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Alaska’s problem: cuts, revenue needed Revenue Commissioner Hoffbeck says following presentation of problem, fiscal changes will be proposed, followed by more discussion Kristen Nelson Petroleum News
The state isn’t in a fiscal crisis, Alaska Commissioner of Revenue Randy Hoffbeck told the Anchorage Chamber of Commerce June 22. It’s only a fiscal crisis if we fail to act, he said, adding that there are no easy solutions.
The state’s finances became an issue a year ago when oil prices began to drop, eventually leveling out at some $60 a barrel. The Department of Revenue expects to see oil prices stay in the $60-$80 per barrel range for about four years, Hoffbeck said.
That will require a fiscal plan, and while the governor will propose that plan, legislators will have to act on it and that will require support from their constituents, he said.
With that in mind, the administration will be out this summer, Hoffbeck said, talking to groups in the state about the problem and potential solutions.
In Revenue’s June 4 white paper, “Building a Sustainable Future: Conversations with Alaskans,” the department recommended a four-legged stool of shared responsibility to deal with the state’s current economic reality:
•Continued budgetary restraint and prudent use of savings by government;
•Broad-based taxes on citizens, collected from transient and seasonal workers as well as from residents;
•Participation by the oil industry through what Revenue described as “a fair and stable tax and revenue structure that protects Alaska’s interests at a broad range of prices”; and
•Permanent Fund use “through mechanisms that preserve the value and continue to build Alaska’s sovereign wealth savings account.”
Growth tied to population Hoffbeck said the state’s general fund budget has increased steadily over time in nominal terms, and steeply since the mid-2000s, but when adjusted to real or constant dollars budgets declined for 20 years, only recently exceeding post-pipeline period levels, while when adjusted for inflation and population, current budgets are lower than most years during the post-pipeline boom.
Hoffbeck said spending is largely driven by people demanding services, and while current spending levels in the state compare favorably to historic levels, Alaska also compares well to other states when compared by population.
Oil tax options Changes to oil taxes are just part of what’s being discussed.
Hoffbeck said the Walker administration is not interested in major oil tax changes, but is talking about what you can tweak.
Revenue’s June white paper says several options have been proposed for changes in oil and gas taxes which would increase state revenue, with some more relevant at lower prices and some at high prices.
The minimum tax floor could be increased to reflect the gross tax in the last years of the ELF tax system, some 7 to 8 percent of gross value. Revenue also said that when Gov. Palin proposed ACES, the original floor was 10 percent, and while at low prices “there is limited incremental revenue that can be extracted from the oil industry,” modeling by the Tax Division indicates an increase to a 10 percent minimum tax would generate some $500 million in additional revenue.
The per-barrel credit could be modified. Revenue said Sen. Bert Stedman introduced a bill in the 2014 session that would have cut the per-barrel credit in half, to $4 per barrel at the lowest prices, while an alternate approach would cut off the credits at the $5 level, removing $6-$7-$8 credits for wellhead values below $110. The department said modifying per barrel credits would add revenue production for Alaska at low prices, especially with high costs, with the greatest fiscal impact likely in the $80-$110 per barrel range.
Provisions for new oil Revenue said the gross value reduction for new oil, calculated against the gross value but creating an offset against taxable net products, could be sunset after a specified number of years, which “would allow sufficient time to recapture the costs of building a new field, and would prevent the gradual trend toward increasing shares of production receiving the benefit.”
Other proposed changes to GVR include reducing the rate from 20 percent to 10 percent or excluding certain fields from being counted as new oil.
Costs of the GVR provisions as passed in Senate Bill 21 were estimated to increase from some $25 million a year initially to $75 million a year in fiscal year 2019, but assumed the higher oil prices at that time and did not include projects or developments not included in Revenue’s production forecast, such as developments by Repsol or Great Bear.
Refundable North Slope credits Revenue said North Slope refundable oil and gas credits would remain at some $400 million for FY16, would reduce slightly in FY17 but “may remain a significant general fund cost as the North Slope continues to develop additional fields.” The department said that if substantial new oil is developed the state’s expected repurchases of these credits could “dramatically increase.”
The state could cap annual repurchases, which would help with cash flow, but that could impact explorers, “some of whom would have to wait to monetize credits or sell them at a discount to producers who would apply them against their own production taxes,” leaving the state’s net fiscal impact unchanged, but shifting a portion of the benefit from explorers to major taxpaying producers.
An alternative would be to use the Alaska Industrial Development and Export Authority as a development bank for rigs, processing and other support facilities, Revenue said. “In addition, there has been some initial discussion of transforming parts of Alaska’s credit system into a direct investment model, where the state’s contribution would be used more like venture capital in exchange for an equity share of projects,” thus providing up-front financing and saving startup companies high interest rates.
Cook Inlet taxes, credits There has also been interest in looking at changes in Cook Inlet taxes and credits, Hoffbeck said.
Revenue’s white paper noted that when PPT was passed in 2006, Cook Inlet was exempted from that net profits based system, and through 2022 Cook Inlet oil and gas production is taxed at the old ELF rates, with production tax on oil locked into a rate of zero and gas taxed at a rate that varies but averages some 17 cents per thousand cubic feet, a limited tax liability generally wiped out by the small producer credit and other credits. Revenue said a recent analysis showed Cook Inlet producers saved an estimated $500-$800 million between 2007 and 2013.
There are also reimbursable credits, which make producers eligible for “below-zero taxation,” with reimbursable oil and tax credits increasing from $33 million in FY11 to an estimated $281 million in FY15.
If Cook Inlet were converted to the SB 21 tax structure, reimbursable credits would be limited to the 35 percent carried forward annual loss credit, and by eliminating the 20 percent capital credit and the 40 percent well lease expenditures, the state’s reimbursable credit would be reduced by $165 million in FY16.
Other options Other options include the addition of tax brackets to SB 21 to restore a degree of progressivity at higher prices, which would increase state revenues at higher prices.
A return to separate accounting for corporate income tax for oil companies has also been discussed. A fiscal note for a bill proposed by Rep. Paul Seaton in 2015 showed an indeterminate revenue impact, but the department said that had separate accounting been in effect from 2007 to 2013, the largest oil and gas corporations would have paid some $220 million more per year in corporate income taxes.
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