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Cleanup tax legislation possible in 2017 Tax Director Ken Alper says most restructuring accomplished in 2016 legislation, most oil & gas tax credits phasing out by 2019 TIM BRADNER For Petroleum News
Another re-run of the oil tax wars seems likely in the 2017 legislative session. It will be largely a cleanup of issues left unresolved in House Bill 247, the heavy-lift bill that revamped the state’s oil and gas tax in 2016, state Tax Director Ken Alper told an energy conference in Anchorage Sept. 20.
Alper also said a package of proposed regulations to provide administrative guidance for HB 247 has just been released by the Department of Revenue for a 30-day public comment period.
Oil tax disputes in one form or another have bogged down legislative sessions since 2010, as well as in many previous years. They were always controversial and distracted lawmakers from other issues.
In his presentation Alper said most of the restructuring of the tax credit program was accomplished in HB 247 and that much of the program will be phased out by 2019.
The program largely accomplished its goals in bringing new companies to Alaska and in particularly encouraging new gas development in Cook Inlet to supply local communities. But in its previous form it was no longer affordable for the state, he said.
Unresolved issues contentious However, the unresolved issues that could be back before lawmakers next spring were among the most contentious in 2016, one being a 35 percent net operating loss tax credit for major North Slope producers.
The fight over that and other parts of HB 247 were sources of sharp disagreement between the House and Senate and factions within the House. They also led to a breakdown in the Republican Majority control of the House, with a rebel group of Republicans aligning themselves with Democrats on parts of the oil tax dispute.
Alper said Gov. Bill Walker now wants the producers’ 35 percent net operating loss tax credit scaled back to 15 percent in 2017 and zero in 2018.
Those changes were also in a tax-credit cleanup bill introduced in the 2016 special session that followed the regular session, but the changes did not pass.
Alper couldn’t guarantee that the governor will introduce the tax credit revisions again but said the NOLs were a major piece of unfinished business and that several other less-important technical changes to the tax statute are needed.
Election results key The fate of a new tax proposal will depend largely on the outcome of the fall Alaska elections and certain key races that will influence organization of the state House and Senate.
If Democrats gain new seats in one or both bodies the chances of coalition-type leaderships are increased. An oil tax bill is more likely to pass under a coalition leadership where Democrats have more sway than under a traditional Republican-led organization.
For their part major oil producers say the NOL problem is overrated. Alper argued previously that the cumulative operating loss tax credits earned by major producers in the current low oil-price period will wipe out substantial future state production tax revenue when oil prices eventually turn up.
Producers suffer net operating losses when lifting and transportation costs of oil from producing fields exceed market sales prices. This occurs for many producers when prices are between $43 and $46 per barrel, Alper told the oil and gas conference.
$8 billion in tax credits In his Sept. 20 presentation Alper reviewed major features of the previous tax credit program including that $8 billion in tax credits have been earned by companies since the incentive program took form in 2007.
Over half of that, $4.4 billion, was in a 20 percent capital investment tax credit in the state tax law that was repealed in 2013 in SB 21. These credits were earned mainly by major North Slope producers who used them against their state production tax liability.
However, about $3.5 billion of the $8 billion were the “refundable” tax credits earned mainly by companies, including small independents, which were drilling and developing new discoveries. Much of the refunds were cash payments by the state.
Oil discovered and produced in seven North Slope fields benefitting from tax credits, Alper said. Those credits amounted to about $24 per barrel on the Slope.
In Cook Inlet there were seven gas discoveries benefiting from tax credits that have produced the equivalent of 73 million barrels of oil (mostly gas expressed in oil values), with the credits equal to $13 per barrel-of-oil equivalent.
Overhang in credits Although the program is being dismantled there is a big overhang of accumulated refundable tax credits, Alper said, that amount to $685 million in state Fiscal Year 2017 and with another $445 million added in FY 2018, for industry investments being made this year, for a total of $1.1 billion. After HB 247 takes full effect the tax credits will no longer accumulate.
However, the state faces huge budget deficits and is in no position to pay for the refundable tax credits now being held by companies
About $30 million a year, the statutory minimum, will likely be paid by the state but companies will just have to hold the remaining credits, Alper told the conference.
Firms holding the credits have three options, he said, and there may be a fourth option. One option is for a company to hold the credits until it develops production and then apply them against production taxes, he said.
A second is to wait until the state’s revenues improve, although that may take a long time. A third is to sell them, probably at a discount, to a producer with tax liability. However, with oil prices low even the major producers have minimal tax liability and little incentive to buy the credits.
A fourth option, however, might be selling the tax credits to a state entity like the Alaska Permanent Fund, which former state Attorney General Craig Richards proposed. The idea was presented to the Permanent Fund’s Board of Trustees, but trustees have rejected the idea, at least initially.
There might also be third parties who could buy the credits and hold them, like a risked long-term investment, although changes in state statutes may be required for this, Alper told the conference. In a separate presentation at the conference former Lt. Gov. Mead Treadwell suggested that an option like the BP Prudhoe Bay Royalty Trust, a long-standing investment instrument, might be possible in providing a way for companies to monetize tax credits they hold.
Alper said in his talk that the idea might be worth exploring.
Meanwhile, the benefits to the state budget of the program winding down won’t really be felt until FY 2019 and will amount to about $65 million to $115 million per year, he said.
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