Oil and Gas Tax Credit Working Group Releases Summary Report
Wielechowski: Opportunity Missed to Help Reform Budget Busting Program
By MARY KAUFFMAN
December 02, 2015
The subject of oil and gas tax credits was a topic of discussion throughout the 2015 regular session, extended session, and the first and second special sessions. With the State of Alaska facing a budget shortfall in excess of $3.5 billion, all operating expenses were and continue to be scrutinized.
On June 29, 2015, Governor Bill Walker deferred payment of approximately $200 million in reimbursable oil and gas tax credits. This deferment was in the form of a gubernatorial veto to a portion of the oil and gas tax credit fund, reducing the allocation from $700 million to $500 million. In the veto message to the Senate President, the Governor stated that the current oil and gas tax credit system was unsustainable. According to the summary report, the payment deferral was meant to begin a conversation on the topic.
The payment deferral, and the reactions from spheres such as the commercial finance sector, prompted the creation of the Oil and Gas Tax Credit Working Group in June 2015. The working group was comprised overwhelmingly from the membership of both the Senate Resources and Finance committees and was suggested to be an ideal vehicle to evaluate and assess the subject in greater detail.
The purpose of the working group was: (1) understand the structure and purpose of the state’s oil and gas tax credit system, (2) understand the similarities and differences between the state’s various oil and gas basins, (3) understand the relationship between the commercial finance sector and the state’s oil and gas energy sector (4) produce a report, detailing the findings of the group’s meetings, and offering recommendations to both the Administration and the Legislature. The group held six meetings.
“This report is the culmination of information gathering that began in June,” said Sen. Cathy Giessel, Chair of the Senate Resources Committee and convener of the working group. “It is our hope that it will further inform our colleagues, the administration, and the public on this subject."
Hardening the minimum production tax for oil; urging a phased approach to any changes in reimbursable credits in order to keep private sector investment in Alaska; and ensuring Alaska businesses that provide services to oil companies receiving tax credits are compensated in bankruptcy court were among the six recommendations.
"During this period of economic challenges for our state, we need to make sure credits do not take oil taxes below the 4% floor Alaska voters upheld last summer in ballot measure 1," said Giessel. "The credit system has brought natural gas stability in the Cook Inlet, as well as more competition to the North Slope. We must make the system more sustainable, but also respect the tremendous investments coming into our state.”
Senator Bill Wielechowski (D-Anchorage) was the only member of the Alaska Senate Democrats invited to sit on the working group and in many ways he feels the report missed the mark.
“The data presented to the working group confirms that the State of Alaska has and will continue to pay out millions more in oil tax credits that we receive in production taxes. This flawed program threatens to overwhelm our budget and threaten essential state services,” said Sen. Wielechowski. “I believe the working group missed a golden opportunity to propose significant and meaningful reforms to a program that unfortunately has surpassed healthcare and public education as the largest cost driver in the budget.”
According to Wielechowski, in fiscal years 2015 and 2016, the State of Alaska is paying out approximately $642 million more in refundable oil tax credits than we receive in production taxes. In FY 2017, credits used against tax liability (predominantly going to large, still very profitable North Slope fields) are projected to skyrocket to $1.25 billion. FY 2018 credits are projected at $1.21 billion and $999 million in FY 2019.
“Unfortunately, this working group touched very little on the per-taxable-barrel credit issue during its discussions,” said Sen. Wielechowski. “Nor did this working group have the opportunity to hear from BP, ConocoPhillips or ExxonMobil, the three largest oil companies operating in the State of Alaska. How can a group propose changes to the oil and gas tax credit system without hearing from the most significant users and beneficiaries?”
Recent Securities and Exchange Commission disclosures confirm that Alaska remains one of the most profitable places in the world for the oil industry to do business and Sen. Wielechowski believes the current tax credit and deduction system virtually guarantees the oil industry a profit via massive subsidies with little in return for this guarantee when oil prices rise.
“There is no other oil jurisdiction in the world with such a massively imbalanced system as Alaska,” said Sen. Wielechowski. “If Alaska had North Dakota's tax and royalty structure the oil industry would be paying roughly double what they are currently paying. Instead, the State of Alaska is now socializing the oil industry's risk while privatizing the profits.”
Sen. Wielechowski sent a letter last week to the chair of the Senate Oil and Gas Tax Credit Working Group outlining his recommendations to fix what he calls the broken tax credit system. His recommendations include instituting a higher minimum gross tax and temporarily reducing the deductible tax credits for the three most profitable fields on the North Slope. Wielechowski is also proposing to continue to provide refundable tax credits, but only to those companies that prove their project is not financially feasible without them.
“There are many creative ways we could address the tax credit issue,” said Sen. Wielechowski. “We could take an equity stake in exchange for credits. We could even increase our royalty rates in exchange for credits. However, what has come out of the Senate Oil and Gas Tax Credit Working Group constitutes a missed opportunity to fix a broken system that is negatively affecting our budget and ultimately our future.”
Other members of the working group included Senators Anna MacKinnon, Peter Micciche, Bill Stoltze, Lyman Hoffman, Click Bishop and Bill Wielechowski. Industry and trade group members included Barbara Huff-Tuckness, President of the Teamsters Local 959; Butch Lincoln, Vice President and Chief Operating Officer of Arctic Slope Regional Corporation; Kara Moriarty, CEO of the Alaska Oil and Gas Association; and Rebecca Logan of the Alaska Support Industry Alliance.
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