Production-killing oil tax bill advances in the House

Reps. Andy Josephson and Geran Tarr, co-chairs of House Resources, confer during floor session.

An aggressive oil tax bill crafted by the co-chairs of the House Resources Committee was voted out of committee this week and is headed for its next stop, House Finance. It will be heard at 1:30 pm Monday.

Republicans on the Resources Committee had criticized HB 111 since its introduction as a committee bill, distancing themselves from it throughout the hearing process that began Feb. 8.

The vote to move the bill forward was along party lines, with Democrats Justin Parish, Geran Tarr, Andy Josephson, Harriet Drummond, and Dean Westlake favoring it, and Republicans George Rauscher, Dave Talerico, Chris Birch and DeLena Johnson saying no. Leaders from the oil and gas industry expressed dismay at the seventh tax change on their industry in the past 11 years.

The bill was crafted by co-chairs Andy Josephson and Geran Tarr, two Anchorage Democrats who have strong anti-oil beliefs. The two were recent presenters at the Alaska Center for the Environment, where they were caught on tape talking about their commitment to moving the state away from oil and into renewable resources.

Reps. Geran Tarr and Andy Josephson talk about their commitment to ending oil production during a meeting at the Alaska Center for the Environment last fall, as Lt. Gov. Byron Mallott, another oil industry critic, listens.

 

SNATCHING DECLINE FROM THE JAWS OF GROWTH

The Department of Revenue issued a fiscal note for HB 111 that predicts the State would capture an additional $45 million in taxes in 2018, $140 million for 2019, and up to $265 million per year by 2026.

Republicans on the committee said the existing oil tax system, adopted in 2013 as SB 21, is responsible for bringing more oil into production this past year, and that more volume is the goal. Oil flowing through the Trans Alaska Pipeline System is where the State of Alaska gets the majority of its revenue, but the pipeline is running at only about 25 percent of capacity.

The production boosting benefits of SB 21 became clear very quickly after adoption. In 2015, average pipeline throughput was 508,446 barrels per day. That rose to 517,868 in 2016, ending 15 years of consecutive annual declines. The trend so far this year is higher still, with a year-to-date average of 554,816 per day.

Even more encouraging are the several new discoveries recently announced by Caelus and Armstrong that may boost Alaska’s pipeline throughput substantially. But, in today’s low oil price environment, there’s no guarantee those finds would be produced under a markedly less favorable tax regime.

HB 111 increases the state government’s take by rolling back tax credits that companies get when they make new investments in the oil patch. It also raises the minimum tax on the gross value of production. These changes can ratchet up taxes 25-100 percent, depending on the producer, at a time when they are lucky to be breaking even.

The bill eliminates net operating loss credits that companies can subtract from their tax bills for North Slope oil. It changes how they can carry those credits forward into future years when they can use them to their advantage.

Kara Moriarty, president of the Alaska Oil and Gas Association, called the bill an ill-conceived policy “which would further damage Alaska’s economy by increasing taxes on the state’s largest private sector industry, and creating one of the largest regulatory processes in state history.”

She was especially critical of the portion of the bill that requires the pre-approval of oil company expenditures before the company could qualify for a potential net operating loss deduction. That would put state bureaucrats in charge of guiding oilfield investment decisions.

FISCAL NOTE FROM REVENUE, BUT NOT FROM DNR

How the state would handle such a pre-approval process was not accounted for in the bill.  And, there was no fiscal note from the Department of Natural Resources detailing the cost of standing up such an approval process, what state personnel might need to be hired to analyze and adjudicate the pre-approval process, or what the appeal mechanism might look like. That bothered Rep. George Rauscher, District 9. The problem with it was explained by AOGA in a statement:

“Due to a variety of factors, such as oil price, the industry does not know at the time of the expenditure if they will suffer a net operating loss. So essentially, the new regulations will mean almost every penny of every proposed investment in the state’s largest private-sector industry would need to be pre-approved by the State of Alaska before the expenditure could happen.

“This also means that expenditures will have to be pre-approved by DNR before they happen to qualify for a net operating loss deduction, and the same expenditures will be audited after they occur by the Department of Revenue in their auditing process to actually receive the net operating loss deduction.”

“This new process, yet to be defined or truly vetted, will add tremendous burden and uncertainty. It is unreasonable to expect every expenditure to be preapproved.” — Kara Moriarty.

During committee discussion on March 14, Rep. Dean Westlake of District 40, voiced his own concerns that, “What I’m seeing here is a little disturbing because we’re going to be micromanaging basically their leases. We want accounting and yet we are five years behind on our accounting.”

Rep. Tarr responded that all of the details of the legislation, which is a broad document, can be spelled out in the regulations that will be developed. “The statute should be less prescriptive in nature because the regulations spell out the details,” she said. “Really let it be dictated by the folks who know best, the folks who manage it” at DNR.

However, with no fiscal note from DNR, legislators have no idea how much time and money it will take to develop the regulations around HB 111 and then administer them.

More importantly, there is no way to accurately estimate the chilling effect this will have on Alaska’s most important industry, the one that pays the majority of the State’s bills.

But it is safe to say that, if this legislation were to somehow become law, the pipeline throughput growth Alaska is currently enjoying would quickly revert to a more familiar pattern of annual declines.

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