Oil taxes have once again been injected into the state legislative session in Juneau, adding complications in attempts to forge an agreement on a long-term state fiscal plan.
Last year fights over petroleum tax bills dragged the session into an extended overtime.
Now two state representatives, Reps. Geran Tarr and Andy Josephson, have introduced a new bill to change the state’s petroleum production tax yet again, for the third time since 2013.
House Bill 111, introduced Feb. 8 in the state House, would largely end the state’s program of making cash payments to explorers after this year and among other changes would increase the state minimum production tax from 4 percent to 5 percent on gross revenues, an effective 20 percent tax increase on oil producers.
Industry tax specialists were reviewing the bill late in the day on Feb. 8 to determine its major impacts. Tarr and Josephson said the bill is intended mainly to finish a reform of the state’s industry incentive tax credit program done partially in House Bill 247 last year, but mainly with provisions developed in the House that were rejected by the state Senate, causing a major standoff in the Legislature last year.
15,000 bpd cutoff
As introduced, HB 111 appears to allow small producing companies and explorers producing 15,000 barrels per day or less to be able to apply net operating loss tax credits against future production tax liability. However, the bill would limit those to $35 million per year per company.
The bill increases taxes in other ways than raising the minimum tax, including language that “hardens” the minimum tax floor. Currently, companies can use certain tax credits to lower the production tax below the 4 percent minimum rate. If that ability is taken away it amounts to a tax increase. The bill also reduces the net operating loss credit from 35 percent of a company’s losses to 15 percent.
It also reduces a per-barrel tax credit given to oil producers. That provision could have the effect of increasing taxes on companies by $100 million to $300 million a year if oil prices reach $70 dollars a barrel or higher, according to a briefing paper provided by the House Majority.
Tarr and Josephson are co-chairs of the House Resources Committee. “We now have an overly-generous system of tax credit subsidies for industry that has to be reformed,” Tarr said in a Feb. 8 briefing. Alaska is running $3 billion-a-year budget deficit due to low oil prices and the tax credit system is something the state can no longer afford, she said.
Josephson said the bill is a starting point for amendments. One he may offer himself would increase the tax credit incentives for selected projects deemed highly favorable by the state Department of Natural Resources.
Complications
Introduction of the bill could complicate things for the Legislature, which is grappling with the larger issue of how to close an expected $3 billion budget deficit.
For Democrats, who control the state House this year through a coalition with a handful of Republicans and independents, the oil tax bill may be a negotiating tool with the Republican-controlled Senate on deficit-closing measures, which could include changes in how Permanent Fund income is managed and changes in the popular citizen dividend program.
Josephson said Feb. 8 that he definitely sees the bill fitting into the Legislature’s larger effort to enact a fiscal package, but he stopped short of saying not passing HB 111 would be a showstopper for other issues.
However, if the larger fiscal plan is agreed, which would stabilize the state’s finances, Josephson said he would also encourage a larger cash payment to be made than the statutory minimum - $70 million this year - on several hundred million dollars of accumulated liability for unpaid past tax credits. “Without a fiscal plan we can’t look at this” more rapid pay down of the tax credit liability, Josephson said.
Senate not expected to be friendly
HB 111 will not have a friendly reception in the Republican-controlled state Senate if it passes the House, and it could become again a major point of contention between the two bodies.
Still, Josephson defended the bill: “This (HB 111) is commonsense legislation to fix problems in our tax policy. … Our intent is not to gouge the industry for more money - rather we want to make necessary changes to the current tax regime in an effort to strengthen the partnership with the industry. Let’s create a fair system that benefits both sides,” Josephson said.
However, Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, takes a different view. She said the hike in the minimum tax represents a tax increase at a time when the industry is grappling with low oil prices and some companies are still operating in the red.
The incentive system has been working as originally intended by the Legislature, she said.
“The tax credits were developed as way to get more companies up here and more development, and they have done that. Most states have incentives like these to encourage their major industries, for example what Washington state does to help Boeing,” a key industry and major employer, Moriarty said.
Companies: HB 21 encouraged investment
In legislative hearings the previous week officials with several producing companies said the overall tax reform accomplished by Senate Bill 21 in 2013, which also began a process of major restructuring the tax credit program, did encourage companies to invest more.
That resulted in new drilling and a stabilizing of production in 2015 and 2016 and even a small increase in production in 2016. Moriarty said that if the tax increases proposed in HB 111 go through and dampened new investment the production decline rates of 6 percent or more may reappear, which will wind up losing revenue for the state in future years, particularly the loss of royalty oil, Moriarty said.
What many forget, Moriarty said, is that SB 21 increased the base tax rate on industry from 25 percent to 35 percent of net income but softened the effect of that with a per-barrel production tax credit intended to focus companies’ attention on boosting production. HB 111 would reduce the per barrel production tax credits, however.
