Alaska’s tax credit programs have brought capital into the state as well as promoting resource production, the Alaska State Senate Oil and Gas Tax Credit Working Group said in a report issued Dec. 1. The group’s report urged a phased approach to any change in reimbursable credits in order to keep private sector investment in Alaska, but also urged ensuring that Alaska companies providing services to oil companies are compensated in bankruptcy court.
Sen. Cathy Giessel, R-Anchorage, chair of the Senate Resources Committee and convener of the working group also said the state needs to make sure that credits don’t take production taxes below the legislated 4 percent floor.
“The credit system has brought natural gas stability in the Cook Inlet, as well as more competition to the North Slope,” Giessel said in a statement. “We must make the system more sustainable, but also respect the tremendous investments coming into our state.”
Months-long process
Tax credits were an issue in this year’s Legislature and in June legislatives committees held a hearing on the state’s oil and gas tax credit system in Kenai.
Following that hearing a working group was formed with members of the Senate Resources and Finance committees: Sens. Giessel; Anna MacKinnon, R-Anchorage; Bill Stoltze, R-Chugiak; Lyman Hoffman, D-Bethel; Click Bishop, R-Fairbanks; Peter Micciche, R-Soldotna; and Bill Wielechowski, D-Anchorage.
Private sector stakeholder groups were represented by Kara Moriarty, chief executive officer of the Alaska Oil and Gas Association; Rebecca Logan, general manager of the Alaska Support Industry Alliance; Barbara Huff-Tuckness, president of General Teamsters Local 959; and Butch Lincoln, vice president and chief operating officer of the Arctic Slope Regional Corp.
Administration members participating included Commissioner Randall Hoffbeck of the Department of Revenue; Director Ken Alper of Revenue’s Tax Division; Director Corri Feige of the Department of Natural Resources’ Division of Oil and Gas; and Paul Decker, resource evaluation manager of DNR’s Division of Oil and Gas.
Prospective changes
The working group summary report makes a number of recommendations, the first of which is that any changes be done prospectively.
“There is a great concern that for many projects, with much of the capital already deployed, a massive change in the tax credit system would undermine the fundamental economics,” the report says.
A danger in making changes is lack of purpose: would changes be made to manage cash flow or to enhance the state’s revenues with new projects, the report asks.
If the concern is only cash flow management, reflecting outlays generated by previously encouraged activities then the state should withdraw entirely from incentivizing behavior. But that would be disastrous to many sectors of the state’s economy, the report says, and is not being recommended.
In the face of massive budget shortfalls, however, all expenditures such as oil and gas tax credits should be scrutinized, the report says, but warns against the potential of adding private sector recession to the contraction of the public sector already underway.
The report recommends a graduated effective date for changes in the current tax credit system, and says that massive changes taking effect in the next 12 months “could be considered retroactive since many projects have gained and expended funds on exploration and development.”
Project timelines a concern
The report urges consideration of project timelines, noting that several projects are nearing production and that the state has spent billions over 10 years to incentivize exploration and development.
A dramatic change in the tax credit system could halt projects already in development, costing the state the investment it has already made.
The report particularly urges protection of the stability of Cook Inlet natural gas supply and encouraging more North Slope production.
Capital investment issues
The report also emphasizes the importance of capital investment.
“The state was able to take a rebate program through its refundable credits and have them serve as an importer of capital from around the world. The growth and sophistication of this system by some of the very best lending institutions is worth continuing,” the report says.
The report cites the importance of bringing in more private sector capital to bolster employment at a time when the state has serious cash flow issues.
It also refers to what happened after Gov. Bill Walker deferred payment on June 29 of some $200 million in reimbursable oil and gas tax credits.
Companies which were in the process of obtaining project financing saw finance agreements suspended, loan amounts significantly reduced or interest rates raised.
“In short, the payment deferral precipitated a liquidity crunch in the state’s energy sector for independent companies,” the report says, noting that Revenue Commissioner Randall Hoffbeck “worked assiduously over the course of the summer to reassure the financial institutions and energy companies that the state would continue to honor its obligations.” Ultimately, the report says, “The initial credit crunch relaxed.”
“With a focus on maximizing the use of capital in the state, another recommendation would be to tether rebates to further in-state operations,” the report says, and “to ensure Alaskan vendors and support service contractors have a stronger path to repayment in the event a company receiving tax rebates flounders.”
Production tax floor
The report also recommends protecting the production tax floor, established at 4 percent under Senate Bill 21, which could be threatened if legacy producers incur carry-forward annual losses great enough to drop their tax liabilities below the floor.
“Though there may be disagreement on proposals to increase the floor, at a minimum the floor installed in Senate Bill 21 should be hardened up and protected.”
The report also says that outlays for frontier basin exploration are relatively small - but those explorers use credits designed for Cook Inlet because those credits, while smaller, are available sooner. It might be worthwhile to allow frontier basin credits to expire, and allow for frontier basin exemptions if any changes are made in credits predominately used in Cook Inlet.
The report also recommends changing reporting requirements to show investment levels, while still protecting confidentiality for individual projects.
“Alaskans deserve to know what the other side of the table is spending on a project if their money is investing in its success,” the report says.
Wielechowski objects
“While I appreciate the efforts made to start the conversation, I am afraid Oil and Gas Tax Credit Working Group missed an opportunity to try and address our broken system,” Sen. Bill Wielechowski, D-Anchorage, said in a Nov. 27 letter to Sen. Cathy Giessel.
The state’s oil tax credit and deduction system “must be reformed” he said, but noted while the largest issue with the state’s tax credit system is deductible tax credits - those taken by producers against taxes they owe the state - “yet there were no hearings fully devoted to this section of the statute.”
Wielechowski said that in fiscal years 2015 and 2016 the state paid out some “$642 million more in refundable oil tax credits than we receive in production taxes,” and noted that the refundable tax credits on which the working group focused “are only a small portion of the problem we face.”
