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House coalition passes 25% bill Senate Finance amends its CS from 22.5% to 25%, refuses to let Revenue write leasehold expenses regs, sunsets audit masters Kristen Nelson Petroleum News
The 30-day special session of the Alaska Legislature ends at midnight, Friday Nov. 16, more than a day after this issue of Petroleum News goes to print, with a nail biter of a finish expected.
The issue is whether House and Senate can agree on amendments to the state’s production profits tax, or PPT.
The House passed their version of amendments to the state’s 2006 oil production tax Nov. 11. Senate Finance passed a committee substitute late in the evening Nov. 14. The Finance CS was expected on the Senate floor Nov. 15.
The Senate Finance CS was amended to the same 25 percent base tax rate as the House bill after starting out at 22.5 percent. Progressivity was also dropped to parallel the 0.4 percent rate in the House bill, although the Senate version retains a different rate at high prices.
The special session was called by Gov. Sarah Palin, who cited the cloud created by indictments and convictions for bribery of legislators who participated in the 2006 session that passed PPT. The administration was also concerned that revenue estimates from the previous administration fell short after taxpayers claimed higher costs as deductions than projected when PPT was passed.
When she proposed her tax bill — Alaska’s Clear and Equitable Share, or ACES — the governor called for a fair share for Alaska and for a tax that would encourage investment in the state.
House at 25 percent The House bill includes a 25 percent tax base, aggressive progressivity (a tax rate surcharge as the net value of a barrel increases), stiff penalties for underestimations of taxes and a standard deduction for operating costs at legacy fields based on 2006 costs.
The increase in base rate (the current petroleum profits tax has a 22.5 percent base) and more aggressive progressivity starting at $30 net with a 0.4 percent slope capped at 25 percent of the net (PPT started at $40 net and had a 0.25 percent slope) were too much for Republicans worried about stifling industry investment in the state. It took a coalition of Republicans and Democrats to pass the bill. Democrats had come into the session favoring a gross tax and their price for approving a net tax was a standard deduction for operating costs at legacy fields. This will be based on 2006 costs and will allow a 3 percent increase each year. Democrats described this as one fixed point in a tax which is otherwise composed of moving parts.
The standard deduction is also viewed as a way for the state to get a handle on auditing difficulties associated with a net tax. The issue of allowing the Department of Revenue to pay enough to attract experienced oil and gas auditors was solved — with a floor amendment — by allowing Revenue four “audit masters” who would be in the exempt category, outside the state’s classification system; the Department of Natural Resources, which also has oil and gas audit issues, would have two audit masters.
Senate Finance works CS The House bill was assigned to Senate Finance, which was already working on a committee substitute which didn’t appear until the evening of Nov. 13. Committee discussions Nov. 12 and Nov. 13 on progressivity in the CS showed a base rate of 22.5 percent and a progressivity varying from 0.6 percent to 0.1 percent as the net trigger price rises from $30 to $90.
The Senate Finance CS did not include either the standard deduction or additional penalties for under estimation of taxes.
When the dust settled after a day of discussion by consultants and the administration about impacts of the Finance CS — and several hours of testimony from oil and gas companies objecting to every aspect of the CS — Senate Finance came back late in the evening of Nov. 14 and quickly passed 12 amendments.
In addition to increasing the base rate to 25 percent and lowering the progressivity rate, the committee removed an ACES requirement that the Department of Revenue write regulations defining allowable leasehold deductions and inserted a sunset for audit masters, a change which Revenue Commissioner Pat Galvin told the committee would make it impossible for him to attract highly qualified oil and gas company auditors because the sunset in effect means he could only offer a three-year job.
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