Legislature ends cash incentives for small oil companies

By
Suzanne Downing
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Rep. Chris Birch speaks in favor of the HB 111 compromise, saying no legislation is perfect, but ending cashable credits is a milestone.

A FINAL END TO ACES

A cash incentive program that has been successful in bringing smaller oil companies to explore and produce oil in Alaska’s North Slope oil patch has come at a price — one the State of Alaska can no longer afford.

In the late hours of Saturday night, both the House and Senate agreed to end the cashable credits that brought companies such as Caelus Energy and Armstrong Oil and Gas to Alaska.

The credits program was part of the old ACES tax regime. House Bill 111 addressed  some of the unintended problems that ACES created.

WHAT HOUSE BILL 111 DOES

Instead of cashable credits, HB 111 moves companies to a tax deduction system, limiting the timeframe for when companies can deduct their net operating losses, basing it on actual production. It’s a measure that is going to make it more difficult for smaller oil companies, because getting a field into production takes many years of investment and initial losses.

The bill will save the State $200 million in the remainder of 2017, but will make it harder for Alaska to attract the smaller companies to what is an expensive operating environment, where oil tax systems have changed constantly.

HB 111 allows oil companies to carry forward losses for either 10 or 7 years, depending on the field’s production. The bill sets an interest rate of  5.25% above the prime rate for money owed to the state by any entity, so effectively 7 percent, as the prime rate is 1.75 percent currently. This is the rate for all delinquent taxes, not only oil and gas.

“The Senate initiated credit reform in 2015,” said Sen. Cathy Giessel, who has led the effort to reform the cash payment program, starting with the Cook Inlet oil and gas fields in legislation that passed in 2016. “Tonight’s action is the culmination of that work and sets the State on a responsible, sustainable course.”

“We’re committed to maintaining a fair, competitive oil tax regime that secures these private-sector opportunities,” said Giessel, chair of the Senate Resources Committee. But she told reporters that, “This bill — make no mistake about it — is a tax increase.”

Senate President Pete Kelly, R-Fairbanks, said, “We do not believe this cash payment reform will significantly curtail investment or endanger jobs.”

The legislation has other provisions, such as “ring fencing,” which limits the ability of explorers to transfer net operating losses between fields before getting to production. In the future, carry forwards can only be used against the field where they were incurred until production begins. In the past, they could be applied to any N. Slope field where the company had a working interest.

Rep. Tammie Wilson, R-North Pole was a no vote on the legislation, saying the fiscal notes on the bill did not add up, and she would need more time to study the bill. Other no votes were Republican Reps. Cathy Tilton of Wasilla-Chugiak, Mark Neuman of Big Lake, George Rauscher of Mat-Su-Valdez, David Eastman of Wasilla and, surprisingly Democrat Sam Kito of Juneau. Rep. Ivy Spohnholz of East Anchorage was not present.

Rep. Tammie Wilson of North Pole speaks about the fiscal notes on HB 111 and her concerns about being rushed to vote on the legislation.

The Senate was unanimously in favor of the bill.

Gov. Bill Walker signaled that he will sign the legislation, but once again called for an income tax on Alaskans, although did not refer to it specifically: “Alaskans deserve a complete fiscal plan and economic stability for the future. I urge lawmakers to continue with this spirit of compromise and collaboration, and pull together to fix Alaska.”

PRIVATE SECTOR RESPONSE: THIS HURTS SMALL COMPANIES

The Alaska Oil and Gas Association noted on Twitter, “Make no mistake: HB 111 will have a negative impact on investment in Alaska. 7th tax change in 12 years.”

One oil company associate speaking on condition of anonymity said the legislation will lead to major companies once again dominating oil production from the North Slope: “So the types of players the Democrats have been courting for years — the small companies — they have effectively just chased away.”

Ending the cash credits was one part of the overall fiscal plan. The governor has also repeatedly called for a “broad-based tax” on Alaskans as a “must have” part of his complete fiscal plan. He is no longer using the words “income tax,” though that is what he has in mind.

DEMOCRATS STRUGGLING IN CAUCUS
The difficulty that the House Democrat-led majority is having within its ranks was evident on Saturday, when the conference committee for HB 111 was set for 1 pm, but did not convene until after 9:15 pm, less than three hours before the special session would end.
That delay was because Reps. Paul Seaton of Homer and Les Gara of Anchorage blew up the fragile compromise by once again trying to force even more onerous conditions on the small oil explorers. Outside of caucus, no one knows what their demands were, but they were enough to keep legislators on campus until the final hour.
Rep. Les Gara of Anchorage talks about how the state has gone from the best credit rating in the nation in 2014 to the worst credit rating in the nation in 2017. He was making a case for income taxes during the waning hours of the second special session: “There’s a big part of the job this legislature has not been able to come together to do.”
Rep. Geran Tarr, the Democrats’ chair of the conference committee on HB 111, was attempting to get to a resolution, but every time she and Sen. Giessel had a handshake agreement, Tarr took it back to her Democrat-controlled caucus, where it was rejected by members more powerful than she.
For much of the afternoon and well into the night, it appeared that the legislation would fail altogether.
CAPITAL BUDGET NEXT
Because of the deep philosophical differences between Republican-led Senate leadership and Democrat-led House leadership, Gov. Walker was forced to separate all items of legislation into individual special sessions, so that Democrats could not leverage every important piece of legislation against some other one in order to get an income tax passed. The Senate Republicans have held firm on opposing income taxes at this time.
The capital budget — money for road work and other infrastructure — is the next critical item remaining. Early Sunday, Senate President Pete Kelly invited the House to tackle the capital budget in a third special session, which would begin this week.  House leadership did not immediately respond.

As drafted, the capital budget would use $56 million in state money to bring in $1.2 billion in federal money. Without a capital budget in place by July 31, negative impacts on jobs and infrastructure work would occur by October.

The capital budget has not been as contentious as the other items, but was held hostage by Democrats during regular session.

“We are close to agreement and should continue negotiations toward a prompt resolution,” said Sen. Peter Micciche, Soldotna, Senate majority leader.

“Alaska is facing tough economic times,” said Sen. Anna MacKinnon, Eagle River, who co-chairs of the Senate Finance Committee. “Job losses are high, our unemployment rate at 6 percent is the highest in the nation, and we’ve lost ground on other key indicators. Eliminating cash payments to oil companies was a good step forward, and we must now turn our focus to a capital budget.”

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