The House Resources Committee is preparing to move a version of an oil tax bill that mitigates some of the impact to industry of the original proposal, but also addresses what committee Co-chair Geran Tarr (D-Anchorage) called the “generosity” of the current tax regime.
House Resources adopted a committee substitute for HB 111 on Friday.
“We’ve made some very modest adjustments that reflect more the moderate- to low-price environment we’re in,” Tarr said during a hearing Monday.
Among the changes from the original proposal, the CS increases the minimum tax from four percent to five percent when oil exceeds $50 per barrel. Originally, the five percent minimum tax became effective at $25.
The current oil tax regime was designed as a 35-percent tax rate, with credits applied to lower the rate.
“If we don’t change the minimum tax, our tax is around nine- to 13 percent. That’s how low it is. That is, from our view, too low,” Tarr said, gesturing to fellow Co-chair Andy Josephson (D-Anchorage). “We have to retain some of the value in the mid- price range because that’s the new normal that we’re going to operate in.”
Increasing the minimum tax, combined with a provision that “hardens the floor” against credits that could drop the tax rate below the minimum, yields $45 million in additional Fiscal Year 2018 revenue.
The CS reduces the impact of a change to the per-barrel credit. The maximum eight-dollar credit would be available until oil hits $80, as opposed to $60 in the original version.
Though the impact on industry was reduced, Tarr said the per-barrel credit needs to be addressed because current law allows for a credit at oil prices of $160 per barrel.
“We’ve never seen $160-a-barrel oil, never in the history of oil prices,” Tarr said. “We can’t count on a windfall coming at a price that’s never happened in the history of oil prices.”
The CS also creates a “dry hole” credit that allows companies to claim up to 15 percent of costs when exploration does not result in any production. Those credits can be paid as cash.
The Department of Revenue was unable to determine the dry hole credit’s impact to the State.
Committee Substitute Reduces Ability to Carry Forward Losses
The biggest change in the bill is the elimination of cashable net operating loss (NOL) credits on the North Slope.
“We’re not writing a check. We’re saying, ‘Carry forward your losses. Once you become a producer, that money will be deducted from your taxes,’” Tarr explained. “I don’t think it works well for the State to have obligations we can’t meet.”
The CS goes further with NOLs, reducing companies’ ability to carry forward their losses. They would only be able to apply 50 percent against a future liability, plus a seven-percent annual “uplift” that acknowledges companies’ lost value.
“When we carry forward their losses, we [currently] allow 100 percent of that value to go forward. We don’t apply any depreciation, so there’s a lot of generosity built into this,” said Tarr.
Tarr said that companies can claim losses for the first seven years of a project. Then, when they begin to produce oil, they can claim a Gross Value Reduction (GVR) credit for another seven years.
With that combination, Tarr said, announcements like that from Repsol and Armstrong last week result in “not much excitement for the State.”
“If we are too generous, what we’ve learned is we will erode all of the value,” said Tarr.
Rep. Dave Talerico (R-Healy), an opponent of HB 111, noted that the Trans-Alaska Pipeline throughput in January and February exceeded 550,000 barrels per day.
“I don’t want to lose the current push to get more oil down the line, and I certainly don’t want to lose the current investment climate,” he said.
Rep. Chris Birch (R-Anchorage) pointed to the CS’s annual fiscal impact of around $200 million starting in FY 2020, increasing to $260 million in FY 2026. Citing Repsol and Armstrong, he said the State can anticipate $1 million in additional royalties a day that would be jeopardized by tax increases.
“We need to take a real hard look at if adding another couple hundred million a year in costs is going to attract the kind of investment that we need to realize our oil and gas potential in this state,” said Birch.
“I don’t see it as user-friendly for some of the producers,” Rep. George Rauscher (R-Sutton) said of the bill. “We’re looking at a lot of money here for them to actually go out and explore, and they’ve put their trust in us.”
Regulatory Provision Delays Bill Movement
Rauscher offered two amendments Monday. The first would have deleted most of the bill while maintaining the ability of companies to carry forward 100 percent of their losses. It would also have increased the uplift to ten percent over ten years and retained the dry hole credit.
A second amendment addressed the same provisions, but did not delete the bulk of the CS.
Josephson said the amendments would have compounded the State’s current liability.
“Alaska is an expensive place to do business,” Birch said in support. “Virtually every business in the oil and gas arena in just about every regime is entitled to recover their costs.”
“Typically, businesses recover their costs by making a profit off of their product,” retorted Rep. Justin Parish (D-Juneau).
Parish called the amendments “a recipe for disaster and for really perverse market incentives.”
Tarr, speaking in opposition, said that carry-forward NOLs are something typically seen in income tax policy. Companies can claim their losses when filing their corporate income taxes, she said.
“There are several places where these losses are recovered,“ Tarr said.
Both amendments failed along caucus lines.
The CS adds provisions allowing legislators to learn some confidential tax information about companies. It also requires the Department of Natural Resources (DNR) to establish, through the public regulatory process, a method of pre-approval for lease expenditures to control the State’s NOL credit liability.
“I think that the public is entitled to know what the investments are and have some share in understanding that through their elected officials,” said Josephson.
Tarr added the regulatory process will give companies more input because it allows for public comment.
But the new DNR responsibilities delayed movement of the bill.
“It’s going to take a little bit of time and effort to figure out exactly what it is that we’re being asked to do and required to do,” said Ed King, Special Assistant to the Commissioner of Natural Resources.
“We’re not interested in growing the size of our department unless it’s absolutely necessary to meet the requirements in the legislation,” King told House Resources, but he noted, “This would require an entirely different accounting process than we currently have in place.”
King said DNR is working on a fiscal note that will probably reflect increased spending.
Tarr intended to move HB 111 out of committee Monday, but she held the bill pending arrival of that fiscal note.
House Resources may move HB 111 Tuesday afternoon when the hearing resumes.