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Administration wants to strengthen floor Minimum 4% tax floor in state’s production tax law not absolute; companies can use carry-over operating loss credits to reach 0% KRISTEN NELSON Petroleum News
House Bill 247, the Walker administration’s proposed changes to credits in the Alaska production tax system, is complicated, so complicated that the administration has spent days in front of the House Resources Committee explaining changes proposed in the bill.
In testimony Feb. 22, Ken Alper, director of the Department of Revenue’s Tax Division, tackled the issue of strengthening the minimum floor - the 4 percent minimum tax on production.
This issue, Alper said, is not based on Senate Bill 21, the most recent change to the state’s production tax system.
“These are issues that have been embedded in Alaska statutes since we switched over to a net profits regime,” he said. “They happen to have come to the forefront now, not because of Senate Bill 21, but because oil prices have collapsed to such a degree that we’re starting to see operating losses in the industry.”
Only one limitation Currently, Alper said, there is only one thing limited by the floor - the sliding scale per-barrel credits specifically on non-GVR (gross value reduction) - legacy oil.
“Old oil is limited by the floor,” he said.
“All other credits under current law can go below the floor,” Alper said, including smaller producer credits, GVR-eligible per-barrel credits, net operating loss credits and alternative credits for exploration.
“All of those can be and are being used to reduce tax payments below the minimum tax to in many instances zero.”
In the case of small producers, say a company holding a portion of a legacy field, they would pay at the 4 percent floor just as their larger partners would, he said.
But, Alper said, that small producer has a credit based on up to $12 million off the top of their taxes, and if their tax was less than $12 million, they would be able to pay zero.
Small producers operating one of the North Slope’s newer fields would be eligible for the GVR which tends to reduce their tax liability, but their $5 per-barrel credit can offset their taxes to zero, “and if it doesn’t, they also could be eligible for the small producer credit.”
SB 21 Asked by Rep. Andy Josephson, D-Anchorage, if payment below the floor was considered in 2013 when the Legislature discussed SB 21 in committee, Alper said “this condition is not a byproduct of Senate Bill 21. This is a pre-existing condition that goes back really to ACES and PPT before that.”
He said SB 21 actually created a hardening of the floor for legacy producers because under SB 21 the sliding scale credit can’t be used to go below the minimum 4 percent floor. Prior to SB 21, he said, credits earned by legacy producers could be used to go below the 4 percent minimum tax floor.
Alper said that as far as the minimum tax goes, prior to 18 months ago it was “an academic conversation,” because in the period when the state has had a net profits tax the price of oil hadn’t gone low to the point “where this might have been relevant - where the minimum tax came into play in a material way.”
The minimum tax is suddenly relevant, he said, “because that’s where we’re getting our revenue from, whereas during the referendum debate (on SB 21), I don’t think that was part of the conversation in any material way.”
The policy questions There are three policy questions involved in strengthening the floor for minimum payment of production taxes.
Alper said on the issue of small producer credits, the question is, “should everyone, not just the major producers, pay at the minimum tax level? Currently the way the law is written, only the large producers pay that floor.”
The second issue is on per-barrel credits for GVR “new” oil, the question being: “Should that tax on production from new fields be allowed to go to zero?”
Alper said that forgetting the numbers and who the players are, is it reasonable “to say that the oil we’re incentivizing through the new oil tax deduction, should it at least be required to pay at the new oil level?”
The third issue, he said, is currently the most pressing and is a major producer issue.
Should those companies with losses that they carry forward into a new calendar year be allowed to use that operating loss credit to reduce their payments below the floor “or should those companies be forced to pay at the minimum tax level and then continue to carry that credit forward into a future year where they might have more tax liability.”
A second issue on the loss-carry-forward credit is whether, as the administration proposes, a requirement for payment of minimum tax should be made retroactive to Jan. 1, 2016.
Alper said the reason the administration is requesting that the change be retroactive is that “at least one of the major producers ... will show a loss for 2015, and will be offsetting minimum tax payments beginning this month ... to the level of zero by using their operating loss credit from calendar year 2015 to offset minimum tax payments from 2016.”
Asked by Rep. Kurt Olson, R-Soldotna, if the companies were doing anything illegal or unethical in their calculations, Alper said absolutely not, that they are following the law and paying taxes the way rules and regulations instruct them to.
What it means for 2016 Companies have operating losses under state law when total lease expenditures exceed gross income, based on Alaska law, during a calendar year.
“At around $50 oil and below some of our producers ... start experiencing operating losses,” Alper said.
During calendar year 2015, for example, the state got some $187 million in production tax, but the companies, in aggregate, “lost $183 million in Alaska last year.” And “at the 2015 operating loss credit rate of 45 percent, that translates to an $82 million carry-forward annual loss credit.”
Theoretically, what would happen in 2016, with oil prices estimated at $40 per month, higher than they currently are, the $82 million in operating-loss credits would mean zero production tax payments through September, and $27.2 million to the state for October through December, the minimum tax, he said.
However, if oil price trends continue at $40 per month in 2016, which, Alper said, is “well below the state’s forecast, but ... could happen,” the companies would show a loss of $1.2 billion in 2016, which at the 35 percent rate for carry-forward credits in effect for 2016, would mean more than $400 million in carried-forward annual loss credits.
“Now if those low prices continue for another couple years, that’s another 2 years worth of zero tax revenue ... so they would be able to completely offset any minimum tax payment for 2 years into the future, until they ran through this $400 million worth of credits and possibly earning additional credits along the way.”
Alper said what is proposed in HB 247 is that even if the companies are losing money, the administration wants them to pay the 4 percent minimum so the state is at least getting something.
And the credits would not be lost but would be deferred into the future and used once the price of oil recovers and the companies have tax liabilities that they could offset with their credits.
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