Legislature(2009 - 2010)BARNES 124

02/15/2010 01:00 PM House RESOURCES

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01:05:50 PM Start
01:06:15 PM HB308
02:59:43 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
               HB 308-OIL AND GAS PRODUCTION TAX                                                                            
                [Contains discussion of HB 337]                                                                                 
1:06:15 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."   [Before                                                               
the committee was  the proposed committee substitute  for HB 308,                                                               
labeled 26-LS1328\E, Bullock, 2/5/10 ("Version E").]                                                                            
1:08:44 PM                                                                                                                    
DAN  DICKINSON, CPA,  Consultant  to the  Legislative Budget  and                                                               
Audit Committee, noted  that his presentation today  is a follow-                                                               
up to  his 2/8/10 presentation in  which he discussed two  of the                                                               
six changes to current statute that  are proposed by Version E of                                                               
HB 308.   He said he  will be discussing the  other four proposed                                                               
changes as  well as some of  the issues raised by  the Department                                                               
of Revenue (DOR) in testimony before the committee on 2/10/10.                                                                  
1:09:41 PM                                                                                                                    
CO-CHAIR NEUMAN recalled Co-Chair  Johnson's 2/10/10 statement to                                                               
the Department of Revenue in which  he advised that his intent as                                                               
sponsor  of HB  308  is to  create more  jobs  and investment  in                                                               
Alaska, and that  he will continue moving the  bill forward while                                                               
agreeing with the administration on  some things that are similar                                                               
between HB 308  and the governor's bill [HB  337] and disagreeing                                                               
on other things.                                                                                                                
MR. DICKINSON  responded that  he will address  the issues  as he                                                               
comes to them in his presentation.   He drew attention to slide 3                                                               
and  noted that  it depicts  where  the proposed  changes can  be                                                               
found in Version  E.  He said many of  the changes are technical;                                                               
however, six  are substantive and  those are the changes  he will                                                               
1:11:38 PM                                                                                                                    
MR. DICKINSON  began his presentation  with discussion  about the                                                               
proposed change  that interest  would not  be due  on retroactive                                                               
regulation changes  prior to those regulations  being implemented                                                               
[slide 5].   He pointed out that both production  tax and royalty                                                               
tax are due on  the last day of the month  following the month of                                                               
production  [AS 43.55.020(a)],  and this  is the  cash flow  that                                                               
keeps the state going.                                                                                                          
1:12:01 PM                                                                                                                    
MR. DICKINSON, in response to  Co-Chair Neuman, further explained                                                               
that every 30 days the state  can change whether a royalty is in-                                                               
kind  or in-value,  but  that change  is  forward-looking by,  he                                                               
believes, 120  days.  In  response to  Representative Guttenberg,                                                               
he said  the state has  changed from royalty in-value  to royalty                                                               
in-kind about  20 times on the  North Slope over about  33 years,                                                               
but   he  is   unsure  about   Cook  Inlet.     In   response  to                                                               
Representative  Seaton,  he  said  the  royalty  is  exempt  from                                                               
taxation regardless of whether it is in-kind or in-value.                                                                       
1:13:33 PM                                                                                                                    
MR. DICKINSON  returned to  his presentation  and noted  that the                                                               
amount of tax that is due for  a particular month can change at a                                                               
later date because  of a number of things, such  as a retroactive                                                               
revision of tariff.   If additional tax is due  because the value                                                               
of the oil changed, the taxpayer  must pay that tax plus interest                                                               
from the time that original tax  payment was due.  It is explicit                                                               
in  law  that  in  settlement   the  Department  of  Revenue  can                                                               
compromise  on  the  tax  amount   without  having  to  take  the                                                               
settlement before  a judge.   The department  can also  settle in                                                               
regard to whether  there will be a penalty  for tax underpayment.                                                               
However, current law does not  mention interest and therefore the                                                               
department cannot change the amount of the interest due.                                                                        
1:15:21 PM                                                                                                                    
MR. DICKINSON  explained that  the 2007  act, Alaska's  Clear and                                                               
Equitable  Share  (ACES), made  several  major  changes and  very                                                               
explicit directions  were given to  the Department of  Revenue to                                                               
write regulations  [slide 6].   One major  change related  to oil                                                               
transportation  - the  cost of  shipping oil  through the  Trans-                                                               
Alaska Pipeline  System (TAPS) and  on tankers.  Under  ACES, the                                                               
transportation  cost is  the lower  of  actual cost  or what  the                                                               
Department  of   Revenue  determines   as  reasonable   cost  [AS                                                               
43.55.150].   However,  the department  has not  yet said  how it                                                               
will  calculate those  reasonable costs.   Therefore,  a taxpayer                                                               
that is currently deducting what it  pays for TAPS might owe more                                                               
money once the  department publishes its new  regulations for the                                                               
transportation standard.                                                                                                        
MR.  DICKINSON,   in  response  to  Co-Chair   Neuman,  expounded                                                               
further.   Under the change proposed  by both HB 308,  Version E,                                                               
and the  governor's bill,  a taxpayer would  not owe  interest on                                                               
additional  tax  due  as  a  result  of  the  new  transportation                                                               
regulations.   However, if  this change is  not made,  a taxpayer                                                               
will  be required  to  pay interest  when  those regulations  are                                                               
finally implemented.                                                                                                            
MR. DICKINSON  continued his presentation, stating  that there is                                                               
a  similar dynamic  in regard  to  the upstream  or lease  costs;                                                               
transportation  being  the  downstream  cost  after  leaving  the                                                               
lease.  Under ACES, a  lease expenditure is not deductible unless                                                               
it is  specifically allowed by  Department of  Revenue regulation                                                               
[AS  43.55.165(a)].   The regulations  affecting  2007 were  just                                                               
adopted this last quarter, and  taxpayers must now look back over                                                               
the  past two  years  to see  if  they owe  additional  tax as  a                                                               
consequence of these new regulations.                                                                                           
1:17:52 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether  that was limited  by the                                                               
standard  deduction methodology  so  that  those regulations  are                                                               
really only  going to be  currently applicable because  the lease                                                               
expenditures were  limited by the percentage  increase; thus, the                                                               
regulations were not really necessary at that time.                                                                             
MR.  DICKINSON  replied  that  for   the  limitations  under  [AS                                                               
43.55.165](j) and (k),  a taxpayer would clearly  not be affected                                                               
by  the  definition  for  2007,   2008,  and  2009  because  this                                                               
requirement that the  department define it by  regulation was not                                                               
there under the  rules for 2006, the year that  laid the base and                                                               
which increases by 3 percent a year.                                                                                            
1:18:59 PM                                                                                                                    
MR.  DICKINSON returned  to his  presentation and  explained that                                                               
the production  tax is a  yearly tax.  Twelve  estimated payments                                                               
are made  and these  are trued  up in  March.   Many of  the ACES                                                               
reforms were affective in the  middle of the year, which required                                                               
that two half  years be melded into  a single year.   It took the                                                               
Department of Revenue  several years to write  the regulations on                                                               
that.  There were also  new report requirements [AS 43.55.030 and                                                               
AS 43.55.040]  and there were  new rules for  exploration credits                                                               
[AS 43.55.025].                                                                                                                 
MR. DICKINSON  noted that  slide 7  summarizes the  Department of                                                               
Revenue's  status for  each  of these  projects.   The  reporting                                                               
requirements  were published  in May  2008, effective  June 2008.                                                               
The  next  project  was  the  changing  of  35  sections  of  the                                                               
regulations which  included the mid-year regulations;  those were                                                               
adopted in September  2009 and became effective  in October 2009.                                                               
The regulations for exploration  credits were adopted in November                                                               
2009, effective December 2009.   Regulations regarding deductible                                                               
lease  expenditures  were  adopted  in  January  2010,  effective                                                               
February  2010.     Regulations  regarding  reasonable   cost  of                                                               
transportation have  not yet been  adopted, but the  public draft                                                               
was released in February 2010.   There are also a number of other                                                               
projects,  some which  will have  retroactive  effects, and  some                                                               
which will not;  of these major projects, a period  of nearly two                                                               
years has  gone by  in which the  taxpayers have  not necessarily                                                               
known what their obligations are.                                                                                               
1:21:23 PM                                                                                                                    
MR.  DICKINSON said  Governor  Parnell's  proposal would  require                                                               
that interest  be waived by  amending AS 43.55.020(i)  [slide 8].                                                               
Two things  make the  governor's proposal  more explicit  than HB
308, Version  E, and committee  members may want to  consider the                                                               
governor's  language to  ameliorate  the language  of Version  E.                                                               
The  first is  the recognition  that  just because  there are  no                                                               
regulations does  not mean there  are no rules; a  taxpayer still                                                               
needs to  consider what tax  would be owed under  existing rules.                                                               
The  second is  that  Governor Parnell's  proposal is  explicitly                                                               
REPRESENTATIVE P.  WILSON understood  Mr. Dickinson to  be saying                                                               
the tax goes back retroactively, but the interest does not.                                                                     
MR. DICKINSON answered correct.   Under both of these approaches,                                                               
the  tax is  always going  to be  retroactive and  the amount  of                                                               
money owed is not going to change;  it is just who is bearing the                                                               
interest for it.                                                                                                                
1:23:47 PM                                                                                                                    
MR. DICKINSON continued his presentation  and advised that if the                                                               
governor's  approach  was  adopted  by HB  308,  Version  E,  the                                                               
restructuring [of  AS 43.05.225] would  not be required  and half                                                               
the  sections  in  the  bill   would  disappear  because  all  of                                                               
references would  no longer  need to  be changed  [slide 8].   He                                                               
pointed out that currently under Section  6 of Version E, page 3,                                                               
line [4],  all the changes would  be to subsection (a),  but when                                                               
AS  43.05.225 itself  was changed,  the (a)  was not  introduced,                                                               
which may cause confusion in how that all ties together.                                                                        
MR. DICKINSON, in response to  Representative Seaton, stated that                                                               
the  governor's bill  just  deals with  the  issue of  production                                                               
taxes,  but HB  308,  Version  E, would  affect  all  taxes.   In                                                               
response  to Co-Chair  Neuman, he  explained that  the governor's                                                               
provision would be  in AS 43.55 which deals  just with production                                                               
taxes, and  HB 308, Version  E, deals  with AS 43.05  which deals                                                               
with interest on all taxes.                                                                                                     
1:26:18 PM                                                                                                                    
MR.  DICKINSON, in  response  to  Representative Tuck,  clarified                                                               
that the  governor's bill alleviates  only the interest  due, not                                                               
the  tax that  is due.    In further  response, he  said HB  308,                                                               
Version E,  does not  waive the  other non-production  taxes that                                                               
are due  and both HB  308, Version E, and  HB 337 deal  only with                                                               
the interest issue.                                                                                                             
REPRESENTATIVE TUCK understood that Section  6 of Version E, page                                                               
3, line 4, should read "Sec. 43.05.225(a)."                                                                                     
MR. DICKINSON responded correct.                                                                                                
1:27:38 PM                                                                                                                    
REPRESENTATIVE SEATON  inquired whether  both bills  would affect                                                               
the interest  that would be  due on settlement amounts  that have                                                               
been negotiated  for the amount of  tax that is due.   He further                                                               
understood that  under the governor's  bill a waiver  of interest                                                               
on settlements would not be discretionary.                                                                                      
MR.  DICKINSON, in  regard to  the first  part of  Representative                                                               
Seaton's   question,  replied   that  he   thinks  this   affects                                                               
settlements and  non-settlements the  same way.   Currently, when                                                               
there is  a settlement of an  issue, agreement is reached  on the                                                               
amount due and  interest is added on top of  that.  Mr. Dickinson                                                               
said that during the seven years  when he was the director of the                                                               
Division  of Tax  settlements were  typically more  by the  issue                                                               
than by the  dollar amount, and one of the  first things that was                                                               
done  in  settlement discussion  was  the  identification of  the                                                               
amount of each issue and everyone  was aware of the interest that                                                               
was tagged with  it.  In a settlement under  current law, neither                                                               
the  attorney   general  nor  the   Department  of   Revenue  can                                                               
compromise the amount of the  interest, but the amount of penalty                                                               
and amount of tax due can be compromised.                                                                                       
1:30:03 PM                                                                                                                    
MR. DICKINSON,  in regard  to the  second part  of Representative                                                               
Seaton's  question, stated  that waiver  of the  interest is  not                                                               
discretionary in  both HB 337  and HB  308, Version E.   However,                                                               
there is an important distinction and  one thing he would like to                                                               
talk about  is possible  upgrades to  the governor's  language in                                                               
Version  E.   Under  the governor's  proposal  the Department  of                                                               
Revenue  would be  required  to make  a  determination that  "the                                                               
producer  made a  good faith  estimate of  its tax  obligation in                                                               
light  of the  regulations then  in effect  when the  payment was                                                               
due"  [slide 9].   Therefore,  the department  must first  make a                                                               
determination that  the taxes  were paid in  good faith  and then                                                               
the  interest  waiver  automatically   follows.    Mr.  Dickinson                                                               
suggested that members consider  an improvement to the governor's                                                               
language such that  the department would not be  required to make                                                               
a  determination of  good faith  and the  interest would  just be                                                               
automatically  waived.   However,  interest would  be charged  in                                                               
those cases  where the  department makes  a determination  that a                                                               
taxpayer acted in bad faith [slide 10].                                                                                         
1:31:37 PM                                                                                                                    
REPRESENTATIVE  SEATON posed  a scenario  in which  a dispute  is                                                               
settled  and the  producer agrees  that  it owes  the state  $100                                                               
million  from two  years  ago, but  no interest  is  due on  that                                                               
settlement  amount.     He  asked  whether  that   would  be  the                                                               
discretionary  or non-discretionary  point that  is being  talked                                                               
about by  Mr. Dickinson.  For  example, there would be  no reason                                                               
to  pay the  full  taxes  because the  producer  would know  that                                                               
waiver of the interest in the settlement is mandatory.                                                                          
MR. DICKINSON responded  that there are two parts  to the answer.                                                               
The  first part  is  that this  does  not change  the  law as  it                                                               
affects settlements.   The attorney general  and the commissioner                                                               
must still  approve the  settlement of  the principal  amount and                                                               
the penalty  if they are different  than what was assessed.   The                                                               
only case  in which the waiver  of interest would be  required is                                                               
when the amount  in dispute arises as a consequence  of there not                                                               
being a  regulation in  place and the  regulation comes  in after                                                               
the fact; thus,  a carte blanche waiver of interest  would not be                                                               
the case.   Additionally, a timeline is being  talked about here.                                                               
The   statutory  requirement   came  in   2007,  the   regulatory                                                               
fulfillment came in 2009, and  under the current six-year statute                                                               
of  limitations  it may  be  2012-2013  before an  assessment  is                                                               
issued.   The interest between  2010 and  2013 is not  changed at                                                               
all by  these rules.  All  that is changed is  the application of                                                               
the interest  before the rules were  in place up until  they came                                                               
into place.  From then on,  once the rules are official and known                                                               
by the taxpayers, it is as if the rule had always been there.                                                                   
1:34:41 PM                                                                                                                    
REPRESENTATIVE  SEATON  surmised  the  aforementioned  would  not                                                               
apply to Prudhoe Bay or Kuparuk production.                                                                                     
MR. DICKINSON  replied that  the fixing of  costs at  2006 levels                                                               
will only apply  to the lease expenditure issue.   The downstream                                                               
transportation  was not  affected by  that; neither  was how  the                                                               
22.5  percent  and 25  percent  rates  are  meshed, nor  how  the                                                               
reporting requirements are dealt with.                                                                                          
1:35:39 PM                                                                                                                    
REPRESENTATIVE  P. WILSON  understood the  governor's bill  would                                                               
deal only  with the production tax,  but that HB 308,  Version E,                                                               
would deal with  all of the taxes.  She  asked whether that would                                                               
apply only to  the timeline between when it started  and when the                                                               
regulations are in place.                                                                                                       
MR. DICKINSON  answered yes.  He  said he believes the  intent in                                                               
both bills is only to deal with  the issue of when a taxpayer has                                                               
to file  a return  and does not  know what the  rules are.   Then                                                               
there is  the question of  whether that happens in  the cigarette                                                               
tax or the alcohol tax as  opposed to the production tax; so when                                                               
he used  the term "all"  he meant the other  20 tax types  of the                                                               
state's 21 tax types.                                                                                                           
1:37:05 PM                                                                                                                    
REPRESENTATIVE KAWASAKI commented that  it seems the committee is                                                               
taking up a  bill that has not  yet been calendared.   He said he                                                               
thinks it may  be out of order to talk  about the governor's bill                                                               
until the provisions  of HB 308, Version E, are  addressed and it                                                               
is known how  those provisions would impact the state.   He would                                                               
therefore prefer to stay away from  HB 337 until it is before the                                                               
CO-CHAIR NEUMAN  responded that the Department  of Revenue talked                                                               
to  the   committee  about  the   governor's  bill   on  2/10/10.                                                               
Additionally,  members  should  have  HB  337  in  their  offices                                                               
because it  has been read across  the House floor.   The point is                                                               
to look  at where there  is agreement  between the two  bills and                                                               
develop  the best  legislation to  move  forward; therefore,  Mr.                                                               
Dickinson looked at the department's  presentation and at HB 308,                                                               
Version E, and is presenting those likenesses and differences.                                                                  
REPRESENTATIVE  KAWASAKI reiterated  his discomfort  with drawing                                                               
another bill into the discussion  unless it is officially planned                                                               
to do that.                                                                                                                     
1:39:56 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG,  in regard to the  good faith estimate                                                               
language on slide 9, (1)(B), inquired how good faith is defined.                                                                
MR.  DICKINSON replied  that he  does  not know  and an  attorney                                                               
would  need to  be asked.    He said  that  in some  ways he  was                                                               
speaking to this same point  when he suggested the improvement to                                                               
the  governor's language  [slide 10,  second bullet].   He  noted                                                               
that four  versions of transportation  regulations have  come out                                                               
so far [slide 7] and that  the department is considering two very                                                               
different  approaches  for  these  regulations.   So,  while  the                                                               
taxpayers  are familiar  with the  four versions  that have  come                                                               
out, they are still left with  having to figure out which version                                                               
will be the most likely.   The point is that until the department                                                               
really defines something, there is not really a rule out there.                                                                 
1:42:55 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  stated he was unaware  that there were                                                               
regulations  in the  past regarding  facility sharing  [slide 7].                                                               
He  asked whether  there  will  be impacts  on  taxes from  these                                                               
MR. DICKINSON said  that is the exact point.   There is currently                                                               
a  rule,  but the  rule  has  never mentioned  facility  sharing.                                                               
Until that  rule is  adopted, taxpayers  are going  to act  as if                                                               
there is not  a special rule for facility sharing  and that it is                                                               
just like  any other cost.   When a law  is passed that  says the                                                               
department shall  now define by  regulation, there is no  rule in                                                               
place until the department actually does so.                                                                                    
CO-CHAIR NEUMAN  stated that a  taxpayer is acting in  good faith                                                               
when adhering  to the  rules that  are currently  in place  and a                                                               
change in the rules that  increases the taxpayer's taxes does not                                                               
negate  this;  therefore the  taxpayer  should  not have  to  pay                                                               
MR. DICKINSON agreed that that is the intent of the bill.                                                                       
1:45:44 PM                                                                                                                    
REPRESENTATIVE  SEATON, in  regard to  Mr. Dickinson's  suggested                                                               
change to HB 308, inquired whether  it would it make sense to say                                                               
that if  a taxpayer has  paid its  full tax obligation  under the                                                               
rules that existed at the time, then the interest is waived.                                                                    
MR. DICKINSON  responded that that  would cover  many situations.                                                               
However, in a situation where a cost  is a cost as defined by the                                                               
department  by  regulation, there  is  technically  no rule  that                                                               
applies.  A lot of time could  be spent trying to figure out what                                                               
rule should  have applied.   For example, should a  taxpayer have                                                               
looked by  analogy to some  other section of the  regulations, or                                                               
applied  the  statute directly,  or  known  the regulations  were                                                               
CO-CHAIR  NEUMAN interjected  that under  ACES  it is  up to  the                                                               
Department of Revenue  to make the determination  that a taxpayer                                                               
acted in good faith.                                                                                                            
1:47:54 PM                                                                                                                    
REPRESENTATIVE  SEATON  stated  that there  were  regulations  in                                                               
place  [when  ACES  passed],  so  if a  company  paid  its  taxes                                                               
consistent with the  regulations existing at the  time, then that                                                               
could be the bar to qualify as acting in good faith.                                                                            
MR. DICKINSON reiterated  that that might make sense in  a lot of                                                               
situations.    However,  he  is asterisking  that  when  the  law                                                               
changed  in July  2007, the  regulations had  been written  under                                                               
prior laws,  so it must be  determined what pieces apply  and how                                                               
well they  apply.   For example,  Alaska had  separate accounting                                                               
income tax from 1978-1981, but  the regulations for that were not                                                               
written  until 1980.   In  a large  hearing on  this case  in the                                                               
1990s  one of  the things  being fought  was what  rules were  in                                                               
place  if  the  regulations  were not  there.    Conflicts  occur                                                               
because there are two ways to think about something.                                                                            
1:51:42 PM                                                                                                                    
REPRESENTATIVE  TUCK  posed a  scenario  in  which there  are  no                                                               
regulations in place, but a  company still pays what it estimates                                                               
its taxes would possibly be.   In this case the interest could be                                                               
waived under all tax schemes  when regulations are implemented at                                                               
a later date.   He asked whether under HB 308  a company that did                                                               
not make any  tax payments would be considered to  not have acted                                                               
in good faith and would therefore owe interest.                                                                                 
MR.  DICKINSON  said  he  hesitates to  answer  because  that  is                                                               
getting into  attorney areas.   However, in  general he  does not                                                               
think there is an obligation  to follow regulations that have not                                                               
been properly adopted.  This  is because not all regulations that                                                               
get proposed get adopted.                                                                                                       
1:53:43 PM                                                                                                                    
MR.  DICKINSON returned  to his  presentation  and addressed  the                                                               
proposed tax  rate tied to resident  hire under Section 15  of HB
308,  Version E  [slide  12].   He  explained  that this  section                                                               
applies to taxpayers that are subject  to the base tax rate of 25                                                               
percent under  AS 43.55.011(e)(1).   Any direct  labor that  is a                                                               
lease expenditure would have to  be accounted for as being either                                                               
resident or nonresident  by a set of definitions.   At the end of                                                               
the year,  the taxpayer could  get a  tax rebate if  its resident                                                               
hire rate  is at least  80 percent.   The new effective  tax rate                                                               
would then  be somewhere between 20  percent and 25 percent.   If                                                               
an 80 percent resident hire  rate is not achieved, the taxpayer's                                                               
tax  rate  would remain  at  25  percent.   He  recommended  this                                                               
provision become effective  at the beginning of a  year because a                                                               
change in mid-year would require lots of regulation writing.                                                                    
1:55:38 PM                                                                                                                    
REPRESENTATIVE KAWASAKI, in  regard to the third  bullet on slide                                                               
12, inquired  how the accounting  of direct labor as  resident or                                                               
nonresident  would work  in  a practical  manner.   For  example,                                                               
there are  many nonresident subcontractors working  on what would                                                               
be considered a lease expenditure deduction.                                                                                    
MR. DICKINSON  said he will  be addressing this in  future slides                                                               
and that  this question  is a good  point because  the production                                                               
taxpayers comprise  less than one-fourth of  the actual employees                                                               
in the oil patch.                                                                                                               
1:57:40 PM                                                                                                                    
REPRESENTATIVE SEATON  understood that the Department  of Revenue                                                               
currently  limits  what is  an  allowed  expenditure.   He  asked                                                               
whether the  third bullet on  slide 12 would mean  establishing a                                                               
new category and that the  state would mandate what the companies                                                               
put into  lease expenditures as  well as  limit what is  put into                                                               
lease expenditures                                                                                                              
MR.  DICKINSON replied  no, there  is  no mandating.   The  rules                                                               
about what constitutes a lease  expenditure have been established                                                               
by the  Department of Revenue.   A  separate test would  then say                                                               
that  the labor  in  that  is classified  as  either resident  or                                                               
nonresident and the  ratio would subsequently be  determined.  He                                                               
said he will be dealing with how  the labor is defined and how it                                                               
all fits together later in his presentation.                                                                                    
1:59:30 PM                                                                                                                    
MR. DICKINSON returned to his  presentation, noting that slide 13                                                               
depicts how the resident hire  ratio translates into an effective                                                               
tax rate after  the rebate.  He  said he started at  a 70 percent                                                               
resident hire  ratio because that  is currently the  average rate                                                               
in the  oil patch  according to Department  of Labor  & Workforce                                                               
Development figures.   He explained that the tax  rebate would be                                                               
0  percent for  resident hire  ratios between  70 percent  and 80                                                               
percent.   Starting with 80 percent,  there would be a  2 percent                                                               
rebate  for  every  2.5  percent   incremental  increase  in  the                                                               
resident hire ratio.  From a  97.5 percent resident hire ratio to                                                               
100 percent,  the tax rebate  would increase  by 4 percent.   The                                                               
effective tax rate would be  calculated by multiplying the rebate                                                               
amount by the 25 percent nominal  [base] tax rate.  Thus, for 70-                                                               
80  percent  local hire  ratios,  the  effective tax  rate  would                                                               
remain at 25  percent.  At an 80 percent  ratio the effective tax                                                               
rate would  drop to 24.5  percent and  at 100 percent  local hire                                                               
the effective tax rate would drop to 20 percent.                                                                                
2:01:18 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI cited  the  issue brought  up by  Marcia                                                               
Davis, Deputy Commissioner of the  Department of Revenue, where a                                                               
company  might  choose to  fire  a  non-Alaskan  to reach  a  2.5                                                               
percent increment rather than hire  an Alaskan as a new employee.                                                               
He  asked why  a  step approach  was used  rather  than a  linear                                                               
MR. DICKINSON  answered that  later in  his presentation  he will                                                               
explain why a linear slope would work better.                                                                                   
2:02:33 PM                                                                                                                    
MR.  DICKINSON moved  to slide  14, a  depiction of  oil industry                                                               
nonresident  workers  from  a Department  of  Labor  &  Workforce                                                               
Development publication.   He said that in 2008,  29.8 percent of                                                               
the 17,000 workers  in the oil industry  were out-of-state, which                                                               
translates to 5,043 out-of-state  workers and about 12,000 Alaska                                                               
resident workers.                                                                                                               
MR. DICKINSON  provided an  example [slide 15]  of the  impact of                                                               
the  tax   rebate  derived  from  the   Department  of  Revenue's                                                               
[2/10/10] presentation.   He  pointed out  that when  a company's                                                               
resident worker  ratio is right  next to the line  between tiers,                                                               
an increase  in the ratio of  just 0.5 percent would  have a huge                                                               
[per employee] tax  effect.  However, when the ratio  is not near                                                               
a tier  line, an increase  in the ratio  would have a  small [per                                                               
employee]  tax effect.   This  tiered, or  step, method  makes it                                                               
difficult to determine  what the tax effect will be  for a change                                                               
in  the  number of  resident  employees.    He said  the  extreme                                                               
example put  forth in  a [2/11/10  Anchorage Daily  News] article                                                             
correctly  depicted that  the hiring  of just  one Alaskan  would                                                               
result in a $30 million tax savings [slide 16].                                                                                 
2:05:02 PM                                                                                                                    
MR. DICKINSON provided  another example of the impact  of the tax                                                               
rebate.     He  posed  a   scenario  in  which  Company   C,  the                                                               
hypothetical company used in the  Department of Revenue's 2/10/10                                                               
example, has  4,500 resident  workers for a  ratio of  70 percent                                                               
[slide 18].   The  addition of 650  resident workers  would bring                                                               
the ratio  to 79.98 percent.   This increase would be  at no cost                                                               
to the  state because the  ratio must be  at least 80  percent to                                                               
receive a rebate.  He  offered his understanding that the sponsor                                                               
of HB 308 purposely chose  80 percent because it is significantly                                                               
higher  than the  state's  current  average of  70  percent.   He                                                               
pointed out  that his example  is expressed as number  of workers                                                               
while  HB  308,  Version  E,   is  written  in  terms  of  hours.                                                               
Therefore, he has provided an example  on slide 19 that uses 2000                                                               
hours a year per worker.                                                                                                        
2:06:36 PM                                                                                                                    
MR. DICKINSON said  his purpose in providing  these two different                                                               
examples is  to illustrate  that a small  increase in  the worker                                                               
ratio, even  as little as one  hour, could result in  a large tax                                                               
rebate,  and  the  opposite  could also  occur  whereby  a  large                                                               
increase  in the  ratio results  in  no tax  rebate.   Therefore,                                                               
Representative   Kawasaki   was    therefore   correct   in   his                                                               
identification of this problem.                                                                                                 
MR.  DICKINSON moved  to another  example [slide  20] in  which a                                                               
large  company has  5,200 resident  workers [out  of 6,500  total                                                               
workers] for  an 80 percent  ratio and  a 24.5 percent  tax rate.                                                               
If that  company increased its  ratio to 82.49 percent  by adding                                                               
162 resident  workers there would be  no change in its  tax rate.                                                               
He  suggested a  formula  as an  answer to  this  problem.   [The                                                               
formula depicted on slide 21  would be a continuous function with                                                               
rounding.  The rebate would be  equal to the tax base (production                                                               
tax value)  times the higher  of resident hours divided  by total                                                               
hours  or 0.8,  less 0.8.    That would  transform resident  hire                                                               
rates between  80 percent and  100 percent  into a series  from 0                                                               
percent to  20 percent.]   He  said he  has attached  "the bottom                                                               
pieces" in  his suggested  formula, but that  a formula  could be                                                               
run that hits  the "tops" or the "middles".   Regardless of which                                                               
piece is used,  the point of using the formula  is that any extra                                                               
hour or extra worker will move a company by the same amount.                                                                    
2:08:02 PM                                                                                                                    
REPRESENTATIVE  TUCK noted  that even  if the  linear formula  is                                                               
used there  would be no tax  rebate for increasing the  number of                                                               
resident workers when  the ratio still remains  below 80 percent.                                                               
He therefore  surmised that it  is possible a  company converting                                                               
from  nonresident workers  to resident  might not  receive a  tax                                                               
rebate for some time.                                                                                                           
MR. DICKINSON responded correct, the  80 percent is a choice that                                                               
has  been made  and getting  up to  that 80  percent would  get a                                                               
company no additional tax breaks.                                                                                               
2:09:20 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  commented that  a carrot is  being given                                                               
to those  employers who hire  Alaskans but  a stick is  not being                                                               
used on those that refuse to  hire Alaskans.  Could this baseline                                                               
be lowered, he asked.                                                                                                           
MR. DICKINSON replied  that a decision must be made  on where the                                                               
baseline  is and  whether  there is  a penalty  below  that or  a                                                               
benefit  above.   He  added  that a  better  way  to answer  this                                                               
question is to look at what  is really happening in the oil patch                                                               
and  to look  at another  problem.   For example,  at a  previous                                                               
meeting the  question was  raised about  whether a  company could                                                               
simply not  report its  nonresident workers and  not apply  for a                                                               
deduction,  thereby letting  its taxes  rise as  a result  of not                                                               
taking that deduction  but still coming out ahead  because of the                                                               
rebate.  The answer to that question is yes.                                                                                    
2:11:20 PM                                                                                                                    
MR. DICKINSON provided an example of  how this would work for the                                                               
year 2009  for the entire North  Slope using the assumption  of a                                                               
$10  billion  tax base/production  tax  value  (PTV) [slide  23].                                                               
Under AS 43.55.011(e)(1), that $10 billion  is taxed at a rate of                                                               
25  percent, thus  the total  tax burden  is $2.5  billion.   The                                                               
maximum possible  resident hire rebate  on that tax  burden would                                                               
be  20  percent or  $500  million.    In  2008 there  were  5,000                                                               
nonresident workers  in the industry  at an assumed  average wage                                                               
of $100,000,  for a total  of $500 million in  nonresident wages.                                                               
Not claiming the nonresident wages  as lease expense would result                                                               
in the  wages not  being deductible,  and the  tax base  would go                                                               
from $10 billion  to $10.5 billion, which would  increase the tax                                                               
burden by $125  million.  However, the rebate would  drop the tax                                                               
rate from 25 percent to 20  percent, which would decrease the tax                                                               
burden by  $500 million.   The taxpayer would therefore  come out                                                               
ahead by $375  million.  Thus, setting up a  situation where this                                                               
can occur does  not drive companies to hire  more Alaskans, which                                                               
is the point of HB 308, Version E.                                                                                              
2:14:32 PM                                                                                                                    
CO-CHAIR NEUMAN pointed  out that a large  corporation will often                                                               
form several  corporations within itself  so that A buys  from B,                                                               
and C buys from  D, and D buys from A,  and therefore who reports                                                               
labor costs can get pushed down the  line.  He said this needs to                                                               
be kept in  mind when looking at the next  set of Mr. Dickinson's                                                               
slides so that the state does not get gamed in this regard.                                                                     
MR.  DICKINSON  reviewed  four possible  solutions  that  he  has                                                               
discussed  with  the  sponsor  to prevent  the  no  reporting  of                                                               
nonresident wages  [slide 24].   One solution  would be  to shift                                                               
the scale  so that resident  hire would  only swing the  tax rate                                                               
between 24 percent  and 25 percent rather than 20  percent and 25                                                               
percent.  This way, the swing  would only be $100 million, rather                                                               
than  $500 million,  and  therefore  it would  not  be worth  not                                                               
reporting nonresident workers in the deduction.                                                                                 
CO-CHAIR  NEUMAN  interjected that  slide  28  lists the  largest                                                               
employers in the oil and gas industry.                                                                                          
2:16:40 PM                                                                                                                    
MR. DICKINSON  continued his review  of solutions, saying  that a                                                               
second solution would  be to put out rules that  require that any                                                               
time any  labor is  included as  a lease  expense, all  the labor                                                               
from  that company  must be  included.   This  would address  the                                                               
issue  of  pass  through  that was  raised  by  Co-Chair  Neuman.                                                               
However,  the problem  with putting  down more  rules is  that it                                                               
results in  ever more complex  rules to  get there, which  is not                                                               
Co-Chair Johnson's  intent.  A  third solution would be  to focus                                                               
on new hires only and provide  a specific dollar rebate for every                                                               
new Alaskan.  The problem with  this solution is that it does not                                                               
recognize  a company  that already  has a  good Alaska  hire rate                                                               
above a company  that does not; so, part of  the issue is whether                                                               
the  intent  is  to  focus   on  new  hires  versus  the  overall                                                               
experience.    A fourth  solution,  given  the structure  of  the                                                               
industry,   would  be   to  have   the   Department  of   Revenue                                                               
commissioner publish the amount of the  tax rate each year.  This                                                               
tax rate would be based upon  the resident hire ratios of the 10-                                                               
20  largest employers  in the  industry that  are generating  the                                                               
lease expenditures.                                                                                                             
2:18:56 PM                                                                                                                    
MR. DICKINSON  said his reason  for stating "given  the structure                                                               
of the  industry" is  that he  wants to focus  on what  is really                                                               
happening on  the North  Slope, which is  that the  producers are                                                               
the taxpayers,  but employees are  working for the  operators and                                                               
not  necessarily  the producers  [slide  25].   This  is  because                                                               
producers hire an  operator to operate the field for  them and it                                                               
is the  operator that hires  the employees that actually  work in                                                               
the field.   Typically, however, much  of the field work  is done                                                               
by contractors.   According  to Department  of Labor  & Workforce                                                               
Development  numbers,  direct  employment  in  the  oil  and  gas                                                               
industry  is  [4,055]  while   indirect  employment  in  oilfield                                                               
services is [12,875].                                                                                                           
2:19:54 PM                                                                                                                    
MR. DICKINSON,  in response  to Co-Chair  Neuman, noted  that the                                                               
Department  of  Revenue's  annual  summary  shows  there  are  15                                                               
entities that  file production tax  [slide 26].  Twelve  of those                                                               
are filing  a zero  return or  a return  for $10  or $15  that is                                                               
based upon the  requirement to pay a conservation  surcharge of 5                                                               
cents  for every  oil barrel  produced.   There  are really  only                                                               
three large taxpayers and two small taxpayers.                                                                                  
MR. DICKINSON further  explained that the structure  on the North                                                               
Slope is  in units.   On the  Prudhoe Bay  unit, "ConocoPhillips"                                                               
produces  about  130,000  barrels  a  day,  "BP"  produces  about                                                               
96,000, "ExxonMobil"  about 130,000,  "Chevron" about  4,000, and                                                               
some other  taxpayers are  down in much  smaller ranges;  "BP" is                                                               
the operator and passes on  the costs proportionately to how much                                                               
oil  each  producer is  being  assigned.    The Kuparuk  unit  is                                                               
operated by  "ConocoPhillips" and "BP"  gets about 50,000  of the                                                               
80,000   barrels    that   are    produced   there    each   day.                                                               
"ConocoPhillips, BP,  and ExxonMobil" own most  of the production                                                               
from each of  the fields.  These  three majors are not  a part of                                                               
the  "Pioneer and  ENI" group.   "Anadarko"  has a  piece of  the                                                               
Alpine  field.    "Chevron"  has very  small  pieces  in  several                                                               
fields.  Thus, while there are  quite a few different fields, the                                                               
underlying  ownership is  by three  large corporations  and those                                                               
corporations depend  upon the  operator.   The Oooguruk  field is                                                               
operated by  "Pioneer" and  all the rest  are operated  by either                                                               
"BP or ConocoPhillips."                                                                                                         
2:22:28 PM                                                                                                                    
MR. DICKINSON  related that production  is about  700,000 barrels                                                               
per day  or about 250 million  barrels a year, according  to 2009                                                               
fiscal data.  Cook Inlet produces  about 10 percent of that, most                                                               
of which is in gas.   However, Cook Inlet pays less than one-half                                                               
of one percent of the  taxes because under the current production                                                               
tax law the  economic limit factor (ELF) was frozen  in place for                                                               
the Cook Inlet until  2022.  Thus, the tax for  Cook Inlet oil is                                                               
zero  and the  tax for  Cook Inlet  gas is  about 17.5  cents per                                                               
thousand cubic feet (Mcf).                                                                                                      
CO-CHAIR NEUMAN  interjected that at  one-half of one  percent of                                                               
the taxes, Cook  Inlet production is minimal  compared to Prudhoe                                                               
2:23:43 PM                                                                                                                    
MR.  DICKINSON  pointed  out  that AS  43.55.024  provides  a  $1                                                               
million per month credit for  production that is less than 50,000                                                               
barrels per day [slide 27].   Thus, most of the taxpayers in Cook                                                               
Inlet, as well as the smaller  taxpayers on the North Slope, have                                                               
no  production  tax obligation  other  than  the AS  43.55.011(i)                                                               
conservation charge, which is only in  the tens of dollars.  This                                                               
leaves  the  state  with three  major  producers  covering  95-98                                                               
percent of the taxes and two others picking up the remainder.                                                                   
MR.  DICKINSON, in  response to  Representative  Tuck, said  "NS"                                                               
stands for North  Slope and the fields listed on  the top half of                                                               
slides 26 and 27 are North  Slope fields.  He further pointed out                                                               
that his  statements about who is  paying tax and who  is not are                                                               
based purely upon  his own estimates because he has  not seen the                                                               
tax  returns for  any of  the companies  as that  is confidential                                                               
information.    He said  he  is  certain about  his  conclusions,                                                               
2:25:24 PM                                                                                                                    
MR.  DICKINSON  directed  attention  to a  list  of  the  state's                                                               
largest oil and gas industry employers  [slide 28].  He said "BP,                                                               
Conoco, and  Chevron" are  field operators  and are  probably the                                                               
employers of  the 4,000 direct  employees.   All the rest  of the                                                               
employers  on the  list  are  oil field  service  companies.   He                                                               
further noted  that this  list shows  only those  employers under                                                               
the categories of oil and  gas extraction and oil field services.                                                               
There are additional  North Slope oil and  gas industry employers                                                               
under the  categories called catering and  security, engineering,                                                               
communications, and  construction.  "ConocoPhillips and  BP" will                                                               
make  decisions on  which contractors  to hire  and he  therefore                                                               
surmises that  the sponsor's goal with  HB 308, Version E,  is to                                                               
make  the number  of  residents in  a  contractor's workforce  an                                                               
important bid variable.   This would be  accomplished through the                                                               
[fourth suggested solution on slide  24], which sets the tax rate                                                               
by looking at the industry as a whole.                                                                                          
2:28:22 PM                                                                                                                    
MR.  DICKINSON  noted  that  "Exxon" is  the  operator  of  Point                                                               
Thomson, but is not on the  list of the top 100 employers because                                                               
that field is  not yet producing and that corporation  is not the                                                               
operator of any other fields.   He turned to slide 39 and pointed                                                               
out  that the  Prudhoe  Bay  field constitutes  most  of the  oil                                                               
production in  Alaska and all of  the work being done  on Prudhoe                                                               
Bay goes through to the three  largest taxpayers.  Kuparuk is the                                                               
next largest oil producer and all  of the work on that field will                                                               
also  go through  these three  largest  taxpayers.   He said  his                                                               
point in  reviewing this  is that the  industry-wide work  may be                                                               
best reflected  by looking at an  industry-wide employment number                                                               
as opposed to parceling it out between each taxpayer.                                                                           
CO-CHAIR NEUMAN commented  that Mr. Dickinson is  talking about a                                                               
structure that offers  a beneficial bid variable to a  lot of the                                                               
support companies.                                                                                                              
2:30:34 PM                                                                                                                    
MR. DICKINSON, in response  to Representative Kawasaki, explained                                                               
that  the Department  of Labor  &  Workforce Development  reports                                                               
employment numbers in ranges.  Thus,  on slide 28 the two numbers                                                               
depicted  under the  column for  total  employees represent  that                                                               
range; where  there are no  numbers depicted in that  column, the                                                               
numbers immediately  above the  blank space  are applicable.   He                                                               
added  that this  information is  available  in the  department's                                                               
document  entitled, Nonresidents  Working in  Alaska, 2008,  that                                                             
was released in [January 2010].                                                                                                 
REPRESENTATIVE EDGMON stated he would  like to see a breakdown in                                                               
the nonresident  column [of  slide 28]  as to  how many  of those                                                               
positions  could actually  be  filled by  Alaska  residents.   He                                                               
surmised that some  of those are skilled  positions that Alaska's                                                               
workforce cannot  support.  For  example, a  commercial fisherman                                                               
from  Alaska could  work  as  a laborer  but  not  as a  chemical                                                               
engineer.  This  type of breakdown would help  show the potential                                                               
for converting these jobs from nonresidents to residents.                                                                       
2:32:35 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG said  he has worked on  the North Slope                                                               
most of his life  and he does not at all read  HB 308, Version E,                                                               
as a jobs  bill.  The bill  is based on total work  hours and has                                                               
nothing to  do with  wages.   It would use  state revenue  to buy                                                               
jobs for  Alaskans plus give  the companies hundreds  of millions                                                               
of dollars, all  without knowing whether that money  will be used                                                               
to put more oil  into the line or provide legacy  jobs.  There is                                                               
nothing that  says those jobs will  be high-paying, high-skilled,                                                               
generational  legacy jobs.   While  he recognizes  that the  bill                                                               
will come  back with  major changes, there  is nothing  that says                                                               
jobs  are  needed on  the  North  Slope.    Giving money  to  the                                                               
industry  to hire  Alaskans is  not  the right  track because  it                                                               
would be a subsidy for existing  jobs, he opined.  The bill would                                                               
not create  new jobs or  new investment.  Industry  says Alaskans                                                               
are  too  expensive  to  hire,  therefore  if  industry  receives                                                               
anything it  should be  the difference in  cost between  hiring a                                                               
resident  versus a  nonresident.   He cited  examples for  why he                                                               
believes  the  bill  would   create  inefficiencies  rather  than                                                               
efficiencies, and said  he thinks the bill could be  written in a                                                               
whole different way  that would better reflect  the real economic                                                               
2:38:40 PM                                                                                                                    
REPRESENTATIVE  SEATON  said it  seems  there  would not  be  any                                                               
impetus for  12 of the 15  companies to hire Alaskans  given that                                                               
they have  no production  tax liability.   He surmised  that this                                                               
provision  is therefore  targeted  only at  the  three payers  of                                                               
production tax.                                                                                                                 
MR. DICKINSON agreed the provision  is targeted at the production                                                               
tax.  The  operators are the critical link  between the taxpayers                                                               
and the contractors and that three-step removal is important.                                                                   
2:40:26 PM                                                                                                                    
REPRESENTATIVE  TUCK, in  regard to  resident versus  nonresident                                                               
hire, presumed  that this would  be for  workers that have  to do                                                               
with particular leases.                                                                                                         
MR. DICKINSON answered  that generally to be  qualified the labor                                                               
must be a lease expenditure.                                                                                                    
2:40:56 PM                                                                                                                    
REPRESENTATIVE  TUCK  inquired  whether  catering  and  security,                                                               
engineering,  transportation,  communications,  and  construction                                                               
are  positions that  are typically  held with  lease expenditures                                                               
[slide 28].                                                                                                                     
MR. DICKINSON  responded yes.   Such positions  in the  oil patch                                                               
are  deductible lease  expenditures.   While  these services  can                                                               
happen in  different industries,  in Alaska  they tend  to happen                                                               
predominantly in the oil industry.                                                                                              
REPRESENTATIVE  TUCK surmised  that there  is potential  for this                                                               
provision to  reach into other  industries that are  not included                                                               
on slide 28.                                                                                                                    
MR.  DICKINSON replied  yes, this  would make  them part  of that                                                               
total equation.                                                                                                                 
2:42:35 PM                                                                                                                    
CO-CHAIR NEUMAN requested  the help of the Department  of Labor &                                                               
Workforce Development  in answering both  Representative Edgmon's                                                               
question  and Representative  Guttenberg's concerns.   Given  the                                                               
economic multiplier  effect, he presumed  that the impact  of the                                                               
local hire provision could be widespread.                                                                                       
2:44:07 PM                                                                                                                    
REPRESENTATIVE TUCK  asked whether a  company that uses a  lot of                                                               
subcontractors would be  able to come out ahead  by not reporting                                                               
the subcontractors' nonresident workers.                                                                                        
MR.  DICKINSON  replied  that  all   the  taxpayers  do  lots  of                                                               
contracting.   Non-reporting  of nonresident  workers would  mean                                                               
the penalty  of no tax deduction  for that cost.   However, as he                                                               
discussed  earlier,  the  problem  could arise  that  the  rebate                                                               
benefit outweighs the penalty, which  would incentivize a company                                                               
to not  report the nonresident  workers that it  employs directly                                                               
as  well as  all  the  way through  to  the  subcontractors.   It                                                               
therefore does  not make sense to  create a system, as  Version E                                                               
might, where this could happen.                                                                                                 
2:45:59 PM                                                                                                                    
REPRESENTATIVE  TUCK  stated he  does  see  where there  are  any                                                               
checks and balances in regard  to a company with direct employees                                                               
that are predominantly residents  but has subcontractors that are                                                               
predominantly nonresident.   What  is to  keep that  company from                                                               
not reporting its subcontractors'  nonresident workers, he asked.                                                               
He further understood that the  Department of Revenue can see who                                                               
a company's  direct employees are.   He inquired whether  this is                                                               
also true for the company's subcontractors.                                                                                     
MR. DICKINSON answered yes.  One  of the things that will happen,                                                               
this bill  aside, is  that most  of the time  and effort  will be                                                               
spent  looking at  contracting because  that is  how most  of the                                                               
work is  done.   Under current labor  figures, one-fourth  of the                                                               
labor  is  done  by  employees   and  three-fourths  is  done  by                                                               
contractors.  The  work done by contractors is  the vast majority                                                               
of deductible  lease expense.   The effect  on a taxpayer  of not                                                               
reporting  the dollar  spent to  hire a  nonresident to  do lease                                                               
work is  the same  whether it is  paid directly as  a wage  or is                                                               
bounced down through a contractor or a subcontractor.                                                                           
2:47:43 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG asked how  Mr. Dickinson sees the first                                                               
three  bullets on  slide 29  being addressed.   He  further asked                                                               
whether there would  be a reason for leaving  out overhead labor,                                                               
contractor  labor,   or  professional  service  labor   from  the                                                               
resident hire calculation.                                                                                                      
MR. DICKINSON responded  no, but posed a scenario  to outline the                                                               
problem.    A taxpayer  gets  a  bill  from  the operator.    The                                                               
operator gets  a bill  from a contractor.   The  contractor built                                                               
some things  with materials and  labor.   A bill is  presented at                                                               
each point.   Someone goes  to a hardware  store and buys  a unit                                                               
that  has already  been  built.   Someone  built  that unit  from                                                               
manufactured parts.   So, how far  down does this go?   These are                                                               
issues that he therefore thinks  should be figured out in statute                                                               
rather than regulation because they could be very problematic.                                                                  
2:50:20 PM                                                                                                                    
REPRESENTATIVE SEATON pointed out that  right now the state has a                                                               
limitation  on  allowable expenses.    However,  under Version  E                                                               
there would be  both allowable and required  expenses which would                                                               
result in  mandating a  company to declare  something as  a lease                                                               
expenditure or mandating what a  company can deduct.  He inquired                                                               
whether that gives the state a lot of additional problems.                                                                      
MR. DICKINSON  returned to slide  24 which provides  four options                                                               
for  solving that  particular problem  and said  that option  two                                                               
fits Representative  Seaton's description.   He said  this option                                                               
would require a bunch of new rules  and he does not think that is                                                               
the most  appropriate way of  solving the incentive  problem that                                                               
he identified earlier.  However,  he continued, he does not think                                                               
that option  four would be  a mandate.   In further  response, he                                                               
explained that  the notion behind  option four is that  there are                                                               
only three  taxpayers responsible for  97 percent of the  tax and                                                               
all three are basically in the  same sets of units and hiring the                                                               
same  kind of  contractors.   Therefore,  the  overall ratios  of                                                               
those contractors  could be  looked at  and used  to set  the tax                                                               
rate for all  three major taxpayers.  This way  there would be no                                                               
major winners and  no major losers.  These  three taxpayers would                                                               
then be driving towards the hiring of more residents.                                                                           
2:53:38 PM                                                                                                                    
REPRESENTATIVE  SEATON said  he thinks  option four  gets to  not                                                               
having a company-specific profit tax  rate.  He asked whether his                                                               
understanding is correct.                                                                                                       
MR. DICKINSON explained  that the structure of the  net tax would                                                               
not be changed.   The profits determine the base.   The tax would                                                               
be a  rate times the  base, and the  rate would be  determined by                                                               
the taxpayer's local  hire.  For example, there  are several sets                                                               
of rates  for federal  income tax -  individual, married,  and so                                                               
forth - and each of these rates is applied to the same base.                                                                    
2:55:33 PM                                                                                                                    
MR. DICKINSON provided a quick overview  of the next 10 slides in                                                               
his presentation.   He said  [slides 32-35] address  the proposed                                                               
30  percent  credit  for  well  work.    Slide  34  outlines  the                                                               
differences  of  putting this  provision  under  AS 43.55.023  or                                                               
under AS  43.55.025.  Slide  35 compares the definitions  of well                                                               
work between HB  308, Version E, and the governor's  bill.  Slide                                                               
37 addresses the  proposed change in the  statute of limitations.                                                               
The Department  of Revenue used  to have  three years to  set the                                                               
amount of tax due, but  typically that three-year statute was not                                                               
met and  this resulted in  extensions.   In 2007, the  statute of                                                               
limitations  was  extended to  six  years  for production  taxes.                                                               
Under  HB 308,  Version E,  the statute  of limitations  would be                                                               
returned to  three years.   He  pointed out  that the  statute of                                                               
limitations  does not  apply in  cases of  fraudulent returns  or                                                               
when it  can be shown  there was an intent  to evade taxes.   The                                                               
statute  of  limitations  only applies  for  a  disagreement  and                                                               
subsequent audit.   Tax avoidance, not tax evasion,  is where the                                                               
statute of limitations comes in.                                                                                                
2:57:35 PM                                                                                                                    
MR. DICKINSON  concluded by drawing  attention to slide  39 which                                                               
depicts the  decline of Alaska oil  production.  He said  that 20                                                               
years ago Alaska was producing 2 million barrels a day and today                                                                
it is only producing 600,000 barrels a day.                                                                                     
CO-CHAIR NEUMAN  noted that the  governor's bill was  read across                                                               
the House  and Senate floors on  2/10/2010.  He urged  members to                                                               
address further questions  to staff at the  Department of Revenue                                                               
and Department of Labor & Workforce Development.                                                                                
[HB 308 was held over.]                                                                                                         

Document Name Date/Time Subjects
Dickinson Presentation CS HB 308 2.15.10.pdf HRES 2/15/2010 1:00:00 PM
HB 308