The proposed budget released by Gov. Bill Walker’s administration in December included a request that the Department of Revenue explore options for expediting payment of outstanding oil and gas exploration tax credits, and proposed that bonds be issued to make payments, with credit holders to be paid off at a discount.
In a Jan. 22 Senate Finance Committee hearing Revenue Commissioner Sheldon Fisher said the proposal was that the state would purchase credits at a discount to the face amount, allowing those holding credits to receive cash for credits that have been issued and outstanding. He said the department believes it can do this at a cost below the companies’ costs of capital.
The state would use the proposed 10 percent discount to pay the cost of interest on bonds the state would issue, using the discount to pay the cost of interest.
When the budget was released Fisher said the administration estimates that by the time all credit programs expire there will be about a billion dollars in credits. It is estimated that some $100 million of those will be sold to other oil companies to offset taxes, leaving just under $900 million. He said that based on current revenue and statutory requirements those credits would be paid off over the next six to seven years.
The discount
Fisher said in Senate Finance that the discount covers immediate payment versus what the obligation would be over time and added that taking the discounted payment is an option for credit holders: They don’t have to take it. The concept is companies will choose to do this because they get money faster and at a cheaper rate than they could get it going into the market, he said.
Sen. Peter Micciche, R-Soldotna, said the 10 percent discount seemed a little rich, an administrative fee tacked onto the time value of money.
Ten percent is a little rich, Fisher said, but the idea is that 10 percent would be the base amount and through providing the state with an overriding royalty interest companies could buy that down to 5-6 percent, the minimum amount of discount to cover the cost.
The 10 percent also addresses a concern some might have that there is not enough benefit to the state, Fisher said, adding that the state has been reaching out to credit holders to try to understand their view.
Tax Division Director Ken Alper was asked about the proposal to bond to pay for credits in a Jan. 26 House Resources Committee hearing. He said the bill doesn’t exist yet and called it a very complex piece of legislation.
In a summary of tax changes Alper noted that House Bill 111, passed in July 2017, ended cashable tax credits, replacing them with carry-forward losses.
Rep. Justin Parrish, D-Juneau, said it sounded to him like a solution that protects the interests of oil companies, and asked what the current interest rate was on the $800 million in tax credits outstanding. Alper said the credit payments are subject to appropriation and that there is no interest charged for delay on credit payments.
