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Legislature’s impasse over oil taxes jeopardizes bipartisan consensus

Pipelines at Prudhoe Bay on Alaska’s North Slope. (Loren Holmes / Alaska Dispatch News)

JUNEAU — The Alaska Legislature's impasse over oil and gas taxes and budget reforms is jeopardizing a bipartisan consensus on repealing a state program to promote energy development by making cash payments to oil companies.

Both the Republican-led Senate majority and the largely Democratic House majority support repealing the program, with unpaid oil-company claims already projected to exceed $1 billion by next year.

But the two majorities disagree sharply on the other elements contained in House Bill 111, the oil- and gas-tax legislation currently sitting in limbo in a House-Senate conference committee. The dispute centers on whether to increase companies' effective tax rates while scaling back deductions — steps favored by the House but opposed by the Senate.

The legislation now appears to be on life support, with lawmakers shifting their focus to the budget with three days left in a special session and a government shutdown less than three weeks away. Inaction on the payment program for an extra year could add another $200 million to the state's pile of outstanding cash credits, according to projections by Gov. Bill Walker's administration.

"The conversations are ongoing — I remain optimistic until there's no time left," said Anchorage Democratic Rep. Geran Tarr, co-chair of the House Resources Committee and the HB 111 conference committee. "But we're pretty far apart."

Anchorage Democratic Rep. Geran Tarr speaks in support of House Bill 111 during an April floor debate. (Nathaniel Herz / Alaska Dispatch News)

House leaders have for months described an oil-tax increase, and elimination of the cash payments, as crucial pieces of their broader plan to fix the state's $2.5 billion deficit, which also includes an income tax proposal that the Senate rejected.

After more than two dozen hearings, the House passed a version of HB 111 projected to add $285 million to the state's bottom line by 2022 — both by raising taxes and by eliminating cash payments.

The small companies previously eligible to receive their tax credits as cash — those with production of less than 50,000 barrels a day — could instead claim credits against their future tax bills, even if it takes years before any taxes are due as companies bring projects online.

Companies would also receive the credits at a lower rate — 25 percent of losses instead of 35 percent — and the value of the losses would erode by 10 percent annually if they're not used within seven years.

The Senate majority then rewrote the House proposal, agreeing to eliminate the cash payments but leaving the credit rate at 35 percent and rejecting the proposal to reduce their value after seven years. The Senate also removed the tax increase from their version of the bill, which altogether would add $150 million to the state's bottom line by 2022 — slightly over half the impact of the House proposal.

Senate majority members have aggressively defended the state's baseline tax regime, which was established in 2013 by legislation from their chamber, Senate Bill 21.

Soldotna Republican Sen. Peter Micciche, the majority leader, suggested in an interview Tuesday that the differences between the two chambers could sink the whole bill, in spite of the agreement that the cash payments should stop.

"I think it would be a shame at this point to continue offering cash credits because of the extras that the House chooses to tag onto the bill. We would really like to end that program this year," Micciche said.

The Senate majority isn't unwilling to consider more changes to oil taxes, but the rest of the House proposal hasn't been "adequately evaluated," Micciche added. When a reporter pointed out that the Legislature was finishing its fifth month in Juneau, Micciche responded that the House didn't send its version of HB 111 to the Senate until mid-April.

Soldotna Republican Sen. Peter Micciche talks with colleagues during a break from an April committee hearing. (Nathaniel Herz / Alaska Dispatch News)

House Democrats, meanwhile, argue that the Senate version of the bill simply converts an overly generous system of cash payments into an overly generous system of credits to be applied to companies' tax bills, since the Senate's proposal leaves the credit rate at 35 percent of losses instead of reducing it to 25 percent.

"The Senate proposal changes the name and pays the same, and that's the problem," said Tarr, the Anchorage Democrat. "It doesn't accomplish what we want."

She pointed to projections by Walker's administration that show companies building up a stash of nearly $1.5 billion in credits by 2027 under the Senate proposal, compared to $610 million under the House plan.

Even if those credits aren't being paid as cash, they still represent a massive potential cost to the state treasury, she argued.

"You're either writing a check or it's less revenue," Tarr said.

Senate majority members argue that their proposal would, in fact, save money.

Even if the credits would accrue at the same rate as the cash payments — 35 percent of losses — the state comes out ahead by not paying up front, said Sen. Cathy Giessel, R-Anchorage, the chair of the Senate Resources Committee.

Companies wouldn't earn interest on their losses, so because of inflation, the credits would be worth less when applied to tax bills years into the future, she said.

And companies that lose money developing oil projects can benefit from the credits only if their projects actually produce oil, she added — unlike now, since companies can claim cash payments whether they're producing oil or not.

That second benefit is contingent on the adoption of a House provision that would keep companies from using losses accrued at one project to reduce taxes on production from another project. But Senate majority members say they're open to compromising on that provision.

"It is a huge difference," Giessel said, referring to the Senate's version of the bill.

The gridlock has put the state's oil industry lobby in an unusual position.

It typically advocates for stability and the status quo. But it now acknowledges that there's a consensus in Juneau to repeal the cash payment system, and would prefer to see a replacement adopted soon.

"If you're going to eliminate cash payments to small companies, then how are you going to do it? Make your decision and then we will continue to make investment decisions based on that," said Kara Moriarty, head of the Alaska Oil and Gas Association.

Tarr suggested that if lawmakers don't repeal the cash payment program this year, they could work on legislation over the summer to be passed early in the 2018 session.

But even if HB 111 is approved this year, legislators have also signaled an interest in examining the broader tax structure next year.

A legislative committee last month announced a plan to spend up to $450,000 over two years on three new oil and gas consultants, who are being tasked with creating models of the impact of potential tax changes on state finances and industry investment.

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