Legislature(2009 - 2010)BARNES 124

03/17/2010 01:00 PM House RESOURCES

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01:05:21 PM Start
01:05:43 PM HB308
03:00:28 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
               HB 308-OIL AND GAS PRODUCTION TAX                                                                            
                [Contains discussion of HB 337]                                                                                 
1:05:43 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 HB 308, Version 26-LS1328\E, Bullock, 2/5/10.]                                                                
REPRESENTATIVE OLSON  moved to adopt  the new  proposed committee                                                               
substitute  (CS)  for  HB   308,  Version  26-LS1328\P,  Bullock,                                                               
3/17/10, as a work draft.                                                                                                       
REPRESENTATIVE SEATON objected for discussion purposes.                                                                         
1:07:00 PM                                                                                                                    
CO-CHAIR  JOHNSON  requested Mr.  Dan  Dickinson  to explain  the                                                               
changes made by Version P.                                                                                                      
DAN E. DICKINSON,  CPA, Consultant to the  Legislative Budget and                                                               
Audit  Committee, noted  he is  a self-employed  certified public                                                               
accountant doing some  work for the Legislative  Budget and Audit                                                               
Committee, and  HB 308  is part of  that work.   He began  with a                                                               
summary  of  the  eight changes  and  provisions  proposed  under                                                               
Version P  [slide 3].  The  first change is to  the progressivity                                                               
provision.   Version P would leave  the rate the same  but change                                                               
the base [the previous proposed  committee substitute, Version E,                                                               
would have  changed the rate].   In response to  Co-Chair Neuman,                                                               
he described  base and rate  by providing an example  using sales                                                               
tax:   the goods being  sold are the base  and a 3  percent sales                                                               
tax  is the  rate.   However, progressivity  is more  complicated                                                               
because different rates  apply to different amounts.   He used an                                                               
income  tax  example to  explain  progressivity:   one  tax  rate                                                               
applies  to  income between  $0  and  $15,000, another  tax  rate                                                               
applies to  the income between  $15,000 and $20,000,  and another                                                               
tax rate applies to income between $20,000 and $25,000.                                                                         
1:10:10 PM                                                                                                                    
MR.  DICKINSON said  the second  change is  to the  interest rate                                                               
provision.  Version P would set  the interest rate charged by the                                                               
state for  delinquent tax  to be  the federal  funds rate  plus 3                                                               
percent with  no ceiling  [Version E  proposed the  federal funds                                                               
rate plus 2 percent with a ceiling].   The third change is to the                                                               
provision that  no interest is due  on [additional tax owed  as a                                                               
result  of  implementing]   retroactive  regulations;  Version  P                                                               
adopts the governor's version of  this provision [HB 337, SB 271]                                                               
with a few minor changes.                                                                                                       
MR. DICKINSON said  the fourth change is a new  provision made by                                                               
Version  P that  would allow  credits to  be applied  immediately                                                               
rather than over  two years as required by  current statute under                                                               
the Alaska's Clear  and Equitable Share (ACES)  legislation.  The                                                               
fifth change is to the 30  percent credit provision for well work                                                               
in  which one  definition from  Version E  is reworded  slightly.                                                               
The sixth provision  is restoration of the  three-year statute of                                                               
limitations which  remains the  same as Version  E.   The seventh                                                               
change is a  new provision that would remove  the requirement for                                                               
matching spend  when a company wants  to sell its credits  to the                                                               
state.    He  said  this   provision  is  also  proposed  in  the                                                               
governor's bill.  The eighth change  is that the tax rate tied to                                                               
resident hire, as proposed in Version E, has been removed.                                                                      
1:12:06 PM                                                                                                                    
CO-CHAIR  NEUMAN  noted  that  Co-Chair  Johnson's  goal  as  the                                                               
sponsor of  HB 308 is to  work with the administration  in regard                                                               
to similar  legislation proposed  by the governor  [HB 337].   He                                                               
said  Version P  incorporates the  positive aspects  of both  the                                                               
bills to create jobs.                                                                                                           
MR.  DICKINSON  pointed  out  that   four  of  the  major  issues                                                               
addressed  in Version  P  are also  addressed  in the  governor's                                                               
bill, although treatment  of the issues in the two  bills may not                                                               
be identical.  Those four issues  are:  interest would not be due                                                               
on  retroactive   regulations  prior  to   their  implementation,                                                               
credits would be spread over one  year, there would be a distinct                                                               
credit for well work, and no  matching spend would be required in                                                               
order for the state to purchase credits.                                                                                        
REPRESENTATIVE  SEATON removed  his  objection.   There being  no                                                               
further objection, Version P was before the committee.                                                                          
1:13:57 PM                                                                                                                    
CO-CHAIR  JOHNSON,  in  response  to  Representative  P.  Wilson,                                                               
stated  that the  removal in  Version  P of  a tax  rate tied  to                                                               
resident hire does not diminish  his desire to encourage resident                                                               
hire.   He  had anticipated  five minutes  of discussion  on that                                                               
issue, but instead  it took two days.   The real issue  of HB 308                                                               
is to  build a structure  that allows  people to invest  and spur                                                               
development and he  does not want to cause a  sidetrack from that                                                               
because  the bill  would still  create jobs,  just maybe  not for                                                               
Alaskans as he had hoped.                                                                                                       
1:15:39 PM                                                                                                                    
MR. DICKINSON  commenced his  presentation, addressing  the topic                                                               
of  progressivity [slide  5].   He  said that  under the  federal                                                               
personal income  tax rules each  bracket represents an  amount of                                                               
income  that  is taxed  at  a  different  rate, but  the  state's                                                               
current production tax  law does not have this  feature.  Rather,                                                               
the same  tax rate is  applied to the  net value of  every single                                                               
barrel  of oil.   The  current  base rate  is 25  percent and  is                                                               
always  there; progressivity  then  adds an  additional  0 to  50                                                               
percent up  to a maximum production  tax of 75 percent,  and this                                                               
then applies to every bit of value generated on every barrel.                                                                   
1:17:03 PM                                                                                                                    
MR.  DICKINSON   explained  that  Version  P   would  create  two                                                               
production tax  brackets [slide 6].   The first bracket  would be                                                               
the base tax  rate of 25 percent  on the value of  each barrel up                                                               
to  $30 per  barrel.    Once above  $30  per  barrel, the  second                                                               
bracket would  be the  25 percent  base rate  plus progressivity.                                                               
He noted that $30 per barrel  has always been used to trigger the                                                               
progressivity calculation.                                                                                                      
MR.  DICKINSON compared  progressivity under  current law  and as                                                               
proposed by HB 308, versions P  and E [slide 7; note: Version "S"                                                               
on the  slide is  a typographical error,  it should  read Version                                                               
"P"].  Under  current law, the tax rate is  established by taking                                                               
the  value  per barrel,  subtracting  $30,  and then  adding  0.4                                                               
percent for every  dollar that is left.  For  example, for $10 of                                                               
additional  production  tax  value  above $30,  an  additional  4                                                               
percent in progressivity  is added to the 25 percent  base, for a                                                               
total  tax  of  29  percent  that is  applied  to  every  barrel.                                                               
Version P  would maintain the  current 0.4  percent progressivity                                                               
rate,  but the  base would  be  the same  as the  number used  to                                                               
calculate  the rate.   Thus,  the  base would  be production  tax                                                               
value  less  $30  per  barrel, and  the  progressivity  would  be                                                               
applied only  to the net value  above $30.  Version  E would have                                                               
taken the  production tax value  per barrel, subtracted  $30, and                                                               
then added  0.2 percent for  every dollar left [which  would then                                                               
be added to the 25 percent base].                                                                                               
1:19:53 PM                                                                                                                    
MR. DICKINSON,  in response to Representative  Kawasaki, said the                                                               
progressivity provision is under sections 5 and 6 of Version P.                                                                 
CO-CHAIR  JOHNSON added  that this  is the  same way  the federal                                                               
income tax is based.  A certain  tax rate is applied to the first                                                               
amount of income  and anything above that income  amount is taxed                                                               
at a different  rate; the total amount of income  is not taxed at                                                               
the higher rate.                                                                                                                
MR.  DICKINSON, in  response  to Co-Chair  Neuman,  said the  net                                                               
value is  determined by subtracting  all of the  downstream costs                                                               
of transportation and all of  the upstream costs of producing the                                                               
oil and  gas.  The  idea behind the current  tax is that  all the                                                               
costs are subtracted and what is left is the net value.                                                                         
1:22:17 PM                                                                                                                    
MR.  DICKINSON compared  the  state's  current progressivity  tax                                                               
system  [AS 43.55.011(g)]  to the  federal income  tax system  to                                                               
show the  difference in tax  that would be  paid.  Assuming  a 25                                                               
percent  tax rate,  under both  systems the  total amount  of tax                                                               
paid on a  net value income of  $27, $28, $29, or  $30 per barrel                                                               
would be the same  [slides 8-11].  At a net  value income of $31,                                                               
$32, $33, $34, or $35 per barrel,  more tax would be paid only on                                                               
the amount  above the  $30 under the  federal income  tax system;                                                               
but under the state's progressivity  system, more tax would be on                                                               
all of the $31, $32, $33, $34, or $35 of income [slides 12-16].                                                                 
1:24:27 PM                                                                                                                    
MR.  DICKINSON, in  response to  Co-Chair Neuman,  explained that                                                               
most states  with income  tax, as well  as the  federal corporate                                                               
and  personal income  taxes, use  a progressivity  measure.   For                                                               
example, sales  taxes typically  have a  different rate  for food                                                               
and clothing  than for  luxuries.   Most states  have one  or two                                                               
different  rates,  but Alaska's  corporate  income  tax has  nine                                                               
different brackets  between $0 and $100,000  and everything above                                                               
$100,000 is at one rate.   In further response, he explained that                                                               
his examples  on slides  8-16 are  focused on  only one  piece of                                                               
Alaska's  production tax.   Royalties,  property taxes,  the base                                                               
rate of the  production tax, and the floor of  the production tax                                                               
are  all  regressive.   The  income  tax is  mildly  progressive.                                                               
Overall, Alaska's  system remains a regressive  system.  However,                                                               
in situations of  very high prices, such as $130  per barrel, the                                                               
progressivity piece so  dominates the state take  that the system                                                               
is actually progressive.                                                                                                        
1:26:59 PM                                                                                                                    
MR. DICKINSON,  in response to Representative  Kawasaki, said the                                                               
income  shown on  slides 8-16  is increasing;  it is  depicted in                                                               
yellow and increases  from the bottom to the top  of the graphic.                                                               
This  income increases  less  fast  than the  whole.   Under  the                                                               
state's  progressivity system  (right graph),  as the  per barrel                                                               
net value  increases, the income  increases very  slowly relative                                                               
to the  increase in  the tax; whereas,  under the  federal income                                                               
tax  progressivity system  (left graph),  the tax  increases less                                                               
slowly so the income increases more.                                                                                            
1:28:03 PM                                                                                                                    
MR.  DICKINSON,  in response  to  Representative  Tuck, said  the                                                               
relationship between income  and tax is 75 percent  income and 25                                                               
percent  tax [slides  8-11] until  the bracket  trigger [of  more                                                               
than $30 net value per barrel]  is reached.  In further response,                                                               
he agreed  that on slide 16  the ratio between income  and tax is                                                               
nearly 50:50 [for the depicted net  value of $35 per barrel].  He                                                               
clarified, however,  that the graphics are  not representative of                                                               
either  the actual  federal income  tax rate  or State  of Alaska                                                               
progressivity under AS 43.55.011(g).   The graphics are simply to                                                               
illustrate the point of how progressivity moves.                                                                                
1:29:55 PM                                                                                                                    
MR. DICKINSON resumed his presentation,  noting that the chart on                                                               
slide  17 is  from  the  Department of  Revenue  and depicts  the                                                               
nominal  and marginal  tax rates  under current  law.   The graph                                                               
shows  that when  the progressivity  trigger is  hit, there  is a                                                               
very rapid  change in the  marginal rate because  each percentage                                                               
that is added is applied to a very large base.                                                                                  
MR.  DICKINSON said  slide  18 depicts  what  would happen  under                                                               
Version P,  which would  change the state's  current system  to a                                                               
bracketed system.  Under Version P,  the nominal rate is a little                                                               
bit lower and rises less quickly,  and there is not a sudden leap                                                               
in the marginal rate when  progressivity is triggered [slide 19].                                                               
Instead,  as  the tax  rate  increases,  the marginal  rate  also                                                               
1:31:25 PM                                                                                                                    
MR.  DICKINSON,   in  response   to  Representative   P.  Wilson,                                                               
explained  that the  red line  on slide  18 is  the nominal  rate                                                               
under current  [ACES] law.  For  example, at a net  value of $100                                                               
per barrel, the  tax rate would be roughly 42  percent.  When the                                                               
value goes from $100 to $101,  more of that dollar is consumed by                                                               
tax so  the marginal tax rate  on that additional dollar  is more                                                               
like 70 percent because of how progressivity works.                                                                             
CO-CHAIR  NEUMAN   understood  the  marginal  rate   to  increase                                                               
proportionately at a much higher number than the nominal rate.                                                                  
MR. DICKINSON agreed,  saying one reason it is  higher is because                                                               
as  soon as  the  progressivity threshold  is  reached under  the                                                               
current law there  is an immediate bump-up in  the marginal rate.                                                               
This bump-up  is because every  dollar then immediately  has this                                                               
new rate applied to it.                                                                                                         
1:33:20 PM                                                                                                                    
MR. DICKINSON, in response to  more questions from Representative                                                               
P. Wilson, said  that to calculate the tax rate,  every dollar of                                                               
additional  value  that is  taxed  creates  also a  higher  rate.                                                               
Under current law, the rate and  the base both increase after $30                                                               
net  value is  reached.    When there  is  no progressivity,  the                                                               
nominal  rate  is  25  percent  and  it  always  applies.    Once                                                               
progressivity is  hit, the progressivity formula  determines what                                                               
is added to  the 25 percent base  rate, so the tax  rate goes up;                                                               
thus, nominal means the actual rate.   Marginal means how much of                                                               
each additional dollar earned goes to the tax collector.                                                                        
1:35:30 PM                                                                                                                    
MR.  DICKINSON, in  response to  several questions  from Co-Chair                                                               
Neuman,  said the  progressivity rate  is 0.4  percent for  every                                                               
additional dollar.  The red line  [ACES nominal rate] on slide 18                                                               
is where the  0.4 percent is seen for each  additional dollar; as                                                               
each  dollar  is  increased  along  the  X  axis,  the  tax  rate                                                               
increases by  0.4 percent.   The green line [ACES  marginal rate]                                                               
increases  much more  quickly [than  the ACES  nominal tax  rate]                                                               
because what it is being applied against is also getting larger.                                                                
REPRESENTATIVE SEATON  interjected that the [ACES  marginal rate]                                                               
could also  be thought of  as the windfall profit  tax.  It  is a                                                               
windfall profit  tax because progressivity is  triggered when the                                                               
net value is above the area where  the base tax applies.  He said                                                               
windfall profit  is the term  that was used  during deliberations                                                               
on  ACES, and  it seems  to him  that conversations  during these                                                               
deliberations are being ignored.                                                                                                
MR.  DICKINSON responded  that under  the  Department of  Revenue                                                               
assumption for slide  18, there is a $26 cost  per barrel that is                                                               
not visible  in the diagram.   Therefore, everything  depicted on                                                               
the diagram  is profit.   Whether  it is windfall  or not  can be                                                               
debated, but  there is  no tax  unless there is  a profit.   When                                                               
deciding  whether to  make an  investment that  will generate  an                                                               
extra dollar, the decision maker  considers who will receive that                                                               
extra dollar.  Thus, someone  thinking about an investment thinks                                                               
about the  marginal rate, not the  average rate, and that  is why                                                               
the [ACES marginal rate] is important to look at.                                                                               
1:38:00 PM                                                                                                                    
REPRESENTATIVE SEATON noted the  graph depicts marketplace prices                                                               
above the $30 per barrel  profit at which progressivity kicks in.                                                               
He cautioned  that the  graph not be  confused with  the decision                                                               
point on  whether to drill  a well  which is based  on production                                                               
and anticipated hurdle  rates and anticipated revenues.   At some                                                               
point in  time a decision  maker will look at  anticipated profit                                                               
and  that is  when discussion  about what  happens above  the $30                                                               
profit trigger will occur.                                                                                                      
CO-CHAIR  NEUMAN said  a company  looks at  how fast  its netback                                                               
will be because it must  have fluid capital for reinvestment, and                                                               
that is what HB 308 is about.                                                                                                   
MR.  DICKINSON  replied tax  is  one  of  the things  taken  into                                                               
consideration  when a  company  performs  calculations to  decide                                                               
whether to invest.  The [ACES  marginal tax] is what will be used                                                               
in that  calculation.  He said  he does not think  many investors                                                               
will ignore  the tax when  making the calculation, and  while tax                                                               
will  not be  the only  thing that  is considered  it is  clearly                                                               
something that is part of the calculation.                                                                                      
1:41:15 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  inquired  whether there  is  a  graph                                                               
showing total government take when operating along this line.                                                                   
MR.  DICKINSON answered  he  had  such a  graph  in his  previous                                                               
presentations, but  for today's  presentation he only  has slides                                                               
about production tax.                                                                                                           
CO-CHAIR NEUMAN urged members to  look at charts in the committee                                                               
packet  provided  by  Representative Seaton  comparing  estimated                                                               
production taxes.                                                                                                               
REPRESENTATIVE  GUTTENBERG  asked  whether the  total  government                                                               
take rises  as much as the  graph shows [slide 18]  or is capped;                                                               
i.e., does  the state take come  out of the federal  take or does                                                               
it all rise together.                                                                                                           
MR. DICKINSON responded  both effects are there.   For income tax                                                               
there is simply some switch  between state take and federal take.                                                               
However, property  tax is fixed,  so as  the value per  barrel of                                                               
oil  increases the  percentage going  to property  tax decreases.                                                               
Thus,  graphs  showing total  government  take  have curves  that                                                               
slope up  as the  marginal rate increases,  but the  variation is                                                               
generally between 65 and 55 percent.                                                                                            
1:43:20 PM                                                                                                                    
REPRESENTATIVE  TUCK surmised  the  green  line representing  the                                                               
ACES  marginal tax  [slide 18]  is not  how much  in a  dollar is                                                               
invested, but rather how much an additional dollar is made.                                                                     
MR. DICKINSON replied correct.                                                                                                  
MR. DICKINSON, in response to  Representative P. Wilson, said the                                                               
red line depicted  on slide 18 is the nominal  rate under current                                                               
[ACES]  law.   The purple  line represents  the new  nominal rate                                                               
that would go into effect if Version P became law.                                                                              
MR.  DICKINSON, in  response  to  Representative Tuck,  explained                                                               
that  Version P  would create  a bracketed  system like  that for                                                               
personal [federal]  income tax.   He confirmed that the  graph on                                                               
slide 18  can be  used as  a comparison  between current  law and                                                               
Version P.                                                                                                                      
1:45:47 PM                                                                                                                    
MR. DICKINSON returned to his  presentation, noting that slide 20                                                               
depicts the  mechanics of why there  is a very large  increase as                                                               
the net value moves  from $30 to $31.  At $30,  the base tax rate                                                               
is  25   percent  under  both   [Version  P's   proposed  bracket                                                               
methodology  and   current  ACES  methodology].     At  $31,  the                                                               
progressivity  tax  is  triggered  - under  Version  P's  bracket                                                               
methodology  the  25.4  percent  tax  would  apply  only  to  the                                                               
additional $1,  the other $30  would remain at 25  percent; under                                                               
current  ACES  methodology  the   25.4  percent  applies  to  the                                                               
additional $1  as well as  to the  other $30, which  generates 12                                                               
cents more  in tax.  This  12 cents jumps the  effective tax rate                                                               
[on that $1] by 12 percent, from 25 percent to 37 percent.                                                                      
1:48:05 PM                                                                                                                    
CO-CHAIR NEUMAN, in  regard to this tremendous  increase for just                                                               
one more dollar, inquired whether  this same rate follows through                                                               
for net values of $32 or $34.                                                                                                   
MR.  DICKINSON pointed  out that  the initial  bump in  the green                                                               
line [ACES marginal  tax] on slide 19  is the jump from  25 to 37                                                               
percent.  After  that initial bump, the  marginal rate increases,                                                               
although it does  not continue at that slope.   The marginal rate                                                               
also increases  more rapidly than  the nominal rate, but  most of                                                               
the change occurs because of the jump in the base.                                                                              
MR.  DICKINSON,  in  response to  Representative  Tuck  regarding                                                               
slide   20,  confirmed   that   "personal   federal  income   tax                                                               
progressivity" is the same as what  is proposed by Version P, and                                                               
["AS  43.55.011(g) Progressivity"]  is  the same  as current  law                                                               
under ACES.                                                                                                                     
MR.   DICKINSON,  in   response  to   Representative  Guttenberg,                                                               
clarified that because  the jump from 25 percent  to 25.4 percent                                                               
is on  $31, the  effective rate  on that  $1 is  37 percent.   He                                                               
further  confirmed that  for each  subsequent dollar  there is  a                                                               
1:50:30 PM                                                                                                                    
REPRESENTATIVE  SEATON  surmised  the  state  is  taxing  on  the                                                               
nominal rate,  not the marginal  rate, and that Mr.  Dickinson is                                                               
extracting the marginal rate to explain  the effect of the tax on                                                               
that portion of dollars above the $30 profit per barrel.                                                                        
MR. DICKINSON answered correct, the  state uses the nominal rate,                                                               
but  that does  not make  the  marginal rate  any less  real.   A                                                               
company  calculates its  taxes  with the  nominal  rate, but  the                                                               
marginal rate tells what is really happening.                                                                                   
MR. DICKINSON,  in response to  Co-Chair Neuman,  reiterated that                                                               
the  nominal rate  is what  a company  needs for  calculating its                                                               
tax, but the  marginal rate tells a company what  is really going                                                               
on with  any additional investment  or cash inflow when  it tries                                                               
to figure out what will happen if it adds an additional dollar.                                                                 
REPRESENTATIVE  SEATON  said  that  happens  with  an  additional                                                               
increase in price, not an additional  investment, so it is not an                                                               
investment.   That calculation can be  made, but it does  not tie                                                               
into  a   company's  investment,  it  may   tie  into  investment                                                               
strategy.   Looking at  the marginal  on what  a dollar  earns is                                                               
totally based on the differential  between the Alaska North Slope                                                               
(ANS)  West Coast  (WC) price  and a  company's expenses  in that                                                               
month's  time.    Therefore,  it  is a  price  variable,  not  an                                                               
exploration or  production variable,  so it  is important  to not                                                               
get these things confused.                                                                                                      
1:52:39 PM                                                                                                                    
CO-CHAIR JOHNSON  said he does  not think there is  any confusion                                                               
at all  because he  thinks the marginal  tax rate  does influence                                                               
investment,  so they  correlate.   Testimony  was recently  heard                                                               
that the ability  to get a return on investment  is what triggers                                                               
a company's  investment decisions.   This  is precisely  what the                                                               
companies were talking about regarding return on investment.                                                                    
REPRESENTATIVE GUTTENBERG  surmised that  even if a  company does                                                               
nothing, profits will  be made because the price of  oil is going                                                               
up regardless  of what a  company does; therefore, a  company may                                                               
not do anything until it can take better credits off its money.                                                                 
MR. DICKINSON  responded that, clearly, taxes  are thought about,                                                               
along with  a forward-looking  price forecast.   He  cited Ronald                                                               
Reagan who, during  a time of very high  incremental and marginal                                                               
tax rates,  said it was  better to  make four movies  rather than                                                               
five because taxes  made the fifth movie not worth  doing.  Thus,                                                               
decisions are made based on the marginal tax rates.                                                                             
1:54:42 PM                                                                                                                    
CO-CHAIR  NEUMAN interjected  that  taxes can  get  to the  point                                                               
where netback  on the profits is  not there, and in  essence that                                                               
is what  progressivity is.  A  company making money in  Alaska is                                                               
not a bad thing because then  the company will continue to invest                                                               
more in  Alaska.   When taxes  get too high,  it will  affect how                                                               
much money a company wants to continue to invest in Alaska.                                                                     
MR.  DICKINSON reiterated  that  clearly taxes  are  part of  the                                                               
decision and clearly they are not the only part of the decision.                                                                
1:55:32 PM                                                                                                                    
MR.  DICKINSON   commenced  his  presentation,   describing  what                                                               
happens  in production  tax as  the  destination value  increases                                                               
[slides 21-23].   He said the  figures in these slides  are based                                                               
on the assumption  that the destination value is  $26 higher than                                                               
the production tax  value per barrel of oil.   The slides compare                                                               
current  tax law  with the  tax proposed  by Version  P.   As the                                                               
destination  value  increases,  the  amount  of  tax  paid  under                                                               
Version P would be less than  that paid under current law because                                                               
the Version P  tax rate would remain at the  25 percent base rate                                                               
when  destination  values are  [between  $26  and $56]  (the  red                                                               
triangle at the bottom left of the graph).                                                                                      
MR. DICKINSON,  in response to  Representative Seaton,  said that                                                               
at a  destination value  of $156 per  barrel, the  production tax                                                               
would be roughly  $10 less per barrel under Version  P than under                                                               
current law.                                                                                                                    
1:57:13 PM                                                                                                                    
MR. DICKINSON compared  current law, Version P,  and the previous                                                               
committee  substitute  [Version  E],  which posed  to  halve  the                                                               
current  progressivity rate  [slide 22].   At  destination values                                                               
above   $90   per  barrel,   Version   P   would  generate   more                                                               
progressivity than would Version E.                                                                                             
MR.  DICKINSON,  in  response to  Representative  Tuck  regarding                                                               
slides  21-23, explained  that destination  values of  $0-$26 per                                                               
barrel are the  amounts where a company is  recovering its costs.                                                               
Destination values of  $26-$56 (the red triangle)  are within the                                                               
thirty-dollar  bracket  and  above   $56  is  when  progressivity                                                               
applies.   Therefore, progressivity would apply  to everything in                                                               
the blue line [current law]; but  in the purple line [Version P],                                                               
progressivity would  apply only to  the amount above  the thirty-                                                               
dollar bracket [above the destination  value of $56].  In further                                                               
response, he clarified that for Version  P the 25 percent rate is                                                               
all that would apply to destination values of $56 or less.                                                                      
MR.  DICKINSON, in  response to  Co-Chair Neuman,  explained that                                                               
"PTV"  is the  production tax  value,  which is  what is  taxable                                                               
after subtracting all costs.   The Department of Revenue used $26                                                               
for these costs, so he imported that figure into these graphs.                                                                  
MR.  DICKINSON,   in  response   to  Representative   P.  Wilson,                                                               
confirmed the turquoise line on slide 22 represents [Version E].                                                                
1:59:28 PM                                                                                                                    
MR. DICKINSON  explained the  black line  on slide  23 represents                                                               
the  base tax  rate  of 25  percent, and  depicts  the amount  of                                                               
production tax that would be  paid per barrel at each destination                                                               
value if  there was no progressivity.   It can therefore  be seen                                                               
how much tax  is generated from progressivity.   At a destination                                                               
value of $136,  Version P would remove about  one-quarter to one-                                                               
third of  the progressivity.   At destination values  around $90,                                                               
Version  P  would halve  the  progressivity,  but the  amount  of                                                               
progressivity being halved is much smaller.                                                                                     
REPRESENTATIVE  SEATON, in  regard  to the  destination value  of                                                               
$136, stated that  under a 25 percent base rate  the tax would be                                                               
about  $30 and  under current  law the  tax would  be about  $60.                                                               
Thus, at $136, the total production  tax of $60 under current law                                                               
would  be about  50  percent [of  the  destination value],  which                                                               
means the companies would be retaining about 50 percent.                                                                        
MR. DICKINSON agreed that is correct, roughly speaking.                                                                         
2:01:16 PM                                                                                                                    
MR. DICKINSON  reviewed slide 24 which  depicts the progressivity                                                               
that would be  generated over a time period of  one year in which                                                               
the  oil  price  increases  by  $10  each  month.    At  $50  [in                                                               
destination  value] no  progressivity  would  be generated  under                                                               
either current law or Version P  because of the $26 in production                                                               
costs and  the $30 at  which there is  no progressivity.   As the                                                               
destination value  rises, the increase  in progressivity  is more                                                               
under current law than Version P.   For example, at a destination                                                               
value of  $140, Version P would  bring in about $420  million per                                                               
month in  progressivity, whereas the  current law would  bring in                                                               
about $600 million.                                                                                                             
REPRESENTATIVE P. WILSON surmised that  as price goes up, Version                                                               
P would allow producers to keep more money [than current law].                                                                  
MR. DICKINSON replied correct.                                                                                                  
2:03:02 PM                                                                                                                    
MR. DICKINSON, in  response to Co-Chair Neuman,  stated there are                                                               
five  bites  at the  apple  that  a  producer must  worry  about:                                                               
federal tax,  and State of  Alaska property tax,  production tax,                                                               
income tax, and royalties, given  99 percent of the production in                                                               
Alaska is  on state land.   The  revenue generated per  barrel is                                                               
primarily from the state income  tax and state production tax and                                                               
not so much the property tax.   In further response, he confirmed                                                               
that slide  24 shows  neither the  total tax  nor the  25 percent                                                               
base production tax; it only shows the progressivity.                                                                           
2:04:00 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that a  third of the  tax difference                                                               
between  Version P  and current  law  would be  taxed by  federal                                                               
income tax anyway.   So, under Version P, a  producer would pay a                                                               
little  over   one-third  of  that  difference   to  the  federal                                                               
government instead of the State of Alaska.                                                                                      
MR.  DICKINSON answered  that is  correct because  this would  be                                                               
fully deductible for federal taxes.                                                                                             
REPRESENTATIVE  P. WILSON  inquired what  difference it  makes to                                                               
the company as to who it is paying the tax to.                                                                                  
MR. DICKINSON responded probably not  much, but every dollar that                                                               
is  deductible  only has  a  35  percent  effect on  income  tax.                                                               
Changing state taxes by $1 would  change federal income tax by 30                                                               
cents; so, net, a company would still be 65 cents ahead.                                                                        
2:05:08 PM                                                                                                                    
REPRESENTATIVE P.  WILSON, given that producers  would be looking                                                               
at  overall taxes  and  not  just Alaska  taxes,  asked what  the                                                               
difference would be  if Alaska lowered its taxes  and the federal                                                               
government then took it anyway.                                                                                                 
MR. DICKINSON  pointed out  that of  the eight  largest producing                                                               
states, the  combined federal  and State of  Alaska tax  is much,                                                               
much higher  at current  price levels  than it is  in any  of the                                                               
next seven.   Further, the Gulf  of Mexico has no  state taxes so                                                               
only  federal taxes  apply.   Thus, when  making a  decision, one                                                               
piece of a company's thinking is  that in Alaska it would keep 35                                                               
percent of the money  but in the Gulf of Mexico  it would keep 65                                                               
2:06:58 PM                                                                                                                    
CO-CHAIR NEUMAN  inquired whether  Alaska's taxes are  similar to                                                               
those of Alberta,  Canada, before Alberta's taxes  were changed a                                                               
year or two ago.                                                                                                                
MR. DICKINSON  replied that  in 2007,  Alberta instituted  a much                                                               
higher  royalty  under  a  document   called  "Our  Fair  Share".                                                               
Royalty in Alberta is like tax  in Alaska, and Alberta also has a                                                               
property tax and  an income tax.  This increase  resulted in much                                                               
push-back  by  industry, and  last  week  Alberta announced  that                                                               
starting in 2011  it will roll back the rates  to lower than they                                                               
were in 2007.   The limit of no more than 5  percent in the first                                                               
year of a well's existence will stay.                                                                                           
2:08:53 PM                                                                                                                    
CO-CHAIR NEUMAN  related that  Alberta had  a tremendous  loss in                                                               
revenue, which forced the roll back to create more investment.                                                                  
MR. DICKINSON agreed,  saying the statements made  by the Alberta                                                               
government  last   week  were  focused  on   attracting  industry                                                               
investment because investment had fallen  off or not increased in                                                               
some  areas to  the  degree  that had  been  hoped.   In  further                                                               
response, he  said an important  distinction between  Alberta and                                                               
Alaska is that Alberta is much  more heavily invested in gas than                                                               
is Alaska.   The gas price has fallen by  several hundred percent                                                               
from its  high point and  gas probably accounts for  the majority                                                               
of Alberta's royalties.                                                                                                         
2:10:44 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG understood  that  the [marginal  rate]                                                               
from progressivity  is 37  percent on  the dollar  over $30.   He                                                               
asked  what  happens  to  the investment  dollar,  such  as  what                                                               
credits are received for that investment dollar.                                                                                
MR. DICKINSON answered this is  accounting for any dollar change.                                                               
So, if a  company did not invest and therefore  generate an extra                                                               
dollar of  free cash flow,  this would  have the same  effect and                                                               
that is the  whole reason it is  structured the way it  is.  That                                                               
is to  say, the state is  going to pick up  a significant portion                                                               
of a  company's investments because  every time an  investment is                                                               
made it  is deductible, and  in Alaska even capital  expenses are                                                               
deductible costs and lower the  production tax value (PTV), which                                                               
is the  value that is taxed.   By deliberately choosing  the high                                                               
point of  the marginal rate,  it can be  shown that the  state is                                                               
picking  up over  90 cents  of every  dollar invested  and taking                                                               
over 90 cents  of every additional dollar  being earned, although                                                               
that problem does not happen very often.                                                                                        
2:12:15 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  surmised that in some  ways the higher                                                               
the rate, the more a company gets back on its investment dollar.                                                                
MR.  DICKINSON  responded  that  the  investment  dollar  has  an                                                               
immediate value  from the  state.  When  making an  investment, a                                                               
company  is looking  for  long-term  return.   If  less is  spent                                                               
initially,  then  the  rate  of return  might  look  better,  but                                                               
ultimately  a company  is  looking  at the  return  that will  be                                                               
received in  future years.  So,  just looking at the  dollars, an                                                               
investor would  like to invest at  a point at which  the marginal                                                               
rate  is  very high  and  then  collect  it  all later  when  the                                                               
marginal rate is lower.                                                                                                         
2:13:11 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG inquired  how that  affects the  total                                                               
lifting cost.                                                                                                                   
MR. DICKINSON  replied there are  two ways an investor  can think                                                               
about those  taxes.  When  the marginal  rates are very  high, an                                                               
investor is writing a much larger  check.  When the marginal rate                                                               
is  really high,  a drilling  manager  is not  thinking that  the                                                               
government is paying for most of  what he or she is doing because                                                               
actual out-of-pocket  costs remain  relatively constant  and what                                                               
is changing is the amount of tax that a company pays on that.                                                                   
REPRESENTATIVE  GUTTENBERG argued  the  drilling  manager is  not                                                               
doing  that  because  an  accountant  is doing  that.    He  said                                                               
legislators have  heard repeatedly that the  most important thing                                                               
is stability.   The most stable location shown  to legislators by                                                               
industry  was a  place where  the government  take was  something                                                               
like 95 percent and had not changed  in 30 years.  There are lots                                                               
of  things in  play and  legislators  are trying  to balance  all                                                               
those things against what is in the state's best interest.                                                                      
REPRESENTATIVE  P. WILSON  commented that  in locations  like the                                                               
aforementioned there are no environmental  rules so the companies                                                               
have much lower costs than in the U.S.                                                                                          
2:15:21 PM                                                                                                                    
MR.  DICKINSON returned  to his  presentation  and addressed  the                                                               
proposed  interest rate  provision  for  delinquent taxes  [slide                                                               
26].   Version P  would do  away with a  floor [and  ceiling] and                                                               
would charge the federal funds rate  plus 3 percent, which is the                                                               
same  general interest  rate  that a  corporation  would pay  for                                                               
underpayment of  tax under the  Internal Revenue  Service system.                                                               
In  response to  Co-Chair Neuman,  he said  slide 26  incorrectly                                                               
states Version S instead of Version P.                                                                                          
CO-CHAIR JOHNSON  explained this interest rate  is being proposed                                                               
because a taxpayer  that is delinquent on taxes  through no fault                                                               
of  its own  should not  be  punished.   However, an  intentional                                                               
mistake would  be another set  of circumstances.  In  response to                                                               
Co-Chair Neuman,  he confirmed  that it  is the  commissioners in                                                               
the administration who make the  initial assessment as to whether                                                               
an underpayment is intentional.                                                                                                 
2:17:58 PM                                                                                                                    
MR. DICKINSON  related that under  current law the  interest rate                                                               
on  delinquent taxes  is 11  percent,  although the  rate did  go                                                               
slightly above  that for a short  period (red line on  slide 27).                                                               
The federal  funds rate  is currently  at a  historic low  of 0.5                                                               
percent (dark  blue line).   Under Version  P, the  interest rate                                                               
would be  the federal funds  rate that is announced  each quarter                                                               
plus 3 percent;  thus, the current rate under Version  P would be                                                               
3.5 percent (turquoise line).                                                                                                   
REPRESENTATIVE  TUCK, in  regard to  Co-Chair Johnson's  previous                                                               
statement, said he  can see how someone  would intentionally hang                                                               
on to  money knowing a good  rate of return would  be received on                                                               
that money through investments or even deposits.                                                                                
CO-CHAIR  JOHNSON  responded  that  is why  the  ceiling  on  the                                                               
interest rate  was removed.   Should the  interest rate go  up in                                                               
the  future,  he did  not  want  the state  to  be  stuck with  a                                                               
ceiling.  Additionally, Version P  would make the rate consistent                                                               
with what the federal government charges for use of its money.                                                                  
2:19:33 PM                                                                                                                    
MR. DICKINSON discussed the proposed  provision for interest from                                                               
retroactive regulations  [slide 28].   Version  E would  not have                                                               
considered  tax   payments  owed  as  a   result  of  retroactive                                                               
regulations to be delinquent.   Version P adopts the more complex                                                               
scheme  proposed under  the governor's  bill, which  is that  the                                                               
Department of  Revenue (DOR)  is required  to waive  the interest                                                               
between  the  time  of  production   and  implementation  of  the                                                               
regulation  if an  underpayment  arises.   However  there is  one                                                               
difference between the governor's bill  and Version P:  under the                                                               
governor's  bill, DOR  is required  to  make a  finding that  the                                                               
producer  acted  in  good  faith;  Version  P  provides  that  no                                                               
interest is due if DOR does  not find that the producer failed to                                                               
make a good faith estimate.                                                                                                     
2:21:03 PM                                                                                                                    
REPRESENTATIVE SEATON asked whether that  puts the onus on DOR to                                                               
come up  with a  legal demonstration that  the taxpayer  acted in                                                               
bad faith.                                                                                                                      
MR. DICKINSON replied  he does not think it is  a question of bad                                                               
faith.  Rather, if DOR finds  something that appears not to be in                                                               
good faith, then it can require  interest.  He said it is unclear                                                               
to him  where the burden of  proof would be, but  Version P takes                                                               
away the  affirmative requirement  that DOR determine  good faith                                                               
beforehand in every case.                                                                                                       
REPRESENTATIVE SEATON  said he  thinks it  would be  advisable to                                                               
obtain a  legal opinion as to  whether that change makes  a shift                                                               
of burden to the department to prove something.                                                                                 
2:22:25 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  that slide  26 states  the proposed                                                               
interest  rate  would   apply  to  almost  all   taxes,  but  the                                                               
discussion has  been about only  one tax.   He inquired  what the                                                               
implications would be across all  the other departments from this                                                               
proposed change in general law  and asked which taxes this change                                                               
would apply to.                                                                                                                 
MR. DICKINSON  answered he believes  this change would  not apply                                                               
to the property tax, the insurance  tax, and a third tax which he                                                               
cannot remember at the moment.                                                                                                  
REPRESENTATIVE SEATON  said this does  not tell members  what the                                                               
economic effect  is to the  state given  that all of  these other                                                               
taxes would be covered by this bill.                                                                                            
MR. DICKINSON  responded he has  not done  a fiscal note  on this                                                               
provision,  but the  vast majority  of  the taxes  that would  be                                                               
affected, in  terms of  dollars, are the  production tax  and the                                                               
income tax.   All the other taxes together  would constitute only                                                               
2-3 percent of the total tax burden compared to those two.                                                                      
MR. DICKINSON, in  response to Co-Chair Neuman, said  he does not                                                               
know of any models that are  being built to look at the incidence                                                               
of delinquency in the insurance, fisheries, or other taxes.                                                                     
CO-CHAIR NEUMAN suggested Representative  Seaton discuss with Mr.                                                               
Dickinson the modeling being done related to production tax.                                                                    
2:25:34 PM                                                                                                                    
REPRESENTATIVE SEATON  asked whether Mr. Dickinson  has looked at                                                               
the dollar  effect of any  retroactive regulations that  apply to                                                               
Cook Inlet or  other small producers that are not  in Prudhoe Bay                                                               
or  Kuparuk  where  a  standard  deduction  was  implemented  for                                                               
upstream expenses [for the time period of 2007-2010].                                                                           
MR. DICKINSON replied the upstream  expenses that were frozen are                                                               
one piece of the calculation.   For Prudhoe Bay and Kuparuk there                                                               
is  downstream transportation.    The law  changed  in 2007,  the                                                               
regulations were not implemented until  2010, so there were three                                                               
years in  which the gross  value could  vary.  The  capital piece                                                               
was not  frozen and  the capital  piece is of  the same  order of                                                               
magnitude  as what  he  has  seen for  Prudhoe  Bay and  Kuparuk.                                                               
Roughly speaking for  those three years, the piece  of costs that                                                               
will be regulated that way is  larger than the piece of cost that                                                               
was frozen.                                                                                                                     
2:27:49 PM                                                                                                                    
MR.  DICKINSON, in  response to  Co-Chair Neuman,  clarified that                                                               
slide 26  focuses on the  interest rate  and slide 28  focuses on                                                               
the issue  of regulation  changes.   He confirmed  that penalties                                                               
would not  be applied  to any  additional tax that  is owed  as a                                                               
result of the changes.                                                                                                          
MR.  DICKINSON   reviewed  the  proposed  provision   for  credit                                                               
recovery [slide  29].   The 2007  ACES legislation  required that                                                               
certain credits be  recovered over a two-year period.   Version P                                                               
would restore the  2006 rule that allowed credit  recovery over a                                                               
one-year period.   He related that the Department  of Revenue has                                                               
advocated  for  this  change  because  the  two-year  period  has                                                               
created a lot of complexity with very little value.                                                                             
MR.  DICKINSON, in  response to  Co-Chair Neuman,  confirmed this                                                               
provision would assist the Department of Revenue.                                                                               
2:29:23 PM                                                                                                                    
REPRESENTATIVE SEATON  recalled that the reason  for implementing                                                               
the  two-year credit  recovery period  was to  protect the  state                                                               
from having to pay large capital  credits during times of low oil                                                               
prices when  taxes would  be lower  because of  the profits-based                                                               
tax system.  He asked whether  the assumption now is that the era                                                               
of high oil prices  is here to stay so there is  no longer a need                                                               
to worry that they may go back down.                                                                                            
MR. DICKINSON answered that that  argument might hold up under an                                                               
assumption that  a level of  high and low  investment corresponds                                                               
exactly with  the years of high  and low revenue.   While looking                                                               
through Department of  Revenue slides, the only  argument that he                                                               
saw  advanced for  advocating a  two-year credit  recovery period                                                               
was  that most  places  have  two, three,  or  four  years.   The                                                               
federal tax  code considers  five years  to be  much accelerated.                                                               
In-so-far   as  these   credits  are   considered  analogous   to                                                               
depreciation,  [one  year]  was the  fastest  depreciation  found                                                               
around  the world  and  therefore the  department  was trying  to                                                               
spread it out.   He said he thinks it assumes  a precision in the                                                               
correspondence that may not have been  seen over the past two and                                                               
a half years.                                                                                                                   
2:31:17 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  said he  is looking for  the practical                                                               
effect on  this same  subject:   who has  benefitted and  who has                                                               
been unable to use the credits.                                                                                                 
MR. DICKINSON responded  that given the prices seen  over the two                                                               
and a  half years this  statute has  been in effect,  he believes                                                               
the  three  large  taxpayers have  probably  used  their  credits                                                               
fairly  effectively  and  still  have a  lot  of  tax  obligation                                                               
remaining for the state.  In  further response, he said the other                                                               
taxpayers can have  the state purchase their credits.   Having to                                                               
hold off on some  of that cash flow for six  months might have an                                                               
effect in the  first year, but for a company  in roughly a steady                                                               
state  of investment  not much  difference would  be seen  in the                                                               
cash flows by having to split the credits over two years.                                                                       
2:32:48 PM                                                                                                                    
MR.  DICKINSON  outlined  the   proposed  provision  for  capital                                                               
investment credits  [slide 30].   Version P would only  provide a                                                               
change to a definition; therefore,  it would provide a 30 percent                                                               
credit for well  work that includes operating  and capital costs.                                                               
He compared the differences between  Version P and the governor's                                                               
bill.     The   governor's  bill   would  rewrite   the  existing                                                               
exploration  credits  in  AS  43.55.025   as  well  as  insert  a                                                               
development well  credit [slide  31].  Version  P would  take the                                                               
existing  system of  lease expenditures  and allow  certain lease                                                               
expenditures that are used for well  work to also qualify for the                                                               
30 percent credit.  In  response to Co-Chair Neuman, he confirmed                                                               
that development  wells would include  the reconditioning  of old                                                               
wells, the notion being to develop  a well further even if it has                                                               
been producing for awhile.                                                                                                      
2:34:18 PM                                                                                                                    
REPRESENTATIVE SEATON observed that Version  P would provide a 30                                                               
percent credit for  both capital and operating  expenses for well                                                               
work.  He inquired whether  the governor's bill also proposes the                                                               
30 percent credit for operating expenses.                                                                                       
MR.  DICKINSON replied  he believes  the governor's  bill is  for                                                               
both  because there  is  no  specific requirement  that  it be  a                                                               
capital cost.  In response to  Co-Chair Neuman, he said that this                                                               
well  work would  be  an  upstream cost,  not  a midstream  cost.                                                               
Version  P requires  it be  a lease  expenditure first,  and then                                                               
this is a subset of  lease expenditures; there is nothing similar                                                               
to  that  in  the  governor's  bill.    In  further  response  to                                                               
Representative  Seaton,   he  stated  that  Version   P  includes                                                               
injector wells  while the  governor's bill  specifically excludes                                                               
service [injector]  wells.  He said  intangible development costs                                                               
(IDC) are all  the costs that are necessary for  drilling a well.                                                               
First, however, this must be a  lease expenditure and, if not, it                                                               
would be excluded.                                                                                                              
2:37:38 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG inquired  as to  what the  state gives                                                               
now for well work.                                                                                                              
MR.  DICKINSON  answered  that any  capital  expense  is  already                                                               
included and is  at a 20 percent credit,  and capital investments                                                               
already include  the creation  of wells.   Version P  would boost                                                               
that 20 percent  credit to 30 percent.  He  explained that at the                                                               
point of production the well fluid  coming out of the ground is a                                                               
combination of  oil, gas, water,  and sand, and it  requires time                                                               
and money  to separate them.   Version  P would provide  that the                                                               
costs for getting  the fluid out of the ground  are eligible, but                                                               
the costs dedicated to separation would not be eligible.                                                                        
2:38:48 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  observed that expenses for  putting in                                                               
a well, such as hooking up  the Christmas tree and flow lines and                                                               
constructing  the  shack would  be  capital  expenditures.   Then                                                               
there are  normal yearly maintenance  expenses which  are covered                                                               
under operation expenses.   Enhancements would be  such things as                                                               
fracking, more seismic  work down in the well, and  so forth.  He                                                               
asked whether the  state gives credits for that now.   He further                                                               
asked where the definition of a service well can be found.                                                                      
MR.  DICKINSON,  regarding  the definition  of  a  service  well,                                                               
responded that he goes to  the definitions in Alaska regulations,                                                               
which  he believes  are  those used  by the  Alaska  Oil and  Gas                                                               
Conservation  Commission (AOGCC).   In  regard to  the difference                                                               
between maintenance  and capital  expenditures, he  said fracking                                                               
is considered  an intangible drilling  cost that  would currently                                                               
be eligible  for a  20 percent  capital cost  credit.   Version P                                                               
would raise  that 20 percent  credit to  30 percent.   In further                                                               
response, he confirmed that the  governor's bill would also raise                                                               
this to 30 percent.                                                                                                             
CO-CHAIR NEUMAN added  that the idea behind this  provision is to                                                               
help re-develop older fields to raise production.                                                                               
2:40:56 PM                                                                                                                    
REPRESENTATIVE SEATON referenced page  9, lines 29-31, of Version                                                               
P and  inquired what  is "26  U.S.C. 263(c)".   He  further asked                                                               
whether the language on these  lines means that all operations of                                                               
the well itself during the entire  operation of the field will be                                                               
given  a 30  percent tax  credit  for operating  expenses.   Will                                                               
pumping the oil  through a collector line be the  only thing that                                                               
does not receive this credit, he queried.                                                                                       
MR. DICKINSON,  regarding the  second question,  replied no.   He                                                               
explained  that the  huge above-ground  facilities  on the  North                                                               
Slope are separation  facilities.  The cost of the  well is below                                                               
the ground  and where  it hits  the Christmas  tree is  where the                                                               
cost deductions cease.                                                                                                          
2:43:13 PM                                                                                                                    
REPRESENTATIVE  SEATON   offered  his   belief  that   under  the                                                               
definition  on  page 9,  the  injector  wells, operation  of  the                                                               
injector wells, pressurizing of the  field, bringing the fluid to                                                               
the surface, and anything connected  to that portion of operating                                                               
these fields would all receive a 30 percent credit.                                                                             
MR. DICKINSON  answered that the  processing by which the  gas is                                                               
pressurized up before  being re-injected is not  eligible for the                                                               
2:43:50 PM                                                                                                                    
REPRESENTATIVE SEATON  understood an injection well  is permitted                                                               
under  Version  P.    Given   that  operation  during  production                                                               
includes costs of operating a well  and moving well fluids up, he                                                               
inquired how the  costs of operating a well are  excluded when an                                                               
injection well is specifically allowed.                                                                                         
MR.  DICKINSON responded  that upon  listening to  Representative                                                               
Seaton's definition,  perhaps more language would  be appropriate                                                               
and could  be done  here in  statute or in  the regulations.   He                                                               
explained that  an injection well  is not bringing fluids  to the                                                               
surface;  rather, it  is  pumping something  back  down into  the                                                               
well.    For  purposes  of  an injection  well,  the  process  of                                                               
drilling the  well would  be included.   But,  during production,                                                               
well related  expenditure would be  the cost of operating  a well                                                               
and moving the well fluids.                                                                                                     
2:45:14 PM                                                                                                                    
REPRESENTATIVE  SEATON  requested  that  the  sponsor  state  his                                                               
intent on this language when the committee gets to discussion.                                                                  
REPRESENTATIVE P.  WILSON requested that before  the next meeting                                                               
on  HB 308,  Mr. Dickinson  provide members  with something  that                                                               
shows the cumulative effects of  all of this and whether anything                                                               
will be left for the state.                                                                                                     
MR. DICKINSON  replied there  will be  quite a  bit left  for the                                                               
state and  there will  be a fiscal  note from  the administration                                                               
that will tie together all the net effects.                                                                                     
REPRESENTATIVE P.  WILSON said she  would like to see  the effect                                                               
in picture form rather than in words.                                                                                           
CO-CHAIR  NEUMAN  requested Mr.  Dickinson  to  work with  Deputy                                                               
Commissioner Davis of the Department of Revenue.                                                                                
2:47:40 PM                                                                                                                    
MR.  DICKINSON returned  to his  presentation  and addressed  the                                                               
proposed  provision  that would  change  the  current statute  of                                                               
limitations  for production  tax from  six years  to three  years                                                               
beginning  with the  2011  tax year  [slide 32].    He said  this                                                               
provision is the same in Version P as it was in Version E.                                                                      
MR.  DICKINSON  discussed the  provision  that  would remove  the                                                               
matching  spend requirement  [slides 33-34].   He  explained that                                                               
under  current  law, a  producer  that  is producing  fewer  than                                                               
50,000 barrels per day can  bring its transferable credits to the                                                               
state  for purchase,  assuming the  producer has  already lowered                                                               
its taxes  to zero.   He  clarified that  these would  be credits                                                               
that have  come about as  a consequence  of investment, not  as a                                                               
consequence  of  being  a  small   producer.    Currently,  three                                                               
conditions  must  be   met  for  the  state   to  purchase  these                                                               
transferable credits:   1) it is not earlier than  allowed on the                                                               
certificate, a  condition that  will become  moot if  the earlier                                                               
provision to  change the  certificates is  enacted; 2)  within 24                                                               
months of  applying for  a certificate, the  taxpayer pays  out a                                                               
similar amount in capital investment or  lease bids - this is the                                                               
requirement that would be removed by  Version P; and 3) there are                                                               
no other outstanding tax liabilities.                                                                                           
MR. DICKINSON concluded  by noting that the  local hire provision                                                               
that was included in Version E has been removed from Version P.                                                                 
2:49:44 PM                                                                                                                    
CO-CHAIR  NEUMAN  requested  further  explanation  regarding  the                                                               
first condition that must be met.                                                                                               
MR. DICKINSON responded  there are currently two  paths a company                                                               
can take if  it makes an investment or does  something that earns                                                               
a credit:  the company can use the  credit itself or it can get a                                                               
transferable tax certificate  from the Department of  Revenue.  A                                                               
transferable tax certificate  can be sold to  another party, held                                                               
for use in a future year, or sold to the state.                                                                                 
CO-CHAIR  NEUMAN added  that Version  P  would allow  use of  the                                                               
transferable credits within the first year.                                                                                     
MR.  DICKINSON  related that  when  a  taxpayer uses  the  credit                                                               
itself, it estimates its taxes every month and applies one-                                                                     
twelfth of  the credit.  Everything  is then trued up  at the end                                                               
of the year when the actual credit is known.                                                                                    
CO-CHAIR  NEUMAN said  this  allows for  more  fluid capital  for                                                               
MR. DICKINSON replied yes, the  notion is to make reinvestment as                                                               
quick and effective as possible.                                                                                                
CO-CHAIR NEUMAN  noted there are  incentives in Version P  to try                                                               
to attract that reinvestment.                                                                                                   
MR. DICKINSON agreed.  The  idea behind this bill, as articulated                                                               
by Co-Chair  Johnson and  the governor,  is that  making specific                                                               
things  subject to  the credits,  like  well work,  which is  the                                                               
nexus of the production, encourages reinvestment in these areas.                                                                
CO-CHAIR NEUMAN  remarked that what  must be found is  that sweet                                                               
spot for  stimulating reinvestment  back into Alaska  and finding                                                               
out  whether  a  reduction  in  taxes  results  in  the  industry                                                               
reinvesting that  money back into Alaska.   The goal is  for that                                                               
reinvestment to create more jobs in Alaska for Alaskans.                                                                        
2:52:39 PM                                                                                                                    
CO-CHAIR  JOHNSON  stated  that  every  drill  rig  provides  100                                                               
Alaskan jobs.  More than a  tax credit for well workovers, HB 308                                                               
is about  the human  element of  jobs.  At  some point  the state                                                               
must look at  the human consequences should that well  not be re-                                                               
worked to provide  more oil down the pipeline.   Version P should                                                               
slow the fall in jobs that is now happening.                                                                                    
2:55:46 PM                                                                                                                    
REPRESENTATIVE SEATON recalled a producer's previous testimony                                                                  
about wanting to have more on the upside, which is what HB 308                                                                  
is intended to do.  At that time there was discussion about re-                                                                 
initiating a  balance on  the downside  if more  is added  on the                                                               
upside.  To provide the public  and committee members the time to                                                               
review the  amendment he  is proposing in  this regard,  he moved                                                               
Conceptual Amendment 1, written  as follows [original punctuation                                                               
provided], to be considered at the next meeting:                                                                                
     Page 2 after line 22                                                                                                       
     Insert new Section 5                                                                                                       
     AS 43.55.011(f) is repealed and reenacted to read:                                                                         
     (f) The provisions  of this subsection apply to  oil and gas                                                           
     produced  from  each lease  or  property  within a  unit  or                                                           
     nonunitized   reservoir   from   which   1,000,000,000   BTU                                                           
     equivalent  barrels of  oil or  gas  have been  cumulatively                                                           
     produced by the  close of the most recent  calendar year and                                                           
     from which the  average daily oil and  gas production during                                                           
     the  most   recent  calendar   year  exceeded   100,000  BTU                                                           
     equivalent barrels.  Notwithstanding any  contrary provision                                                           
     of law, a  producer may not apply tax credits  to reduce its                                                           
     total tax  liability under (e)  of this section for  oil and                                                           
     gas produced from  all leases or properties  within the unit                                                           
     or  nonunitized  reservoir below  10  percent  of the  total                                                           
     gross value at the point of  production of that oil and gas.                                                           
     If  the  amount  calculated  by  multiplying  the  tax  rate                                                           
     determined  under  (g)  of  this  section  times  the  total                                                           
     production tax  value of the  oil and gas taxable  under (e)                                                           
     of this section  produced from all of  the producer's leases                                                           
     or properties  within the unit  or nonunitized  reservoir is                                                           
     less than 10  percent of the total gross value  at the point                                                           
     of production of that oil and  gas, the tax levied by (e) of                                                           
     this section for that oil and  gas is equal to 10 percent of                                                           
     the total  gross value  at the point  of production  of that                                                           
     oil and gas.                                                                                                           
     Renumber following sections accordingly                                                                                    
CO-CHAIR JOHNSON objected for future discussion purposes.                                                                       
2:58:11 PM                                                                                                                    
MR. DICKINSON, in response to  Co-Chair Neuman, drew attention to                                                               
slide  36, which  depicts Alaska's  past, present,  and projected                                                               
oil production for the years 1965-2019.                                                                                         
CO-CHAIR  NEUMAN  pointed  out  that  the  projection  is  for  a                                                               
decrease  in  oil production;  the  projection  is not  even  for                                                               
holding  a  level  amount  of  production.   He  noted  that  oil                                                               
production  affects  90  percent  of  the  state's  general  fund                                                               
revenue  and it  is only  three companies  that are  paying these                                                               
taxes, which is something to be concerned about.                                                                                
2:59:38 PM                                                                                                                    
REPRESENTATIVE   SEATON  noted   that   Conceptual  Amendment   1                                                               
addresses the previous  version of the bill, Version E.   He said                                                               
it is  his hope that  the committee will be  able to look  at the                                                               
issue and  how the  amendment would have  affected things  had it                                                               
been in effect over the past three years.                                                                                       
[HB 308 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB 308 Version P 3.17.10.pdf HRES 3/17/2010 1:00:00 PM
HB 308
CSHB 308 v.P Sectional Analysis.pdf HRES 3/17/2010 1:00:00 PM
HB 308
HB308 RDC Letter.pdf HRES 3/17/2010 1:00:00 PM
HB 308
HB 308 LOS State Chamber.pdf HRES 3/17/2010 1:00:00 PM
HB 308
CSHB 308 v.P Technical Aspects.pdf HRES 3/17/2010 1:00:00 PM
HB 308