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Committee rejects Knowles' plan to shrink tax break

Posted: Sunday, May 05, 2002

JUNEAU (AP) -- Gov. Tony Knowles on Saturday proposed cutting in half a proposed tax break for a North Slope natural gas pipeline, but a legislative committee ignored his suggestion.

The House Rules Committee approved a new version of House Bill 519 that would exempt the pipeline builders from property taxes during construction and for the first year afterward.

The tax break would cost the state and local governments about $600 million. That's less costly than the $760 million tax break in an earlier version of the bill, but more expensive than the $385 million potential break Knowles proposed Saturday.

Knowles also proposed a potential payback of the tax break.

''My bottom line is this,'' Knowles said in a news conference. ''This bill must be reshaped to reflect a two-way partnership that's fair and reasonable and acceptable to Alaskans.''

Rep. Pete Kott, R-Eagle River, said he had not seen Knowles' proposed changes until Saturday, and they went beyond what he had been discussing with Department of Natural Resources Commissioner Pat Pourchot earlier in the week.

''I thought we were on the same page,'' Kott said. ''Obviously, we aren't any more.''

Kott introduced the bill at the urging of Veco Inc., an Anchorage construction and oil field service company, whose employees contribute to the campaigns of about two-thirds of legislators, including Kott.

Kott says the state needs to offer incentives to spur oil and gas companies to invest the $20 billion to build the pipeline. He and other supporters of the measure say the long-term benefits to the state will more than outweigh the costs.

Opponents have said the industry has not provided enough financial information to judge whether the tax break is needed, and the state should only offer the incentive through negotiations with the industry.

On Tuesday DNR Commissioner Pourchot said the administration could support the bill if the following conditions were met:

-- The tax break ends when construction ends, rather than continue for two years afterward.

-- The incentive is taken off the table in July 2008, forcing the companies to act quickly if they want to receive it.

-- The definition of what facilities would be exempt from taxes is tightened, so unrelated facilities don't get a break.

-- Language calling for use of Alaska workers and Alaska businesses is strengthened.

-- There is assurance that municipal governments that would lose taxes under the bill also receive some help, since they would have to provide more services during pipeline construction.

Knowles added to those proposed changes on Saturday.

He agreed with allowing the companies to be exempt from the usual 20-mill property tax during construction. But he proposed that during that time they pay a temporary 3-mill property tax.

That would generate about $68 million, which would go into a fund to help communities and state agencies heavily impacted by the construction.

Knowles also proposed companies pay back the other 17 mills of tax through a 6-cent per thousand cubic feet surcharge if the wholesale price of natural gas in Chicago reaches $5.50 per thousand cubic feet. The current price is about $3.75 per thousand cubic feet.

''We must assure that when the good times roll, Alaskans share those benefits,'' Knowles said.

If prices never reached $5.50, the tax would not be repaid. The $5.50 threshold would be adjusted over time for inflation.

Kott rejected Knowles' proposal. He said Phillips' representatives told him Knowles' payback idea could make the project more expensive than if the state provided no tax break at all.

Michael Hurley of Phillips said Saturday afternoon the company was still analyzing Knowles' proposal. He was concerned about a requirement that the company continue paying the surcharge for 90 days after the quarter in which all exempted taxes had been repaid.

''What that says to me is ultimately they're going to collect more than they gave up,'' Hurley said. ''We're trying to figure it out, but our initial reaction is it doesn't look good.''

Department of Revenue Deputy Commissioner Larry Persily said the money repaid would not be adjusted for inflation, so the producers would essentially be receiving an interest-free loan that they repay only if prices rise substantially.

''If the price is that high, this is a very profitable project,'' Persily said.

The Rules Committee, which Kott heads, adopted its own version of the bill Saturday in a meeting lasting less than two minutes with no discussion of Knowles' proposals.

Democrats on the committee arrived late, after the meeting had ended. Committee member Ethan Berkowitz, D-Anchorage, said he had received Kott's new version of the bill about 10 minutes before the meeting and was reading it in his office.

Berkowitz said he would have proposed the governor's amendments if the committee had waited for him. Democrats are outnumbered 5-2 on the committee, though, so Berkowitz probably would have lost that vote.

The version the committee adopted includes some concessions to Pourchot's proposals earlier in the week.

It tightens the definition of an eligible project and allows the exemption for just one year after construction ends, instead of two.

Kott said it also includes deadlines by which companies must take concrete steps toward building a pipeline. For instance, they must submit a right of way application by June 30, 2004.

The bill comes before the full House on Monday morning. If it passes the House, it must still go through the Senate.

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