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Alaska State Legislature
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24th Alaska State Legislature
The 24th Alaska State Legislature
Alaska State House Resources Committee
Rep. Ralph Samuels, Co-Chair Rep. Jay Ramras, Co-Chair

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Rep. Ralph Samuels
State Capitol, Room 126
Juneau, AK 99801-1182
Phone: (907) 465-2095
Fax: (907) 465-3810
      Click image for large 5'' x 7'' portrait

Rep. Jay Ramras
State Capitol, Room 104
Juneau, AK 99801-1182
Phone: (907) 465-3004
Fax: (907) 465-2070

Oil And Gas Production Tax
Sponsor Statement for CS HB 488 (RES)
Alaska State Legislature
Alaska State Legislature
Attachments Attachments

 
Released:
March 27, 2006
Updated:
February 19, 2012


"An Act repealing the oil production tax and gas production tax and providing for a production tax on the net value of oil and gas; relating to the relationship of the production tax to other taxes; relating to the dates tax payments and surcharges are due under AS 43.55; relating to interest on overpayments under AS 43.55; relating to the treatment of oil and gas production tax in a producer's settlement with the royalty owner; relating to flared gas, and to oil and gas used in the operation of a lease or property, under AS 43.55; relating to the prevailing value of oil or gas under AS 43.55; providing for tax credits against the tax due under AS 43.55 for certain expenditures, losses, and surcharges; relating to statements or other information required to be filed with or furnished to the Department of Revenue, and relating to the penalty for failure to file certain reports, under AS 43.55; relating to the powers of the Department of Revenue, and to the disclosure of certain information required to be furnished to the Department of Revenue, under AS 43.55; relating to criminal penalties for violating conditions governing access to and use of confidential information relating to the oil and gas production tax; relating to the deposit of money collected by the Department of Revenue under AS 43.55; relating to the calculation of the gross value at the point of production of oil or gas; relating to the determination of the net value of taxable oil and gas for purposes of a production tax on the net value of oil and gas; relating to the definitions of 'gas,' 'oil,' and certain other terms for purposes of AS 43.55; making conforming amendments; and providing for an effective date. "


"The objectives of the bill remain as follows: Increase the state's share or "government take," under conditions of high oil market prices; provide industry with new or expanded incentives to explore and produce from marginal and frontier fields; and to ensure motivation for continued activity in the Cook Inlet fields."
- Rep. Samuels

 

CSHB 488 (RES) would convert Alaska's oil severance tax structure from the Economic Limit Factor (ELF) method, to a petroleum profits tax (PPT) method. The governor's version would increase revenue by about $705 million per year, on average, over the next five years. The House Resources Committee (HRC) version would increase revenue by about $816 million per year, on average, over the same five years.

The severance tax is one of four levies paid by the oil industry in Alaska, the others being royalties, property taxes, and income taxes. Tax deductions and tax credits continue to be used to motivate industry for exploration, production, and development activities. The objectives of the bill remain as follows: Increase the state's share or "government take," under conditions of high oil market prices; provide industry with new or expanded incentives to explore and produce from marginal and frontier fields; and to ensure motivation for continued activity in the Cook Inlet fields.

The HRC proposed several changes to the governor's bill, most notably, installing a two- pronged progressivity feature on the PPT tax rate. In the governor's version, the PPT rate is a flat 20% regardless of the market price of oil. The HRC version also uses the 20% rate, but only at market prices up to $50 per barrel (WTI benchmark). At market prices between $50 and $110 per barrel, the progressivity feature adds 3/10% of the wellhead value for every dollar the market price is over $50. A single year of additional revenue in times of high market prices can offset many years of lower revenues when prices are close to their historical average.

If there is a dramatic price shock or the value of oil continues to rise at market prices over $110 per barrel, the tax generates an additional 37.5% of wellhead value for the state. We would get a greater share at very high market prices. As prices climb, the combined effect of the 20% PPT base rate and the 37.5% progressivity factor (which is deductible in calculating the amount payable under the PPT rate) approaches 50% of the oil's value in Alaska. The committee felt this two-pronged progressivity feature would keep investment opportunity in Alaska strong, while allowing the state to share in windfalls at high spikes of market prices.

Another policy change from the governor's bill to the HRC version was the elimination of transition costs as deductions from income tax. The governor provided a deduction for invest-ment costs incurred in the past five-years, feeling that investments made in that period and directly tied to the production of oil which would be taxed at the new rate, should be allowed. After hearing considerable testimony on this component, the HRC deleted it completely.

Exploration tax credits of 40% under SB 185 (Ch. 59, SLA 03) will be extended ten years under the HRC version, and the governor's credit rate of 20% remains intact. This is intended to motivate explorers and independent firms. As is currently done, a company will be able to choose from the two options as they assess which is most beneficial to them.

The House Resources Committee allowed no credit for abandonment costs, but such expenses remain tax-deductible. And, in terms of a private royalty severance tax rate, the HRC version set it at 5%.

As introduced, the governor's version of HB 488 proposes to make the current oil spill contingency surcharge (which is currently 5-cents per barrel) creditable against the PPT. The HRC left the current statute in place, but modified the program. The current 2-cents per barrel which goes into the Response Mitigation Account (RMA), is reduced to 1-cent. This surcharge will continue in suspension as long as the RMA balance holds at $50 million. The remaining 3-cent per barrel surcharge, which is deposited into the Prevention Mitigation Account (PMA), increases to 4-cents per barrel under the HRC substitute bill.

The governor provided a $73 million annual allowance for all producers, against which a 20% credit would be applied, resulting in a $14.6 million tax credit per company, annually. The merits of this allowance and credit incentive eluded committee members, so this provision was changed to a direct tax credit, dollar for dollar, on the first $12 million worth of capital investment for exploration, production, or development work. This annual credit is non-transferable, non-salable, not eligible for carry-forward, and can only be applied to a current year's severance tax. Should a company spend less than $12 million, the credit would be applied to whatever amount they did spend.

As protection for explorers and new entrants to Alaska, the HRC devised a tax credit repurchasing program for those credits a company earns on expenditures of up to $10 million per year for investments in exploration and/or lease purchases in Alaska.

The effective date for HB 488 as introduced by the governor, was July 1, 2006. The HRC version changed that to April 1st, also the beginning of a fiscal quarter, but a change which would bring the state another $200 million this year.

Bill Version: 24-GH2052Y

# # #

 
Attachments:
 
·
Print Text Version
· Acrobat PDF Version [PDF - 1 page - 50 KB]
· Petroleum Production Tax Overview
· HB 488 Backup Material and On-Line Resources
· Hou Res work draft 24-GH2052Y [PDF - 4.99 MB]
· Amendments offered to work draft on 03-16-06 [PDF - 1.43 MB]
· Amendments offered to work draft on 03-17-06 [PDF - 909 KB]
· Complete Bill Text for HB 488


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· Rep. Ralph Samuels
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· Rep. Jay Ramras
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· Rep. Paul Seaton
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· Rep. Carl Gatto
 
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