Legislature(2009 - 2010)BARNES 124

02/08/2010 01:00 PM House RESOURCES

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01:04:52 PM Start
01:05:19 PM HB308
03:02:52 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
               HB 308-OIL AND GAS PRODUCTION TAX                                                                            
1:05:19 PM                                                                                                                    
CO-CHAIR  NEUMAN announced  that the  only order  of business  is                                                               
HOUSE BILL NO.  308, "An Act relating to the  tax rate applicable                                                               
to the  production of  oil and gas;  relating to  credits against                                                               
the oil  and gas production  tax; and  relating to the  period in                                                               
which oil and gas production taxes may be assessed."                                                                            
1:06:16 PM                                                                                                                    
REPRESENTATIVE JOHNSON, sponsor  of HB 308, stated  that a couple                                                               
of the  bill's provisions,  such as  the progressivity,  are very                                                               
similar to  those that were  included in the original  version of                                                               
Alaska's Clear and Equitable Share  (ACES) that was introduced by                                                               
Governor  Palin.    He  said  he  believes  the  state  may  have                                                               
overstepped  its bounds  with ACES,  and therefore  HB 308  would                                                               
make six changes to the current ACES law.                                                                                       
1:07:51 PM                                                                                                                    
REPRESENTATIVE  OLSON  moved  to  adopt  the  proposed  committee                                                               
substitute (CS) for HB 308,  Version 26-LS1328\E, Bullock, 2/5/10                                                               
("Version E") as the work draft.                                                                                                
REPRESENTATIVE TUCK objected for purposes of discussion.                                                                        
REPRESENTATIVE  JOHNSON  explained  that the  primary  difference                                                               
between the  original version of HB  308 and Version E,  which he                                                               
is  asking to  be adopted,  is the  local hire  provision.   That                                                               
provision  was  not ready  at  the  time  the original  bill  was                                                               
introduced.   While  the local  hire provision  is a  substantive                                                               
change,  the  other  differences  between the  two  versions  are                                                               
technical  changes  where  language  was moved  from  section  to                                                               
section to make the bill read more smoothly.                                                                                    
1:09:57 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG   asked  why   Representative  Johnson                                                               
believes the  local hire provision  in HB  308 would stand  up to                                                               
constitutional  muster  anymore than  anything  else  has in  the                                                               
REPRESENTATIVE  JOHNSON responded  that  he does  not know  about                                                               
constitutional  muster, but  he does  know that  the film  credit                                                               
bill [Senate  Bill 230] passed  by the Twenty-Fifth  Alaska State                                                               
Legislature offered a 10 percent  discount for local hire.  Those                                                               
provisions have not been challenged  and have worked successfully                                                               
for two years.                                                                                                                  
1:11:02 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG argued  that  the film  industry is  a                                                               
completely  different animal  than the  oil industry  and pointed                                                               
out  that  the  legal  counsel's  memo  states  there  may  be  a                                                               
constitutionality issue.  This issue has  been to court.  The oil                                                               
industry has a  history of opposing the  legislature's efforts to                                                               
hire Alaskans, and  has actively engaged in  opposition to hiring                                                               
Alaskans  to such  a degree  that he  has had  to explain  to top                                                               
level  executives why  they are  not good  corporate citizens  in                                                               
Alaska.   He surmised Version  E will  go to the  House Judiciary                                                               
Standing Committee.                                                                                                             
REPRESENTATIVE  JOHNSON responded  that  HB 308  would put  local                                                               
hire at the  forefront of what the legislature expects.   This is                                                               
not like  the cases that  Alaska has lost  for local hire  or for                                                               
charging more for out-of-state hunting  and fishing licenses than                                                               
for in-state,  he maintained.   Under HB  308, local hire  is not                                                               
mandatory, it is an incentive.   If a company chooses not to take                                                               
advantage  of the  provision, it  will pay  the tax  rate it  has                                                               
today.  If  a company chooses the incentive, it  can buy down its                                                               
base  tax  rate by  the  percentage  of local  hire.    It is  no                                                               
different than  Tennessee offering a 10-year  moratorium on taxes                                                               
to Saturn  for putting  a plant  in that  state and  hiring local                                                               
people.  He thinks  this is a way that is  legal because half the                                                               
people he talks  to say it is  legal and half say it  is not, and                                                               
Mr. Bullock's  memo says the  provision may  be unconstitutional,                                                               
not that it  is unconstitutional.  The only way  to know for sure                                                               
is to test it and he is prepared to go to court.                                                                                
1:15:24 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  maintained that incentives  have never                                                               
worked before with the oil industry.                                                                                            
REPRESENTATIVE  JOHNSON disagreed.   He  said he  thinks the  oil                                                               
industry  is  a  creature  of  profit and  that  no  industry  or                                                               
business has a  conscience.  Industry adds up the  numbers and if                                                               
they are in the black they do it,  and if they add up red they do                                                               
not, and the  largest black number gets the  investment.  Through                                                               
this incentive, HB  308 would help to make  the industry's bottom                                                               
line look good  by replacing some of the  non-resident workers on                                                               
the North Slope with Alaskans.                                                                                                  
1:16:49 PM                                                                                                                    
REPRESENTATIVE P.  WILSON understood Version E  would not mandate                                                               
a company to  do local hire; it is just  available to the company                                                               
if it wishes to have a bigger  tax write-off.  She asked what the                                                               
results  of the  local hire  incentive  have been  with the  film                                                               
REPRESENTATIVE  JOHNSON replied  that this  week a  local casting                                                               
director was hired for a movie  that will be filmed in Alaska and                                                               
to receive the  tax reduction this director is  looking for local                                                               
residents.   He  said he  believes  the film  industry makes  its                                                               
decisions the  same way as  does the  oil industry -  the biggest                                                               
black number gets the investment.                                                                                               
1:18:22 PM                                                                                                                    
REPRESENTATIVE  JOHNSON, in  response to  Co-Chair Neuman,  noted                                                               
that  the  current  discussion  is  on  the  differences  between                                                               
Version  E of  HB 308  and  HB 308  as introduced,  and the  main                                                               
difference is the  local hire provision.  The  other five changes                                                               
that  would be  made to  current ACES  law are  the same  in both                                                               
versions of the bill.  In  further response, he said that all six                                                               
changes  will  be  explained  once   Version  E  is  adopted  and                                                               
discussion begins on it.                                                                                                        
REPRESENTATIVE TUCK maintained his  objection to adopting Version                                                               
E as the working document.                                                                                                      
1:20:28 PM                                                                                                                    
REPRESENTATIVE  JOHNSON,  in regard  to  scheduling  for HB  308,                                                               
stated  that  today  he  will provide  his  presentation  as  the                                                               
sponsor  and  presentations  will   also  be  made  by  committee                                                               
consultant  Dan Dickinson  and  bill drafter  Don  Bullock.   The                                                               
administration will  be available  at the next  committee meeting                                                               
to answer questions about the  six proposed changes.  Anyone else                                                               
that members wish to have testify can be asked to do so.                                                                        
CO-CHAIR  NEUMAN requested  that members  let the  co-chairs know                                                               
whether  there are  any particular  departments that  should come                                                               
speak to the committee regarding HB 308.                                                                                        
1:21:37 PM                                                                                                                    
REPRESENTATIVE  TUCK,  in regard  to  the  factory in  Tennessee,                                                               
inquired whether  that corporate tax  credit was for  the factory                                                               
moving there  and/or for an  audit program to ensure  the factory                                                               
was hiring in-state workers.                                                                                                    
REPRESENTATIVE  JOHNSON answered  he is  uncertain how  Tennessee                                                               
set up its plan,  but that it was a 10-year  tax moratorium - not                                                               
a tax credit  - so the factory  paid no taxes for 10  years.  The                                                               
basic premise  of Version E is  that the state would  be offering                                                               
incentives with the understanding that  there will be local hire.                                                               
There is probably no direct  correlation with anything else other                                                               
than the film industry that  could be looked at regarding someone                                                               
getting a discount for hiring Alaskans.                                                                                         
1:22:58 PM                                                                                                                    
REPRESENTATIVE JOHNSON added that Alaska charges more for out-                                                                  
of-state  fishing licenses  than  resident licenses.   The  state                                                               
also charges  more for out-of-state commercial  licenses than in-                                                               
state, thus a  bidder preference of 10-15 percent  is provided as                                                               
a direct discount for just living  here.  Version E does not even                                                               
go to  those levels; it would  provide that a company  can choose                                                               
to take advantage of a discount.   There would be no mandate that                                                               
a  company  hiring  an Alaska  resident  gets  something  another                                                               
company is not  entitled to - which is the  basic premise, called                                                               
equal treatment, for the lawsuits that  the state has lost.  Each                                                               
individual company,  not the state, would  make the determination                                                               
as to the hiring of an out-of-state person or a local resident.                                                                 
CO-CHAIR  NEUMAN  said  the  crux  is that  a  company  can  take                                                               
advantage   of  tax   credit  progressivity   by  hiring   Alaska                                                               
1:24:29 PM                                                                                                                    
REPRESENTATIVE JOHNSON  explained the mechanism by  which the tax                                                               
credit progressivity  would work.   Alaska  currently has  a flat                                                               
base  production  tax rate  of  25  percent.   According  to  the                                                               
Department  of Labor  & Workforce  Development  (DLWD), about  70                                                               
percent  of the  5,000  people  working on  the  North Slope  are                                                               
Alaskans.  Version  E would provide incremental  buy-downs of the                                                               
tax rate  in return for hiring  a workforce that is  greater than                                                               
80 percent  Alaska residents.   A company  with 85  percent local                                                               
hire  would have  its base  production tax  rate reduced  to just                                                               
over 24  percent.  A  company with  100 percent local  hire would                                                               
have its  base production tax rate  reduced to 20 percent.   Each                                                               
half  point  increase in  local  hire  would have  a  correlating                                                               
reduction  of the  base production  tax  rate.   Compared to  the                                                               
original ACES,  the 5 percent  tax reduction would  reduce annual                                                               
revenue  to  the  state  treasury by  about  $500  million  while                                                               
generating about $1.2 billion in economic benefit to the state.                                                                 
1:26:00 PM                                                                                                                    
REPRESENTATIVE JOHNSON  portrayed legislators'  potential support                                                               
or  opposition to  Version E  as being  related to  two differing                                                               
philosophies:   one philosophy  being it is  better to  have $500                                                               
million in  the state's treasury  and one philosophy being  it is                                                               
better to have  $1.2 billion in the private sector.   He said his                                                               
philosophy is that $500 million  in the hands of private citizens                                                               
is   better  than   $500  million   in   the  state's   treasury;                                                               
philosophically, he  believes it is better  that his constituents                                                               
have  the  money and  make  their  own  decisions.   However,  he                                                               
recognizes that the  various regions of the state  will differ in                                                               
philosophy, and  some regions will  believe it is better  for the                                                               
money to  go to government  because that would mean  work through                                                               
capital projects and other social programs.                                                                                     
CO-CHAIR NEUMAN agreed with Representative Johnson.                                                                             
1:27:57 PM                                                                                                                    
REPRESENTATIVE  TUCK disagreed  that Version  E is  about private                                                               
versus  public as  he thinks  all committee  members want  to see                                                               
Alaskans  get jobs  on  the North  Slope.   Rather,  it is  about                                                               
whether the method  proposed in Version E would  be successful in                                                               
the courts.   He  understood a recent  court decision  found that                                                               
the price  difference between out-of-state and  resident fees for                                                               
fishing licenses is unconstitutional  under the basis of equality                                                               
between  the states.   To  him, Version  E is  about out-of-state                                                               
jobs  versus in-state  jobs.   He knows  plenty of  Alaskans that                                                               
would love  to have  those jobs on  the North Slope.   It  is the                                                               
highest paying industry  in the state and  Alaskan families would                                                               
prosper from those job opportunities.                                                                                           
REPRESENTATIVE TUCK  related that  when he first  became involved                                                               
with  the   Alaska  Process   Industry  Careers   Consortium,  an                                                               
organization that  trains Alaskans for  jobs on the  North Slope,                                                               
work was being  done on an instrumentation program  that would be                                                               
implemented nationwide.  However,  when his organization tried to                                                               
get buy-in,  the oil  industry refused  while utilities  were all                                                               
for   it,  so   it  subsequently   went  to   the  back   burner.                                                               
Fortunately,  the  oil  industry  is now  getting  more  involved                                                               
because, he  thinks, industry has  realized it will soon  need to                                                               
replace workers on the North Slope due to top-heaviness in age.                                                                 
REPRESENTATIVE TUCK  said he does  not know whether it  really is                                                               
cheaper to hire  out-of-state workers than to  train local people                                                               
and put them to work.  He wants  to make sure that Version E will                                                               
actually  accomplish  the  intent   and  do  so  effectively  and                                                               
legally.   He does  not want to  see the state  get balled  up on                                                               
good intentions  by making a mistake  along the way, so  he wants                                                               
to  work through  this to  find the  best way  to accomplish  the                                                               
1:30:50 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  responded that  Version  E  is not  like                                                               
fishing licenses because it does  not charge anyone for anything;                                                               
it would not charge a  company an additional business license for                                                               
not hiring  Alaskans.  He  hopes there has  been a sea  change in                                                               
the oil  industry and  that there will  be cooperation  in hiring                                                               
more Alaskans and he wants to  incentivize the industry to do so.                                                               
He wants it  to make sense to the accountants  sitting in offices                                                               
in Houston, Texas, to decide  to hire Alaskans for those $83,536-                                                               
per-year jobs.   He also  hopes that if  a company cannot  find a                                                               
resident for a job that it  will require the non-resident it does                                                               
hire to move  to Alaska in order  to be hired.   He predicted the                                                               
oil   companies  will   become  the   state's  biggest   training                                                               
facilities.   The industry will do  what is right for  its bottom                                                               
line and he  is trying to align that bottom  line with what works                                                               
for Alaskans.                                                                                                                   
CO-CHAIR NEUMAN pointed  out that the State of  Alaska provides a                                                               
7.5 percent  buyer preference when the  Department of Corrections                                                               
purchases  cheese,  milk,  or   produce  from  Alaska's  farmers.                                                               
Additionally,  the   state  offers  corporate  tax   credits  for                                                               
training programs.                                                                                                              
1:34:27 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  related  that  for  approximately  20                                                               
years under  the economic  limit factor (ELF),  the tax  rate for                                                               
the Kuparuk oil  field was close to zero and  the investment rate                                                               
was  very low.    Had industry  been investing  at  the rate  the                                                               
sponsor  is  projecting,  the  state  would  not  be  seeing  the                                                               
production  decline that  it is  seeing  now.   He asked  whether                                                               
anyone will be  available to answer questions  about how reducing                                                               
the  tax  rate  as  provided  under Version  E  will  change  the                                                               
industry's business  plan of very  little reinvestment  even when                                                               
it had almost no taxes.                                                                                                         
REPRESENTATIVE JOHNSON  replied that  someone will  be testifying                                                               
on all  aspects of  the bill.   Times have  changed considerably;                                                               
for example, it  was heard on the House floor  today that it will                                                               
be very difficult for anyone  to invest in the National Petroleum                                                               
Reserve-Alaska (NPR-A).   The only place where  companies will be                                                               
able to  invest for awhile is  Kuparuk and Prudhoe Bay,  and this                                                               
is what the state must look  at to fill the Trans-Alaska Pipeline                                                               
System (TAPS).   The focus is going to be  on those legacy fields                                                               
and  HB  308 deals  with  that  by  addressing well  workover  in                                                               
addition to new exploration for tax credit.                                                                                     
1:36:57 PM                                                                                                                    
REPRESENTATIVE  TUCK  inquired as  to  the  reasons for  the  oil                                                               
industry's hiring of so many out-of-state workers.                                                                              
REPRESENTATIVE  JOHNSON suggested  this  question  be asked  when                                                               
industry  representatives  are  before   the  committee,  but  he                                                               
guesses it is a little bit  the money as well as the availability                                                               
of help.   He thinks Version E addresses this  issue by making it                                                               
worth industry's while  to train Alaskans as opposed  to the easy                                                               
way  of hiring  someone from  out of  state.   He reiterated  his                                                               
belief that the oil industry  would become the state's number one                                                               
trainer in order to take advantage of this tax break.                                                                           
1:38:17 PM                                                                                                                    
REPRESENTATIVE  JOHNSON, in  response  to  another question  from                                                               
Representative  Tuck,  said the  [base  production]  tax rate  is                                                               
currently 25 percent.  If  100 percent resident hire is achieved,                                                               
the tax  rate would  be reduced  to 20  percent.   This reduction                                                               
represents about  $500 million less  to the state's  treasury and                                                               
about  $1.2 billion  more  to  the private  sector,  using a  1.9                                                               
multiplier factor.                                                                                                              
CO-CHAIR NEUMAN pointed out that  there are several charts in the                                                               
committee packet in this regard  and witnesses will be explaining                                                               
it further as well.                                                                                                             
1:41:13 PM                                                                                                                    
REPRESENTATIVE JOHNSON, in response  to Representative P. Wilson,                                                               
explained that  there are  5 percentage  points in  tax reduction                                                               
and  that  this percentage  is  split  into 10  equal  increments                                                               
between 85 percent  resident hire and 100  percent resident hire.                                                               
He  wanted  the increments  to  be  small  enough to  provide  an                                                               
incentive to go beyond an 80  percent resident hire and to strive                                                               
for 100 percent local hire.                                                                                                     
REPRESENTATIVE P. WILSON  said she likes this as  she thinks more                                                               
Alaskans  are  not  hired  by   the  industry  because  they  are                                                               
uneducated in the  areas desired by the oil industry.   Version E                                                               
would be a definite incentive  that makes it worth the industry's                                                               
while to educate Alaska workers.                                                                                                
1:43:34 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI disagreed,  saying  he thinks  a lot  of                                                               
people in Alaska  are qualified for these jobs but  have not been                                                               
hired.  Even with  a nominal to 0 percent tax  rate on the legacy                                                               
fields, the companies  still refused to hire locals.   He cited a                                                               
report  in the  committee packet  regarding mining,  oil, or  gas                                                               
extraction jobs  that states:   3,000  workers are  residents and                                                               
1,000  are nonresident  workers; wages  for resident  workers are                                                               
$440 million  and for  nonresidents the  wages are  $150 million;                                                               
and for  earnings per quarter  resident workers  received $37,000                                                               
and  nonresidents   received  $44,000.    While   he  appreciates                                                               
offering an incentive to industry to  do more for local hire, the                                                               
university has done  a lot of training, as has  the Department of                                                               
Labor  & Workforce  Development and  local pipeline  construction                                                               
companies.    He offered  his  opinion  that something  is  being                                                               
missed by  chasing an industry  that has  done well in  the state                                                               
and that  has refused to  hire local.   He is tired  of providing                                                               
corporate welfare to this industry,  as both the industry and the                                                               
state are making  money off this non-renewable  resource and that                                                               
is a fair thing to do.                                                                                                          
1:46:54 PM                                                                                                                    
REPRESENTATIVE JOHNSON  agreed the state  has done a lot  and has                                                               
trained a lot of people, and  that it is not working.  Therefore,                                                               
he is  trying something different  by offering an incentive.   If                                                               
industry does  not play, it  does not  get the tax  advantage and                                                               
the state still  gets its money.  The only  thing being chased is                                                               
jobs  for  Alaskans, and  under  Version  E  this would  be  done                                                               
through the local hire provision  as well as the other provisions                                                               
related to investment credits.                                                                                                  
1:48:43 PM                                                                                                                    
REPRESENTATIVE TUCK, referred to page  4, Version E, line 19, and                                                               
asked whether the tax savings are  based on how ACES is currently                                                               
administered or on the changes proposed by the bill.                                                                            
CO-CHAIR  NEUMAN   requested  Representative  Johnson   to  first                                                               
identify the section that the local hire provision is in.                                                                       
REPRESENTATIVE JOHNSON  said the local hire  provision is located                                                               
on  page 6  under  [AS 43.55.022].   The  section  that is  being                                                               
referenced by  Representative Tuck  is in  the original  bill and                                                               
has to  do with progressivity, and  Version E makes no  change to                                                               
that.  The only difference  between the original bill and Version                                                               
E is Section 43.55.022, which relates to local hire.                                                                            
CO-CHAIR  NEUMAN interjected  that this  is Section  15 [page  6,                                                               
Version E].                                                                                                                     
REPRESENTATIVE  JOHNSON  agreed.   He  said  the section  he  was                                                               
referring to  is on page 6,  lines 12-31, Version E,  which deals                                                               
with local hire, not progressivity.                                                                                             
1:50:33 PM                                                                                                                    
REPRESENTATIVE  TUCK  surmised that  the  provisions  on page  6,                                                               
roughly lines  12-31, Version  E, are related  to the  new number                                                               
from page 4, lines 19-23, Version E.                                                                                            
REPRESENTATIVE JOHNSON  said that is  incorrect and is  an apples                                                               
to oranges  comparison because  one is  progressivity and  one is                                                               
local hire.   One deals  with the base  rate and the  other deals                                                               
with progressivity,  which is  a different section  of law  and a                                                               
different tax.                                                                                                                  
REPRESENTATIVE  TUCK understood  that the  local hire  provisions                                                               
are not tied to the tax progressivity.                                                                                          
REPRESENTATIVE   JOHNSON  replied   correct,   [the  local   hire                                                               
provisions] are tied to the base rate of 25 percent.                                                                            
REPRESENTATIVE TUCK maintained his  objection to adopting Version                                                               
E as the working document.   He requested that members be able to                                                               
ask questions of Mr. Donald Bullock, the drafter of Version E.                                                                  
1:52:33 PM                                                                                                                    
DONALD BULLOCK  JR., Legislative  Counsel, Legislative  Legal and                                                               
Research  Services,  Legislative  Affairs  Agency,  Alaska  State                                                               
Legislature, stated  that he wrote  the [2/5/2010]  memo referred                                                               
to  earlier.   He  explained  that Version  E  takes a  different                                                               
approach to local hire than what  has been seen before.  It would                                                               
not require  that 5  percent of the  workers be  residents, which                                                               
means  that  5  percent  of  those jobs  may  not  be  filled  by                                                               
nonresidents.    It  is distinguished  from  the  license  issues                                                               
because  workers  from  out  of state  are  not  paying  anything                                                               
differently  to  come in  and  work.    Rather, Version  E  would                                                               
introduce  an  economic factor  to  the  employers to  take  into                                                               
consideration  the  cost  through  the tax  of  hiring  different                                                               
percentages  of Alaska  residents versus  nonresidents.   That is                                                               
only one factor  because employers must also look  at whether the                                                               
skills are available.   The tax break would be  offset if out-of-                                                               
state labor was  less expensive than in-state labor,  and in that                                                               
case it would  be an economic decision to hire  workers that cost                                                               
less.    Therefore,  Version  E   introduces  another  factor  by                                                               
providing  an incentive  that lowers  a company's  taxes when  it                                                               
hires Alaskans.                                                                                                                 
MR. BULLOCK  pointed out that  Version E  does not say  a company                                                               
must do  this.  It  gives the company a  benefit if it  does, and                                                               
that is  why his memo does  not say it is  a waste of time  to do                                                               
this.    It  is  a  different approach  that  would  be  open  to                                                               
interpretation, and he  is unaware of a case that  has dealt with                                                               
this approach.   Version E would provide  incentives to employers                                                               
to  hire Alaskans  and see  where  their economics  lie in  their                                                               
MR. BULLOCK noted that this  is also different than the situation                                                               
where there  were no taxes due  for an oil field  because without                                                               
an  incentive it  does  not  make any  difference  who a  company                                                               
hires.  It  would be an economic decision if  the field is coming                                                               
close to breaking even or if  the company can start saving costs.                                                               
It is not a residency or  non-residency issue; the tax is already                                                               
zero - there was not an incentive for the state to offer.                                                                       
MR. BULLOCK  said he  cannot tell  members that  if the  state is                                                               
taken to court it is going to  lose.  However, he expects that it                                                               
will be  taken to court,  and the issue  will be whether  this is                                                               
enough of  an incentive that is  offered to employers that  it in                                                               
fact is onerous to nonresidents.   He does not know the answer to                                                               
this and  that is why  he did  not offer anything  affirmative in                                                               
his  memo.   Had  this  been like  other  bills  or other  passed                                                               
legislation that  requires 20 percent  of a company's  workers be                                                               
Alaskans, it would be pretty clear that no, this cannot be done.                                                                
1:55:35 PM                                                                                                                    
REPRESENTATIVE TUCK inquired whether  there was a similar concern                                                               
when  the  tax   advantage  for  the  film   industry  was  being                                                               
considered [Senate Bill 230].                                                                                                   
MR. BULLOCK answered he cannot speak  to that bill because he did                                                               
not work on it;  he can only speak to Version E  of HB 308, which                                                               
he drafted.                                                                                                                     
1:56:12 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  asked  whether other  industries  might                                                               
challenge that this benefit is only given to the oil industry.                                                                  
MR.  BULLOCK  responded probably.    This  offer is  an  economic                                                               
incentive; other industries could be  eligible to the same thing.                                                               
Calculation of  the percentage  is based on  the number  of hours                                                               
that  are worked  for projects  and expenses  that are  qualified                                                               
expenditures  under  ACES  43.55.165,  and the  number  of  hours                                                               
directly relates to  the number of people that  would be working.                                                               
Because  contractors, as  well as  the companies  themselves, are                                                               
making lease expenditures that may  be allowed, contractors would                                                               
be  included within  this rebate  system.   However, the  benefit                                                               
goes to  the person that  is subject  to the production  tax, the                                                               
person who is paying the contractor.                                                                                            
1:57:58 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG understood  Mr. Bullock  to be  saying                                                               
that this would apply not just  to the leaseholder but to all the                                                               
leaseholder's subcontractors down the line.                                                                                     
MR. BULLOCK replied any work that  is done on a lease expenditure                                                               
that  is  allowed   as  a  deduction  in   determining  what  the                                                               
production tax is.                                                                                                              
1:58:12 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG inquired  whether a non-resident person                                                               
could claim that  this is a commerce clause issue  - if it cannot                                                               
be done  one way, then it  cannot be done another  way that would                                                               
accomplish the same thing.                                                                                                      
MR.  BULLOCK answered  that  he  is not  saying  it  will not  be                                                               
challenged.  He  reiterated that there is not a  direct burden on                                                               
a non-resident,  the burden is only  indirect.  It is  on the one                                                               
that makes  the decision  - the  employer - as  opposed to  a law                                                               
that says  a person  will pay  more to buy  something, such  as a                                                               
license, because  he or she is  a non-resident.  The  state would                                                               
not  be  requiring  that  a certain  percentage  must  be  Alaska                                                               
residents, which  would mean that that  percentage is unavailable                                                               
to nonresidents.   All jobs are available to  all people, whether                                                               
residents or nonresidents.   If nonresidents are  hired, they may                                                               
cost more; however, they could  cost less because of differential                                                               
labor costs.   So,  Version E takes  an economic  approach rather                                                               
than  requiring  a  certain  number of  positions  or  a  certain                                                               
percentage.   That is  where he  is unsure, because  it is  not a                                                               
direct burden,  it goes  through the employer  and what  it costs                                                               
the employer to run the business overall.                                                                                       
1:59:57 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  asked   whether  there  is  something                                                               
comparable to this that has happened in the past.                                                                               
MR. BULLOCK responded not that he is  aware of.  Most of what has                                                               
happened in the  past is that the state  has charged nonresidents                                                               
more to  do something,  such as go  to college or  fish.   Or the                                                               
state  has  said employers  must  have  a certain  percentage  of                                                               
residents.  So,  Version E is different than the  majority of the                                                               
cases that have  come.  He is just saying  there is a possibility                                                               
that it  could be  challenged; the plaintiff  would have  to show                                                               
that it is a direct impact on nonresidents.                                                                                     
REPRESENTATIVE GUTTENBERG  said he  thinks the  legislature would                                                               
hear that it is a direct  impact on nonresidents, but he respects                                                               
Mr. Bullock's opinion.                                                                                                          
CO-CHAIR NEUMAN  said members are  the legislature and it  is the                                                               
legislature that makes the laws.                                                                                                
2:01:13 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  noted that some industries  already have                                                               
a workforce  of 80-90 percent  residents.  He asked  whether this                                                               
would impact how the state does business with other industries.                                                                 
MR. BULLOCK  replied he is unsure  what is being asked,  but that                                                               
under the equal  protection argument there is a  sliding scale in                                                               
economic issues.  If the legislature  says there is a good reason                                                               
why it is  discriminating in this case and that  good reason does                                                               
not  have to  do with  a  fundamental right  - but  working is  a                                                               
fundamental right  - that there  is more flexibility.   The state                                                               
must show that it is good  public policy and in the best interest                                                               
of the  state to do  that discrimination,  and that the  means of                                                               
doing it is a reasonable way to get  there.  This is a bill for a                                                               
particular industry and it could  be done in different industries                                                               
but  it would  depend on  the mechanism  that is  used.   In this                                                               
particular case, there  is a significant tax  on Alaska's largest                                                               
industry, so there  is a clear vehicle for providing  a rebate or                                                               
a tax  break.  The  state could have  another break in  AS 43.20,                                                               
which has a  benefit to corporations that pay income  tax, but it                                                               
does not do  anything for taxpayers that are not  subject to that                                                               
because they are not incorporated.                                                                                              
2:03:19 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG requested  a  definition of  residency                                                               
worker  under  AS 43.40.092  and  severability,  as there  is  no                                                               
severability in Version E at this time.                                                                                         
MR. BULLOCK answered that severability  is presumed in every act.                                                               
While severability  is sometimes  put in specifically,  the court                                                               
will  separate  what may  be  separated.    The definition  of  a                                                               
resident worker  is in the motor  fuel statutes, and it  takes on                                                               
from  the  definition  in  Title  1, which  is  that  someone  is                                                               
physically present  with the intent  to remain.  That  statute is                                                               
about the  burden of  proof and  one of the  proofs is  whether a                                                               
person  is eligible  for  a dividend  from  the Alaska  Permanent                                                               
Fund; a resident  worker is not defined anywhere  in the statutes                                                               
except in that one provision.   Therefore, he took what the state                                                               
had available when drafting Version E.                                                                                          
2:04:57 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  posed a  scenario  in  which HB  308,                                                               
Version E,  passes in its  current form  as a tax  incentive, but                                                               
the residency provision  is cut by the courts.   He asked whether                                                               
the other provisions in the bill would still remain in place.                                                                   
MR. BULLOCK  responded that there  is no direct link  between the                                                               
provision providing a  rebate for Alaska hire  and the provisions                                                               
for relief  from interest on  retroactive regulations  and change                                                               
in  the progressive  tax rate.    Therefore, it  is possible  the                                                               
court would leave the remainder of the bill in place.                                                                           
2:05:51 PM                                                                                                                    
REPRESENTATIVE TUCK maintained his  objection to adopting Version                                                               
E as  the working  document.   He said he  thinks the  concept of                                                               
ensuring  that Alaskans  are taken  care of  first is  very good.                                                               
Therefore, he  would like to see  this provision as its  own bill                                                               
to ensure that  it gets all the way through  the legislature.  He                                                               
has always tried  to figure out ways to ensure  that Alaskans get                                                               
those North  Slope jobs.   One way is  to make sure  Alaskans are                                                               
trained.   The  state's high  schools and  universities could  be                                                               
doing  more,  as  could  the  Department  of  Labor  &  Workforce                                                               
Development.  For  sure, however, is that the  oil industry could                                                               
be doing a  lot more.  To  get more Alaskan hires,  he would like                                                               
to see  the oil industry do  the training rather than  relying on                                                               
the state to do the training.   He pointed out that he has worked                                                               
on the  North Slope as an  electrician and that people  without a                                                               
southern drawl  or British  accent usually feel  out of  place on                                                               
the North  Slope.   He further  stated that  most of  those North                                                               
Slope workers  do not  spend their money  in Alaska  because they                                                               
fly directly from  the North Slope to where they  live outside of                                                               
the  state.   Version  E  would provide  the  opportunity to  see                                                               
whether  this  works  and  whether it  has  potential  for  being                                                               
applied to other industries.                                                                                                    
REPRESENTATIVE  TUCK  withdrew his  objection.    There being  no                                                               
further objection, Version E was before the committee.                                                                          
2:08:31 PM                                                                                                                    
REPRESENTATIVE JOHNSON said that to him  HB 308, as a whole, is a                                                               
jobs bill.   The best way to reduce social  ills such as domestic                                                               
violence, drugs, and prisons is  to give someone a home, respect,                                                               
and a reason for getting up every  day, and the way to do that is                                                               
with a  job.   Therefore, he  has named the  bill the  Alaska Job                                                               
Security Act.  He said he  hopes the bill will be transferable to                                                               
other  industries and  welcomes members  to file  other bills  in                                                               
this  regard.   He stated  that  in terms  of progressivity,  the                                                               
language  in  HB 308  is  the  same  as  the original  ACES  bill                                                               
introduced by Governor  Palin to take the place  of the petroleum                                                               
production profits tax (PPT).  He  offered to go over the history                                                               
of the  ACES legislation  with Representative  Tuck since  he was                                                               
not in the legislature at that time.                                                                                            
2:10:44 PM                                                                                                                    
REPRESENTATIVE  JOHNSON reviewed  the six  changes that  would be                                                               
made to  existing law  by HB  308, Version  E.   He said  some of                                                               
these changes are  related to small errors and  oversights in the                                                               
ACES bill  and some  are substantive policy  changes.   The first                                                               
change is that  Version E would allow credits  for workover rigs,                                                               
the  philosophy being  that anything  that puts  a barrel  of oil                                                               
down the  pipeline, whether from  a new or existing  well, should                                                               
be  allowed to  have those  credits.   Additionally, he  related,                                                               
both  a  new  well  and  a  workover  each  represent  100  jobs,                                                               
according  to industry.   The  second  change is  that Version  E                                                               
would  drop  the  interest  rate   so  that  11  percent  is  the                                                               
[ceiling].   The third change  is that  HB 308, Version  E, would                                                               
provide  that  until  the  ACES   regulations  are  accepted  and                                                               
published, the state  can go back and collect any  taxes that are                                                               
mispaid by  a producer,  but it cannot  charge interest  on those                                                               
mispaid taxes if the taxpayer was operating in good faith.                                                                      
2:12:26 PM                                                                                                                    
CO-CHAIR  NEUMAN pointed  out that  under  existing statute,  the                                                               
credits are  forwarded to  try and  get further  exploration, but                                                               
that he thinks HB 308, Version  E, targets new technology for the                                                               
workover  of existing  wells.   He surmised  that this  provision                                                               
will also be  an incentive for smaller companies  to do workovers                                                               
on smaller wells.                                                                                                               
REPRESENTATIVE JOHNSON  replied that a qualified  workover may be                                                               
as  simple  as  a  collapsed   casing  that  is  causing  reduced                                                               
production.   In an effort  to put  more flow through  the Trans-                                                               
Alaska Pipeline  System, the tax  credit would apply  to anything                                                               
from exploring for new geology  to basically everything below the                                                               
wellhead,  regardless  of  whether   a  well  is  already  there.                                                               
Currently, it is considered new  exploration when the distance is                                                               
something like one  to three miles from an existing  well and the                                                               
credit does not apply to wells  that are drilled within a shorter                                                               
distance  than that.   He  thinks that  was an  oversight in  the                                                               
original ACES that  has deprived the state of  both royalties and                                                               
throughput.   Governor  Parnell has  indicated this  is something                                                               
that will be  included in his bill as well  [the governor's bill,                                                               
HB 337/SB 271, was introduced on 2/10/10].                                                                                      
2:15:20 PM                                                                                                                    
REPRESENTATIVE   JOHNSON,    in   response    to   Representative                                                               
Guttenberg, said he  will have Mr. Dan Dickinson  point out where                                                               
the six changes  are located in Version E, but  for the moment he                                                               
is providing an overview.                                                                                                       
REPRESENTATIVE JOHNSON continued  his review of the  changes.  He                                                               
noted that  ACES changed the  look-back period for an  audit from                                                               
three years to six years, and  HB 308 would return this look-back                                                               
period to  three years so  that the  oil industry is  treated the                                                               
same  as other  industry.   The fifth  change is  the local  hire                                                               
provision that has  already been talked about.   The sixth change                                                               
would reduce the  progressivity from 0.4 percent  to 0.2 percent.                                                               
He  explained that  0.2 percent  was the  figure proposed  in the                                                               
administration's  original  ACES bill  and  that  it was  changed                                                               
somewhere  in the  committee  process.   A  0.2 percentage  would                                                               
preclude  the possibility  of having  110 percent  progressivity.                                                               
He  maintained that  this change  is also  about jobs  because it                                                               
leaves more money for investment  which would translate into more                                                               
oil flowing through the pipeline.   He related that in 2009 there                                                               
were  2,776  unemployment claims  for  the  oil industry,  almost                                                               
double the  1,067 claims made in  2007 and the 1,350  claims made                                                               
in 2008.                                                                                                                        
2:19:11 PM                                                                                                                    
REPRESENTATIVE P.  WILSON inquired  whether the  proposed changes                                                               
in HB  308 could make  it beneficial  for industry to  drill even                                                               
when it  is known  there is no  oil in a  certain location.   She                                                               
further asked whether there will be a sectional analysis.                                                                       
CO-CHAIR  NEUMAN  said  the  bill will  be  reviewed  section  by                                                               
section so members can ask questions.                                                                                           
REPRESENTATIVE JOHNSON added that the  plan is to spend some time                                                               
reviewing  the  bill  and that  Legislative  Legal  and  Research                                                               
Services is  in the  process of  preparing a  sectional analysis.                                                               
In regard to  encouraging the drilling of a dry  hole, he pointed                                                               
out that if $1 million was spent  to drill a well, the 20 percent                                                               
tax credit  would amount to  $200,000; so drilling dry  holes for                                                               
the tax credit just would not happen.                                                                                           
2:21:29 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  asked what  the value  is of  the credit                                                               
for well workovers.                                                                                                             
REPRESENTATIVE JOHNSON responded  that if a producer  does not do                                                               
a workover, it gets nothing, and  it costs the state nothing.  If                                                               
a workover  is done, the  credit will  depend upon the  amount of                                                               
capital expenditure  and he thinks  each individual well  will be                                                               
dealt with differently.   He suggested this question  be asked of                                                               
the producers when they testify.                                                                                                
2:22:35 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI inquired  whether industry  is currently                                                               
doing these workovers and whether it  is a higher or lower number                                                               
REPRESENTATIVE JOHNSON  understood that  very little  workover is                                                               
occurring on  the North  Slope and  that most  of those  rigs are                                                               
setting on their sides.  He  suggested that this question also be                                                               
asked of the producers when  they testify because such rig counts                                                               
are available.                                                                                                                  
2:23:12 PM                                                                                                                    
CO-CHAIR  NEUMAN  offered his  understanding  that  the state  is                                                               
still writing some of the regulations  for ACES, and HB 308 would                                                               
work in a coordinated effort in  this regard.  He asked where the                                                               
state is in writing these regulations and who is writing them.                                                                  
REPRESENTATIVE  JOHNSON replied  he does  not know.   He  related                                                               
that he  has talked to members  of the industry and  for the most                                                               
part they  are clueless  as to  what will  be in  the regulations                                                               
even  though  ACES  was  passed  two years  ago.    Some  of  the                                                               
regulations are done and some are not.                                                                                          
2:24:54 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  pointed  out  that it  took  this  body                                                               
almost  four months  to decide  on  [Marmot] Day,  so not  having                                                               
regulations  in  nearly  two  years  does not  seem  out  of  the                                                               
ordinary.   He  said  he thinks  it is  premature  to talk  about                                                               
rolling back  taxes on  the oil  industry when  committee members                                                               
have not heard from the  administration or industry experts about                                                               
how  ACES is  working  to date.    He  said he  hopes  it is  the                                                               
sponsor's and co-chair's  intent to hear from  these folks before                                                               
HB 308 is moved out of committee.                                                                                               
CO-CHAIR NEUMAN  assured Representative  Kawasaki that it  is the                                                               
intent of both co-chairs to take a look at where things are at.                                                                 
REPRESENTATIVE JOHNSON stated that he  will try to get any person                                                               
that members wish to have  come speak and that the administration                                                               
is due  to testify, as  are industry  experts.  The  committee is                                                               
already ahead because  of the four months  that legislators spent                                                               
reviewing and becoming  educated about ACES.  He  intends to have                                                               
serious discussions, not  railroad the bill through.   He said he                                                               
thinks there is  a problem and that it is  costing the state jobs                                                               
and  opportunity.    If  the  state  does  not  develop  its  own                                                               
resources  and  take  charge,  the   state's  future  is  dismal.                                                               
Legislators can talk and talk,  but nothing gets done until there                                                               
is  a bill  before members.   It  will be  up to  members of  the                                                               
committee and the full body to  determine which way to go with HB
REPRESENTATIVE  KAWASAKI reiterated  he would  like to  hear what                                                               
the administration has to say.                                                                                                  
CO-CHAIR  NEUMAN  added  that everyone  is  working  through  the                                                               
regulations and all else the best they can.                                                                                     
2:29:01 PM                                                                                                                    
REPRESENTATIVE TUCK, in regard to  the unemployment numbers cited                                                               
by Representative Johnson,  inquired how it is  known whether the                                                               
numbers are not  Alaskans that are being replaced  by people from                                                               
the  Lower  48.   He  further  asked whether  those  unemployment                                                               
numbers include out-of-state workers that have been laid off.                                                                   
REPRESENTATIVE  JOHNSON  said  he believes  those  were  resident                                                               
numbers that  he cited.   Both numbers are available  because the                                                               
Department of Labor & Workforce  Development tracks both in-state                                                               
and out-of-state numbers.   He added that he  believes the number                                                               
would  be  closer  to  5,000  if  the  out-of-state  figures  are                                                               
included.  He offered to get that number for committee members.                                                                 
2:30:43 PM                                                                                                                    
REPRESENTATIVE  TUCK   related  that  according  to   the  report                                                               
entitled,  Nonresidents Working  in Alaska,  2008, issued  by the                                                             
Department  of  Labor &  Workforce  Development,  the percent  of                                                               
total new  hires for nonresidents  in oil field services  went up                                                               
42.7 percent.   It  would be  nice to  know whether  Alaskans are                                                               
being displaced, he reiterated.                                                                                                 
REPRESENTATIVE JOHNSON  answered that  the Department of  Labor &                                                               
Workforce Development  will be before  the committee and  able to                                                               
address  that.   The  department  will  also be  responsible  for                                                               
auditing and making sure that  the [42.7] percent starts going in                                                               
the opposition.   He  said Version  E is his  attempt to  fix the                                                               
problem that he has perceived.                                                                                                  
REPRESENTATIVE  TUCK  agreed, provided  it  does  not go  in  the                                                               
opposite direction so that the state  is losing jobs overall.  He                                                               
inquired whether there is a fiscal note that reflects Version E.                                                                
REPRESENTATIVE JOHNSON said he will get that to members.                                                                        
2:32:44 PM                                                                                                                    
REPRESENTATIVE P. WILSON  stated she is pleased  that members are                                                               
looking at  this and  determining how HB  308 would  affect ACES.                                                               
She pointed out  that even though it took the  legislature a long                                                               
time to look at ACES, a lot  of amendments were done on the floor                                                               
and many were  done on the fly, making it  hard to determine what                                                               
all was affected.                                                                                                               
REPRESENTATIVE JOHNSON responded that he  likened it to a feeding                                                               
frenzy   and  that   there  were   amendments  members   did  not                                                               
understand.  Numerous members wanted  to prime co-sponsor HB 308,                                                               
but he refused  so he could maintain a certain  amount of control                                                               
and ability to slow it down  to enable everyone to know what they                                                               
are voting  on.  Given the  months that were spent  on ACES, most                                                               
of HB  308 has  already been reviewed  by members.   It is  not a                                                               
revisit of  a whole  new concept;  it is a  tweaking of  what the                                                               
governor originally brought to legislators.                                                                                     
CO-CHAIR  NEUMAN  urged members  unfamiliar  with  ACES to  learn                                                               
about it from the administration.                                                                                               
2:35:39 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  said it  is currently  unknown whether                                                               
ACES is  working because many of  the regulations are not  yet in                                                               
place.   Members learned much  from both the Murkowski  and Palin                                                               
administrations  and were  taught  that international  conditions                                                               
have a lot  more to do with  what happens in Alaska  than what is                                                               
done by  the legislature.   The  part of ACES  that did  pass and                                                               
which has  now lapsed is  the standard deduction.   Without doing                                                               
anything, the industry  will be getting a tax  break of $230-$250                                                               
million from  now on, and he  would like to see  what effect that                                                               
will have on development and exploration.   Much of ACES is still                                                               
in play and  it cannot be determined  what it did or  did not do.                                                               
Additionally,  the   stock  market  has   a  lot  of   effect  on                                                               
everything.   At  this point,  people can  only speculate  rather                                                               
than talk about real history.                                                                                                   
2:39:25 PM                                                                                                                    
DAN  DICKINSON, CPA,  Consultant  to the  Legislative Budget  and                                                               
Audit Committee,  began his  PowerPoint presentation  by pointing                                                               
out where  each of the six  proposed changes can be  found within                                                               
Version E [slide  3].  He explained that Version  E is voluminous                                                               
because of  the changes in technical  definitions about interest,                                                               
and  every time  it is  referred to  in the  rest of  the statute                                                               
book, the  reference must be  changed.  The  sections highlighted                                                               
in yellow are the  meat of the bill and are  the sections that he                                                               
will discuss.                                                                                                                   
2:41:00 PM                                                                                                                    
MR.  DICKINSON  said  Section  6  of Version  E  deals  with  the                                                               
proposed  change in  interest  rate that  is  paid on  delinquent                                                               
taxes [under AS 43.05.225].  Section  6 would change this rate to                                                               
be the [lower  of] the federal funds rate plus  two percent or up                                                               
to a  ceiling of 11  percent [slide 5].   He explained  that this                                                               
interest rate  applies to all of  Alaska's 20 tax types,  such as                                                               
cigarette,  bed, and  other taxes,  and that  percentage-wise the                                                               
oil  and gas  production tax  is by  far the  largest [source  of                                                               
revenue]  at  well over  90  percent.    Under current  law,  the                                                               
interest rate is  established as the higher of  the federal funds                                                               
rate  [plus 5  percent] or  11 percent.   He  suggested that  the                                                               
revisions  be made  effective on  the  beginning or  ending of  a                                                               
quarter, given that the interest is compounded quarterly.                                                                       
2:42:26 PM                                                                                                                    
MR.  DICKINSON  related the  historical  context  of the  current                                                               
interest rate, which  was implemented in 1991 when  a huge series                                                               
of litigations  in both royalty  and tax  were coming to  a peak.                                                               
In the  1970s and early  1980s, many  people were irked  that the                                                               
state's  interest rate,  particularly for  royalty claims,  was a                                                               
simple rather  than compound rate;  thus, in a  20-year-old claim                                                               
the difference between  a simple and a compounded  rate was huge.                                                               
These people  argued that  from a  company's standpoint,  it made                                                               
sense to  underpay taxes  and then pay  simple interest  when the                                                               
bill became due because - in  essence - the company was getting a                                                               
loan from  the state for an  incredibly low rate.   Therefore, in                                                               
1991 the focus  was on making the rate compound  for both royalty                                                               
and tax.   Over the decade  of the 1980s, the  federal funds rate                                                               
declined from about 14 percent to  about 6 percent; thus, by 1991                                                               
the 11  percent floor had become  a ceiling [slide 6].   Interest                                                               
rates continued to fall over the  next 20 years and under current                                                               
law  this  11 percent  has  become  the required  interest  rate.                                                               
Today the  federal funds  rate is 0.5  percent, but  the interest                                                               
rate that is  being charged for taxes is 11  percent, which is 22                                                               
times the federal funds rate.   He said this context is important                                                               
because  when the  current interest  rate  was put  in place,  it                                                               
represented a  number below which  the federal funds rate  plus 5                                                               
percent was expected to be.                                                                                                     
2:45:52 PM                                                                                                                    
MR. DICKINSON  compared the actual  interest rate charged  by the                                                               
state from  1980-2009 to  the rate that  would have  been charged                                                               
had Version E  been in place during that same  time period [slide                                                               
8].  He pointed out that  the interest rate under Version E would                                                               
have  been  considerably  lower  than  11  percent;  thus,  under                                                               
Version E,  the prevailing rate  applied to all taxes  would have                                                               
been the federal funds rate plus 2 percent.                                                                                     
2:47:21 PM                                                                                                                    
MR.   DICKINSON,  in   response  to   Representative  Guttenberg,                                                               
reiterated that the interest rate for  all tax types is the same;                                                               
thus the interest rate on oil taxes  is the same as for the other                                                               
types of taxes.  He explained  that the thick blue line [slide 7]                                                               
represents the federal  funds rate, and the thick  red line above                                                               
that blue line  is the flat 11 percent floor  and the thin purple                                                               
line  above that  blue  line is  the federal  funds  rate plus  5                                                               
percent.  Since passage of the  [1991] bill, there have been only                                                               
one  or two  quarters  in which  the federal  funds  rate plus  5                                                               
percent actually  exceeded that  11 percent;  thus, over  most of                                                               
[1991-2009], the interest rate has been 11 percent.                                                                             
2:48:48 PM                                                                                                                    
MR.  DICKINSON compared  Alaska's  current interest  rate to  the                                                               
federal  interest rates  under the  Internal Revenue  Service and                                                               
the tax  code [slide 9].   For individuals, the interest  rate is                                                               
the federal  funds rate plus  3 percent for both  overpayment and                                                               
underpayment of  taxes.  For  corporations the interest  rate for                                                               
overpayment of taxes  is the federal funds rate  plus 0.5 percent                                                               
and for a large underpayment it  is the federal funds rate plus 5                                                               
percent.  Thus,  Alaska's current rules line up  with the federal                                                               
situation  of corporations  with large  overpayments.   Version E                                                               
would change  Alaska's interest rate  to being more in  line with                                                               
the federal  general corporate  rate [federal  funds rate  plus 2                                                               
percent  for  tax  overpayment  and federal  funds  rate  plus  3                                                               
percent for tax  underpayment].  He pointed out  that the federal                                                               
rate does not have  a ceiling or a floor; it  is only the federal                                                               
funds rate plus a percent.                                                                                                      
2:49:59 PM                                                                                                                    
MR.  DICKINSON moved  to the  second proposed  change located  in                                                               
Section 7 of Version E [slide  11].  Section 7 would mandate that                                                               
interest is not  due on an increase in tax  liability that is the                                                               
direct  result of  the adoption  of  regulation with  retroactive                                                               
application  until  30  days  after the  effective  date  of  the                                                               
regulation.  Governor  Parnell has proposed to  address this same                                                               
issue in a bill that he  will soon be introducing [the governor's                                                               
bill, HB  337/SB 271, was introduced  on 2/10/10].  In  a January                                                               
14, 2010, press release the  governor states that he would "allow                                                               
for the  waiver of interest charges  on late payments due  to the                                                               
retroactive application of new regulations."                                                                                    
MR.  DICKINSON  explained why  this  second  change is  necessary                                                               
[slide 12].  Production  tax is due on the last  day of the month                                                               
following the month of production  [AS 43.55.020(a)].  Generally,                                                               
within that 30 days a company can  get a fair estimate of the tax                                                               
due.   However, lots of  things can  happen that will  change the                                                               
amount  of  tax   due:    audits,  the   taxpayer  receiving  new                                                               
information,  retroactive revision  of  tariffs, and  retroactive                                                               
changes  in  regulations.   Under  current  ACES law,  when  such                                                               
changes happen, the change goes back  to the first month that the                                                               
company owed the tax.  For example,  if a tax is owed on the last                                                               
day  of August  2007 for  production in  July 2007,  and an  ACES                                                               
regulation  is  later put  into  place  that says  something  the                                                               
taxpayer thought  was an  expense is not,  the taxpayer  will owe                                                               
interest  on that  back to  August 2007.   The  law says  that if                                                               
there is  a tax dispute,  the attorney general or  the Department                                                               
of Revenue  can settle a  compromise with the taxpayer  in regard                                                               
to a figure  and a penalty [AS 43.55.070].   However, the statute                                                               
does  not  mention  interest  and  thus  the  attorney  general's                                                               
interpretation   is   that   interest  cannot   be   compromised.                                                               
Therefore,  even if  a taxpayer's  position is  deemed as  having                                                               
been reasonable at  the time the tax was paid,  the taxpayer must                                                               
still  pay the  interest  if more  tax  is owed  as  a result  of                                                               
subsequent regulations.                                                                                                         
2:52:44 PM                                                                                                                    
MR. DICKINSON  outlined the five  major areas in which  ACES gave                                                               
the Department  of Revenue  new rules  for taxpayers  [slides 13-                                                               
14].   The  new reporting  requirements [AS  43.55.030 and  .040]                                                               
came out  in regulation in May  2008, effective as of  June 2008.                                                               
New regulations directing how taxpayers  must deal with combining                                                               
two  half years  of production  tax came  out in  September 2009,                                                               
effective October 2009.  Because  production tax is a yearly tax,                                                               
and the effective  dates of most of the ACES  reforms was July 1,                                                               
2007, ways  of combining  two half years  had to  be implemented.                                                               
Furthermore, ACES directed that  allowable costs shall be defined                                                               
by the  department under regulation  [AS 43.55.165(a)]  and those                                                               
new rules came out in January  2010, effective February 2010.  He                                                               
pointed  out  that  the  costs   of  employee  training  are  not                                                               
deductible under these  new regulations.  In regard  to new rules                                                               
for reasonable  transportation for  things like  the Trans-Alaska                                                               
Pipeline  System  and  tankers,  ACES directs  that  the  cost  a                                                               
taxpayer  is allowed  to  deduct will  be the  lower  of what  is                                                               
actually  paid   or  what  the  department   thinks  is  actually                                                               
reasonable  [AS  43.55.150].     However,  two  years  later,  no                                                               
regulation has been  promulgated and taxpayers still  do not know                                                               
what the department thinks is  reasonable.  Under HB 308, Version                                                               
E, interest  could not be  charged on  the difference in  the tax                                                               
when the regulation comes out retroactively.                                                                                    
2:54:56 PM                                                                                                                    
MR.  DICKINSON turned  to the  third proposed  change located  in                                                               
Section 11 of Version E [slides  15-24].  Section 11 would change                                                               
progressivity [AS 43.55.011(g)] from  0.4 percent to 0.2 percent.                                                               
He pointed out  that the progressivity can be huge.   Of the $6.9                                                               
billion brought in  from the production tax in  fiscal year 2008,                                                               
$4.2 billion  came from  the 25  percent base  tax rate  and $3.2                                                               
billion came  from progressivity [slide  17].  This  $3.2 billion                                                               
in  progressivity  is the  same  amount  that was  received  from                                                               
royalties that same fiscal year.   The amount received for income                                                               
taxes  was  $0.6 billion  and  the  amount  for state  and  local                                                               
property taxes was $0.4 billion.                                                                                                
2:56:05 PM                                                                                                                    
MR. DICKINSON  reviewed how the proposed  change in progressivity                                                               
would work [slide 18].   Progressivity would start at 0.2 percent                                                               
until an additional  25 percent in progressivity is  added.  Then                                                               
it  would  go to  0.1  percent  per  additional dollar  until  50                                                               
percent   in  progressivity   is  added,   at  which   point  the                                                               
progressivity  is  capped.    Under   current  law,  the  initial                                                               
progressivity  goes up  at  0.4 percent  for  every extra  dollar                                                               
until the 25 percent is reached [slide  19].  Then it goes at 1.0                                                               
percent [until  the 50 percent  cap is  reached].  He  noted that                                                               
the  progressivity proposed  by  Version E  is  identical to  the                                                               
original  version of  ACES introduced  by Governor  Palin, except                                                               
that Governor  Palin's proposal  would have  capped progressivity                                                               
at 25 percent.                                                                                                                  
2:57:28 PM                                                                                                                    
MR. DICKINSON, in response to  Representative Guttenberg, said he                                                               
has not done  an analysis of what this would  have meant over the                                                               
past  two years.   However,  slide 21  depicts a  graph from  the                                                               
Department of Revenue's  January 14, 2010, analysis  in which the                                                               
department talks about  three important aspects of  the tax rate:                                                               
the nominal rate; the marginal rate,  which is the amount paid in                                                               
tax  for  every  additional  dollar of  revenue  that  a  company                                                               
receives; and the  effective rate, which is a  restatement of the                                                               
tax as  a gross figure.   He  referred members to  [slides 22-24]                                                               
for  a  further  sense  of   what  would  have  happened  in  the                                                               
intervening years.                                                                                                              
2:58:27 PM                                                                                                                    
MR.  DICKINSON addressed  the  fourth  proposed change  regarding                                                               
local hire [Section 15 of Version E].   He noted that most of the                                                               
employers in  the oil  and gas  industry on  the North  Slope are                                                               
companies  that provide  oil field  services, and  the employment                                                               
figures shown on  [slide 29] are only for  companies that provide                                                               
direct  services.    Not  included  on  that  slide  are  Alaskan                                                               
companies   that  provide   services   for  catering,   security,                                                               
engineering,  transportation,  communication,  and  construction.                                                               
He pointed  out that these  are the  companies that will  have to                                                               
improve their local  hire rates, and they will have  to pass that                                                               
information on  to the  taxpayers to  get the  credit.   So, what                                                               
will happen is that the  taxpayers will insist in their contracts                                                               
with these  companies that the  amount of local labor  be proven.                                                               
Therefore, the  proposed provision  will translate down  from the                                                               
taxpayers to  the operators  of the units  to the  contractors to                                                               
the  subcontractors.    This  is  not an  imposition;  it  is  an                                                               
economic incentive that  is removed several times  from the folks                                                               
who actually have to make the behavioral changes.                                                                               
CO-CHAIR NEUMAN  urged members with  questions to speak  to staff                                                               
at the Department of Revenue and to Representative Johnson.                                                                     
3:00:36 PM                                                                                                                    
MR.  DICKINSON pointed  out that  slide 33  deals with  the fifth                                                               
proposed change  regarding the  30 percent  credit for  well work                                                               
[Section 17 of Version E].                                                                                                      
REPRESENTATIVE  JOHNSON  reiterated  that  work on  HB  308  will                                                               
continue and  that Mr. Dickinson  will be available by  phone for                                                               
further  questions  when the  bill  is  again considered  by  the                                                               
committee.   In  response to  Representative Kawasaki,  he stated                                                               
that  it will  be up  to  the administration  to determine  which                                                               
people  to bring  before the  committee to  answer questions  and                                                               
present the administration's position.                                                                                          
[HB 308 was held over.]                                                                                                         

Document Name Date/Time Subjects
CSHB 308 version E.pdf HRES 2/8/2010 1:00:00 PM
HB 308
CSHB 308 Sponsor Statement.E.pdf HRES 2/8/2010 1:00:00 PM
HB 308
Technical Aspects of CSHB 308.E.pdf HRES 2/8/2010 1:00:00 PM
HB 308