Oil tax credits could help pay down retirement liability

Posted: Wednesday, January 31, 2007

Unused oil profits tax credits could be a source of revenue to help the state of Alaska reduce the unfunded liability to its public employee and teacher retirement systems.

A measure sponsored by Rep. Paul Seaton, R-Homer, and Rep. Mike Kelly, R-Fairbanks, would enable the trustees of the Alaska Retirement Management Board to buy what are called “transferable tax credit certificates” from oil and gas producers and resell them to the Alaska Department of Revenue.

The ARM Board would buy the unused credits at 92 percent of their face value. The state, through the Department of Revenue, would buy them from the ARM Board at 100 percent face value, thus ensuring the ARM Board an 8-percent profit.

That money would then be applied to the state’s unfunded liability to the Public Employee Retirement System and the Teachers Retirement System. A recent estimate put the unfunded liability owed to those programs at more than $8.6 billion and growing.

Just how much the ARM Board might derive annually if House Bill 48 becomes law cannot be determined because it would depend on many factors, including how many such credits would be available to purchase.

Under the Petroleum Profits Tax law passed last year, transferable tax credits amount to a possible direct refund of up to $25 million per company each year, Seaton said. Companies only become eligible when they generate investment credit, but sustain a loss — such as exploration companies before production begins, Seaton said.

Beyond the $25 million, the PPT law allows unused tax credits to be purchased by other companies to offset their own PPT liability up to an annual limit of 20 percent.

Allowing the ARM Board to purchase unused credits at 92 percent of their value would also help explorers and small producers by creating a floor in the price of such credits.

“The explorers and small producers are concerned about the discount rate that they may be forced to accept for the transfer since the credits can only be applied to the PPT liability and there are few companies large enough (that is, with enough tax liability under the PPT) to utilize the credits,” Seaton said in a recent newsletter. “In the past, 90 percent has been paid for similar credits, although with a limited pool of users, this rate could fall to 70 percent or 80 percent.”

The 92-percent floor set by HB 48 would help ensure an equitable return for companies actually making investment in exploration, while reducing the state’s PERS/TRS unfunded liability, Seaton said.

The law has a specific caveat, however.

The ARM Board would be allowed to sell transferable tax credits to the Department of Revenue only if the revenue commissioner determined that the state’s economic conditions were acceptable for such a purchase.

Rep. Kelly said the measure would give the ARM Board one more tool to address the unfunded liability, now pushing $10 billion, facing the public employee retirement program.

Hal Spence can be reached at harold.spence@peninsulaclarion.com.

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