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Vol. 21, No. 4 Week of January 24, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Tax changes up

Governor proposes 5% base, tax credit changes, AIDEA development lending

KRISTEN NELSON

Petroleum News

The Alaska Legislature, which gaveled in Jan. 19, is tackling the state’s budget problems, beginning with a review of Gov. Bill Walker’s proposed budget. As part of tackling budget problems caused by the dramatic drop in crude oil prices and the continuing decline in crude oil production in the state, the governor has proposed changes in the state’s oil and gas tax system designed to save the state money.

And in an effort to replace some of the support to small- and medium-sized oil and gas companies presently using the state’s oil and gas credits, Walker is also proposing that the Alaska Industrial Development and Export Authority be authorized to support oil and gas development in the state.

In a transmittal letter to the Legislature for the tax change bill, Senate Bill 130 and House Bill 247, the governor said the four elements in the bill would protect the state’s fiscal future “while instituting cautious reforms in the oil and gas tax credit system.”

Elements of the bill include simplifying the oil and gas tax system by repealing “numerous narrowly targeted credits”; strengthening the minimum tax for North Slope oil and gas; focusing the state’s purchase of oil and gas tax credits on small companies hiring Alaska residents; and making changes “to promote good governance in tax administration.”

The second bill, Senate Bill 129 and House Bill 246, would, the governor said, “establish a new oil and gas infrastructure program and fund” for AIDEA, a “tool for AIDEA to use in assisting the oil and gas industry in the state by proposing an oil and gas infrastructure development program to allow AIDEA to assist in supporting small or medium-sized oil and gas producers that are dependent on outside financing.”

Tax change specifics

A fiscal note for the tax change bill prepared by Ken Alper, director of the Department of Revenue’s Tax Division, says the bill is described as “a comprehensive attempt to reform and reduce the cost of Alaska’s current program of providing direct tax credit rebates and other advantages to oil and gas companies.”

Alper said that through the end of fiscal year 2015 companies received some $7.4 billion in tax credits, including credits used against tax liability and credits repurchased by the state.

Goals of the legislation include reduction of the state’s annual cash outlay; protecting net operating loss credits “especially for exploration activity”; limiting repurchases to companies who need the support; strengthening the minimum tax and preventing abuses to the system; being more open and transparent; and honoring and paying credits earned to date and through any transition period.

Fiscal impact

Alper said the Department of Revenue estimates the legislation would have an initial impact of $500 million per year, with $400 million “saved through reduced operating budget expenditures” and $100 million from increased revenues.

Of the savings, about $200 million would come from tax credit certificates which would no longer be earned and about $200 million from some tax credit certificates that would continue to be earned but, in most cases, would have to be held until the companies had tax liability.

The $100 million earned would come about half from hardening the minimum tax floor, reducing the ability of companies to offset the 4 percent payment, and about half from increasing the minimum tax rate to 5 percent.

Alper said the department’s oil price forecast indicates that by fiscal year 2019 oil prices will likely have recovered enough that “it would be unlikely that one or more of the major oil producers would have a net operating loss.”

It would cost about $1.5 million to implement the changes in the bill as the Tax Revenue Management System and Revenue Online tax portal would require “substantial reprogramming,” but no additional costs are estimated to administer the tax program.

AIDEA

John Springsteen, AIDEA director, said in a fiscal note that establishment of the Oil and Gas Infrastructure Development program and fund would provide AIDEA “with new tools to support the development of the oil and gas sector of the economy,” providing the agency the authority “to finance oil and gas infrastructure development through project financing, issuing bonds, bond guarantees, and other beneficial financial mechanisms.”

In his transmittal letter the governor said “the bill would require that AIDEA make sure the participants in an AIDEA oil and gas infrastructure development program do not take, apply for, or accept a gas exploration and development credit or a production tax credit from the State.”

Walker also said projects eligible for AIDEA financing would be those already explored and with “established proven reserves.” He said the agency “would establish processes for financing and confirmation of proven reserves. Speculative developments that are still in the exploration stage would not be eligible under the program.”



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