House sends oil tax rewrite to Senate

April 10–While many Alaskans were busy taking advantage of a warm spring weekend, House Majority coalition members were making up for lost legislative time by whisking their oil tax proposal onto the House floor.

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A Finance Committee rewrite of House Bill 111 was introduced on Friday, moved from committee Saturday and voted on Monday. It passed the House on a 21-19 vote.

Anchorage Independent Jason Grenn was the lone majority caucus member to vote against the bill.

Cutting the state's future oil and gas tax credit obligation was an expected topic this session and a foundational goal of the Democrat-led majority.

Once reluctant to curb the industry incentive credits, Republican legislators have also acknowledged a need to limit the state's exposure to additional cash outlays while the Legislature overhauls the rest of state finances to close an ongoing budget deficit that this year is about $2.8 billion.

It does that.

However, HB 111, particularly the version that emerged in the House Finance Committee Friday, April 7, is an overhaul of the underlying oil tax code.

To that end, Grenn said during the floor debate that the bill tinkers with too much of the oil tax code and he would support legislation that more narrowly addressed the state's outstanding tax credit obligation, which is expected to be nearly $1 billion in about a year.

According to Tax Division Director Ken Alper, HB 111 would raise taxes at mid-range oil prices between about $50 and $100 per barrel and generally be a wash compared to current law at higher prices.

The bill now eliminates the sliding scale per barrel credit applicable to the large, legacy oil fields such as Prudhoe Bay and Kuparuk, and reduces the base tax rate from 35 percent to 25 percent.

The impact of the base rate tax change and elimination of per barrel credits is to make the effective rate equal to the statutory rate at the $50 to $100 range; the current law has been criticized by members of the House Majority for never collecting 35 percent of net profits unless prices reach more than $150 per barrel.

Varying with market price by $1 in $10 increments — from zero at prices above $150 per barrel to $8 at less than $80 per barrel — the credit's inverse relationship to price is a mechanism to add progressivity to the base 35 percent production tax rate on company profits.

Previous iterations of HB 111 reduced the per barrel credit at low prices but kept the 35 percent base rate.

At prices above $100 per barrel, HB 111 would add a 40 percent personal income-like tax bracket on profits earned above the $100 price. Roughly, the first $60 in production tax value would be taxed at 25 percent; additional profit above $60 would be taxed at 40 percent.

While killing the sliding per barrel credit is undeniably a significant policy change, supporters of the move note it mirrors what former Gov. Sean Parnell proposed in 2013 in the first version of Senate Bill 21, the vehicle for Alaska's current oil tax law.

It is also a step to simplify the layered provisions of the current tax system, which the Legislature's tax consultant urged be done in some form, proponents contend.

That same consultant also noted Alaska would be one of very few oil-producing regimes to raise taxes during a period of low prices if the Legislature chooses to do so this year.

Additionally, the bill would keep the current 4 percent gross minimum tax, but “harden” it by preventing credits or deductions from taking a company's production tax liability below the 4 percent minimum. The House Resources Committee had hardened and raised the minimum tax to 5 percent.

The change to the 25 percent tax rate combined with eliminating the sliding per barrel credit amounts to shifting the price at which the minimum gross tax kicks in from about $75 per barrel to $55 per barrel, according to the Revenue Department calculations.

That's because of the increase in the effective net production tax rate at lower prices makes it greater than 4 percent above $55 per barrel, and current law calls for the state to tax at the higher of the two — gross or net tax rates.

Overall, the HB 111 headed to the Senate raises North Slope oil taxes by between $80 million and $100 million per year in the near term, according to Revenue projections.

Language to require state approval for lease expenditures from development projects that could result in operating losses and thus carry forward deductions, as well as creation of a new, after-the-fact 15 percent “dry hole” cashable credit to lessen the burden on small companies with failed exploration projects was cut out of HB 111. The provisions were added in the House Resources Committee.

The lease expenditure review concept caused particular consternation from industry over the fear the Department of Natural Resources would final say over every investment companies planned to make. Resources Co-chair Rep. Geran Tarr, D-Anchorage, stressed the intent of the provision was to give the state a one-time avenue for input on developments it would likely be an indirect investor in through tax revenue forgone by way of accumulated tax deductions; however, it was written broadly in the bill and left much up to regulator interpretation.

Net operating losses

As it stands, HB 111 would leave the current 35 percent net operating loss, or NOL, credit rate in place, but shift it from a cashable credit to a tax deduction held by explorers until a production tax liability is earned.

The key changes relate to NOLs held for the long-term.

It would automatically cut the value of NOLs by 10 percent each year they are held beyond seven years, a provision aimed to expedite production from greenfield projects.

A previous iteration of HB 111 that came out of the Resources Committee cut the NOL to 17.5 percent but then added an annual interest “uplift” to increase the value of the NOL back to nearly 35 percent of the original expenditure.

The current bill also includes a “ring fencing” provision that ties a net operating loss to the project from which it is accrued.

Finance Co-chair Rep. Paul Seaton, R- Homer, said the provision is intended to prevent a producing company from buying NOLs stockpiled by an explorer and using them to offset production tax liability without ever getting to production on the project that generated the losses.

Minority caucus Republicans in floor debate expressed worry that ring fencing fields would prevent the NOLs from being transferred in the sale of a promising exploration project, for example. Seaton clarified that the buyer could use the carry-forward NOLs as long as production is realized from the sold project.

On to the Senate

If history is any indication, the four hours of debate over HB 111 on the House floor Monday likely did little more than provide the requisite political theatre, as the bill still needs to pass the Republican-dominated Senate, where leaders have indicated no interest in changing the base production tax.

Senate Republicans — who have said they want to see an end to cashable tax credits and have their own legislation ready to make that happen — largely neutered the non-credit provisions of House Bill 247 last year.

HB 247 phased out tax credits for Cook Inlet operators, which primarily produce natural gas for Southcentral energy needs but do not provide substantive production tax revenue to the state.

The more meaningful House floor vote will come after HB 111 is approved by a House-Senate conference committee, assuming it gets that far.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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