Oil industry supporters Tuesday morning panned the latest legislative measure proposing to change the state's oil-tax system, attacking proposals such as one that would end oil tax credits in Cook Inlet in 2018 even though gas production taxes in the basin would be eliminated as a partial counterweight.
The bill, Senate Bill 130, a substitute for Gov. Bill Walker's original proposal to reduce cash tax credits next year by $400 million and increase the production tax by $100 million, was introduced Monday night in the Senate Resources Committee chaired by Sen. Cathy Giessel, R-Anchorage. By Tuesday afternoon, it passed out of the committee and on to the Senate Finance Committee, where a hearing was scheduled for Wednesday afternoon.
The revised measure calls for dozens of changes to Walker's bill, including instituting a five-year limit on the so-called "new oil" that at today's low prices triggers no production tax payments.
Rebecca Logan, general manager of the Alaska Support Industry Alliance, told members of the Senate Resources Committee that they are turning to the oil industry for help because the Legislature put together a budget that didn't do enough to close the state's $4 billion deficit.
Companies represented by the oil-industry group have told lawmakers they've laid off thousands of workers, she said. But it appears only 75 state employees have lost jobs in the last two years because of budget reductions.
"I knew you'd come to the oil industry because you didn't do your job on the budget," she said.
Kara Moriarty, president of the Alaska Oil and Gas Association, called the proposed elimination of the Cook Inlet tax credits a "nuclear bomb" for the basin that will hurt activity and production. The bill will also have negative repercussions across the North Slope oil fields, leading to further job reductions statewide at companies that are already battered because of low oil prices, she said.
"We'd ask what other industry is being asked to pay, or pay more, when the state has clearly indicated that industry is losing money?" she asked.
Sen. Cathy Giessel, R-Anchorage and chair of the committee, said in a post-meeting interview that the proposal tries to strike a balance between the needs of the state and the oil and gas industry.
"Nobody is winning here," Giessel said. "We're going to see a decline in work and production and I totally get that."
But she said the bill is not a tax increase on the oil industry. "We are reducing the amount of subsidies and rebates we can give companies because we are bleeding cash too," she said.
Giessel said a goal in the Legislature is expanding the market for gas in Cook Inlet, including providing state incentives to restart the Agrium fertilizer plant in Nikiski, a heavy user of natural gas that shut down in 2007 because of concerns about the Cook Inlet gas supply. In recent years the supply of gas has grown, in part because of the tax credits. Market demand will give explorers a reason to hunt for gas, she said.
"Cook Inlet is our energy security for about 65 percent of state's population, so that's why we incentivized it, but our (oil and gas) consultant has said this amount of credits doesn't make sense," she said.
A Division of Revenue analysis released Tuesday afternoon showed the measure could bring in an estimated $10 million in fiscal year 2017, $55 million in fiscal year 2018, about $72 million each of fiscal years 2019 and 2020, and about $120 million in 2021 and 2022.
Among its key changes, the bill calls for reducing the state's $630 million cash tax credit program that reimburses up to 65 percent of project costs.
It would reduce tax credit programs in Cook Inlet starting in 2017, then zero them out in 2018.
It would eliminate production taxes on gas in Cook Inlet starting in 2018. A 2022 sunset on the zero-tax rate on oil production in Cook Inlet -- where a small amount of oil is produced compared to the more than 500,000 barrels produced daily on the North Slope -- would be removed.
The bill also removes the minimum 5 percent tax floor the governor's bill had proposed. The new bill would keep the minimum floor at 4 percent. Also staying will be a provision that allows North Slope oil producers to reduce their tax rate to zero using tax credits.
Eliminating opportunities to reduce taxes through credits by making the 4 percent rate an absolute minimum will create bigger problems for the state that will outweigh benefits, Giessel said. It will create a growing bubble of losses that companies carry forward each year, amounting to a debt the state will be obligated to pay under the carry-forward loss credit for the North Slope, she said.
A Senate working group Giessel had organized last year to consider changes to the state's oil tax system said the minimum tax should be just that -- a "hard" floor. But Giessel said she's "stepping back" from that recommendation based on new knowledge about the size of that bubble.
Bert Stedman, R-Sitka, a committee member, said he disagrees with that view and supports a hard floor that can't be breached by credits.
"I understand the logic, but from a sovereign state's position you need to set up a tax structure so when oil prices are down cash is coming into the sovereign, and when prices are up hopefully everyone makes more," he said.
Stedman said he doesn't support the current production tax regime in part because the oil industry understands provisions of the law better than state officials.
And while he's not fully satisfied with the substitute proposal, he said it's a "good start" with some equitable measures that will help stabilize the state's tax system.
Stedman supports the five-year limit on the "nasty little thing in our tax code" known as new oil. New oil is not expected to be taxed until the price of North Slope crude oil rises to about $73 a barrel. The state's latest revenue forecast doesn't anticipate such a high price in the next decade. About 50,000 barrels of oil is eligible for the new-oil benefits, and that figure could grow in the future.
Stedman also supports reducing in stages the tax credit payments in Cook Inlet because it gives oil and gas explorers and producers time to deal with the changes.
"You've got to give them some breathing room," he said. "You can't kick them in the butt and throw them to the curb."
The Senate committee took up the measure so quickly that three members of the seven-member committee missed Tuesday's morning meeting because of other conflicts.
Sen. Bill Wielechowski, D-Anchorage and a committee member, missed the meeting to attend a hearing on the state's Military Code of Justice.
Wielechowski said committee members have had little time to familiarize themselves and submit proposed amendments to the substitute bill, which calls for 43 changes to Walker's proposal.
"We didn't even start this bill until two weeks before the end of session, and now there's a race to get it done," he said.
A proposal in the House -- the House's second substitute bill of Walker's original oil tax bill -- has been held up on the floor in recent days over a lack of support.
Some in the Republican-led majority seek softer changes that would have less impact on the oil industry while members of the Democratic minority want more aggressive changes.
Giessel said there have been several hearings in the House, and the Senate working group last year also provided members of the Resources committee and others a chance to understand the issues.
She said she's been waiting for a bill in the House to reach the Senate, but it's becoming clear that may not happen soon enough.
"The clock is running out, so the Senate had to step up and lead," she said.