Saturday, March 10, 2012

Head-on coming; Senate Resources completes oil tax bill nothing like what House passed

Kristen Nelson

The Alaska House and Senate appear to be on a collision course over changes to the state’s oil production tax.

Last year the House passed an oil tax reduction requested by Gov. Sean Parnell. The stated goal of House Bill 110 was to encourage more industry investment in the state — and more oil production — by reducing the tax level imposed by Alaska’s Clear and Equitable Share, ACES, passed under Gov. Sarah Palin in 2007. ACES came on top of an oil tax increase enacted in 2006 under Gov. Frank Murkowski, the Petroleum Profits Tax or PPT, which moved the state from a tax on the gross to a tax on the net and added progressivity — as oil prices, and profits, rose, the state would get more revenue.

ACES steepened the progressivity curve in PPT, increasing the state’s take at higher oil prices.

The Senate did not act on HB 110 last year, citing a need for more information before it acted.

The Senate didn’t act on HB 110 this year, instead moving its own bill, Senate Bill 192. A committee substitute for that bill passed out of Senate Resources March 2, headed for Senate Finance. Hearings in Senate Finance had not yet been scheduled when this issue of Petroleum News went to press March 8.

House Bill 110

Dropping volumes in the trans-Alaska oil pipeline were the driver behind tax changes in HB 110.
Industry argued that the steep increases in the state’s production tax rates which were enacted in 2006 and 2007 made Alaska uncompetitive for investment, investment which was needed to stem the state’s production decline.

HB 110 would have made several changes in the state’s production tax system. Significant fiscal impacts were expected from a reduction in tax rates which were bracketed under the bill and capped at a maximum production tax rate of 50 percent.

At forecast production levels, state revenue was expected to drop under HB 110 by $469 million in fiscal year 2013, $989 million in FY2014, $1.166 billion in FY2015, $1.418 billion in FY2016 and $1.554 billion in FY2017, a total of some $5.6 billion over that period. At production levels 20 percent above the forecast, the revenue loss would have been about $2.7 billion over the same period, and with increased royalties at a production level 20 percent above the forecast, the revenue loss would have been $401 million.

In addition to production tax and royalties, the state collects property tax and corporate income tax. The federal government also collects taxes. The total of state and federal taxes is the government take.

Senate Resources bill

The Senate Resources committee substitute for SB 192 lowers the rate of progressivity and the cap on progressivity.

Under the bill progressivity will still be triggered when the price of oil is above $30 per barrel in production tax value (the price of oil less production and transportation costs), but the progressivity rate under SB 192 will be 0.35 percent for each dollar increase in the production tax value, or PTV, instead of the current 0.4 percent. At $101.43 per barrel PTV the progressivity rate will drop to 0.1 percent; at $201.43 per barrel PTV progressivity is capped (the previous cap wasn’t reached until a PTV value of $342.50 per barrel).

The committee said initial Department of Revenue calculations indicated the reductions would result in revenue losses of $200 million to $250 million per year.

SB 192 also provides a reduction of $10 in production tax value for each new barrel produced for the first year, adds a 10 percent tax floor to ensure Alaska receives some revenue even at very low oil prices, provides for decoupling — the separation of oil and natural gas for production tax calculations — and calls for the Alaska Oil and Gas Conservation Commission to develop an electronic petroleum information management system for public information currently gathered by the commission and the departments of Revenue, Natural Resources and Labor and Workforce Development.

The Senate’s reasoning

Senate Resources co-Chair Joe Paskvan, D-Fairbanks, said March 6 in a Senate Bipartisan Working Group press availability that his “inquiry from a year ago indicates that in that range of $120 to $140 a barrel, that there can be a distortion of the relationship between Alaska as the owner of the resource and the amount of monies that are paid by the oil industry.” He said he believes the changes in SB 192, the 0.35 slope compared to the 0.4 slope in ACES, “particularly targets” that $120-$140 a barrel price range and “more appropriately balances the relationship between the state and the oil industry.”

Sen. Kevin Meyer, R-Anchorage, said he believes the bottom line is that there isn’t enough oil in the pipeline and said he thinks “progressivity is the major factor that has to be addressed” to make Alaska a little more competitive with other places worldwide that companies can invest.

BP and ConocoPhillips have committed to invest $5 billion of additional capital in exchange for the tax reductions in HB 110.

Sen. Bill Wielechowski, D-Anchorage, said March 6 that there is “clearly no commitment” for that investment because it would also require ExxonMobil’s agreement. He also said that analysis done last year showed the $5 billion investment would be “wildly profitable under our current tax structure,” with the state actually picking up 60 percent of that through tax credits and deductions.

Sen. Hollis French, D-Anchorage, agreed on the issue of Exxon’s commitment being required on the $5 billion investment, and said that HB 110 would push “1.8 billion a year across the table,” calling the governor’s bill a giveaway.

French said the governor needed to “run the numbers again” ... “look at the strength of the commitment” and recognize that HB 110, with “up to $18 billion” in foregone revenue, is a “horrible, horrible ... business idea for the state to engage in.”

Both Wielechowski and French voted to pass SB 192 out of committee; voting against moving the bill were Sen. Tom Wagoner, R-Kenai, and Sen. Lesil McGuire, R-Anchorage.

The House response

At a House Majority press availability on March 6, Rep. Mike Hawker, R-Anchorage, chair of the Legislative Budget & Audit Committee, called the Senate’s decision not to build on the work the House did on HB 110 last year unfortunate, calling the House process “open and transparent.”

He said he’s “a little disappointed in the process and product that came out of Senate Resources. Most of what was in that bill was never even discussed in committee; it’s something that ... appears to have been written in a caucus meeting rather than in a public forum.”

Hawker said his primary concern with the Senate bill is that he does not think it moves the needle. He characterized the bill as making “nothing more than a very, very small cosmetic change to the state’s progressivity tax, the one that I think everyone has universally agreed is broken.”

Rep. Craig Johnson, R-Anchorage, said he was “a little pleased with what the Senate has done,” saying they have moved from saying last year that no changes would be needed to ACES, “to at least recognizing that it’s broken and that it needs to be fixed.”

Hawker also said he thinks the state has “lost sight of having a vision for our tax policy,” calling the present policy “pretty much a policy of take as much as you can while you can get it.”

He cited Gov. Jay Hammond, who at the time the trans-Alaska oil pipeline was being built espoused a policy that the state and federal government takes two-thirds and leaves one-third to industry.

“I think something as clear and crystal as that vision might be something that would work for this state,” Hawker said.

House Speaker Mike Chenault, R-Nikiski, said he expected the oil tax bill to be taken up in Senate Finance the week of March 12. If Senate Finance keeps the bill for a week and then sends it on to the House, that would allow the House the four weeks that’s been discussed, he said, referring to Senate President Gary Stevens’ proposal that the bill leave the Senate in time for the House to have a month to work on it.

Chenault said he expects that schedule may slip some, but said “the House will take the time that’s necessary to go through that piece of legislation ... and have a good public process.”

He said the House will want to look at modeling on whatever bill comes out of the Senate, will want to have an open process and talk to Alaskans and the industry.

“You know, that may take three weeks; it may take three months; I don’t know. Until the Senate sends a bill out of Finance we won’t know in its entirety what it does,” Chenault said.

Hawker said he shared the Senate’s objectives for tax reform — more production, more jobs and sustainable tax revenue.

He said SB 192 is “nothing more than a cosmetic change to the progressivity factor,” and doesn’t address high marginal rates, a concern that LB&A’s consultants have expressed.

He also said the bill did not pay attention to consultant recommendations that total government take be capped at a reasonable level.

Hawker said if the state wants “robust activity, we offer robust fiscal terms; if we want minimal activity, we offer minimal fiscal terms. It’s a pretty straight tradeoff.”

He said SB 192 is a giveaway — it reduces taxes but not enough to gain additional investment.