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Vol. 12, No. 44 Week of November 04, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Two tax bills now in play

Alaska governor’s PPT rewrite, ACES, departs first committees with major changes

Kristen Nelson

Petroleum News

The first committee substitutes are out for Gov. Sarah Palin’s proposal to increase oil production taxes, the ACES bill, and the Alaska House and Senate are talking such different approaches that it is hard to see where the Legislature may land at the end of the 30-day special session that started Nov. 18.

Both the House Special Committee on Oil and Gas and the Senate Resources Committee voted out committee substitutes Oct. 29 — substitutes which are considerably shorter than the original bill.

The bill, Alaska’s Clear and Equitable Share, is the administration’s proposal to make a number of changes in the petroleum profits tax, or PPT, passed in August 2006, including raising the tax rate from 22.5 percent to 25 percent, changing the trigger point and slope of the progressivity feature — which raises taxes as oil prices climb — and providing a number of tools for the Department of Revenue in administering the tax.

The bills are now in the House Resources and Senate Judiciary committees.

One reason the shape of a final measure is hard to discern is because the Senate divided up work on the bill, leaving tax rate issues to Senate Finance, the bill’s last committee of referral. The Senate Resources CS did not include the tax increase in the governor’s bill leaving work on that provision to Finance, so what view the Senate will take on the governor’s proposal to increase the tax rate from 22.5 percent to 25 percent and change the trigger point and slope of the progressivity is not clear.

House kicks up progressivity

The House Oil and Gas Committee worked the entire bill and made a number of changes, including dropping the 10 percent gross tax floor for legacy fields and changing the progressivity element to a tax on the gross. House Oil and Gas did not increase the PPT base rate. In a press release issued after the CS was adopted, Oil and Gas Chairman Kurt Olson, R-Soldotna, said the committee considered the increase in the base PPT rate from 22.5 percent to 25 percent, but did not adopt it because members of the committee generally believed that approach would dampen oil industry investment in Alaska.

The redo in the progressivity factor is in response to the belief of Alaskans that “we are not getting our fair share, especially when the price of crude is as high as it is,” Olson said. “Our approach is to redo the progressivity formula of the PPT, which will result in significantly greater revenue to the state whenever the price goes over $50 a barrel.”

House Oil and Gas adopted a progressivity surcharge on the gross value of the barrel of oil when that value is above $50.

House CS under attack

The Oil and Gas CS change basing progressivity on gross value has already drawn criticism.

The House Oil and Gas CS came under attack by committee member Rep. Mike Doogan, D-Anchorage, who said at a House Minority press conference Oct. 30 that numbers used in modeling proposals before the committee were changed in ways that weren’t explained — and in such ways that the CS proposal appeared to bring in more revenue to the state than ACES — which isn’t the case if other numbers are used.

Doogan said he expects that “we’re going to get different versions of this bill at every stop” and it will have to be fixed on the House floor, noting that House Oil and Gas produced a committee substitute for the Alaska Gasline Incentive Act last year, a version which was scrapped in House Resources.

Commissioner of Revenue Pat Galvin and administration consultants defended the ACES approach to progressivity Oct. 30 in House Resources, telling committee members that the ACES approach, with progressivity on net rather than gross, is in line with the way companies look at investment decisions and allows the state to increase its revenues while allowing the companies acceptable levels of return on investments.

Senate committee substitute

The Senate committee substitute retains the current tax system’s structure, taxing the net value of petroleum resources, the Department of Revenue said in a fiscal note. The bill eliminates the transition investment expenditure credit except to the extent that transition credits earned from April 1, 2006, to the bill’s effective date that could not be used to offset tax liability can be carried forward. This allows companies that have expenditures — but don’t currently have production — to benefit from these credits to the same extent as companies with existing production.

The bill excludes from qualified lease expenditures expenses related to unscheduled production interruptions; excludes dismantlement, removal and restoration costs; requires taxpayers to provide cost projections to allow the state to better forecast state revenues and pursue changes in reported costs; authorizes public reporting of some cost data; authorizes a short-term audit program; and designates an exempt class of oil and gas auditors.

Senate Judiciary heard objections to the exempt class of oil and gas auditors from two of the state’s labor unions. The unions want the state to keep oil and gas auditors within the classified service and create additional grades of classified workers to allow the state to attract experienced auditors by paying closer to the market rate.

The Department of Administration told Senate Judiciary that it has tried to work within the state’s classified service, but that the level of oil and gas auditors it needs aren’t attracted to levels of pay the state can offer within the classified service.

The Department of Revenue said it even looked at bringing in auditors right out of college — many more than the state actually needs in order to ensure that some remain with the state. As those auditors gain experience, the department said, most would move on to jobs in private industry because the state is at the bottom of the pay scale.

The current goal in making oil and gas auditors exempt employees, Deputy Revenue Commissioner Marcia Davis told House Resources, is to be able to attract some senior and very qualified auditors to lead the state’s oil and gas auditing program.

Revenues vs. investment

Public comment on the bills has been divided between those who believe the oil companies make “obscene” profits in Alaska and that the state, as the resource owner, should get a bigger share of the proceeds from current high prices and those concerned that raising the tax rate — and changing it the year after it was enacted — will have a negative impact on oil industry investment in the state. Those opposed to raising the tax also point out that the state currently has a surplus and has not established a long-term fiscal plan to deal with declining oil revenues as production drops.

Democrats in the Legislature favor the state taking a larger share of oil industry profits in Alaska, pointing to the high value oil currently brings and the need to fund state services.

Republicans also speak in favor of the state getting a fair share of profits with current high prices, but many are concerned that the state’s economy could be hurt if oil companies invest less in Alaska.

State revenues come not only from PPT, which is a tax on production, but also from royalties on oil produced from state oil and gas leases, from corporate income tax and from property tax. The value of royalties is based on the production level as well as the price, and the volume of royalty to which the state is entitled drops as volumes produced drop.

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