The latest version of a measure to reform state subsidies for oil and gas drilling calls for replacing a controversial tax credit program by 2020.
The new version of House Bill 247, if approved by the House and Senate, would save the state about $300 million per year by 2021, according to an analysis provided by the Alaska Department of Revenue.
“The headline is we’re getting rid of credits, but we’re really not,” said Ken Alper, director of the tax division of the Department of Revenue.
Credits, which can be transferred, rolled over to subsequent years and are the effective equivalent of cash, would be replaced by a tax deduction system.
At current oil prices, the major North Slope oil producers are losing money with every barrel of oil they pump. For every dollar lost on the North Slope, the state pays 35 cents in credits that can be applied against a company’s state tax burden.
Senate Bill 21, approved by the Legislature in 2013, set a minimum production tax of 4 percent, but a loophole in SB 21 allows oil producers to use those “net operating loss” credits to reduce their tax rate to zero.
Furthermore, because the credits don’t expire, unused credits can be rolled over to the next year, erasing that year’s production tax as well.
The new version of HB 247 replaces that system, but because oil companies have already earned so many “loss” credits, the change won’t be felt for four years.
Among the revised measure’s other significant changes are an $85 million cap on credits per company per year (Walker had proposed $25 million, House lawmakers $100 million or more) and a phase-out of credits in Cook Inlet. Those credits had been implemented to encourage natural gas production to feed Anchorage and the Kenai Peninsula.
HB 247 was proposed by Gov. Bill Walker before the start of this year’s Legislative session. One of the cornerstones of his plan to erase the state’s $4 billion budget deficit in three years, Walker’s version of HB 247 would have saved about $300 million starting in Fiscal Year 2017, which begins July 1.
Conservatives in the House majority balked at Walker’s bill, saying it would harm the oil and gas industry that employs tens of thousands of people. In the House resources and finances committees, they rewrote Walker’s plan, eliminating most of its savings.
Once HB 247 reached the House floor, however, moderate Republicans and Democrats opposed the rewritten bill and denied it the 21 votes needed to pass the House.
Tuesday’s revised plan was the first significant progress on reforming the subsidy program since the bill was returned to committee.
“The oil and gas tax credit bill is key,” said Rep. Cathy Muñoz, R-Juneau.
If HB 247 garners enough votes to pass the House, it will allow the Senate to pass a separate bill that spends part of the Alaska Permanent Fund’s investment earnings to fund government.
Senators have been reluctant to give up a key budget piece in negotiations before the House acts. A proposal that cuts drilling subsidies and spends a portion of the Permanent Fund is expected to at least halve the state’s annual deficit at current oil prices.
The changes to HB 247 have not yet been scheduled for a hearing.
