Giessel: Cashable credits needed to go

Anchorage Republican hopes HB 111 mandated working group produces solutions toward simpler tax system, continues boosting production

Steve Quinn

For Petroleum News

Sen. Cathy Giessel is home after nearly six months of work, mostly in Juneau, which ended July 15 with the Legislature agreeing on HB 111, the oil tax bill that essentially brings an end to oil companies’ ability to exchange tax credits for cash. But even as the Anchorage Republican wrapped up another year as Resource Committee chair, she says the interim will be busy with the HB111-mandate working group to review the state’s oil system. There’s also an update from the Alaska Gasline Development Corp that must be scheduled, a briefing she calls overdue. Giessel shared her thoughts on developments for the first half of the year and what she would like to see happen before the Legislature returns in January.

Petroleum News: What do you believe the Legislature accomplished with HB 111?

Giessel: the most important thing that HB 111 does is to repeal the cash payments the state has offered as an incentive to the small and mid-size companies who develop our natural resources, our oil and gas. That is the number one objective of the bill, certainly from the Senate side. Also, the House and the governor articulated that as a primary goal. We certainly heard from the public they shared that goal.

Petroleum News: There are still outstanding credits owed that could reach $1 billion by early next year. How would you like to see that addressed? The Senate attempted to pay down a large chunk in the capital budget and that’s still possible.

Giessel: The Senate views the unpaid cashable credit debt as something we owe. I would like to see it paid down as we can afford it, always meeting the minimum statutory amount. The more we appropriate to that, the more quickly we can pay that down. I believe we could see some companies declare bankruptcy because we’ve seen this drag out so long, that being the lack of payment of those credits earned.

That’s bad news. It’s bad news for the private company, for the company who borrowed money, it’s bad news for the lender, and it’s bad news for the state of Alaska. We already have a reputation of being a risky place to do business. And to not follow through on a “contract” that we made, a partnership we entered into when these companies were invited to some work in the state, it’s a black eye on us, and that concerns me.

Petroleum News: Would it help with the capital budget option still out there?

Giessel: The Senate proposed paying $288 million, which is about a fourth. I believe that would show a good faith effort to pay the debt that we owe. What the Finance Committee co-chairs decide to do, decide is workable going forward I can’t say. I don’t serve on the Finance Committee. These credits were importing new money, new capital to our state. The lending institutions who were issuing these loans were very positive about Alaska. They watched us and felt we were trustworthy. They went out on risk to make these loans. Now they are frankly the ones holding the paper. It’s the lending institutions to whom we owe the unpaid tax credits. We’ve broken faith with them. I think this will impair the state’s credit, even the municipalities’ credit going forward.

Petroleum News: Companies can still recover their losses upon production years out. Some say this can be seen as an incentive to produce. Do you see that as a plausible outlook?

Giessel: The expenditures now become deductions versus being applications to the state for cash. The expenditures, if the company is not in a loss position, are still deductible on their taxes, of course. If they go into a loss, these are deductions that can be carried forward. This is basically how all business taxes work, certainly how you and I pay our IRS taxes. If we have a home mortgage, we get to deduct that. Healthcare costs are deductions.

So moving this from cash to a deduction is very logical. We have been told by multiple consultants over multiple years was that Alaska was unique in offering incentives through cash. They certainly have worked, just like car dealerships use them to motivate buyers. If you and I were buying a car, the car dealership would probably direct us to certain models or years thorough deductions or cash off on certain vehicles.

We know through Cook Inlet, just seven years ago, we were having brown out exercises. Enstar, the gas utility here in Southcentral was seeking gas, offering very high prices to pay for that gas, but it simply wasn’t found in Cook Inlet. The conversation was turning to importing natural gas to Alaska. The Legislature enacted cash credits and now we have ample gas, so it worked. The problem is, with our fiscal situation we simply can’t support it any more. It’s time to step back and move to the deduction system for expenditures and carry forward for losses that other jurisdictions use. Will it affect investment? It probably will. That said we nevertheless cannot continue to offer cash.

So the Legislature will be challenged going forward to inform itself and understand what kind of incentives we could afford to offer to bring companies to our state to develop the oil and gas resources. Maybe it’s in the form of infrastructure. Maybe it’s in the form of regulatory streamlining. These are ideas I believe will be vetted in the working group, which is also part of HB 111.

Petroleum News: Who will make up that working group?

Giessel: The bill describes the working group members. It is described as bi-cameral, so that’s both House and Senate, bipartisan, so that’s both parties. The two co-chairs will be one from the Senate and one from the House will be appointed by the presiding officers (House speaker and Senate president) and those two co-chairs will appoint the other members and those members will come from the both legislative bodies.

There is also an advisory group incorporated in this, made up of people who are not legislators but have expertise and skills in the area, particularly in tax structure and oil and gas development. It could be members of the state departments, so some of our own administration, members of the industry, trade organizations or economists. This is very much like the working group I convened in 2015 that specifically looked at the tax credits being offered in Cook Inlet. It was a Senate working group.

We had bi-partisan representation. I focused on members of Resources and Finance committees as members of the group, then had trade organizations, labor unions, Native corporations also included in the group. This is very similar to that.

We had a report that was put out. The recommendations from that report began to be implemented in 2015. Those are embodied in HB 247. They were completed this year in HB 111. This working group that HB 111 describes has potential to examine how our tax policy might be simplified.

One of the things we’ve heard again over the years from multiple consultants as well as industry is that Alaska has the most complex tax policy in the world. We need to simplify that so legislators can understand it, but so can the industry.

Petroleum News: So how many people do you think would make up this working group?

Giessel: The bill does not confine the size of the working group. That will be a discussion I’ll have with whomever is appointed on the House side. We need to make it a group that is a size that is workable. We also I believe will want to make this a group that is informed.

Petroleum News: You mentioned the report your group put together in 2015 and mentioned a lot of it was implemented in since then. What final touches do you believe HB 111 has?

Giessel: The report from Dec. 1 of 2015 recommended the repeal of cash credits and that was embodied in HB 111. Probably the significant piece in the 2015 working group recommendations was the hardening of the 4 percent minimum tax floor. That was not completed in HB 247 but was completed in HB 111.

Petroleum News: A lot of times working groups are considered simply as another layer of government or just window dressing to show the public it’s being looked into. Clearly, you believe work was completed and recommendations got enacted.

Giessel: I come from the healthcare profession. I have been part of countless working groups who have produced excellent reports that became coffee table books. I am committed in my role as a policy maker, a state senator, that working groups I participate in will have concrete, actionable recommendations that don’t simply sit on the coffee table. So yes, my part of this working group described in HB 111, I will work hard to endeavor to make those workable, actionable reasonable recommendations.

Petroleum News: The working group looks comparable, except that it will be both chambers, not just one. So do you think the work done two years ago can become a blue print for the coming working group?

Giessel: It might be. I don’t regard the working group as the cornerstone of HB 111. I think what HB 111 did for the Senate was clarify in our minds just how complex our tax policy really is. As we attempted to repeal the cash credits, which was the ultimate goal of HB 111, we saw clearly that our system was so complex that removing one piece had ripple effects throughout our tax policy. That needs clarification; that needs cleaning up. It’s a lot like buying an entry level house and doing add-ons, additions. Suddenly you have electrical systems that don’t connect with one another or a convoluted series of pipes. That’s kind of what we ended with in our oil policy.

Petroleum News: So would the next step be to bring clarity to the system, but without major increases or decreases?

Giessel: The oil tax policy we have now is based on SB 21 passed in 2013. We know that foundational policy is working. We’ve had two years, year over year of increased production. That is the only place where state government can have any influence. We can’t influence the worldwide price. We can influence the positive business environment so that investment takes place that results in increased oil throughout our pipeline. The goal of this working group is to ensure that the solid strong foundation of tax policy continues to go forward. We recognize in the Senate that some refinement that tax policy, but maintaining those foundation is what creates an economic future for our state.

Petroleum News: As it is so complicated, why do you think it’s working enough to drive up production?

Giessel: The companies who invest here have multiple tax attorneys who work for them. Our state has a large team of auditors in our tax division. This keeps things moving forward. Right now the audits of the state takes the full seven years to audit. It takes that long we’ve been told by our tax director (Ken Alper) because of the adjustments that have to be made through the various policies that we’ve had. We are emerging from ACES, but auditors have to be trained each time new regulations have to be written and it gets fairly complicated.

Petroleum News: LB&A hired three consultants. What can the value be by having these consultants in addition to the working group?

Giessel: We do have three consultants, however, there was no work product requested of these consultants. What was required was immersing themselves in our tax policy and constructing a model of our current policy so when asked questions to clarify what our policy is now and how it might be improved, they have concrete suggestions, they can identify areas of improvement that can be made. So there is no product that is available at this point other than a working model that can suggest improvements.

Petroleum News: So how can these models assist the working group?

Giessel: My goal is to start this process in collaboration with my House co-chair counterpart, providing legislators and staff with basic oil tax policy 101. One thing we find out is that we look at tax policy year after year and that legislators ourselves don’t completely understand our tax policy. It’s not because legislators aren’t smart enough. It’s a complicated tax policy.

And so foundational information is important. That lays the ground work. That will provide consultants with an opportunity first of all to show us they understand the policy. It will produce questions and ideas that we put forward to them on how to improve it and maintain Alaska’s competitiveness and still have a fair tax policy for the citizens of Alaska.

Petroleum News: What would you like to accomplish during the interim?

Giessel: First of all, related to the working group, when the two co-chairs are appointed, and I am making the supposition that I am the Senate’s co-chair, sitting down with the other co-chair and determining what the goal is for this working group. When we first hired these consultants through the Legislative Budget & Audit Committee, my initial goal was to have the 101 course so all legislators and staff understand the tax policy as it exists. In working through these goals, if you don’t know what you’re aiming at, you won’t know if you hit it. If you aim at nothing, you’ll hit it every time, so having that goal is important.

In terms of other goals for this interim, which will be rather brief of course, because it’s already nearly August, the Alaska LNG project update is overdue. That will be something my office will be scheduling pretty soon, again with the House co-chairs in Resources.

Petroleum News: what is it you would like to hear or learn further from AGDC?

Giessel: The number one thing I would like to hear is what they economics look like for this project going forward. We hear nearly daily about the enormous amount of gas that is available throughout the world in countries that have not previously been developing hydrocarbons. The world is awash in gas. We hear that prices are falling. The other day I heard Japan is looking to become a distribution hub, not just a consumer. That changes some economics.

Certainly Japan will be looking for the least costly gas because they will become a middle man. They will want a markup as they distribute to other countries. All of this to me sounds pretty challenging for our project that has an 800-mile pipeline, a greenfield development with a gas treatment on the north and an LNG plant to the south.

Petroleum News: So this will be a joint hearing, not just one for the Senate?

Giessel: I have always scheduled hearings during the interim as joint hearings, so I will be collaborating with the co-chairs of House Resources.

Petroleum News: AGDC has been providing regular updates. Have those helped? There have been criticisms about communication between AGDC and the Legislature.

Giessel: Yes, they have. The AGDC has $100 million in their wallet to spend on this project so yes, the Legislature is very interested in making sure that $100 million is spent wisely and productively for the state.