Petroleum tax issues are sure to be front and center again in the 2017 legislative session, legislators are saying. It’s mostly to deal with issues left unresolved in a major revamp of the tax law passed last year in House Bill 247.
Gov. Bill Walker, however, may want to use his political capital next year on needed state fiscal reforms, which will likely include some form of broad-based tax on citizens, like a personal income tax, state tax director Ken Alper said in an interview.
Rep. Paul Seaton, R-Homer, will again push a version of a personal income tax bill he introduced last February, House Bill 365. Seaton will co-chair the House Finance Committee next year in the new coalition organization, a position of influence.
Walker also proposed a personal income tax in the 2016 session, although it came in late.
In an interview Alper said tax changes on other resource industries, such as mining, may move to the back burner in 2017 so that fiscal reform gets full attention. The governor has not yet made his decisions on those, he said.
“We don’t want the 2017 session to be dominated by oil taxes again. There are bigger issues in front of us,” meaning the fiscal gap, Alper said.
“However, we fully expect legislators to push for (oil) tax legislation,” some of them aggressively, Alper said. The Revenue Department will provide modeling and information to legislative committees on these.
House v. Senate
The House, led next year by a coalition, is likely to pass tax changes, sources in the Legislature said, but these may hit a wall of resistance in the Senate, which is still led by Republicans.
Seaton said the Legislature must finish the job of reforming the state oil and gas tax credit program that was mostly accomplished this past session.
HB 247, passed last spring, phased out most of the tax credits over three years - they will be off the books by 2019 - but Seaton said two important issues remain.
One is a limit on the number of years that operating net loss tax credits can be carried forward. Under current law there is no limit.
A second, both Seaton and Alper said, is the ability of producers to use certain tax credits to lower their taxes below the minimum “floor” rate of 4 percent of gross revenues. Alper said “hardening” the floor minimum tax could be one priority for the governor. “We have to be sure we get at least the minimum tax at low oil prices,” he said.
The net operating losses carried forward by the major producers have become less important now that oil prices have edged up closer to $50 a barrel. “At that price there will be few operating losses in the large ‘legacy’ fields,” which means the major producers will not have large carry-forwards, Alper said. This isn’t true for smaller independent companies, however. There are also huge worries over large projects going into development that could accumulate hundreds of millions in tax credits eligible for refunds.
Tax credit liability
For now, a great concern is how to deal with hundreds of millions of dollars of oil tax credit liability that have already accumulated, and which are still increasing.
Given the state’s financial difficulties the appropriations for cash refunds in the upcoming FY 2018 budget, “will likely be around the $40 million statutory minimum set out in the law,” Alper said. Credits that can’t be refunded add to the liability.
For the current year, FY 2017, the governor vetoed most of the cash appropriation for credits, leaving only the minimum payment. Payments are made to applicants on a first-come, first-served basis, Alper said, and if there are insufficient funds appropriated, as happened this year, the available money is pro-rationed among those holding credits who have applied for the refunds.
The overall accumulation of the unpaid credits is a big worry because it hurts the state reputation and credit rating agencies don’t like it.
“We have to find a way to get these off the table,” Alper said. “We shouldn’t leave industry just hanging out there,” with companies having invested on the basis that tax credits would offset part of the cost.
Last year the governor had proposed a $1 billion fund to help retire the accumulated credits but the proposal was linked to an overall fiscal reform package passing, which didn’t happen.
As of today the tax credit liability totals $450 million, Alper said. By the end of the current FY 2017 fiscal year, next June 30, the total will be $650 million to $700 million. By the following year, at the end of FY 2018 on June 30, 2018, the total is expected to be around $1 billion, he said.
That’s without any major new North Slope projects, such as two proposed by Armstrong Oil and Gas and Caelus Energy on discoveries they have made.
Explorers and developers do have other options than the state to monetize the tax credits, however. Once they apply for the tax credits and receive certificates from the Department of Revenue (not all expenses are eligible for credits) they can sell the credits to a producing company that can use them to reduce production taxes.
Typically these are purchased at a discount, however, so the explorer or developer does not get the full benefit of the tax credit in that situation. The state pays 100 percent face value for approved expenditures when it purchases credits.
Liability could balloon
Seaton said the tax credit liability total could balloon if one or both of the two significant new Slope oil discoveries move forward. Under the existing law both Armstrong Oil and Gas and Caelus Energy are eligible for cash refunds for net operating losses if development decisions are made. Major North Slope producers are not eligible for cash refunds although they can credit any operating loss tax credits against production taxes owed the state.
But for Armstrong and Caelus, in theory a $1 billion investment in new field development would trigger a $350 million cash refund from the state, Alper said.
“Those projects could total $10 billion each, so at $20 billion total the state’s obligation could be $7 billion,” he said.
Anything that isn’t paid in cash, and the state is financially limited, just adds to the future liability.
Seaton said he’ll push time limits again on the NOL carry-forwards to stop the accumulation of money owed. “Right now we have no tools to deal with this. There are really only two options, one being to increase the production tax to bring in more revenue (legislators have also talked about hiking the minimum tax),” or some way of limiting the accumulation of liability by putting time limits on the carry-forwards, he said.
