Oil tax credit negotiations continue

It has been three weeks since legislation to scale back Alaska’s oil and gas tax credit program took a big step backward to the House Rules Committee.

In the meantime Rules chair Rep. Craig Johnson, R-Anchorage, has put forth two very similar versions of House Bill 247 that would all but eliminate the state’s refundable credit program.

However, with no committee hearings on the bill since early April, little has been heard from legislators and the public has not had an opportunity to comment on legislation changes on the issue that has stalled the entire legislative process.

Majority and Minority caucus leaders in the House have said they believe a tax credit compromise could jumpstart activity on the budget and other revenue proposals, but not much more.

The Rules versions of HB 247 are the fifth and sixth iterations of the legislation first introduced by Gov. Bill Walker and, compared against adaptations from other House and Senate committees, most resemble what the administration had in mind at the start of the session.

What started as concessions by the Republican-led Majority to appease Minority members and a group of Republicans that have joined them in believing prior committee versions did not cut the program far enough could have swung the other way if the concessions went too far for some in the Majority to support.

Walker’s plan would have raised taxes and cut the state’s annual credit obligation by upwards of $500 million per year by fiscal year 2018, according to the Revenue Department.

The Rules Committee’s proposal could have nearly a $300 million per year benefit to the state — or detriment to industry — by the time it is fully implemented in 2020, the department estimates.

Drastically cutting the oil and gas tax credit program that has become the state’s third largest budget line item is a foundational piece of the administration’s New Sustainable Alaska Plan to solve the $4 billion budget deficit by fiscal year 2019.

Regardless of the prospective savings from cutting the industry incentive program, the state is still expected to owe about $775 million during fiscal 2017 for credits currently being earned by companies. The operating budgets passed by the House and Senate currently fund just a fraction of that obligation, meaning hundreds of millions of dollars more will have to be added to the final budget whenever the credit stalemate is resolved.

Alaska Oil and Gas Association Executive Director Kara Moriarty said in an interview her trade association has answered questions from legislators that have asked for feedback on the latest bills and that she is just waiting to testify whenever the next committee hearing on HB 247 might be.

The industry has pushed back against changes to the program at a time when oil prices are at best near the current cost to produce a barrel of North Slope crude — about $46 per barrel, according to the Revenue Department.

Moriarty said the numerous changes to oil tax policy, whether supported or opposed by the industry, have at least been rooted in a principle with an ultimate goal in mind, which is missing this time.

“(Lawmakers) are trying to set a policy to fill a budget gap and for us, we’re just waiting,” she said.

Increasing taxes when companies are already laying off significant chunks of their workforce will do little more than lead to decreased oil and gas production in the state, industry representatives continue to emphasize.

The administration and legislators pushing for the changes need to ask, “What do you want Alaska to look like five years from now, 10 years from now?” Moriarty said. “It’s not a political issue for us. Whatever the policy is, we will make an economic decision.”

Released May 2, the latest Rules HB 247 would close the Cook Inlet credit program to new entrants at the end of 2016. Companies with oil and gas production in the Inlet basin during 2016 would still be eligible for fading capital expenditure credits that would be terminated at the end of 2018.

State subsidies for natural gas exploration and development in the Inlet have largely been credited with securing Southcentral’s energy supply in recent years. Leaders of several of the region’s utilities

Credits for exploration in “Middle Earth” Alaska — areas of the state other than Cook Inlet or the North Slope — would be maintained.

The North Slope refundable Net Operating Loss credit would also terminate at the end of 2016 for all companies except the smallest producers. Companies with less than 20,000 barrels per day of production could continue to receive the 35 percent NOL credit through 2019.

Ending the refundable NOL credit would push companies to deduct annual operating losses from future tax liabilities, thus establishing a true tax “floor” by not allowing deductions to reduce a company’s tax obligation below the 4 percent minimum production tax.

The Department of Revenue estimates a 4 percent minimum production tax could raise $100 million or more per year in tax revenue once the NOL is fully eliminated.

Legislators on both sides of the debate have conceded the impact of refundable NOL credits on the minimum tax during low oil price periods — such as now — was not considered while the industry-supported oil tax reform known as Senate Bill 21 was vetted and passed in 2013. At that time oil prices were consistently near $100 per barrel.

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

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