- Associated Press - Thursday, March 31, 2016

JUNEAU, Alaska (AP) - Oil and gas tax credits are poised to be the subject of major debate as the Alaska Legislature enters what are supposed to be its final weeks.

The oil and gas industry is warning against big changes at a time when the industry is being hit by low oil prices.

The state, which has long relied on oil revenues to fund government, is feeling the effects of chronic low prices, too, and lawmakers face some unpopular options, including changes to the dividend that most Alaskans receive each year, as they try to address a multibillion-dollar budget deficit.

The state Department of Revenue estimates that during the next fiscal year, the state will owe $825 million in credits to companies with no tax liability, which are typically smaller companies developing and exploring on the North Slope and Cook Inlet. That includes newly earned credits and those not covered this year because of a cap placed on them by Gov. Bill Walker.

The department also estimates there will be about $630 million at the end of next year in credits carried forward by major producers with an annual loss. These credits can’t be cashed out, but they can be used in ways such as offsetting tax liability.

With oil prices starting around $40 a barrel, producers are “going negative” and they’re able to use operating loss credits to go below the minimum production tax, said Ken Alper, director of the department’s Tax Division. The department is forecasting an average North Slope oil price of about $40 per barrel for the fiscal year ending June 30.

“What happens as things get worse is the operating loss credits get bigger and you can offset more and more of your production tax until finally you can offset all of it, which is what happens starting in January of 2017,” he said.

At least one of the major producers had an operating loss in calendar year 2015, and the department is forecasting that all three will have losses this calendar year, he said.

A preliminary department forecast estimates production tax for the coming fiscal year of about $54 million and about $24 million for fiscal year 2018. The figures include a spill prevention surcharge and a provision that allows the state to collect a tax from a private landowner having oil produced on their land.

Production tax totaled $2.6 billion two years ago. Oil prices began their skid in late summer 2014. Production tax totaled $390 million during the last fiscal year.

The production tax is one component of the revenue the state derives from the industry. Other elements include property and income tax and royalties. Total petroleum revenue for next year is estimated at $1 billion.

Walker proposed changes to the tax credit system, including repealing certain Cook Inlet credits, raising the minimum tax on North Slope producers and disallowing the use of operating loss credits to reduce payments below the floor. The so-called hardening of the floor to a certain extent is a deferral, Alper said, because companies would end up carrying forward operating loss credits they earn.

The House Resources Committee scaled the bill back and rejected those tax provisions. The bill is currently being heard in House Finance.

Kara Moriarty, president and CEO of the Alaska Oil and Gas Association, said the industry is losing money. “We are not some cash cow,” she said. “We don’t have pools of money sitting around in reserves in this low price environment.”

Alper said it may be worthwhile to discuss whether operating loss credits should be lower at really low prices, but “for the time being, we’re not looking to change the operating loss credit itself,” he said. Walker’s tax credit bill itself wouldn’t balance the budget but is seen as a piece of a larger package, he said.

Sen. Bert Stedman, R-Sitka, said the current system isn’t sustainable and believes addressing the oil tax structure and tax credit system should be the top priority. He raises concern in particular with the net operating loss credits and suggests taking the production tax to zero at a certain price to get around them or zeroing out those credits.

Moriarty said net operating loss credits were intended to help level the playing field. She said there was recognition, too, that at low prices the industry would face severe economic challenges and the credits were a way to encourage continued investment.

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