Newest oil subsidy cuts are ’40 percent’ of governor’s proposal

The latest version of a bill cutting the state’s subsidies to oil and gas drillers is about 40 percent of what was first proposed by Gov. Bill Walker, the state’s tax director told lawmakers Wednesday evening.

The declaration came after members of the House Finance Committee introduced a modified version of House Bill 247 earlier in the day. HB 247 is a cornerstone in Gov. Bill Walker’s proposal to erase the state’s $4 billion deficit by 2019.

As originally proposed, Walker’s bill would have a $435 million impact on the deficit in fiscal year 2018, which starts July 1, 2017. The House Resources Committee drastically overhauled the governor’s proposal, producing a bill with a deficit reduction of only $70 million. The finance committee took the resources committee’s version and came up with something else.

“The bill before you is somewhere in between,” said Ken Alper, director of the state tax division.

According to documents presented to committee members, the newest version would reduce the deficit by $195 million in fiscal year 2018.

“It’s a little bit of a half version or a 40 percent,” Alper said, comparing the new version to the governor’s original idea.

Reforming the state’s subsidies for oil and gas drillers is the second-biggest piece of Walker’s plan to fill the state deficit. At issue are the tax credits the state issues to drillers for exploration and production, and the tax rate set by Senate Bill 21, a wide-ranging oil and gas tax reform bill approved by the Legislature in 2013. SB 21 set a minimum production tax of 4 percent. That floor contained a significant loophole, however.

At current oil prices, oil producers are losing money and earn “net operating loss” tax credits they can use to lower their taxes to zero. Walker proposed removing that ability and raising the floor to 5 percent. He also proposed limiting the amount of credits the state gives out.

In presentations across the state, representatives of the governor’s office said they expected the governor’s reforms to save $500 million per year.

The finance committee is considering a milder version of the bill, which includes several key aspects:

Instead of a minimum production tax of 5 percent, the House bill proposes a minimum tax of 2 percent;

Instead of a $25 million cap on the amount of credits per company per year, the finance committee is considering a $100 million cap; Cook Inlet oil would be taxed for the first time; Cook Inlet tax credits would be reduced, but not as much as proposed by the governor.

Speaking to the committee, Alper warned that at current oil prices, the revised bill does not prevent major oil producers from setting up a “wave” of tax credits that could wipe out production taxes for years into the future.

“Below $46 a barrel, they’re losing money (on the North Slope),” Alper explained.

For every dollar the price of North Slope oil is below $46, producers lose $180 million. When that happens, the state pays 35 percent of the loss in tax credits.

At current prices, the loss is so great that the companies have more tax credits than tax payments. The credits can carry over to next year, wiping out that year’s production tax. The process can repeat for years, the producers building up a larger and larger stack.

“That’s a wave that will build and roll forward until, let’s say, you get a catastrophic spike in oil,” Alper said.

If that happens, the state might expect billions in revenue from production taxes but get millions or billions less because of the “wave” of built-up tax credits.

Next year, the state is expected to face $825 million in tax credit liability.

That alarmed at least one member of the finance committee.

“I think we need tax revenue to be able to afford $800 million in tax credits,” said Rep. Les Gara, D-Anchorage.

Other members of the committee said the tax credit program seems to be working. Between April 2015 and March 2016, North Slope oil production rose 1 percent. That was the first yearlong increase in production since 2002.

Production is still expected to decline in the long term, but Rep. Tammie Wilson, R-North Pole, said she would like to hear more about how the credit system is working.

“The part we don’t really hear is how much money we’re actually making every year,” she said. “When do we know as Legislators that we’ve tipped the scale too much?”

The finance committee is expected to spend Thursday and Friday debating that issue.

When it approves the bill, something that could come as early as this weekend, it will go to the House floor for a vote. The bill will then head to the Senate for committee vetting and a floor vote.

Gov. Walker will have the final say, and if he does not like the final result, he could do what he did last year and veto some or all of the funding for the oil and gas tax credit program. The state is statutorily required to pay only about $70 million in credits.

“Quite frankly, we cannot provide certainty and stability to the industry under a credit regime if, when it comes time to write the check, we don’t have enough money,” said Revenue Commissioner Randall Hoffbeck.

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