House commitee pushes back on governor's attempt to increase taxes on Alaska oil industry

A House committee has watered down Gov. Bill Walker's proposal to increase the oil production tax and reduce tax credits paid to the oil and gas industry, introducing replacement legislation that would be worth about $50 million a year in savings instead of the $400 million in both savings and revenue proposed by the governor.

The substitute bill, introduced over the weekend by leadership in the House Resources Committee, also removes transparency provisions proposed by the governor that would have disclosed which companies receive tax credits, and for how much.

Walker introduced House Bill 247 as part of a broad package to help close the state's massive budget gap caused by low oil prices — a deficit that's now estimated to reach $4.1 billion in the current year. Other measures from the governor include creating the state's first individual income tax since 1980 and changing the way the Permanent Fund is managed. The Permanent Fund change would result in lower dividends for at least the next few years.

The committee substitute, if approved, will require a much larger draw from the state's rapidly dwindling savings, said Rep. Andy Josephson, D-Anchorage, a member of the committee.

"Why is it OK to make huge cuts to programs for seniors and the disabled, but to spare the oil industry?" Josephson asked. "I don't understand the logic."

The committee substitute is designed to ensure that companies critical to the economy can continue operating, said Gary Zepp, an aide to Rep. Ben Nageak, D-Barrow, co-chair of the committee that caucuses with the Republican-led majority.

"It costs more to get oil out of the ground than they are getting for the oil," Zepp said.


Amendments to the proposed bill are expected to be considered Tuesday afternoon.

The governor's version would have raised $500 million in its first year, in 2017, and less in the next two years, according to a preliminary analysis by the Revenue Department that also reviewed the committee substitute.

The substitute bill protects North Slope oil producers, where the state has traditionally made much of its income through production taxes. The governor had hoped to increase the minimum production tax from 4 percent to 5 percent, a measure designed to raise $100 million. The new bill eliminates that increase.

The governor had also proposed reducing the amount of refunded tax credits, which are paid in cash, by $400 million in 2017. Of that, $200 million in savings would have been achieved by deferring payment until later.

The planned deferral won't happen under the committee proposal because it removes an annual eligibility cap for each company proposed at $25 million by Walker. Instead, the committee proposal sets the annual eligibility cap at $200 million for each company, a level that's not expected to be met but will protect the state if a huge project is sanctioned, supporters of the new proposal said.

In Cook Inlet, the substitute bill will phase in reductions to some tax-credit programs, starting in 2017 and continuing in 2018, with the 40 percent well-lease expenditure credit phasing out after 2018. The governor had proposed an effective date of July 1 for his reductions, with some credits targeted for elimination then, including the well-lease credit.

The bill retains some key provisions in Walker's plan. It mandates that some credits expire as planned, such as the small producer credit worth about $12 million a year for a company. That will end May 1.

In another similarity, the new measure will also close a loophole tied to the per-barrel credit for so-called "new oil" — known as the gross value reduction that supports relatively new projects. In some cases, companies could use the credit to inflate their net-operating loss, and boost what they received under a 35 percent net operating loss credit.

Nageak and his fellow committee co-chair, Rep. Dave Talerico, R-Healy, did not return calls seeking comment. Walker was also unavailable for comment, a spokeswoman said.

The committee bill would create a legislative working group to propose changes to the Cook Inlet tax regime that will be considered by the Legislature next spring. The goal is creating a long-term system that promotes stable investment and oil and gas production in Cook Inlet, said Rena Delbridge, who helped develop the committee substitute as an aide to Resources vice-chair Rep. Mike Hawker, R-Anchorage.

Josephson said the committee substitute, if ultimately approved by the Legislature, will affect his ability to support an overall state fiscal plan. He won't feel comfortable raising income taxes on individuals or reducing dividend checks if the oil industry isn't also taxed to a similar degree.

Josephson noted that the Revenue Department's spring revenue forecast released on Monday shows the state collecting just $690 million in unrestricted general fund revenue from the oil industry next year, with most of that through royalties. Meanwhile, the state currently expects to pay $825 million in cash tax credits, leaving a negative balance of $134 million. But the state also expects to receive an additional $318 million in restricted revenue, such as into the Permanent Fund.

"We're scheduled to pay more in credits than we'd receive from the oil industry (into the general fund)," said Josephson.

In describing an estimated net loss for Alaska's treasury next year from adding unrestricted, general-fund oil revenues and subtracting oil tax credits, an earlier version of this story didn't note the estimated amount that the state is expected to collect in restricted revenue from the oil industry in 2017. Adding all three items together will result in the state receiving more money from the industry than it spends on tax credits, according to the Department of Revenue projection.

Alex DeMarban

Alex DeMarban is a longtime Alaska journalist who covers business, the oil and gas industries and general assignments. Reach him at 907-257-4317 or alex@adn.com.