What passage of HB111 means for Alaska

It’s time for an update from Juneau. As you know, Gov. Walker ordered the legislature to continue their work on the oil and gas bill, HB111, in this second special session. After a few set-backs, the conference committee reached a compromise of the bill on Saturday, July 15, and the bill was passed later that evening. The final version of HB111 does three things:

1) It retroactively ends cash payments to oil companies starting July 1 of this year;

2) It allows oil companies to carry forward losses for either 10 or 7 years

depending on the field's production; and

3) It changes the interest rate to 5.25% for delinquent taxes owed to the state.

As you all know, due to the State’s challenging fiscal environment, the State of Alaska could no longer afford offering an incentive of upfront cash credits at more than $200 million yearly. To clarify, companies that have already received cash credits who are waiting on the State to pay those credits should still get paid. New work, after July 1, 2017, will no longer be eligible for the cash credits.

HB 111 moves companies to a tax deduction system, limiting the time-frame for when companies can deduct their net operating losses, basing it on actual production. It allows oil companies to carry forward losses for either 10 or 7 years, depending on the field’s production. They also increased the interest rate to 5.25% for delinquent taxes owed to the state.

We know that SB 21’s tax structure has delivered new production very well. When SB 21 passed, one of the arguments the law made was that the minimum tax companies paid was hard. After careful review of SB21, they found instances where the floor could be soft, and a company would pay no taxes, (companies could take their loss credit and apply it against their tax due). HB 111has resulted in hardening the floor, but not raising the overall tax rates.

HB111 will also protect a competitive oil tax regime which encourages investment and production. Oil production creates jobs, delivers tax revenue and deposits royalty earnings into the permanent fund coffers.

The downsides of HB111 are that this makes it more difficult for the smaller oil companies to want to invest in Alaska. The upfront incentive of cash credits has been removed and this was an incredible incentive for companies to come and invest millions of dollars to explore and drill so they could get a field into production. We know this process takes more than 7-10 years and during that time many companies take an initial loss. Also, this is the 7th change in the tax structure in the past 12 years and that does not work well for any business investor in Alaska. That type of constant change and uncertainty makes for a very insecure investing environment.

Colleen Sullivan-Leonard represents the 7th District in the Alaska State House.