The plumbing behind Gov. Bill Walker’s attempt to reduce the state’s oil and gas tax credit payments was exposed Feb. 12 in a House Resources Committee hearing.
Rep. Mike Hawker, R-Anchorage, took the lead in criticizing the administration’s exhaustive 29-page House Bill 247 that closes complex loopholes in some sections and simply raises industry taxes in others.
Tax Division Director Ken Alper got through less than half of the 46 sections of the legislation during the two-hour committee meeting.
Much of that time was spent discussing ways the administration has proposed to prevent producers from lowering their tax liability below the intended minimum production “tax floor,” currently set at 4 percent, during periods of low oil prices.
HB 247 would eliminate the ability for credits to be used to take a tax liability below the tax floor. Credits would then be held until a company had a sufficient tax obligation against which to use them.
Legislators that supported the industry tax structure in Senate Bill 21, which was passed in 2013 under former Gov. Sean Parnell and upheld by a voter referendum in August 2014, have said the intent was to set a hard tax floor when SB 21 was passed, but there are ways that deductible credits can be used to take a liability below that floor.
The issue is one that has only come up recently as low oil prices have reduced the prescribed production tax rate along with producers’ profitability.
Alper noted, as others have, that SB 21 was first modeled and drafted in 2013 with an oil price regime between $80 per barrel and $120 per barrel, so some issues at today’s prices in the $30 per barrel range were unforeseen.
The Oil and Tax Credit Working Group formed last summer and headed by Senate Resources chair Cathy Giessel, R-Anchorage, also recommended hardening the tax floor, a move the Alaska Oil and Gas Association referred to as a “flagrant money grab at a time when the state should be encouraging industry to continue making vital investments in the state,” in comments on the administration’s sectional analysis of the bill.
Giessel said at a press briefing Feb. 15 that the Legislature’s consultant, Enalytica, is modeling the financial effects of Walker’s proposed tax credit changes. The report should be available by the week of Feb. 22.
AOGA President Kara Moriarty noted in an interview that a hard minimum tax would not allow producers to apply a loss and lower a potential tax liability to zero; something companies in other industries often do with losses against their corporate income tax payments.
The state’s oil and gas tax credit system once again became headline news last June when Walker vetoed $200 million from a $700 million appropriation for refundable, or cashable, credits paid by the state in the current fiscal year budget.
Industry representatives and numerous Republican legislators have emphasized the credits as a necessity for doing business in Alaska’s high-cost environment, particularly during times of low oil prices. The governor contends the current program is unsustainable as the state faces annual budget deficits approaching $4 billion.
Annual outlays attributable to the credits peaked at more than $1.5 billion when credits under the previous Alaska’s Clear and Equitable Share, or ACES, and SB 21 tax regimes were combined with one another in fiscal year 2014.
ACES had a 20 percent capital expenditure credit that was repealed under SB 21 and replaced with a per-barrel tax credit that was designed to encourage additional production.
The Revenue Department projects the state’s credit obligation will average about $850 million through 2020 under current statutes.
In companion legislation to HB 247, Walker has also proposed establishing a $200 million oil and gas development revolving loan fund, administered by the Alaska Industrial Development and Export Authority, to offset some reductions to the overall credit program.
HB 247 would prevent companies from claiming per barrel production tax credits that could not have been applied during a specific month, because the credit can’t be applied to go below the minimum tax, at the end of the year true up.
“If (the credit) is limited because of the minimum tax in a month, that month’s limitation should carry through for the rest of the year,” Alper said. “What we’re trying to prevent is if there is a limitation in one month, that the company can’t scoop up that limited credit by applying it against another month’s taxes.”
Such circumstances can occur with the per barrel credit that is up to $8 per barrel at times of low prices and inversely shrinks to zero at times of high prices.
The administration is attempting to constrain moving the value of that per barrel credit, which is already calculated monthly, to other months in which it could be applied, according to Alper. The situation is most notable during years of high price volatility.
In 2014, when the price for Alaska North Slope crude peaked at $110 per barrel in June but fell to $60 per barrel by December, the state paid out somewhere between $100 million and $150 million to producers at the end of the year “because of the ability to in effect migrate some of those credits from month to month,” he said.
AOGA called the monthly credit limitation “nothing more than a disguised tax increase.”
Hawker said the portion of HB 247 dealing with monthly per barrel credits described by Alper as complex is actually simple; it allows the state to tax at high rates during certain months and takes taxes from being an annual calculation to a monthly affair strictly in an effort to generate more revenue.
The state is attempting to take away the industry upside of price fluctuation, he contended.
“Let’s just be honest about what we’re doing here. This is just clearly a money grab,” Hawker said, echoing the comments of AOGA.
AOGA wrote that limiting the credits to monthly calculations disregards inevitable uncertainties in monthly calculations compared to year-end results and would mean credits that can’t be carried forward or transferred would be lost, amounting to a “significant and permanent tax increase.”
Not addressed at the hearing, in HB 247 and its mirror legislation, Senate Bill 130, credits held beyond 10 years would expire. The 10-year sunset would apply both to deductible credits held because of minimum tax limitations and to refundable credits paid directly by the state.
The legislation would also put a $25 million per year cap on refundable credits.
A proposal the production tax floor from 4 percent to 5 percent would alone generate about $50 million for the state, Revenue estimates.
Part of the rationale behind raising the minimum production tax to 5 percent was to make sure each industry contributed to the administration’s overarching fiscal plan to close the budget deficit, Revenue Commissioner Randy Hoffbeck said. Walker has proposed similar 1 percentage point tax increases on fishing and mining along with an increase in head taxes for cruise passengers.
Hardening the minimum tax floor would add roughly $50 million to state coffers in the 2017 and 2018 fiscal years. Beyond that, the price of oil is expected to rebound sufficiently to where the minimum production tax is no longer an issue.
AOGA contends that the price per barrel would have to rebound to $85 per barrel before the minimum tax does not apply.
Operating losses and new oil
Alaskans are constantly looking for ways to produce “new oil,” whether from existing fields or new discoveries.
The administration is trying to encourage new production while limiting how much the state compensates companies for expenses incurred in bringing that new oil to the surface.
Currently, North Slope companies producing new oil under SB 21 can subtract 20 percent from their net profit via the Gross Value Reduction, or GVR, credit before calculating the production tax on new barrels. Alper said the concept of the GVR was to reduce the tax as a reward for producing new oil.
The issue with the credit, from the administration’s perspective, is when a new oil producer can claim both the GVR and a net operating loss. With old, or legacy, oil, companies can claim a Net Operating Loss credit to be refunded by the state for part of an annual loss.
Last year that refund was 45 percent of a loss, meaning the state would offset a $10 million loss with $4.5 million in cash, Alper explained.
Future Net Operating Loss credits for the North Slope will be paid at 35 percent, a change prescribed for the end of 2015 in SB 21.
However, adding the GVR to the loss credit calculation can achieve much different results, according to Alper. Through a modification based on gross revenue with the GVR, an $10 million loss could be turned into a $30 million loss on the books and push the state’s payment beyond the actual loss amount.
A 35 percent credit on a $30 million loss equates to a $10.5 million check.
“That was a circumstance we found surprising that it was allowable under law; but it was according to the attorneys’ strict interpretation of Senate Bill 21’s provision’s as they were written,” Alper testified while sitting alongside Revenue Commissioner Hoffbeck.
Accordingly, HB 247 would limit the loss credit, with the GVR calculation, to the actual size of the loss.
Hawker said the change would be “truncating” the incentive for new production.
“What is going to be our consequence? Is it going to have a chilling effect on the pursuit of new oil, which was a very high priority for us by essentially taking away that opportunity, that advantage, in a situation where somebody’s getting started?” Hawker questioned. “They’re getting their field developed; they’re getting their initial production going and they have a loss and we’re saying, ‘Oh, by the way, that incentive that we were trying to give you to get this done — you don’t get it.”
One of the few parts of the legislation not focused on revenue generation attempts to increase what the state can disclose about the credits it pays. According to the administration’s analysis, HB 247 would allow the Revenue Department to publish each company claiming a credit, the amount claimed and a general description of the work being done — information Alper described as “summary level.”
All of that information is currently held confidential by the state in accordance with statute.
“I think it’s really imperative for us to be able to tell our people what we’re investing in,” Rep. Paul Seaton, R-Homer said.
Walker said in a previous interview with the Journal that he would support making more tax credit information public if revenue collected through a broad-based tax — he has proposed an income tax — were used to support the credit payments.
Hawker said the oil and gas tax credit information would take away a company’s competitive advantage by revealing what companies are trying to accomplish.
“It’s obviously philosophical, but I want to respect the taxpayers. I want to give them the advantage that when they make an investment in Alaska they are given the greatest advantage possible for having made that investment,” he said.
However, companies are not required to accept credits for which they qualify.
Hoffbeck noted that more transparency in the credit program would allow for a “more open discussion” around what is a major budget obligation for the state. The issue came up repeatedly when the administration could not provide legislators and others with enough data to inform discussions about policy changes, he said.
AOGA wrote that the impetus for increased transparency arose from credits earned by one or two companies, which can’t be described on an aggregated basis.
The industry group and Hawker also called the legality of the proposed reporting into question. The language in the bill could apply to Net Operating Loss credits and others that could put portions of a company’s financial results into the public realm, Hawker said.
Alper acknowledged the potential issue of inadvertently revealing some of a company’s finances and said the administration would like to find language that is acceptable to all parties involved. Limiting the information to specific refundable credits the state pays directly — exploration, drilling and development credits, for example — could be a middle ground, he said.
“We merely want to be able to report where public money is being spent for the purposes of providing subsidies and benefits to oil companies,” Alper said.
Elwood Brehmer can be reached at [email protected]