Legislature(2009 - 2010)BARNES 124

02/10/2010 01:00 PM House RESOURCES

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Heard & Held
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Heard & Held
          HB 217-TAX ON GAS FOR IN STATE MANUFACTURING                                                                      
1:06:04 PM                                                                                                                    
CO-CHAIR JOHNSON  announced that the  first order of  business is                                                               
HOUSE BILL  NO. 217, "An  Act relating  to the tax  applicable to                                                               
the  production of  natural  gas used  in the  state  as fuel  or                                                               
feedstock in producing a manufactured end product."                                                                             
1:06:58 PM                                                                                                                    
REPRESENTATIVE P.  WILSON moved  to adopt the  proposed committee                                                               
substitute (CS) for HB 217,  Version 26-LS0816\R, Bullock, 2/8/10                                                               
("Version R") as the work draft.                                                                                                
REPRESENTATIVE KAWASAKI  objected and asked what  the differences                                                               
are between Version R and the bill as introduced.                                                                               
REPRESENTATIVE  NEUMAN,  sponsor  of  HB 217,  replied  that  the                                                               
differences  are  related  to   questions  previously  raised  by                                                               
committee members about identifying  the tax credits.  Department                                                               
of Revenue  staff worked with  the bill drafter to  address these                                                               
questions.  Because of some  credits that are available under the                                                               
Alaska's  Clear  and Equitable  Share  (ACES)  law, an  either/or                                                               
clause was  added to ensure that  the 5 percent credit  would act                                                               
to the best benefit.  Thus,  one sentence became eight pages long                                                               
because it must be applied to preceding statutes.                                                                               
REPRESENTATIVE KAWASAKI  removed his  objection.  There  being no                                                               
further objection, Version R was before the committee.                                                                          
1:08:41 PM                                                                                                                    
REPRESENTATIVE  NEUMAN said  HB 217  would reduce  the production                                                               
tax for  gas that is manufactured  within the state of  Alaska in                                                               
an attempt to  induce manufacturing in the state  to create jobs.                                                               
It  would  not affect  Cook  Inlet  gas.    He pointed  out  that                                                               
manufacturing is  a molecular change  in the gas or  the methane.                                                               
An  example  of  manufacturing is  the  Fischer-Tropsch  process,                                                               
which  is a  catalyzed chemical  reaction for  making alternative                                                               
fuels.   However, converting gas  to liquefied natural  gas (LNG)                                                               
for export  is not manufacturing  because it is simply  a cooling                                                               
and compressing  process.  He  reiterated that the purpose  of HB
217 is to create jobs.                                                                                                          
1:10:52 PM                                                                                                                    
REPRESENTATIVE  SEATON  requested   further  explanation  of  the                                                               
differences between Version R and the original bill.                                                                            
REPRESENTATIVE  NEUMAN  deferred  to  Donald  Bullock,  the  bill                                                               
1:11:47 PM                                                                                                                    
DONALD BULLOCK  JR., Legislative  Counsel, Legislative  Legal and                                                               
Research  Services,  Legislative  Affairs  Agency,  Alaska  State                                                               
Legislature, pointed out  that Section 9 of  Version R, beginning                                                               
on page  9, line  31, is  HB 217 prior  to this  CS, which  was a                                                               
change in the  definition of "used in the state".   That "used in                                                               
the  state"  definition was  relevant  to  what is  currently  AS                                                               
43.55.011(o),  which sets  a  maximum  tax rate  on  gas that  is                                                               
produced  and  used in  the  state.    In response  to  [previous                                                               
committee]  discussion, the  sponsor asked  for a  CS that  would                                                               
allow producers  to choose whether to  apply the cap to  gas that                                                               
is used  in the  state or to  have it taxed  at the  regular rate                                                               
that is applicable to  other gas no matter where it  is used.  He                                                               
said the  reason for this  is because,  as he understands  it, AS                                                               
43.55.011(m)  requires  that gas  subject  to  the cap  have  the                                                               
credits  applied before  the cap  is applied;  thus, the  credits                                                               
that  were  applied  to  gas  used in  the  state  could  not  be                                                               
available against other production.                                                                                             
MR. BULLOCK explained that Section  4 of Version R therefore adds                                                               
a new  section to AS  43.55 which  would provide for  an election                                                               
that a  producer could make to  either have the gas  that is used                                                               
in the state taxed as any other  gas or have the cap applied.  If                                                               
the producer  makes the election  provided by Section 4,  then it                                                               
is just like AS  43.55.011(o) - the cap on gas  used in the state                                                               
is the  same as the  cap on gas that  is produced in  Cook Inlet.                                                               
Because this is a new section  that provides for the cap, most of                                                               
the  bill  just corrects  cross  references  to the  section  and                                                               
replaces  reference to  the cap  in  AS 43.55.011(o)  to the  new                                                               
section which is  43.55.014.  So, the change in  the CS is rather                                                               
than having  the cap  applicable to  all gas  used in  the state,                                                               
producers have the option to go  for the cap that is currently in                                                               
AS  43.55.011(o) through  the enactment  of this  new section  or                                                               
just have gas  used in the state  taxed as any other  gas that is                                                               
taxed without regard as to where it is used.                                                                                    
1:14:48 PM                                                                                                                    
REPRESENTATIVE  SEATON inquired  at  what point  a company  could                                                               
make this  selection.   He posed  a scenario  in which  a company                                                               
that is having a major development  takes the tax credits and the                                                               
tax write-offs against  all of its upstream expenses  at the high                                                               
rate and  offset that  against its  oil.   Then, once  gas starts                                                               
flowing, the company  makes this election and its gas  tax is now                                                               
at  a very  low rate.    In that  situation, the  state would  be                                                               
spending  60-70  percent  of the  development  cost  through  tax                                                               
credits and  deferrals and  then when  production starts  the tax                                                               
would  be at  5 percent  and the  state would  never recover  its                                                               
offsets even if there is great gas production.                                                                                  
CO-CHAIR NEUMAN  responded he believes  a lot of that  is already                                                               
done and HB 217 is just  adding manufacturing to the end of that.                                                               
He  deferred to  Mr.  Rogers  of the  Department  of Revenue  for                                                               
further explanation.                                                                                                            
1:17:25 PM                                                                                                                    
GARY  ROGERS,  Oil  &  Gas   Revenue  Specialist,  Tax  Division-                                                               
Administration, Department  of Revenue  (DOR), replied  that much                                                               
of the  answer to Representative  Seaton's question  would depend                                                               
upon each  individual producer's  circumstances and  he therefore                                                               
does not have an answer at the moment.                                                                                          
REPRESENTATIVE NEUMAN said he believes  if that election is made,                                                               
then all  the rules  applicable to AS  43.55.011(o) apply  to the                                                               
cap on gas used  in state.  If the election is  not made, the gas                                                               
is taxed at the other tax rate.                                                                                                 
MR. BULLOCK  added that HB  217 allows a  taxpayer to opt  to use                                                               
what is currently AS 43.55.011(o) or  to not have the gas subject                                                               
to the  limitations, and that limitation  comes with requirements                                                               
of how the credits are applied.                                                                                                 
1:19:58 PM                                                                                                                    
CO-CHAIR JOHNSON  surmised that Representative  Seaton's question                                                               
is whether  a producer  has the  ability to  move back  and forth                                                               
between the tax rates depending on  flow - is it an either/or, or                                                               
is it  an and.   For example, once an  election is made,  can the                                                               
taxpayer  go back  and  pick a  better rate  based  upon its  tax                                                               
credit, or  is the taxpayer  bound to its original  election once                                                               
gas is flowing.                                                                                                                 
REPRESENTATIVE SEATON agreed that that  sums up his question.  He                                                               
cited Point  Thomson as being  an example  because it is  a large                                                               
gas development  and right now  the State  of Alaska is  making a                                                               
major contribution through  the 20 percent tax credit.   There is                                                               
also the  upstream tax on  oil of 25 percent  plus progressivity,                                                               
so at $70  per barrel the state  may be putting in  70 percent of                                                               
the total investment into that  field.  After gas starts flowing,                                                               
his question  is whether  the 5  percent tax  rate could  then be                                                               
elected for gas that is used  in in-state manufacturing.  He said                                                               
he does not believe that in  such a scenario the state would ever                                                               
recover  its investment.   So,  yes, the  question is  timing and                                                               
whether a  taxpayer could utilize  one rate  and then at  a later                                                               
date make the other election.                                                                                                   
1:22:00 PM                                                                                                                    
MR. BULLOCK pointed out a disconnect  between Sections 4 and 5 in                                                               
the CS.   Under  AS 43.55.014(c)  in Section  4, the  election is                                                               
made annually  at the time the  return for the production  tax is                                                               
filed.   However, [Section  5] talks  about making  the estimated                                                               
payments  during  the  year  that  would be  based  on  what  the                                                               
projected tax  would be if the  taxpayer made the election.   So,                                                               
43.55.014(c) could be amended to  say that the taxpayer makes its                                                               
election at the  time the first estimated payment is  due for the                                                               
tax for the  year, rather than waiting until the  end of the year                                                               
to claim it.                                                                                                                    
REPRESENTATIVE SEATON said his problem  with this is that most of                                                               
the investment  in the exploration  and development of  the field                                                               
takes place  before gas  ever flows.   So, if  this is  an annual                                                               
election,  it would  let an  oil company  write off  at maybe  70                                                               
percent; thus,  the state would be  investing in the field  at 70                                                               
percent  of the  total expenses.   Then,  annually, when  the gas                                                               
starts to flow,  the company could elect the 5  percent tax rate.                                                               
This is something that must be  guarded against.  Though that may                                                               
be a  provision in  the fuel  and electrical  generation portion,                                                               
and  this  is  adding   manufacturing,  the  manufacturing  could                                                               
utilize significant  amounts of  gas, much  more than  fuel usage                                                               
for residences.   If the  state does  not have an  export market,                                                               
then all of the gas would be this  way and the state would be the                                                               
major investor and would receive very little in taxes.                                                                          
1:23:59 PM                                                                                                                    
CO-CHAIR JOHNSON asked  whether that problem would  remain if the                                                               
manufacturing aspect of this is taken out.                                                                                      
MR.  BULLOCK   answered  that   the  manufacturing   expands  the                                                               
definition of gas "used in  the state" to manufacturing, which it                                                               
does not do now.  This expands  the market for the gas that could                                                               
be used in the  state.  That, in turn, expands  the amount of gas                                                               
that would  be subject to  an election  to have the  cap applied.                                                               
However, he  pointed out  that the  credits under  the production                                                               
tax in  AS 43.55.023-025  would not  be affected  by HB  217, and                                                               
they  would still  be  generated as  they always  are.   So,  the                                                               
effect of  the bill  is that  it expands the  volume of  gas that                                                               
could be  used in the state  by providing more purposes  that are                                                               
allowed to be subject  to what is now a cap  and, under the bill,                                                               
would be subject to the election.                                                                                               
1:25:07 PM                                                                                                                    
REPRESENTATIVE SEATON said his point  is that the purpose of this                                                               
bill is to  expand the amount of  gas that would be  selling at a                                                               
very low tax rate  and if the state is giving  all of the credits                                                               
that  are   available  through  other  provisions   and  allowing                                                               
upstream deductions  of the 25  percent plus  progressivity, then                                                               
the state will  have a lot of money invested  and get very little                                                               
back.  While the state  would receive revenue from manufacturing,                                                               
manufacturing will not pay the bills.                                                                                           
CO-CHAIR JOHNSON commented that this  is a policy call of whether                                                               
to trade taxes for jobs.                                                                                                        
1:26:29 PM                                                                                                                    
REPRESENTATIVE P.  WILSON, in  regard to page  3, line  26, "make                                                               
the  election at  the  time  the return  is  due", requested  Mr.                                                               
Bullock  to  comment  on  his previous  suggestion  to  make  the                                                               
election earlier than that.                                                                                                     
MR. BULLOCK  explained that ACES  changed what was a  monthly tax                                                               
to an  annual tax, while at  the same time providing  for monthly                                                               
installments.   So, AS 43.55.020,  which is amended by  Section 5                                                               
of  Version R,  provides for  the calculation  of an  installment                                                               
payment  that  is  roughly  equal   to  one-twelfth  of  the  tax                                                               
liability that  will be due  for the year.   There was  already a                                                               
provision  in AS  43.55.020(a) that  applied to  gas used  in the                                                               
state and how  to determine how that cap  affects the installment                                                               
payment.   So, his suggestion  was that since the  taxpayer makes                                                               
installment payments during the year  as the gas is produced, the                                                               
taxpayer  could make  the  election at  the  time an  installment                                                               
payment  is made  rather than  after  the end  of the  year.   He                                                               
pointed out  that the  producer has  to know  whether the  gas is                                                               
used in the state or not,  but in the case of manufacturing there                                                               
are  not yet  any manufacturing  facilities  in the  state.   The                                                               
credits  that are  accruing are  going  to be  applying to  other                                                               
production  until  this  "used  in the  state"  kicks  in,  which                                                               
applies to the question that Representative Seaton had.                                                                         
1:28:40 PM                                                                                                                    
CO-CHAIR NEUMAN  added that HB  217 provides the  opportunity for                                                               
Alaska's  gas to  be used  in different  ways for  manufacturing.                                                               
Right now  Alaska's gas is  used for home heating  and electrical                                                               
generation.   The goal is  to also  use it for  manufacturing and                                                               
create thousands of  jobs in the state.  An  issue was identified                                                               
by the  Department of Revenue (DOR)  and an effort has  been made                                                               
to fix  that.   The fiscal  note is zero.   Right  now no  gas is                                                               
being  produced  for  manufacturing  in-state and  5  percent  of                                                               
nothing is zero to the state.   Therefore, to him, this incentive                                                               
is good.   His goal is to have a  pipeline to Southcentral Alaska                                                               
to some  manufacturing and  everything possible  must be  done to                                                               
try to  establish that.  He  agreed that revenue to  the state is                                                               
important, but  pointed out that by  creating more manufacturing,                                                               
those  manufacturers would  be paying  corporate  taxes.   Alaska                                                               
needs to find ways to diversify its economy, he opined.                                                                         
CO-CHAIR JOHNSON interjected that  manufacturing could take place                                                               
anywhere in the state.                                                                                                          
CO-CHAIR NEUMAN agreed and reiterated  that manufacturing means a                                                               
molecular change and would not include LNG export.                                                                              
1:31:35 PM                                                                                                                    
REPRESENTATIVE SEATON agreed that the  state has been counting on                                                               
gas as  the replacement when oil  goes down.  However,  should HB
217 pass,  and the "large"  pipeline stays inside the  state, and                                                               
all of  the gas  is used  in-state, then the  state would  get no                                                               
revenue  off of  that gas.   He  said he  is using  the term  "no                                                               
revenue" because the  tax credits and the  upstream amounts would                                                               
probably  fully offset  any  amount of  tax  the state  receives.                                                               
When he  looks at jobs  he is also  looking at saying  there will                                                               
not  be forward  funding of  education and  there will  not be  a                                                               
number  of other  things because  the state's  tax base  has gone                                                               
down as a result  of the decline in oil and almost  no tax on the                                                               
gas  used  for manufacturing.    The  state  would then  need  to                                                               
substitute  another tax  regime, such  as an  income tax,  tax on                                                               
mining, or tax on manufacturing.                                                                                                
CO-CHAIR JOHNSON  commented that  if those other  funding sources                                                               
were  out there,  such  as  the manufacturing,  that  would be  a                                                               
pleasant decision to make.  It is a policy call, he reiterated.                                                                 
1:33:49 PM                                                                                                                    
REPRESENTATIVE SEATON  said his  problem with  HB 217  is whether                                                               
the  incentive is  being given  to  the right  people -  it is  a                                                               
production  tax; it  does not  go to  the manufacturer.   If  the                                                               
state wants to have use of  gas for manufacturing, a credit would                                                               
be given to  manufacturers that use gas as a  feedstock.  Then it                                                               
would be  the manufacturer  that is  being encouraged  instead of                                                               
giving a low tax rate to  the producers and hoping that they pass                                                               
their lower costs on to the manufacturer using that gas.                                                                        
CO-CHAIR JOHNSON offered his understanding of that concern.                                                                     
MR. BULLOCK pointed  out that AS 43.55.014 would  sunset in 2022,                                                               
so there would  be an end period  for the election to  apply.  As                                                               
it went  forward it could  be seen how  it works and  the statute                                                               
could be adjusted by the legislature.                                                                                           
CO-CHAIR NEUMAN allowed  that this is his concern  too, but there                                                               
is also  revenue from corporate taxes,  royalties, local property                                                               
taxes, and  the purchase  of permits and  leases from  the state.                                                               
He  noted that  HB  217  says "used  as  ...  feedstock" for  the                                                               
manufacturing process and this is what the bill started with.                                                                   
1:35:50 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG commented  that at  times the  state's                                                               
tax breaks and  incentives do not produce what is  expected.  For                                                               
example,  in the  Interior  the requirement  that  logs could  be                                                               
exported until  they were milled  resulted in the logs  being run                                                               
through the  mill to cut  off two sides  to create slab  wood and                                                               
then the rest of  the log was exported to Japan.   He offered his                                                               
concern that  a minor part  of the  gas molecules could  be taken                                                               
off and the rest exported, rather  than using most of the gas for                                                               
in-state feedstock for  lots of different products.   He inquired                                                               
whether such an unintended consequence has been looked at.                                                                      
CO-CHAIR NEUMAN responded that he  hopes lots of products will be                                                               
made from  the gas.   He noted  that the  Fischer-Tropsch process                                                               
creates synthetic  transportation fuels and a  by-product of that                                                               
process is feedstock  for plastics.  The goal is  to have ethanes                                                               
for raw plastics, as well as  butanes and synthetic propanes.  He                                                               
urged  members to  talk  to  him and  Mr.  Bullock  to get  their                                                               
questions answered.                                                                                                             
CO-CHAIR  JOHNSON urged  members to  speak individually  with the                                                               
sponsor so  their questions can  then be put  on the record  in a                                                               
clear  and concise  manner  at the  next hearing  of  HB 217  and                                                               
action can be taken on the bill.                                                                                                
1:41:04 PM                                                                                                                    
MR. BULLOCK pointed out that the  reason HB 217 has gone from one                                                               
paragraph to ten pages is because  of all of the cross references                                                               
that have to be changed.   He advised that when reading the bill,                                                               
anything related to such cross references  will be seen as (o) in                                                               
brackets, because this is the  subsection of AS 43.55.011 that is                                                               
being deleted,  and before that  bracketing will be  insertion of                                                               
the new election section which is bolded and underlined.                                                                        
1:42:06 PM                                                                                                                    
REPRESENTATIVE P. WILSON  asked why the sponsor  chose to provide                                                               
the benefit to the producer rather than the manufacturer.                                                                       
CO-CHAIR  NEUMAN replied  that the  cost of  feedstock will  be a                                                               
primary  consideration for  potential manufacturers  because that                                                               
will eventually be the cost of  the finished product.  This would                                                               
get that cost of the feedstock to  a rate that is acceptable.  He                                                               
related  that  the  cross  references   are  the  result  of  the                                                               
Department  of Revenue's  determination  that maybe  -  in a  few                                                               
circumstances - there could be a  disincentive to the cost of gas                                                               
for  electrical  generation  and  home  heating  use.    If  that                                                               
happened, it  could cause Alaskans to  have to pay more  for home                                                               
heating and electrical generation.   Therefore, he agreed to this                                                               
suggestion in an attempt to  reduce the cost for those customers,                                                               
which was  the intent of  expanding the  Cook Inlet rate  of 17.5                                                               
cents to the rest of the state.                                                                                                 
CO-CHAIR JOHNSON held over HB 217.                                                                                              

Document Name Date/Time Subjects
CSHB 217 Vers R Memo.pdf HRES 2/10/2010 1:00:00 PM
HB 217
CSHB 217 vers R.pdf HRES 2/10/2010 1:00:00 PM
HB 217
HB308 Administration Review - 2 10 10.pdf HRES 2/10/2010 1:00:00 PM
HB 308