The Honorable Mead Treadwell AGO JU2013200274 No. JU2013200274 Alaska Attorney General Opinions Department of Law Office of The Attorney General April 24, 2013 The Honorable Mead Treadwell Lieutenant Governor P.O. Box 110015 Juneau, Alaska 99811-0015 Re: Review of SB 21 Referendum Application Dear Lieutenant Governor Treadwell: You asked us to review an application for a referendum to reject Senate Bill 21, passed during the legislative session that adjourned April 14, 2013. The Division of Elections designated the referendum as “13SB21.” Because the application complies with the constitutional and statutory provisions governing the referendum process, we recommend that you certify the application. I. SUMMARY OF THE ACT TO BE REFERRED AND EFFECT OF REFERENDUM A. Summary of Senate Bill 21 During the 2013 legislative session, the legislature passed HCS CSSB 21 (FIN) am H (SB 21), “An act relating to the interest rate applicable to certain amounts due for fees, taxes, and payments made and property delivered to the Department of Revenue; relating to appropriations from taxes paid under the Alaska Net Income Tax Act; providing a tax credit against the corporation income tax for qualified oil and gas service industry expenditures; relating to the oil and gas production tax rate; relating to gas used in the state; relating to monthly installment payments of the oil and gas production tax; relating to oil and gas production tax credits for certain losses and expenditures; relating to oil and gas production tax credit certificates; relating to nontransferable tax credits based on production; relating to the oil and gas tax credit fund; relating to annual statements by producers and explorers; establishing an Oil and Gas Competitiveness Review Board; relating to the determination of annual oil and gas production tax value including adjustments based on a percentage of gross value at the point of production from certain leases or properties; and making conforming amendments.” The majority of the bill would amend Title 43, Chapter 55 of the Alaska Statutes—the oil and gas production tax and oil surcharge (“production tax”). In addition, the bill would amend the statutory interest rate for delinquent taxes and would enact a corporate income tax credit for qualified oil and gas service-industry expenditures. Last, the bill would establish an Oil and Gas Competitiveness Review Board in the Department of Revenue (DOR). Because the focus of the referendum is to reject SB 21 and “restore the previously applicable state oil taxation laws”[1] it is important to understand the laws amended by SB 21. Under those laws, AS 43.55, the production tax, is levied annually on oil and gas producers based on the value of all oil and gas produced from leases or properties in the state. A producer first determines the gross value at the point of production of all oil and gas by subtracting the costs of transporting the product to market from the sales value. Then, lease expenditures are deducted from the gross value to determine the annual production tax value of the oil or gas.[2] Under current law, the tax is 25 percent of the annual production tax value plus a monthly “progressivity” tax, which applies only in months in which the producer’s monthly average production tax value exceeds $30. The progressivity tax rate may not exceed 50 percent. Tax credits are a key component of the production tax. A producer or explorer may be eligible for tax credits for exploration work, capital spending, carried-forward losses, or exploration or production in new areas. Tax credits can be taken directly against production tax liabilities or, for a producer or explorer without a production tax liability, may be redeemed as transferable tax credit certificates and sold, transferred, or redeemed for cash. Under AS 43.55.028, such credits are presented to DOR for purchase through the oil and gas tax fund.[3] Other credits are nontransferable and may only be applied against a producer’s production tax liability. SB 21 maintains the basic structure of the current production tax but with several significant changes. First, the base tax rate is increased from 25 percent to 35 percent. Also, the progressivity tax will not apply to oil and gas produced after December 31, 2013. Through a new provision, a producer may be able to reduce its gross value at the point of production for certain oil and gas produced north of 68 degrees North latitude (i.e., on the North Slope) by up to 30 percent through a “gross revenue exclusion.” SB 21 adds two new nontransferable tax credits to AS 43.55.024. One is a credit of $5 per taxable barrel of oil that qualifies for the gross revenue exclusion; the other is a sliding-scale credit for taxable oil that does not qualify for a gross revenue exclusion. Neither credit is transferable or redeemable for cash, nor may any unused portion be carried forward to a later calendar year. SB 21 eliminates the 20-percent tax credit for qualified capital expenditures on the North Slope and amends the carried-forward loss credit. Current law allows a credit for 25 percent of a carried-forward loss, that is, the extent to which a producer’s costs exceed its revenues in a calendar year. The bill retains the 25-percent loss credit for expenditures south of the North Slope, but increases the loss credit for expenditures incurred on the North Slope to 45 percent of a loss from January 1, 2014, to January 1, 2016. After January 1, 2016, the North Slope loss credit would be 35 percent. SB 21 also extends the exploration tax credit under AS 43.55.025 for five years for certain exploration projects, and removes a qualifying requirement related to well distance for exploration wells drilled outside the Cook Inlet sedimentary basin and south of the North Slope. SB 21 also amends restrictions on transferable tax credit certificates to allow tax credit certificates based on North Slope expenditures to be issued as one (instead of two) certificates. SB 21 also makes changes not directly related to the production tax. The bill lowers the interest rate on delinquent taxes to three percent above the applicable federal rate. Under current law, a delinquent tax bears interest at five...
