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February 2010

Vol. 15, No. 7 Week of February 14, 2010

Administration oil tax change bill filed

Parnell proposes ‘four discrete changes’ to production tax; in House bill Johnson proposes tax reduction, credits for Alaska hire

Kristen Nelson

Petroleum News

Earlier this year Alaska Gov. Sean Parnell talked about the changes he would like to see made in ACES, Alaska’s Clear and Equitable Share, the state’s oil and gas production tax. The administration bill embodying those changes was introduced Feb. 9, and the governor said in a transmittal letter that the administration “bill will provide incentives for explorers and producers to continue to invest in Alaska,” with changes designed to encourage investment and employment within the state and ultimately to increase production of oil and gas within the state.

Meanwhile, a bill introduced by Rep. Craig Johnson, R-Anchorage, to reduce the tax rate in ACES, was amended to include tax credits for companies who employ 80 percent or more Alaskans in the state, with the credit increasing as the percentage of Alaskans on the company’s workforce increases.

However, a memo from Legislative Counsel Donald Bullock, warned that “The incentive for the employment of resident workers by a reduction in tax burden raises constitutional issues because of the effect on workers who are not residents of the state.”

Bullock said the incentive for employing resident workers “corresponds to a disincentive for employing workers who are not residents. This raises a question of whether the inducement violates the privileges and immunities clause of the United States Constitution or the equal protection provisions in the United States and Alaska Constitutions.”

Reduction in rate

While the administration proposal deals primarily with credits — expanding existing credits to include 30 percent for all drilling and well-work expenses; allowing the state to pay for capital credits earned by explorers regardless of their future spending levels; allowing companies to enjoy the benefit of capital credits in the year they are earned; and allowing for waiver of interest charges on late payments due to retroactive application of new regulations — Johnson’s bill proposes a wider range of tax changes.

It includes a provision that interest is not due on retroactive regulatory changes prior to implementation.

But it also proposes — in addition to the tax rate reduction for resident hire — dropping the progressivity rate from 0.4 percent to 0.2 percent, providing a 30 percent credit for well work and changing the interest rate the state charges for all Alaska tax types.

Interest rate issue

CPA Dan Dickinson, a former director of the Department of Revenue’s Tax Division, reviewed the interest rate issue for the House Resources Committee at a Feb. 8 meeting.

Currently the state interest rate for late payments of all tax types is the higher of the federal funds rate plus 5 percent or 11 percent, Dickinson said. The bill provides that the state would charge interest at the lower of the federal funds rate plus 2 percent or 11 percent. That rate would also apply to late royalty payments, he said.

Dickinson told the committee that the existing interest rate was implemented in 1991 as the state was settling major production tax and royalty litigation going back to 1977. Federal funds rates have dropped dramatically since the early 1990s, and a table included in Dickinson’s presentation included interest rates for under payments of tax under the Internal Revenue Code: the federal funds rate plus 5 percent for large corporations; and federal funds plus 3 percent for corporate and non-corporate. According to a chart in Dickinson’s presentation, the IRS large corporate rate is now running just above 5 percent, compared to the state’s 11 percent rate.

While the state can compromise the amount of tax and interest in a settlement, state statutes do not mention compromise on interest, Dickinson said in his presentation.

Other oil tax bills introduced this session include a bill by Rep. Clarisse Millett, R-Anchorage, to reduce the net tax rate from 25 percent to 20 percent and a Senate companion bill to Johnson’s bill, introduced by Sen. Lesil McGuire, R-Anchorage.






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