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Resources rolls out oil tax changes
Hearings on a new state oil tax bill in Juneau kicked off Feb. 13 in the House Resources Committee and continued Feb. 17. Committee co-Chair Rep. Geran Tarr, D-Anchorage, predicts the committee will hold hearings for at least two weeks, after which the bill goes to the House Finance Committee.
Tarr is one of the architects of HB 111 along with Rep. Andy Josephson, D-Anchorage.
Among other changes the bill effectively ends the state’s cash outs of almost all of the oil tax credits. It directly raises taxes on oil by increasing the state minimum production tax from 4 percent to 5 percent, and indirectly increases taxes by no longer allowing tax credits to be applied to the minimum tax and also reducing the per-barrel tax credit for producers.
At the Feb. 13 meeting Tarr walked through sections of the bill with Resources committee members, some who are freshmen lawmakers who face a steep learning curve on complex petroleum tax questions.
Major provisions Here are additional major provisions of the bill, as explained by Tarr:
•Cash payouts on net operating loss, NOL, tax credits are ended as of Jan. 1, 2018.
•The only remaining tax credits available for cash reimbursement are for Cook Inlet and “Middle Earth” (Interior basins) qualified capital expenditures in and well lease expenditures made before Jan 1, 2017.
•Once those credits phase out, only capital investment and well lease expenditures made in Middle Earth will be eligible for cash payment. Those were reduced in last year’s HB 247 but there is no termination in HB 111. The payments will depend on money being available, however.
•Only companies producing 15,000 barrels a day or less will be able to claim NOL tax credits (the current threshold is 50,000 barrels a day).
•Companies who are eligible will be able to claim only 15 percent of their net operating loss for a tax credit (currently 35 percent can be claimed). The tax credit must be applied against production tax owed the state. However, they can also be sold, but that would likely be at a discount.
•HB 111 would also remove a three-year limit on accrual of interest on tax owed while an audit is underway. Since up to six years can be allowed for audits by the state revenue department, the three-year limit on interest seems to be tilted in favor of industry taxpayers, Tarr said.
Heavy lift in Resources HB 111 must still clear the House Finance Committee but it’s clear that the heavy lift on the bill, including major amendments, is being left to the Resources committee.
Josephson, who co-chairs Resources along with Tarr, said he’d be open to an amendment that made increased state assistance available to very attractive projects that are vetted by the state Division of Oil and Gas.
The legislation faces big obstacles in the state Senate, however, where Republican leaders of that body have said they have little interest in hiking taxes on the state’s producers.
In defending the effect of HB 111 in raising taxes, Tarr told the committee, “we argue the state should be able to take in some of the ‘upside’ (as prices rise) so as to be able to protect ourselves and offer incentives.”
Also, Revenue Department data now shows producers’ “break even” point for the North Slope at about $46 per barrel, she said. “Given that, as prices move toward $60 a barrel (they are now about $55) we still offer tax credits,” which doesn’t seem right, Tarr said.
Wind down of incentives Overall, if HB 111 were to pass it would increase taxes but would also complete a major wind down of the state’s oil incentives that started in 2013 with passage of SB 21, a major tax overhaul, and continued last year in HB 247.
The big change in SB 21 was elimination of the qualified capital expenditure tax credit for the North Slope which allowed companies to claim a 20 percent tax credit for all capital expenditures. The so-called “QCE” credit had become very expensive for the state, and projections were that its cost to the treasury, in cash reimbursements, would reach a billion dollars a year by 2014.
In SB 21, the Legislature tried to realign the tax credits to incentivize companies to produce oil, with a per-barrel tax credit, rather than by spending money through capital investments. The bill also eliminated a key problem in the tax code, a progressivity formula that hiked tax rates sharply as prices went up.
In 2015 HB 247 continued a wind down, putting the bulk of the tax credit program on a three-year phase out.
- TIM BRADNER
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