Bradners'

Alaska Legislative Digest

November 9, 2007     

Oil and Gas Bulletin

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

Complex side issues emerge in Palin’s oil tax legislation

There are a host of contentious issues tucked into the versions of Gov. Sarah Palin’s oil tax bill now in the House and Senate finance committees. The administration has already complained about allowance of cost deductions only for equipment and services originating in Alaska (i.e. an administrative nightmare) and language lifted from SB-80 (a bill pending in the regular session) that would have state tax auditors decide when production facility or pipeline maintenance is “negligent.” Yesterday industry weighed in before the finance committees citing other issues that complicate and will likely raise the cost and certainly the uncertainty of whatever tax passes. The dropping of the gross revenues tax floor was cited as a positive, however.

The biggest issue remains the net profits tax rate increase and more aggressive “progressivity” formulas that raise tax rates higher at higher oil prices. However, other issues include: (1) a progressivity formula based on gross revenue values (in the House bill) that will complicate the tax and mitigate the flexibility of a net profits tax because it ignores costs; (2) reduction of use of “transitional” investment tax credits for prior investments before enactment of the PPT; (3) requirements that additional exploration data and physical core sections and liquid samples from well test be given to the state as a condition of getting exploration tax credits. This raises costs and poses logistics and safety challenges. The data requirement also applies to federal and private lands, not just state lands; (4) release to the public of confidential well data after two years and seismic data after 10 years will reduce the competitive advantage of an explorer, reducing effectiveness of the incentive; (4) on requirements that cost information be provided to the Department of Revenue language is too vague and needs tightening; (5) authority for the revenue department to use its own estimate of “reasonable” transportation costs for pipeline and tanker charges. These determinations are now made by the Regulatory Commission of Alaska and the Federal Energy Regulatory Commission; (6) making taxpayer cost information public when it is aggregated for three taxpayers. Even though it is aggregated competitors can discern information for single companies; (7) eliminating ability of the department to base audits on inter-company Joint Interest Billings, an option under existing law, removes a valuable tool for the revenue department. The proposal has led industry to suspect the department’s motivation in requesting removal of the option. This is a likely indicator that the Joint Interest Billings will not be allowed, the companies said. Joint-Interest Billings are the expense billings among partners in operating fields and are subject to inter-company audits.

“Stair-step” progressivity formula attracts attention in Senate Finance

The Senate Finance Committee is exploring a new approach to “progressivity,” a formula that increases the net profits tax rate as oil prices increase. The new idea involves a formula with a “curvilinear” tax rate that moves from 0.2 at net taxable oil values of $30-40/barrel, to 0.8 at $40-60/bbl, to 0.4 at $60-80/bbl and 0.1 above $80/bbl. This drew attention and some praise at Thursday’s Senate Finance Committee meeting. Econ One economist Barry Pulliam, who developed the approach at the request of Co-chair Bert Stedman (R-Sitka) said it is more responsive than a single-rate approach to progressivity and the “flattened'” rate keeps the combined PPT/progressivity tax close to the 50 percent maximum even at three-digit oil prices. Stedman said he not endorsing the idea. He said Pulliam's presentation was “only informational.”

Other committee members like the idea, however. Finance Cochair Lyman Hoffman (D-Bethel) said he supports the concept and said it had been discussed with the Murkowski administration when it was building its original PPT bill. Other committee members seem open to the idea. Sen. Charlie Huggins (R-Wasilla) endorsed the stair stepping and complimented Stedman for “maturing this to a very precision way” of approaching progressivity. Sen. Fred Dyson called the mechanism “intriguing.” Hoffman said it would be up to Stedman to decide if the concept would be part of the Senate Finance Committee’s version of Palin’s tax bill.

Chenault says $800 million “revenue gap” doesn’t mean PPT is broken

House Finance Cochairman Mike Chenault (R-Nikiski) says the administration’s projected $800 million “shortfall” in PPT revenues doesn’t necessarily mean the tax law is broken and could be “just an accounting issue.” He is not disputing the low revenue numbers but said $240 million in credits BP plans to claim for last year’s Prudhoe Bay corrosion repairs and income that was “deferred” from reduced production during the field shutdown could account for the income gap.

Administration tries damage control on capitol rumors

Rumors are rampant in the capitol building. Russ Kelly, legislative lobbyist for the governor, paid a visit to the capitol pressroom Thursday to try and squelch two rumors getting circulation. One is that Gov. Palin is threatening to campaign against lawmakers who oppose her tax bill in next year’s election. The second is that she is “making deals'” with Democrats with capital budget promises. Kelly said Palin would endorse or oppose legislative candidates next year based on “numerous factors.” On the “deal” rumor, apparently born from Tuesday’s Bush caucus meeting with the governor and Democrats, Kelly said: “We know that happens in this building (deal making). It isn’t happening in this case.” Kelly also said Chief of Staff Mike Tibbles’ Thursday morning visit with Senate Finance Cochair Bert Stedman (R-Sitka) was not to complain about the slow pace of the committee’s schedule. Tibbles wanted to make sure the administration was being “responsive,” Kelly said, but the discussion was also “a little bit about the vetoes” and energy costs.”

Friday’s schedule:

• 9 a.m. House Finance Committee: amendments
• 9 a.m. Senate Finance Committee: committee work and discussion.
• 1 p.m. Senate Finance Committee: amendments

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.