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Senate Resources votes 5 aye, 2 nay Committee concludes deliberations on SB 305; Stevens, Seekins oppose 25 percent tax rate; Cook Inlet considerations dropped Kristen Nelson Petroleum News
Senate Resources completed work on a committee substitute for Senate Bill 305 March 29, voting 5 to 2 in favor of the bill, with two Republican senators, Ralph Seekins of Fairbanks and Ben Stevens of Anchorage, casting the dissenting votes. Both have said they oppose the committee’s decision to raise the 20 percent tax level proposed by Gov. Frank Murkowski to 25 percent.
SB 305 is the production profits tax, the change from a field-based severance tax based on gross and adjusted by the economic limit factor or ELF to a tax based on a company’s statewide net profits.
The committee had included special tax provisions for Cook Inlet in an earlier version of the bill, but those were stripped out.
The $73 million standard deduction in the governor’s bill was dropped in favor of an allowance for producers who average less than 55,000 barrels per day of oil equivalent in the state, with 6,000 cubic feet of natural gas the equivalent of a barrel of oil.
In addition to the 25 percent tax rate, the Resources CS for SB 305 includes a progressivity feature which has a trigger point of Alaska North Slope crude oil on the West Coast at $40.
Cook Inlet component eliminated Assistant Attorney General Rob Mintz, reviewing the 5,000 bpd exemption for the committee Feb. 23, described the tax-free allowance as scaled to the amount of oil and gas a producer has in the state. If that is an average of 5,000 bpd or less, no production tax would be owed. Above the limit set, however, there would be no allowance. The goal was to target the allowance where most needed, he said, for smaller producers.
Seekins said he appreciated incentives for new producers, but was concerned about the issue of fairness. He said he also wants to encourage those who are already producing to go out and do new developments. It’s like giving a slap in the face to the girl who brought you to the dance, an old favorite, because we’re trying to attract new people, Seekins said.
Stevens said he was concerned about leaving money on the table. There are other incentives for medium- and large-sized players, he said: “If this is the incentive for small players, let’s keep it small.”
Tax rate at 25% The committee defeated an amendment by Stevens to drop the tax rate back to 20 percent on March 24. Stevens said his assumption was that the goal of the bill was to create an incentive and a climate for investments and that the components should balance incentives as well as increased revenues to the state. He said he disagrees with the consultants who have said that the increase in tax rate does not affect investment.
“An increase in tax rate is a disincentive for investment,” Stevens said.
Sen. Bert Stedman, R-Sitka, disagreed. He said that while the governor’s proposal had a 20 percent tax rate, numerous consultants comparing Alaska with other regimes in the world had told the Legislature that a 25 percent take rate would not put an undue strain on gas line negotiations.
“We are not on the leading edge here,” Stedman said, comparing the 25 percent proposal to international fiscal regimes.
With unprecedented price increases in the commodity the difference between 25/20 (25 percent tax and 20 percent credit) and 20/20 is only 4.3 percent, he said.
Seekins said he’d listened to consultants say that a 25 percent tax rate “won’t negatively influence investment climate.”
The “current investment climate is already unacceptable,” with an unacceptable decline in production, he said.
Seekins said he “doesn’t want to perpetuate an unacceptable system,” and the more the state pushes tax rates up the more it discourages investment. The 20 percent tax almost doubles severance, he said, and with progressivity at current prices the tax rate would be at 30 percent.
He said he has to wonder if, with progressivity, “we haven’t pushed this to the point where we are discouraging investment.”
Stevens noted that consultants came and dropped their numbers on the table and left, while the ones who remain, including future legislators, will be affected. He said without production there is no tax, and he believes the 25 percent rate could reduce investment and production. “There is no blood left in the sponge,” he said.
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