Bradners'

Alaska Legislative Digest

November 16, 2007     

Oil and Gas Bulletin

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

Tax foes routed on Senate floor; House gets what it wants

Late Thursday night the Alaska State Senate passed a rewrite of the Alaska oil tax laws, raising the state’s yearly tax revenues from the oil industry substantially. It was a big victory for Democrats in the Legislature, who engineered much of the final action, and for Gov. Sarah Palin, who favored a version of the tax bill passed by the House Nov. 11. The Senate vote was 14-5 with most Senate Minority Republicans joining with most Senate Democrats to pass the bill.

Wednesday night the Senate Finance Committee passed a committee substitute it hoped would garner enough votes to pass the full Senate and House. But the Senate committee omitted one controversial provision many House members wanted, a “standard deduction” (a freeze on operating cost deductions) for “legacy” fields, meaning Prudhoe Bay and Kuparuk. This was a provision supporters of the bill that had passed the House with the operating cost-freeze considered key for their support. After a day of intense negotiations within the Senate and between both bodies a compromise was agreed to. The Senate began debate at 7 p.m. and after passing amendments addressing House concerns, including the standard deduction language, the Senate passed the bill at 11 pm. One major difference remaining between the House and Senate versions is that the Senate bill is retroactive to July 1, 2007, while the House bill takes effect Jan. 1, 2008. The retroactivity means several hundreds of millions of dollars of additional tax revenue will come to the state general fund in the current fiscal year.

Senate Majority Leader, Gary Stevens, gave notice of reconsideration of his vote, a mainly procedural move, so the bill will be back on the Senate floor for a final vote at 10 a.m. today. This will allow the Legislature’s legal division time to give the bill a technical review before the Senate’s final vote. The bill will then be transferred to the House. The House is also scheduled to convene at 10 a.m. today but will delay the floor session until the bill is transferred from the Senate. The House will then vote to either accept or reject the Senate bill, which contains much of what was in the House-passed bill. Early indications are the House will accept the Senate version and the Special Session will adjourn before the midnight deadline.

Issues at end: Standard deduction (cost freeze); allowed deductions, others

Several key issues were in play until the very end. The tax rate fight was settled Wednesday, at 25 percent of net profits; the progressivity formula fight is largely settled (variations exist between House and Senate bills, but both are aggressive). Here are other issues still in play: Standard deduction: The House won this one, getting the language on the Senate bill by floor amendment Thursday night by a vote of 11-8. The term being used to describe a freeze on allowable operating cost deductions for the large Prudhoe and Kuparuk fields, which produce 70 percent of the oil, at 2006 levels. The allowable deduction is allowed to increase at 3 percent yearly and under the Senate amendment will “sunset,” or end, in three years. The proposal, by House Democrats, was adopted narrowly in the House by floor amendment. Supporters, mainly Democrats, argue it is one variable in the net profits tax that can be controlled (Democrats worry industry will inflate operating costs and thus “game” the tax). Opponents argue that the freeze on operating cost deductions negates the net profits tax benefits in the big fields and is a disincentive to development of new projects in the fields, particularly heavy oil, which will add to operations costs.

“Spank BP” provision: The “spank BP” (corrosion) language limits deductions for repair costs related to “faulty maintenance.” The Dept. of Revenue wants to limit deductions for any interruption of service. This is in the House bill. The Senate bill ties the denial of deductions to a penalty for violation of state and federal laws (which has happened with the 2006 BP spills). This is a big one for the industry, which argues there are so many small production interruptions due to minor equipment problems that tracking these costs will be a nightmare. At this point it appears the Senate language will prevail.

Penalties: Very punitive penalty provisions are in the House bill and not the Senate bill. Underpayment of monthly taxes would be subject to an automatic 10 percent penalty for a $10 million underpayment and 20 percent penalty for a $20 million underpayment. ConocoPhillips said these amounts could easily be 1 percent of its payments and honest mistakes will be made, particularly in view of uncertainties as to what deductions will be allowed (see next item). An effort to put the House version of the penalties into the Senate bill by floor amendment failed Thursday night, so it appears the Senate language will prevail. “Allowable” deductions: A net profits tax is supposed to allow actual operating and capital costs as deductions. However, the revenue department wants to define what deductions are allowable by regulation. This language is in the House bill and was added to the Senate bill by floor amendment, 11 to 8. The Senate bill would have left existing language in the state production tax intact, which provides for the department to establish standards for allowable deductions by regulation. If the deductions met the standards, they were automatically allowed. The industry says the existing law provides more certainty, but the revenue department says it wants more “flexibility.” It is now likely to get it.

Note: The special session must adjourn by midnight Friday, November 16.

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.