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Administration wins on tax increase Gov. Sarah Palin gets 25% tax requested in ACES, Democrats get standard deduction; level of continuing investment the worry Kristen Nelson Petroleum News
An expected Nov. 16 knuckle-biter finish to the Alaska Legislature’s 30-day special session never materialized.
The Senate completed most of its work on the bill changing state’s oil and gas production taxes late Nov. 15 and returned in the early afternoon Nov. 16 to address some additional amendments and technical glitches discovered overnight.
By the time the bill reached the House for concurrence with Senate changes it was all over but the shouting: Democrats — who came away with a standardized operating cost deduction for Prudhoe and Kuparuk — teamed with Republicans to pass the tax increase.
The bipartisan approach was necessary, because enough Republicans were worried about the impact of the tax increase on investment by Alaska’s oil and gas industry that Republicans could not by themselves pass the bill.
The situation was complicated by the bipartisan working majority in the Senate. Some Republican members of the bipartisan group voted against the bill while most members of the Senate Republican minority voted in favor. The final vote in the Senate was 14 yeas and five nays. The House vote concurring with Senate changes to the bill the House passed Nov. 11 was 26 yeas and 13 nays (the House passed the original bill 28-12).
Thus the bill that began life as a tax increase with a gross floor, Gov. Sarah Palin’s Alaska’s Clear and Equitable Share, or ACES, became a tax increase, a progressivity increase, a standard operating deduction — all retroactive to mid-year.
Governor happy with bill “We’re happy with this bill,” the governor said at a Nov. 16 press conference, and thanked legislators for their teamwork in gaining its passage. She said the bill met the three requirements the administration had when it started out: “We wanted to receive an equitable share for our resources, of course; also to maintain a positive investment climate; and to gain the tools needed to protect the state’s interest and manage a net tax.”
Commissioner of Revenue Pat Galvin, who managed the bill in the Legislature for the administration, joined the governor in thanking legislators for their work on the bill, and also thanked the members of the administration’s team — from the departments of Revenue and Natural Resources and the governor’s office — for their work.
Galvin noted that the administration team began work about six months ago, “looking at the state production tax system as it existed and identifying the best way to move forward.”
The governor, he said, told them to evaluate all options and that was what they did, using both in-house and outside expertise.
He said the Legislature responded “in kind … looking at all the information and wanting to make the decision based upon the best information that was available …” from agency expertise, from the industry and from outside consultants.
“As we went through the legislative process one of the things that I think was probably our biggest skill was the adaptability of our team to the different ideas, different concepts that were brought forward and the ability to respond quickly with information to legislators in a way that allowed them to evaluate their choices in a real-time basis,” Galvin said.
The governor said she appreciated “lawmakers asking the questions and … also recognizing the need to get it right this time.”
With the standard deduction added, the bill is “truly a hybrid … and that’s where the consistency, the stability will lie,” she said.
Palin said her message to industry is: “We’re glad you’re here; we want to see revitalization in our industry here in Alaska; and we don’t believe there is a need to come back and revisit (the oil tax) again.”
Investment a worry The possibility of negatively impacting oil and gas investment in Alaska worried a number of Republicans, including House Speaker John Harris, R-Valdez, who voted for the bill.
In a statement from House Republicans issues after House passage Harris said:
“The governor and her administration have crafted a bill and pushed it through the Legislature that will either tap the producers for another $1.5 billion without harm, or end up hurting our economy by driving away oil industry investment. We will need billions of dollars of investment to keep our production up, so I am hopeful the governor has not made a serious mistake with this legislation. But we won’t really know for sure for a couple of years.”
Oil and gas company executives told legislators during committee hearings that they were worried about both the tax increase and other portions of the bill which would increase costs to industry, and said that investment decisions already made would have to be revisited in light of the proposed tax changes.
The Senate Bipartisan Working Group did not issue a release after bill passage, but Sen. Joe Thomas, D-Fairbanks, said in a statement that his amendment on the Senate floor gives “all natural gas produced for Alaskan in-state use the same favorable tax rate previously applied only to Cook Inlet gas.”
Sen. Johnny Ellis, D-Anchorage, said “this idea did not have much traction” at the beginning of the special session. “Senator Joe Thomas worked this issue and convinced senators to help the people of the Interior,” Ellis said.
Democrats, Senate Minority pleased “The standard deduction creates one stable point in our tax structure. It anchors a system with many moving parts and allows us to control costs and ensure predictable revenue,” House Minority Leader Beth Kerttula, D-Juneau, said in a statement.
House Democrats introduced the standard deduction provision on the House floor; it was stripped out by Senate Finance but amended back into the bill on the Senate floor.
“This landmark legislation was made possible by the Senate Minority working across the aisle to pass a number of critical amendments previously stripped in the Senate Finance Committee,” Senate Minority Leader Gene Therriault, R-North Pole, said in a statement following House approval of the bill.
Bill basics The bill raises the base rate from the petroleum profits tax, or PPT, enacted in 2006 from 22.5 percent to 25 percent. It raises the progressivity rate, a surcharge, to 0.4 percent when the net value of a barrel of oil is more than $30 (under PPT the progressivity rate was 0.25 percent and the trigger was $40 net). The Senate made the tax changes retroactive to July 1.
Transitional investment expenditure credits — credits for expenditures under the pre-2006 oil and gas severance tax with its economic limit factor or ELF — are eliminated for fields under production.
The House created a standard deduction for operating costs at Prudhoe Bay and Kuparuk based on 2006 operating costs with a 3 percent escalator each year. The Senate put a three-year sunset on that standard deduction.
Revenue will write regulations defining what costs can be deducted and new language — retroactive to April 1, 2006 — excludes any cost associated with a criminal act, including any pleas under the federal Clean Water Act.
The administration wanted to move oil and gas auditors out of the state’s classified service and make the positions exempt so that they could pay enough to attract auditors with experience in the oil industry. Legislators would only agree to create six exempt audit master positions — four in Revenue and two in DNR.
The bill also contains a provision related to taxes on natural gas: natural gas used in the state for fuel will be taxed on the same basis as Cook Inlet gas.
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