JUNEAU — The latest showdown in the Legislature's interminable oil tax fight has loomed large in the extended session, with Senate Republicans and a bipartisan group of House members at odds over limiting Big Oil tax credits.
The House coalition says rising oil prices won't fully restore the ravaged Alaska treasury as long as those credits are in place. Senate Republicans, backed by the state's four major oil producers, say credits are necessary to promote Alaska's economy.
If oil prices follow the forecast of the administration of Gov. Bill Walker, the companies are projected to pay effectively zero production taxes over the next few years while building up a $750 million supply of tax credits by mid-2018 — carry-forward credits that can be used to offset future tax bills.
The credit projections have drawn alarm from Walker's administration and from the Democrats and moderate Republicans who voted for an oil-tax reform measure that passed the House this month.
The measure would completely phase out a credit that solely benefits the state's four largest oil companies. Supporters of the measure say their effort would avoid a tsunami of credits that could not only deprive the state of revenue at low prices, but when prices rebound as well.
"It's a huge liability for the state," said Homer Rep. Paul Seaton, a moderate and one of two Republicans who helped broker the House oil-tax compromise. "If we don't protect ourselves, then I don't think we're doing the job we should for Alaska."
Senate Republicans, meanwhile, proposed a rewritten version of the House bill that would leave the big companies' credits intact.
In doing so, they cite oil industry assurances that companies have cut back spending and won't be running up the same type of losses projected by the Walker administration. Lower expenses mean less money is deducted from profits, and fewer credits are earned.
The debate over the carry-forward credits is at the heart of the Legislature's oil tax impasse. After the Senate passed its rewritten version of the House Bill 247 on May 18, just days before the end of session, House members voted it down, 24-14.
The dispute centers on the tax mechanism production companies can use to keep operating losses on their books for years after they occur.
Normally, a proportion of those losses would be deducted from current production taxes. But with low oil prices, tax bills are so small that companies can have deductions left over at the end of the year. The tax mechanism allows the companies to carry those deductions into future years, as credits, and apply them against taxes if oil prices go up.
The carry-forward tax credits go to companies that produce 50,000 or more barrels of oil daily — a threshold met only by ConocoPhillips, BP, Hilcorp and ExxonMobil. Smaller companies can claim their credits as cash.
ConocoPhillips and BP say they don't use the credits, while ExxonMobil and Hilcorp won't say. The Walker administration predicts there will be $357 million in carried forward credits at the end of the fiscal year June 30.
State records that show which companies are using credits are considered so secret by the Alaska Department of Revenue, even lawmakers can't see them or use them to inform their decisions.
If prices rebound enough to generate significant taxes for the oil companies, revenue forecasts predict the companies could use the credits to offset about $750 million from their bills before writing checks to the state again.
Taxes aren't the only oil revenue that flows into Alaska's savings. When accounting for royalties — a fixed proportion of each barrel of oil pumped by the companies, paid as compensation to the state as landowner — oil is predicted to generate $1.1 billion for the state this year.
That still leaves Alaska with a $4 billion budget hole and less revenue potential, if the Walker administration's projection of $357 million in carry-forward credits holds through the end of June.
But the current oil price, Senate Republicans note, is significantly higher than the Walker administration's revenue forecast — Alaska crude is at $48.50 a barrel, compared to the $39 projected for next year.
If oil stays at that price, the state's tax director, Ken Alper, predicted at a hearing this month the companies won't have losses next year "to a substantial degree," thus limiting their ability to claim the carry-forward credits.
"If current prices remain and become the average, the net operating loss is substantially reduced, and almost eliminated," a spokeswoman for the Senate's Republican-led majority, Michaela Goertzen, wrote in an emailed response to questions, after refusing a request for interviews with Senate leaders. "The reform package that came to us from House was an overhaul of the tax code, and we are not prepared to add that level of uncertainty to Alaska's most invested industry."
Leaders from the House and Senate have each appointed a conference committee to sort out the differences between their two bills, with three members from each chamber. But neither side has shown much of an inclination to compromise.
"It's a philosophical argument," Rep. Craig Johnson, R-Anchorage, and an oil industry supporter who voted against the House proposal, said in an interview. "Do you want money in the treasury? Or do you want investment in the private sector that will carry us toward when we are making $100 a barrel?"
If the carry-forward credits are curtailed, Johnson added: "It's going to be very hard to explain why at $110 a barrel we're not making any money because the pipeline has gone down, because there hasn't been any exploration."
The oil industry echoes Johnson's argument, with an Anchorage-based tax expert for Exxon, Dan Seckers, calling companies' ability to deduct their losses a "cornerstone" of a profits-based tax system. (Oil taxes in Alaska are the higher of 35 percent of profits, or 4 percent of the the gross value of the oil that companies produce.)
"Every time you limit these deductions, take away credits, you're raising the industry's tax relative to your competitors hugely," Seckers told the House Rules Committee earlier this month. By competitors, Seckers meant other oil provinces that might have fewer expenses.
Seckers wouldn't answer a question from Sitka Democratic Rep. Jonathan Kreiss-Tomkins about whether Exxon had claimed any loss-based credits to date, adding it was "potentially possible" for the company to have a net operating loss this year, "depending on how prices go."
"Our tax filings and payments are taxpayer confidential," an Exxon spokeswoman, Kim Jordan, wrote in an email.
The carry-forward credits are seen by some lawmakers as being particularly important to Exxon because of the company's big Point Thomson project on the North Slope, which had been fallow for years.
The company has so far invested $4 billion in the field, which recently began production under a development plan set out in a 2012 agreement with the state.
"It's our deal that those credits are being applied against," said Johnson.
Johnson added the Walker administration's projections of oil companies' future losses, and the associated credits they'll earn, are "terribly inflated."
In hearings this month, oil company officials pointed out that the Walker administration's projections of more than $700 million in carry-forward credits assume industry losses of more than $2 billion over the next few years, since the credits accrue at 35 percent of companies' losses.
In fact, said ConocoPhillips executive Scott Jepsen, the losses are "self-correcting."
"We're not in the business of operating at a loss — we don't try to accumulate losses so we can apply them against future tax liability," Jepsen, Conoco's vice president of external affairs, told the House Rules Committee. "So if we end up with a long period of time … at low oil prices, we invariably will take actions to make sure we get back to cash-flow neutral or cash-flow positive."
Revenue Commissioner Randy Hoffbeck said in a phone interview he agrees with the oil companies "in concept." And, he added, "people could probably throw rocks" at the state's price forecast for next year and its estimate of $39-a-barrel oil — likely inflating companies' potential losses and the amount of carry-forward credits they'd earn.
But assuming oil prices won't budge runs a risk, Hoffbeck said.
"Will they stay at $48 a barrel through the whole year? That's still anyone's guess," he said. "We're going to drop below the line sometimes. And we think we should fix that issue now rather than try to visit it when we have $30-a-barrel oil."
Both Hoffbeck and Seaton, the Homer Republican and proponent of the House legislation, also argue that oil companies' ability to carry forward their losses as credits is unusual in light of other elements of Alaska's tax system.
Hoffbeck said the credits don't mesh with the Alaska's minimum tax floor based on the gross value of oil; Seaton said the credits are overly generous since the state already allows companies to take steep deductions for capital investments.
Critics of eliminating the carry-forward credits cite a written analysis by a legislative consultant, Janak Mayer, that says such a move would leave the state with a tax system with a "very high and highly regressive rate" at low prices.
"While I'm not aware of any such tax regime existing elsewhere in the world, one certainly couldn't imagine a system better designed to discourage reinvestment and encourage harvest and rapid decline," Mayer said.
In fact, Alaska's tax regime and its heavy dependance on oil revenue are so unusual that such comparisons are not particularly useful, said Walter Hellerstein, a tax law professor at University of Georgia.
The state's budget and oil tax problems are political problems, not technical tax issues, he added, citing the absence of other statewide taxes that could take the place of oil revenue in a downturn.
"It's all very nice and good to rely on the oil and gas industry when everything is doing great," Hellerstein said in a phone interview. "Ever heard of a sales tax? Ever heard of an income tax? Well, hello, welcome to the United States."