State of Alaska
Fiscal Note
Bill Version: CCS HB 111
2017 Legislative Session
Fiscal Note Number: 7
(H) Publish Date: 7/15/2017
Identifier: HB111CCCS(CC)-DOR-TAX-07-15-17 Department: Department of Revenue
Title: OIL & GAS PRODUCTION Appropriation: Taxation and Treasury
TAX;PAYMENTS;CREDITS Allocation: Tax Division
Sponsor: RESOURCES OMB Component Number: 2476
Requester: Conference Committee
Expenditures/Revenues
Note: Amounts do not include inflation unless otherwise noted below. (Thousands of Dollars)
Included in
FY2018 Governor's
Appropriation FY2018 Out-Year Cost Estimates
Requested Request
OPERATING EXPENDITURES FY 2018 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Personal Services
Travel
Services
Commodities
Capital Outlay
Grants & Benefits
Miscellaneous
Total Operating 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Fund Source (Operating Only)
None
Total 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Positions
Full-time
Part-time
Temporary
Change in Revenues
1250 UGF Rev (UGF) (10,000.0) (10,000.0) (10,000.0) (15,000.0) (5,000.0)
Total 0.0 0.0 (10,000.0) (10,000.0) (10,000.0) (15,000.0) (5,000.0)
Estimated SUPPLEMENTAL (FY2017) cost: 0.0 (separate supplemental appropriation required)
(discuss reasons and fund source(s) in analysis section)
Estimated CAPITAL (FY2018) cost: 1,350.0 (separate capital appropriation required)
(discuss reasons and fund source(s) in analysis section)
ASSOCIATED REGULATIONS
Does the bill direct, or will the bill result in, regulation changes adopted by your agency? yes
If yes, by what date are the regulations to be adopted, amended or repealed? 01/01/18
Why this fiscal note differs from previous version:
Updated to reflect changes in the Conference Committees CS.
Prepared By: Ken Alper, Director Phone: (907)465-8221
Division: Tax Division Date: 07/15/2017 01:00 PM
Approved By: Jerry Burnett, Deputy Commissioner Date: 07/15/17
Agency: Department of Revenue
Printed 7/15/2017 Page 1 of 5 Control Code: ziWfF
 CCS HB 111 - Fiscal Note 7
FISCAL NOTE ANALYSIS
STATE OF ALASKA BILL NO. HB 111
2017 LEGISLATIVE SESSION
Analysis
Bill Background
This legislation would make multiple changes to Alaska's oil and gas production tax and tax credit statutes. Various credits
have been added to statute since 2003, with state repurchase beginning in 2007. Through the end of FY 2016, about $8
billion in tax credits have been received by companies. This includes $4.5 billion in credits used against tax liability plus
$3.5 billion in credits repurchased by the state; it also includes activity on both the North Slope and other areas of the
state.
According to the sponsors, this legislation builds on work done in 2016 with the passage of HB247. Those changes,
combined with the sunset of most exploration credits that also occurred in 2016, reduces the state's estimates of future
credit demand. Nevertheless, the volume of tax credit certificates eligible for state purchase continues to grow. If annual
appropriations continue according to the statutory formula, the current forecast indicates $1.6 billion in purchasable
credits outstanding in 2026. Additionally, there have been several large discoveries recently announced on the North
Slope; if any of these were sanctioned and built it could result in additional billions in credit liability that under current law
could be payable far in advance of any additional tax or royalty revenue from the development.
With the changes made in this legislation, the state will cease offering transferrable or cashable tax credit certificates for
work done on the North Slope. Instead, companies would be expected to carry forward their losses until such time as they
owe a tax liability to the state, at which time they could be used to offset the company's oil and gas production taxes.
Additional changes are made to provide expanded ability for companies to use or transfer credit certificates to offset tax
liabilities.
Additionally, this bill also creates a legislative working group to recommend potential tax changes in advance of the 2018
legislative session.
Summary of Revenue Impact
The bill's fiscal impacts can be divided into two categories: increases or decreases to revenue (taxes), and reductions in
the demand for tax credit repurchases (appropriations). The cover page table only includes the revenue items as it is
impossible to predict future appropriations. Savings due to reductions in demand for future appropriations to purchase tax
credits are noted in the summary table on page 4. The table shows the impact at forecasted oil prices. Additionally, the
bar charts on page 5 examine the total impacts at a wide range of possible oil prices.
The revenue impact from this bill would be concentrated in changes to credits. The bill establishes additional
circumstances in which Middle Earth credits could be used to reduce taxes. Also, the elimination of the North Slope NOL
credit means major producer losses cannot be used below the "floor", which would increase revenue in those
circumstances. However, at forecasted prices, we are not anticipating operating losses from major producers. Therefore,
revenue impact of the bill compared to the spring forecast is limited to future application of carryforwad lease
expenditures, and application of certain Middle Earth credits against production and corporate income taxes. This results
in revenue reductions of between $5 and $15 million per year during the fiscal note period.
Also, a small indeterminate amount of revenue, both higher and lower, would come from the elimination of the "zero
interest rate" provision after three years of production tax delinquency as well as a reduction in the interest rate for those
first three years.
(Revised 1/11/17 OMB/LFD) Page 2 of 3
HB111CCCS(CC)-DOR-TAX-07-15-17 Page 2 of 5 Control Code: ziWfF
 CCS HB 111 - Fiscal Note 7
FISCAL NOTE ANALYSIS
STATE OF ALASKA BILL NO. HB 111
2017 LEGISLATIVE SESSION
Analysis
Implementation Cost
The changes anticipated in this bill will require somewhat substantial reprogramming of the Tax Revenue Management
System and Revenue Online tax portal. Based on multiple changes, notably the connection created to Alaska's corporate
income tax as well as the need to reprogram interest rates for multiple tax types, we anticipate the programming costs to
somewhat exceed the needs created by the passage of HB247 in 2016. Therefore, we are requesting a onetime
appropriation of $1,350,000 to accomplish the various programming and testing needs to implement the changes. We do
not anticipate any additional costs to administer the tax program. There will also be a need for substantial amendments to
existing regulations to fully implement the changes.
Detail of Specific Provisions
1) Eliminates the Carried Forward Annual Loss Credit (also known as "NOL") credit, which is currently a 35% rate for the
North Slope and a 15% rate in "middle earth." The change is effective 1/1/18, and would eliminate or reduce the future
liability from this credit.
Under this bill, in lieu of operating loss credits, a company may carry forward 100% of lease expenditures incurred outside
the Cook Inlet sedimentary basin and not deducted against production tax in the year incurred. A company may choose to
apply all or part of the carry forward in a future year down to the minimum tax, with a ring fence provision that carry
forwards can only be used if and when production has begun for the area in which the expenditures were generated.
Outstanding carry forwards reduce in value by 1/10th of the initial amount, beginning with the eighth year after earned
for carry forwards generated from producing areas, or the tenth year after earned for carry forwards generated from non
producing areas.
2) Only operating loss credits for expenditures incurred prior to July 1, 2017 are eligible for state repurchase. For
operating loss credits earned during calendar year 2017, only the lesser of the credit for expenses incurred prior to July 1,
2017, or 50% of the annual credit, may be repurchased by the state; the remainder may be carried forward or transferred.
3) Effective 1/1/18, operating loss credit are eliminated and replaced with a carryforward lease expenditures provision
for Middle Earth. Exploration credits earned after 7/1/16 to may be applied against a company's own corporate tax
liability or transferred, but seismic work does not qualify for exploration credits effective 1/1/18. This bill retains capital
expenditure and well lease expenditure credits which can be carried forward or transferred.
4) The tax credit fund in AS 43.55.028 is eliminated when all credits have been paid. Instead, future tax credit repurchases
will be made by ad hoc appropriation. Once the pool of credits that originate from before the effective date remain
eligible for cash repurchase, as well as the remaining corporate income taxbased credits (LNG storage, refinery
infrastructure) that will sunset in the next several years.
5) Tax credits can be used to offset tax obligations from a prior year that result due to an amended tax return to the
extent that they don't effect deposits to the CBRF.
6) The interest rate for delinquent taxpayers is 5.25 percent above the federal reserve member rate, beginning 1/1/18.
This interest rate change is extended to all taxes administered by the Department of Revenue.
(Revised 1/11/17 OMB/LFD) Page 3 of 3
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 Provisions in CCCS CSHB 111 \OO and their Estimated Fiscal Impact based on Spring 2017 Forecast ($millions) - FC PRICE Revised 7-15-17 by Dept. of Revenue
Description of Provision FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027
1. Effective 1/1/18, Operating loss credit eliminated for North Slope and replaced with carry-forward lease
expenditures provision. A company may carry forward 100% of expenditures not deducted against tax, and may
apply all or part in a future year down to minimum tax, contingent upon commencement of regular production for $0 $0 $0 $0 -$10 -$5 -$5 $0 $0 $0
the area in which the expenditures were generated. Carry forwards reduce in value by 1/10th each year beginning in
the eighth or tenth year after earned.
2. For operating loss credits earned during calendar year 2017, only the lesser of the credit for expenses incurred
prior to July 1, 2017, or 50% of the annual credit, may be repurchased by the state; the remainder may be carried $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
HB111CCCS(CC)-DOR-TAX-07-15-17
forward or transferred.
3. Middle Earth credit changes: Effective 1/1/18, Operating loss credit eliminated and replaced with carry-forward
lease expenditures provision. Allow exploration credits earned after 7/1/16 to be applied against a company's own $0 -$10 -$10 -$10 -$10 -$10 -$5 -$5 -$5 -$5
corporate tax liability or transferred, eliminate seismic qualification for exploration credit effective 1/1/18. Retain
capital expenditure and well lease expenditure credits which can be carried forward or transferred.
4. Refinery and LNG storage facility credits may be purchased by appropriation, after repeal of Oil and Gas Tax Credit
Fund. $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
5. Tax credit certificates (including transferred certificates) may be used to offset a liability or assessment for prior-
year taxes, effective immediately.
Indeterminate - Net neutral when combined with budget impact
6. Interest on all delinquent taxes changed to 5.25 percent over Federal Reserve rate, effective 1/1/18.
Indeterminate
Additional impact of implementing above provisions together vs standalone. $0 $0 $0 $0 $5 $10 $5 $0 $0 $0
Total Revenue Impact $0 -$10 -$10 -$10 -$15 -$5 -$5 -$5 -$5 -$5
A. Budget impact of North Slope operating loss credit elimination and carry-forward lease expenditures provisions
effective 1/1/18. $0 $45 $135 $175 $150 $140 $140 $145 $145 $145
Page 4 of 5
B. Budget impact of operating loss credit repurchase limitations for 2017 credits. $0 $45 $45 $0 $0 $0 $0 $0 $0 $0
C. Budget impact of Middle Earth credit changes carry-forward lease expenditures provisions. $0 $10 $10 $10 $10 $10 $10 $5 $5 $5
D. Budget impact of refinery and LNG storage credits may be purchased by appropriation. $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
E. Budget impact allowing tax credit certificates to offset liability or assessment for prior-year taxes. Indeterminate - Net neutral when combined with revenue impact
F. Budget impact of interest changes, effective 1/1/18. $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Additional impact of implementing above provisions together vs standalone $0 $5 $5 $5 $5 $0 $0 $0 $0 $0
Total Budget Impact $0 $105 $195 $190 $165 $150 $150 $