few months after oil prices had collapsed as Walker took office in December 2014, he vetoed $200 million of the state’s $700 million credit bill, contending the state could not afford the open-ended program any longer.

He subsequently submitted a plan to the Legislature in early 2016 to end the refundable tax credits and pay off the obligation as part of a broader overhaul of state finances, but when little of his plan passed he vetoed another $430 million of credit payments along with half the appropriation for the Permanent Fund Dividend.

At the time, the state’s budget deficit was near $4 billion; it has fallen to about $2.5 billion since then with spending cuts and relatively recovered oil prices.

Last year, the Legislature ended the last of the large credits but still appropriated just the formulaic statutory minimum payment of $77 million to the Oil and Gas Tax Credit Fund amid larger battles over spending cuts and taxes to solve the state’s fiscal problems.

SB 176 has not garnered nearly as much attention from legislators as oil tax and credit bills have the last two years.

Republicans have directed ample criticism towards Walker for creating the backlog of owed credits with his vetoes, but haven’t offered a solution of their own other than attempting to appropriate more money than the statutory minimum in order to reduce the credit balance.

Those efforts have failed without the votes to clear the Democrat-led House majority.

Senate Republicans are generally supportive of Walker’s measure and House Democrats are lukewarm on the idea but not wholly against it. The tax credit issue has also taken a backseat to other, larger state finance matters regarding the Permanent Fund.

But given legislative leadership’s familiarity with the tax credit debt issue, SB 176 could move quickly through the Legislature in the coming weeks and be part of an end-of-session compromise.

Alaska Oil and Gas Association spokesman Brandon Brefczynski called the plan “an innovative approach” to resolving the messy issue, but said the group is still concerned about the level of the discount rate and other provisions in the bill.

That said, “AOGA is committed to working with the administration and the Legislature to finding an equitable solution; it’s simply too important,” Brefczynski said. “AOGA does applaud the administration for acknowledging that refunding these payments is a critical step this year.”

Anchorage Democrat Sen. Bill Wielechowski, who serves on the Resources Committee, questioned the legality of the plan when it was first heard in February because the Alaska Constitution gives the state limited bonding powers aimed mostly at capital projects and revenue bonds.

Revenue officials dismissed Wielechowski’s concerns at the time, saying they are confident the subject to appropriation bonds would clear the hurdle and the state has done similar maneuvers in the past.

Wielechowski said Feb. 21 that he had requested an opinion from Legislative Legal Services on SB 176, but his staff said March 26 that they were still waiting for the legal analysis.

The three years of less-than-full payments grew the state’s credit liability to $806 million at the start of 2018, according to Revenue officials. That liability is expected to ultimately grow to about $1 billion in the next couple years as certificates are claimed for prior work. However, the department is anticipating roughly $100 million of refundable certificates will be purchased by the majors, cutting the state’s final estimated tally to about $900 million.

The credits were essentially rebates on company spending on Alaska projects that were designed to lure smaller companies to explore both Cook Inlet and the North Slope; under a standard 35 percent credit, if a company spent $100 million in qualifying expenses and had no production tax liability it would receive $35 million in cash from the state.

Fisher said in testimony to Senate Resources that the Revenue Department would sell bonds in July or August to pay for the initial $800 million and sell another smaller tranche when the last of the certificates are received.


Elwood Brehmer can be reached at [email protected].

03/28/2018 - 11:33am