The House majority introduced Wednesday the first piece of its long-term fiscal plan: an oil tax bill that eliminates cashable tax credits and puts other credits out of the reach of major North Slope producers.
House majority members see reforming oil taxes and tax credits as an essential part of a fiscal solution, despite warnings from the Senate majority that oil tax discussions will delay an end to the legislative session.
“I think the public and the administration have waited long enough, and it’s time for the legislature to act,” House Resources Co-chair Geran Tarr (D-Anchorage) said in a press conference.
“There’s many parts to the fiscal plan, and knowing that we have stability in this important industry and that we’re not going to have excessive cash liabilities is the first step towards getting there,” Tarr added.
“We have a $3 billion deficit, and I think that there shouldn’t be huge surprises in what’s suggested here,” fellow Co-chair Andy Josephson (D-Anchorage) said of HB 111.
If passed, HB 111 would be the seventh oil tax change since 2005.
There are two main types of oil tax credits: credits used against tax liability; and credits available for repurchase.
BP, ConocoPhillips, ExxonMobil, and Hilcorp — the Big Four — must claim credits against tax liability due to their high production volume.
According to the Fall Revenue Sources Book, credits used against liability are forecast to total $238 million in the current fiscal year and $413 million in FY 2018. That is money subtracted from State revenue.
Smaller companies may have their credits repurchased by the State with cash, an expense that appears in the State budget.
After Gov. Bill Walker vetoed $430 million of the cash credits last year, the State’s liability has built to $961 million in FY 2018.
The cash credit liability is forecast to decline over time because the legislature began to phase out Cook Inlet tax credits in a bill passed last year.
HB 111 goes further, eliminating the ability of companies, including those on the North Slope, to cash their credits with the State.
Josephson noted that if legislators want to cut the budget, cash credits are a discretionary item.
“We cannot meet these goals of $800 million outlays,” he asserted.
Tarr said the cash credits have been used by small companies to obtain financing. Since the State has not been able to afford them, it has created a ripple effect throughout the financial sector that HB 111 will correct by creating certainty about the credits’ availability.
“We have an overly-generous system of subsidies that needs to be reformed,” Tarr said simply.
New Bill Raises Minimum Tax, Cuts Credits That Accumulate at Low Prices
While cash credit liability should decrease under current law, credits used against tax liability are forecast to increase to over $500 million per year by FY 2024, even as oil production is forecast to decline.
That liability would further increase if oil prices dropped below about $41 per barrel, the point at which companies lose money in production and therefore have no tax liability.
Current law allows companies to carry forward up to 35 percent of their net operating losses (NOLs) as a credit against future tax liability. In this way, large producers could undercut State revenue for years after oil prices recover.
HB 111 proposes to eliminate this scenario by ending NOL credits for the Big Four and mid-size producers.
The remaining companies with little or no production would have credits capped at $35 million per year. Whereas those credits would previously be cashable, they would instead be issued as a certificate to be sold to another company or used when the small producer generates a tax liability.
The State would only cover 15 percent of small producers’ net operating losses.
The bill also raises the minimum tax on North Slope oil from four percent to five percent, regardless of oil price, and prevents credits from reducing that tax.
A per-barrel credit, now eight dollars when oil price is below $80, would be reduced to five dollars when oil price is below $110. The House majority said in a press release that the provision could generate between $100 million and $300 million at oil prices higher than $70.
The Walker Administration has not had time to assess the fiscal impact of the bill.
Many of the sections in the bill are written to correct the unintended consequences the State faces at low oil prices under the current tax regime, Tarr explained.
“What we’re trying to do with this piece of legislation is minimize the downside risk for the State,” she said.
Tarr noted that recent oil finds like Smith Bay are far from existing infrastructure and, if developed, represent a significant liability to the State under current law, especially at low prices.
In a statement directed at House Resources, the Alaska Oil and Gas Association (AOGA) wrote,
We encourage committee members to view this bill through the lens of what will benefit the State the most in the long run: more oil production, more investment in Alaska’s oil fields, and more economic activity throughout the state. HB 111, as written, will not achieve any of those things, and jeopardizes recent gains like the first oil production increase in 14 years, billions of dollars of new investment in Alaska’s oil patch, and optimism about exciting new oil fields with billions of barrels of potential.
Bill Introduction Prompts Objection on House Floor
The formal introduction of HB 111 became contentious in its own right.
The House Resources Committee is listed as the bill sponsor, drawing an objection from former House Resources Chair Dave Talerico (R-Healy).
Talerico cited a statute (AS 24.08.060) that requires committee bills to be introduced “with the concurrence of a majority of the active members of the committee[.]”
Tarr did provide House Speaker Bryce Edgmon (D-Dillingham) with a list of House Resources members supporting committee sponsorship, a list that constitutes a majority of the committee.
Based on that list, Edgmon ruled that the statute had not been violated.
Talerico’s objection seemed primarily to be a reaction to the new House majority exercising its power through committee chairmanship.
“I just don’t feel that it’s appropriate to arrive at committee concurrence without speaking to all committee members,” Talerico protested on the House floor.
Every House minority member who sits on House Resources rose to affirm they had not been consulted about the bill.
“I have not given permission to put my name on this bill,” said Rep. DeLena Johnson (R-Greater Palmer). “My name will be on the letterhead. My name will be associated with this bill in perpetuity.”
“This is not a transparent action,” Johnson concluded.
“At no time was this bill brought before us,” Rep. Chris Birch (R-Anchorage) agreed. “If it’s a committee bill, you can strike my name.”
Birch said that majority members of House Resources appeared to have held a “secret meeting,” prompting former House Speaker Mike Chenault (R-Nikiski) to suggest an illegal vote had been taken.
Birch and House Majority Leader Charisse Millett noted that Alaska Dispatch News reporter Nat Herz tweeted portions of HB 111 more than an hour before the bill was introduced and minority members had seen it.
“That is what we are objecting to,” Millett told Edgmon.
Rep. Gara: Republicans “Now Outraged About Things They Did Before”
Josephson responded that the former majority caucus routinely introduced bills with committee sponsorship without consulting minority members.
“It was sort of standard operating procedure,” he said.
“For 25 years… they have done exactly what they’re complaining about today,” Rep. Les Gara (D-Anchorage) echoed, speaking of the new Republican minority. “The members here who were here last year did exactly what they’re complaining about today.”
Gara rattled off a list of procedural resolutions introduced during the last two legislatures with House Resources sponsorship, including when Talerico controlled the committee.
“They are now outraged about things they did before,” Gara said of the minority.
He noted that legislative rules are guided by the customs, rules, and precedents of prior legislatures.
Josephson said that it will be apparent through legislative action and press coverage whether minority members support HB 111 or not.
The House upheld Edgmon’s ruling on a 23-15 vote. Wasilla Representatives David Eastman (R) and Colleen Sullivan-Leonard (R) joined House majority members in support.
The floor debate and subsequent press conference delayed the start of a House Resources meeting and limited HB 111’s first hearing to seven minutes. Most of that time was spent dealing with freshman members’ procedural questions and objections.
“I think the ruling of our Speaker was proper,” Josephson told the committee.
Trying to address the concerns of minority members at the press conference, Tarr assured them, “We consider this just a starting point. We plan to have many, many hearings.”
She advised House Resources members to “rest up” while they can.
The next hearing on HB 111 is scheduled for Monday afternoon.