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Vol. 22, No. 16 Week of April 16, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

House moves HB 111

Bill eliminates cashable credits, ties carry-forward losses to lease or property

Kristen Nelson

Petroleum News

A Finance Committee substitute for House Bill 111, an oil tax and credit rewrite, passed the Alaska House by a 21-19 vote April 10 after passing out of House Finance on a 6-5 vote. The bill is now in the Senate, where it will be heard by Resources and Finance. No Senate hearings had yet been scheduled when Petroleum News went to press.

In related action, the House on April 12 passed 22-18 a Finance Committee substitute for Senate Bill 26, creating a sustainable draw from the earnings of the Alaska Permanent Fund, but the Finance CS tied the bill to a condition requiring passage in this session of the Legislature of a broad-based tax which would generate annually at least $650 million directed to education and “the version of House Bill 111 that passes out of the House of Representatives.”

Out of business of cash credits

The Finance CS for HB 111 gets the state out of the business of issuing transferrable or cashable tax credit certificates, replacing those credits with carry-forward losses applicable to production taxes.

In discussions with the committee Ken Alper, director of the Department of Revenue’s Tax Division, said that in addition to getting the state out of the business of cash credits, the per-barrel credit also goes away, replaced with a lower tax rate (25 percent compared to the current 35 percent), so the effective and nominal tax rate are the same, with value of carried forward losses at the same rate as the tax rate.

The 25 percent net tax raises taxes in the $50-$90 per barrel price range, Alper said, with the Finance CS comparable to the original version of Senate Bill 21 as proposed by the Parnell administration in 2013.

Changes in Finance

Alper discussed major differences between the Resource and Finance versions. The House Resources CS increased the production tax floor to 4 percent at prices below $25 and to 5 percent at prices above $50. The Finance CS keeps the current minimum tax of 1 percent above $15, 2 percent above $17.50, 3 percent above $20 and 4 percent above $25.

While the Resources CS prevented any credits from being used below the minimum tax the Finance CS allows use of the small producer credit.

The Resources CS eliminated the 35 percent net operating loss credit for the North Slope and replaced it with a carry-forward structure and allowed for 50 percent carry-forward of losses with uplift of some 8.5 percent for seven years, while the Finance CS allows for 100 percent of losses to carry forward, but without uplift. The Finance CS also decreases the carried forward value by 10 percent per year after seven years.

A point of significance in committee discussions, the Finance CS ringfences the carry-forward expenditures by requiring that they be used only to offset tax value from the lease or property where they were incurred.

The concern expressed in the committee was that a company with large losses on an expensive new development could use those carried-forward net operating losses to offset profits from a profitable producing field elsewhere on the Slope or that a company might sell an asset, including carry-forward losses, and the buyer could use those losses to offset taxes elsewhere on the Slope, without ever developing the field.

The Finance CS includes bracketing: the tax rate is 25 percent up to a production tax value (price less allowable costs and transportation) of $60, a price of about $100, Alper told legislators. When PTV reaches $61, a surtax of 15 percent is charged, but only for the portion of PTV greater than $60.

Consultant’s views

Rich Ruggiero of Castle Gap Advisors has been consulting with legislators on the state’s oil and gas tax and credit system. He has recommended simplifying the existing system by using tax brackets. The Finance CS makes use of this concept, bracketing based on PTV. Asked if this wasn’t “ACES all over again,” Ruggiero said it is a very different form of progressivity than ACES, the Alaska’s Clear and Equitable Share tax regime from the Palin administration, because the increase is only on dollars and volumes above a certain amount.

The Finance CS deals with the growing cashable credits issue, he said, but without more time he said he couldn’t take a position on whether the changes would result in more oil down the pipeline.

On the reduction in value of NOLs after seven years, Ruggiero said there are forces outside a company’s control which impact how quickly a project can get into production, but said he is in favor of a cutoff because it forces a company with a discovery to move the project into development, which is what the state wants.

Because the Finance CS allows for 100 percent recovery of costs it is more competitive than the House CS, which only allowed for 50 percent recovery of costs, Ruggiero said. He raised the question of when the state would require use of an NOL. It has to be used when a company has revenue, but in a year with both current expenses and NOLs, will the state require current expenses be used first? That, he said, could roll out the NOL for long enough to reduce its value.

The Finance CS ringfences use of NOLs, and Ruggiero said ringfencing of projects is fairly prevalent around the world so it’s something companies already have to deal with.

Reaction

Ruggiero said that at low profitability the Finance CS raises taxes which will lower producer take. Increasing taxes at lower profitability probably will be viewed negatively, but he said Alaska will still be attractive competitively because the tax system would allow recovery of costs as fast as production and the market will allow.

The Alaska Oil and Gas Association said the Finance CS passed by the House would hurt Alaska’s economy and characterized the bill as a “fundamental re-write of the state’s oil tax bill.” AOGA also said the Finance Committee denied any opportunity for public or industry testimony on the CS and said the bill would “triple oil taxes at low prices, similar to the old, failed ACES tax system, which did the same at high oil prices.”



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