Report recommends limited changes to oil tax credits

Gov. Bill Walker is expected to release his budget in the next few weeks. One thing it will likely include? Cuts to tax credits for oil companies.

The state paid out more than half a billion dollars in refundable tax credits this past year — and gave up another half a billion in credits deducted from companies’ tax liabilities.

With a budget hole approaching $3.5 billion, that’s a tempting target.

But many lawmakers worry it’s not a smart one. Today, a group of senators issued a report recommending few changes to the credits in the coming year.

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Anchorage Republican Sen. Cathy Giessel convened the Senate Oil and Gas Tax Credit Working Group, and presided over several hearings this fall. She came away with one overriding concern: “Without the tax credits,” she said. “I’m concerned that these smaller companies will pull back.”

Those would be companies like Hilcorp, Caelus Energy, BlueCrest Energy and Furie, which have all ramped up operations in the state in the last decade.

Alaska is counting on these independent companies to explore smaller fields that aren’t attractive to the major producers — and the state has provided hefty incentives to jump start that work.

But the question now is, can the state afford it? Last year (FY2015), Alaska paid out $628 million in refundable credits, while collecting just about $300 million in production taxes — historically, the mainstay of the state budget. (The state collected another $1.7 billion in other oil revenue: mostly royalties, though also property and corporate taxes.) That compares to the high year of 2012, when the state collected about $6.1 billion in production taxes.

But Giessel said if the state pulls credits back too soon, it risks losing out on the investments it’s already made.

“Once production happens, we start getting property tax, corporate income tax, royalties,” she said. “We want to make sure companies cross that threshold to production.”

Giessel said some changes are necessary: she’d like to make sure a company can’t receive so many credits that it drops below the four percent minimum tax floor. If a company that received credits goes bankrupt, she’d like protections in place to shield Alaska contractors.

And looking ahead to future years, she thinks perhaps credits shouldn’t be “stackable” — so a company can’t pile up multiple credits to virtually eliminate its expenses.

But at the end of the day, she said, the credits are doing their job. And her report recommends avoiding any major changes in the coming twelve months. At this point, Giessel said, companies have already built the credits into their business decisions.

“The companies have been very clear,” Giessel said. “‘We understand what the state is facing. But we need lead time to adjust our investments.'”

Sen. Bill Wielechowski, an Anchorage Democrat, was also in the working group.

“I’m glad we did it,” he said. “But I think the working group really missed an opportunity to make some meaningful changes.”

Wielechowski said the status quo is simply unsustainable: something’s got to give, and soon.

One issue, he said, is that the group didn’t address a whole type of credits: those that companies can deduct from their tax liability. These are taken largely by the major North Slope producers.

“And this was not discussed at all,” Wielechowski said. “We had a tax working group meeting that didn’t hear from BP, Conoco and Exxon. How do you have a conversation on oil tax credits — on oil and gas, period — without involving BP, Conoco and Exxon?”

But the biggest issue, he said, is simply understanding what Alaska is getting in return for the credits. What kind of return does the state get on its millions in investment? That largely remains a mystery, Wielechowski said

“Even under [the previous tax regime] ACES, we never knew what we were getting for them,” he said. “We never knew – did the companies really need these? Or were these just the shotgun approach where you’re just providing these massive credits and sometimes they help and sometimes they don’t?”

On on thing, both senators agreed: the credits will be a hot topic when lawmakers meet in Juneau come January.