Bradners'

Alaska Legislative Digest

November 7, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

House Finance is stalled 2 days by complex House Resources bill

House Finance Committee members cooled their heels Monday and most of Tuesday while legislative bill drafters struggled to understand and produce a clean version of the heavily amended oil tax bill that emerged late Sunday night from the House Resources Committee. Some amendments conflicted with others and Resources co-chair Carl Gatto had to sit down with the drafters to sort out the confusion. House Finance finally met to begin consideration of the bill just after 5 p.m. Tuesday. Substantial work on the bill begins Wednesday morning.

Are lawmakers getting paranoid? Concern among some House Democrats with possible efforts to prevent the passage of any bill that increases oil taxes surfaced at the House Finance hearing. When Rep. Bill Thomas (R-Haines) asked if the committee was going to adopt a working draft, Finance co-chair Rep. Mike Chenault (R-Kenai) said it was not necessary, but he would be happy to do so “if the members are concerned I may try something.” Thomas said he only wanted to be sure everyone was working from the same draft and let the issue drop. However, Rep. Les Gara (D-Anch.)said he wanted to quell “the rumors in the hallway, which I think are not true” and formally moved to adopt the House Resources version of the bill. Rep. Mike Hawker (R-Anch.) objected to ask what the rumors were. Gara said a “majority member” told him Chenault might adopt the House Oil and Gas Committee draft. Hawker withdrew his objection and the Resources Committee “V” draft was adopted without objection.

Senate Finance Committee pursued an on-and-off again schedule Tuesday with its version of the tax bill. Some minority legislators saw the delayed action in the finance committees as a majority tactic to run out the special session’s 30-day clock (Nov. 17) without passing a bill. Majority members said they are committed to taking some action, however.

In the Senate Finance meeting Tuesday state Revenue Commissioner Pat Galvin ticked through several issues the department has with the Judiciary Committee version of the tax bill.

• “Corrosion” deductions: Commissioner Galvin is unhappy with language in the Judiciary version which requires auditors to make decisions in disallowing cost deductions as to when industry maintenance practices are “negligent.” This was language adapted from SB-80, a bill pending in the regular session that deals with cost deductions on maintenance. Galvin said he prefers the administration’s proposal for an automatic disallowance when there is an unplanned interruption of production, although he acknowledged such events may or may not have anything to do with faulty maintenance.
• Disallowance of deductions for equipment or services purchased outside Alaska: The Judiciary bill disallows capital and operating cost deductions for purchases outside Alaska. This will cause significant problems for industry taxpayers and state tax auditors in deciding how to allocate costs within and outside of Alaska when specialized oilfield equipment manufactured elsewhere is moved to the state. A better approach is to require that equipment and services are dedicated totally to Alaska oil and gas production in allowing deductions, Galvin told the Senate Finance Committee.
• The ConocoPhillips low-sulfur diesel plant: ConocoPhillips is about to make a $300 million decision on whether or not to convert a small topping plant in the Kuparuk River field to make ultra-low-sulfur (ULS) diesel for use on the slope by producers and contractors. Use of ULS diesel is required by federal regulations. The Department of Revenue said current law, the Petroleum Profits Tax, is ambiguous on whether deductions and investment tax credits should be allowed to the plant under the current net profits tax. The department has made an internal decision that deductions and credit should not be allowed because the plant’s function, making diesel, is not directly linked to oil production. Because there is uncertainty (and maybe a lawsuit) the department wants the Legislature to specify that the plant, and others like it, is clearly nondeductible in a revised tax law. With a $300 million project the various deductions and investment tax credits are worth $100 million to $150 million to the state treasury, Galvin told the committee. ConocoPhillips says that the slope plant is uneconomic if the costs aren’t deductible. It would instead purchase the fuel from the Tesoro refinery near Kenai, which makes ULS diesel. Trucking the diesel to the slope would require about 50 tank-truck trips a day (25 going north full, 25 coming south empty). Ironically, trucking costs are clearly deductible as an operating expense under PPT, ConocoPhillips says.

House Democrats give status report

House Democrats continued to push for a gross revenues tax at a Tuesday news conference. Rep. Harry Crawford (D-Anch.) said a “standard” deduction for operating expenses would allow the state to eliminate one “moving part” from the net-profits tax system. Crawford endorsed an amendment, defeated in the House Resources Committee, to provide a standard deduction for operating costs that would increase 3 percent annually until 2011, then be adjusted based on cost experience during the PPT review mandated for that year. Minority Leader Beth Kerttula (D-Juneau) said she was unsure the state could accurately audit tax returns under the PPT.

Wednesday’s schedule

• 9 a.m. House Finance: review of Resources Committee version of HB 2001 by consultant Steve Porter, with Commissioner Pat Galvin’s comments and a presentation of administration issues.
• 9 a.m. Senate Finance: discussion of base PPT rate, tax filing procedure and guidelines.
• 1 p.m. Senate Finance: discussion of progressivity issues.
• 2 p.m. House Finance: stakeholder testimony.

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.