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House bill to reduce ACES tax tabled Senate proposal to decouple progressivity on oil and gas moves out of Finance; companion bill has been heard in House Resources Kristen Nelson Petroleum News
House Bill 308, an attempt to reduce the progressivity rate in Alaska’s Fair and Equitable Share, or ACES, was tabled in House Resources March 26, victim of a fiscal note which indicated that over time the change could cost the state more than $2 billion in reduced revenue.
In the Senate, however, changes to Senate Bill 305, which decouples oil and gas for progressivity calculations in ACES, won committee approval March 31 in the Finance Committee and moved to the Senate floor after a revision in the bill resulted in a zero impact fiscal note, prepared by Senate Finance.
The goal of HB 308, sponsored by House Resources Co-Chair Craig Johnson, R-Anchorage, was to provide an incentive for additional investment by reducing the production tax burden.
The Department of Revenue had no way of calculating the results of an unknown amount of additional investment, and did not provide a dollar estimate for the change in revenues in its fiscal note.
In its analysis, the department said the bill would retain the progressivity rates in the existing tax, but would change the base upon which the surcharge is applied. Currently the progressivity surcharge is applied to the entire production tax value. The bill would apply the progressivity surcharge only to the amount of the production tax value that exceeded the progressivity trigger of $30 profit per barrel.
Revenue said that had this provision been in place in fiscal year 2008, state revenues would have been reduced by more than $1 billion, or 15 percent of the tax revenue collected; in FY 2009, state revenues would have been reduced by $400 million, close to 13 percent.
Trigger loss in revenue Based on 2009 fall forecasted numbers, if the provision had been in place for all of FY 2010 the state would have received $300 million less in production tax revenue, about 14 percent. The department said that with oil price increases forecast for later years, revenue productions are estimated at $400 million for FY 2011 and up to $622 million in FY 2015.
Referring to the Revenue numbers, Rep. Paul Seaton, R-Homer, said the loss in revenues under the bill’s provisions would have been $1.7 billion-plus in the most recent three fiscal years, without considering the impact of additional credits, which would increase that amount to more than $2 billion in revenue reduction.
Seaton said legislators haven’t identified what they would be willing to cut out of the budget, and although Johnson pointed out that it would just be a reduction in the state’s current surplus, Seaton said the Legislature has just repaid the constitutional budget reserve and he wanted to look further at the economic impact of the bill.
Johnson said the Finance Committee, the bill’s next destination, would allow that, as would the House floor, but Seaton was not persuaded and moved to table the bill. He was joined in voting to table by the committee’s four Democrats, one of whom caucuses with the Republicans, producing a vote to table of 5 to 4.
Senate Finance moves bill Senate Finance moved Senate Bill 305 out of committee without objections March 31; the bill passed the Senate 16 to 3 April 1 and 15 to 3 on reconsideration the same day and now moves to the House.
The committee substitute adopted March 31 included progressivity for gas and included a Senate Finance zero fiscal note with an analysis summing up what Senate Finance Co-Chair Bert Stedman, R-Sitka, and consultant Roger Marks have said about the bill.
Earlier versions of the bill took natural gas out of the progressivity calculation, because as the fiscal note analysis states, the current tax rate is based on the combined Btu value of oil and gas and a Btu of oil is currently worth much more than a Btu of gas.
When the Department of Revenue modeled what would happen if the value of gas in relation to oil dropped back to more traditional levels, 8 or 10 to 1, it was evident the state could lose revenue without natural gas in the progressivity calculation.
Gas progressivity was included in the committee substitute as a separate calculation.
Stedman has been pushing to get a bill through this session because provisions of the Alaska Gasline Inducement Act lock the tax structure in place at the time of the first binding open season, which is expected to begin May 1. Because of the AGIA provisions, the analysis says, “to the extent there is interest in decoupling our tax structure, it needs to be done before April 30, 2010.”
A House version of the bill was heard in House Resources March 31, with Marks walking the committee through the provisions.
Separate progressivity Under this version of the bill, progressivity for oil and progressivity for gas would be calculated separately. As Marks explained in Senate Finance, progressivity for gas goes into two buckets: the first represents current activity in the state; the second bucket represents activity with a major gas sale.
He said it was not the intent of the bill to make tax changes on current activity but to keep the bill revenue neutral. The previous version dealt with this with a credit for differences in calculation before and after the change proposed in the bill, but that would be administratively cumbersome to figure out every month.
The solution, he said, was two buckets for progressivity. As a result, no current activity would see a tax increase and gas from a major sale would not dilute oil progressivity.
“Some producers currently produce Cook Inlet gas or other in-state gas along with North Slope oil,” the fiscal note analysis says. “If all gas were separated from oil these producers would see an immediate tax increase. The bill is not intended to increase taxes on current activity. Having the progressivity for Cook Inlet gas and other in-state gas calculated together replicates the current situation, so these producers will see no tax increases. Only progressivity on export gas, like the gas from a major gas sale, would be calculated distinctly. This will prevent a major gas sale from diluting progressivity on oil.”
The fiscal note analysis also says the bill gives the Department of Revenue authority to adopt regulations to allocate costs between oil and gas, and says that a method based on the relative Btu barrel of oil equivalents should be considered. Revenue had described a number of possible methods of allocating costs to the committee, and asked for direction from the Legislature as to the method.
The fiscal note analysis says the Btu equivalent basis was adopted by Revenue for implementation of the current law.
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